Compromises with Creditors

There are two separate types of creditor compromises specified in Part 14 and Part 15 of the Companies Act 1993, designed to provide a facility to implement compromises, arrangements, amalgamations, and reconstruction, and provided the procedure is followed (with the necessary approvals obtained) then the scheme will be binding on all creditors, even those who may have voted against it. Part 14 is an informal arrangement with the creditors, whereas with Part 15 is supervised and approved by the Court

Definition of a “Compromise”

“Compromise” means a compromise between a company and its creditors, including a compromise which:

(a)  Cancelling all or part of the debt of the company; or,

(b)  Varying the rights of its creditors or the terms of the debt; or,

(c)  Relating to an alteration of a company’s constitution that affects the likelihood of the company being able to pay a debt.

Part 14, the informal Compromise arrangement

In brief, generally the board of directors of the company (or an appointed representative of the company) formulates a proposal, and then circulates it together with other prescribed details and information, to the company’s creditors. The creditors then vote on the compromise. If approved by those creditors voting, it will be binding upon all creditors, and the company. No Court approval is required.

Unlike the regime in Part 15, Part 14 does not provide for a mandatory stay of proceedings pending approval, although the Court has the discretion to stay any proceeding in relation to a debt, and restrain a creditor from taking any action to enforce payment of the debt from the date the notice of the proposal is given. Nor does it provide for the appointment of an administrator to run the company and assist in formulating the proposal.

Procedure of Part 14

  1. Up to the meeting of creditors
    The proposer compiles a list of creditors detailing the amounts owing, and the votes they are entitled to cast on the compromise resolution. The proposer must then give to each known creditor the information as prescribed by the Act, with advice of the intended creditors meeting in which to vote on the compromise proposal.
  2. Meeting of Creditors
    A meeting is held in accordance with Schedule 5 of the Act. The proposal is passed if 50% by number and 75% by value of each class of creditor votes in favour.

Effect on the Company and Creditors once Approved

The proposer is required to provide formal advice to each known creditor, and also the Registrar of Companies. A compromise once approved by the creditors in accordance with the Act, is binding upon the company and all creditors that received notice of the proposal in accordance with the Act. No Court approval is required.

Effect on Guarantees and or debt

While the compromise arrangement is in place, the debt remains, but the creditor can only recover by the terms of the compromise agreement. Also, at the conclusion of the arrangement, the debt is not discharged for all purposes. The effect of this is that ordinarily a guarantor of a company debt will not be discharged simply because the company has entered into Part 14 compromise. Therefore attention is required for the accommodation and treatment of guarantors, and secured creditors within the compromise proposal.

Part 15; Approval of Compromises by the Court

Part 15 of the Act enables the Court, on the application of the company, a creditor, or a shareholder, to order that an arrangement, amalgamation, or compromise, shall be binding upon the company, and any other persons that the Court thinks fit. It has wider scope than Part 14 in that while the latter is limited to compromises with creditors, Part 15 permits arrangements and amalgamations to be imposed.

Procedure – Part 15 of the Act

Essentially the procedure involves four basic steps:

  1. The proposer prepares the proposal and then applies to the Court for procedural orders.
  2. The Court then makes any procedural orders it thinks appropriate from those prescribed by the Act, which are:
    (a)   Notification and provision of information to interested parties,
    (b)  Holding of meetings and the procedure to be followed,
    (c)  Preparation of a report on the proposed compromise for the Court and interested parties,
    (d)  Specification of who will be entitled to appear at final approval hearing.
  3. The proposal is then voted on at the meetings,
  4. Where the designated majority is obtained, the proponent applies to the Court for final approval.