Creditor Compromises

Businesses can sometimes struggle to pay all debts in full, despite their best efforts.
When directors have acted in good faith and act early enough, a compromise may be
acceptable to the company’s creditors.

The purpose of a compromise is to give creditors more than they would if the company was
put into liquidation.

A compromise is an agreement between a company and its creditors. Most compromises have two main characteristics:

• That creditors are paid their debt in part, or full, over a period of agreed time. If they are to be paid in part, then the creditors agree to write off the balance
• During the agreed period, debts are frozen and no creditor can take any action against the company

It is often assumed that compromises with creditors can be difficult to achieve – why would anyone accept less than what was owed to them? However, it is our experience that many creditors are reasonable and understand that businesses can suffer from cashflow issues.

The company can benefit from a compromise in several ways.

A compromise is an alternative to receivership, administration, or liquidation, giving the Director a chance for their company to survive. Although the directors may not be able to arrange for the company to pay its debts in full, they could anticipate being able to provide continuing business to those creditors who have agreed to the compromise. Businesses are very capable of turning around and it is important to maintain supplier relationships.

 

Should I accept a compromise?

• Does the compromise offer more to creditors than they would achieve in a liquidation?
• How do you know?
• Is there a statement of affairs?
• Are there financial accounts?
• Are there actions which should be brought against the directors?

Appointing a Compromise Professional

The proposal should have an independent and experienced professional Compromise Manager. It would not be good practice not to appoint a manager, or to have the director or their representative acting as manager. An independent Compromise Manager will be working for the creditors to ensure they receive their returns as per the agreement.

The documentation

The documentation must be professionally prepared and as per the relevant Companies Act legislation. There should be a separate document explaining the proposed compromise and providing the list of creditors.

Compromise committee

Particularly in large companies, the creditors may appoint a committee of creditors to work with the Compromise Manager. The committee will also represent the wider views of creditors as a whole.

At the meeting of creditors, they get the opportunity to exchange views and ask questions of the proponents of the compromise. At that meeting, creditors should be given the opportunity to ask for modifications to the compromise.