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Financial terms - definitions

A plain English guide to the most commonly used terminology in finance related documents.

Bankruptcy - The formal recognition a person is unable to pay their debts. Applies to individuals only. Companies and partnerships become insolvent and are wound up.

Damages - Money paid as remedy in the law for compensation for an individual's or company's loss. If any other remedy is wanted, an injunction for example - see general contract terms in this page guide - but cannot or is not given by a court, damages will be awarded as a solution.

Debenture - Formal debt agreement. Referring to both the agreement and the document verifying it. Usually issued by companies and supported by security over property of the debtor. If a default occurs the creditor can take and sell the property. Debentures can be transferable and so can be sold. There are markets on the stock exchange that deal in types of debenture. It can be referred to as debenture stock. A mortgage is also a type of debenture, one that is always secure against house and land.

Floating charge - form of security for a debt, instead of naming a specific property which could be taken by the creditor in case of default. This like in a case of a fixed charge in a mortgage, when a class of goods or assets are named, such as the debtor's stock. The debtor can then trade in the assets freely, but if he defaults on payments the floating charge becomes fixed - known as crystallization - over all the stock at that time. The creditor can then take the stock and sell it to recoup the money.

Guarantee - A secondary agreement by which another person(guarantor) promise to pay the debt if the debtor isn't able to repay. Creditors often call for small business on small company directors to give personal guarantees for company debts. This arrangement must be in writing. The guarantor can only be sued for the debt if the actual debtor is unable to pay, in contrast to indemnity.

Indemnity - a third party (indemnifier) promises to pay a debt owed by another party, or repay a loss caused. The person owed can get the money from the indemnifier without having to chase up the debtor first. As in the case of insurance companies, the insurance company pays for damage or less and then recovers the loss from those who caused it.

Insolvency - If a business (or business) is unable to pay business debts due. See bankruptcy, liquidation, and receivership.

Liquidation - the formal break up of a company (including partnership) by realizing (sale or transfer for debt repayment) assets of the business. Usually the process when a business is insolvent but a solvent business can be liquidated when it no longer wishes to trade, for any reason. see receivership.

Receivership - the appointment of a licensed insolvency practitioner puts a business into receivership. The practitioner takes over the running of the company as a going concern to make enough to pay the debt. Alternatively, they can sell the security to cover debt.

Redemption of shares - Companies can issue shares on terms stating the company can buy them back. Not all shares can be redeemed this way, only those stated as redeemable when issued. Payment of shares should come from the reserves of profit so company capital is preserved.

Remedy/remedies - actions or payments ordered by the court a settlement of a dispute (a cure for the dispute). Damages is the most common in the form of monies paid. Others include specific performance - of an action required in the contract, injunction - putting things back how there were before the contract was signed. See the term rescission in this page guide on general contrast terms.

Stamp duty - a tax on specific types of transactions, e.g. dealings in land and buildings, shares and ships.

Wound up - The formal procedure for disbanding a company is known as winding up.
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