Creditor Compromise

What is a Creditor Compromise?

A creditor compromise is a prescribed process under the Companies Act 1993 by which a company can enter into an arrangement with everyone it owes money to. Commonly, it involves full and final settlement payments, of less than the full amount owed, over an extended period, or the use of monies that would not be available to creditors in a liquidation. However, there are many options available.

The process initially involves a proposal being issued in a prescribed format for creditors to vote upon at a meeting. The proposed compromise takes effect and is binding if it is approved by the majority (50% by number and 75% by value). Approval is typically by class of affected creditor (eg. unsecured).

Creditors prefer to support a proposal if it means that they will receive a better financial result than they would in a liquidation or receivership. They also prefer to support companies that they can do business with in the future.

A company does not need to involve the Court in the process. It can, however, involve it where (for example) it is struggling to obtain the approval of a necessary creditor.

What does the proposed creditor compromise need to include?:

• Details of the proponent, including their contact details and the capacity in which they are acting.
• The terms of the proposed compromise and reasons for it.
• The reasonably foreseeable consequences for creditors if it is accepted.
• The interest of the company’s director in the proposed compromise.
• Advice on how it becomes binding upon creditors if approved at their meeting.
• Details of any procedure proposed by which the suggested compromise, if approved, can be subsequently amended.
• A list of the creditors who would be affected (includes amounts owed and voting rights).

The proposed compromise can affect security rights (including personal guarantees) held by a creditor of the company if they agree.

When is a formal creditor compromise useful?

It is particularly useful in the following circumstances:

• Where the company has incurred losses and built up creditors due to a one-time event or as a result of existing overpriced supply contracts.
• Where the company is finding it difficult to raise capital or obtain new loans without a creditor compromise being in place for historic debts.
• Where there are a large number of creditors, and individual arrangements with each of them is not practical.
• Where the company has reasonable relationships with key trading partners and creditors.
• Where the value of the company’s assets is less than its liabilities in a liquidation of receivership.
• Where a private restructuring process is preferred.

See Voluntary Administration for another method to rescue your business.