This article discusses when to accept a company compromise, and suggests what modifications and amendments can be asked for, and when to reject a compromise.
What is a compromise?
A compromise is an agreement between a company and its creditors. Most compromises have two basic features. They provide:-
- That creditors are paid their debt in part or full over a period. If they are to be paid in part, then the creditors write off the balance of their debt
- That during the term of the compromise, debts are frozen and no creditor may take any action against the company
A compromise as perceived by creditors
It seems to us that compromises with creditors can make otherwise rational people break out into a rash of prejudices whereby any suggestion of a compromise is met with a closed mind. On the other hand, we as insolvency practitioners have had some remarkable successes and we know of many creditors who have also been pleased with the results.
A compromise as perceived by the company
The company perceives a compromise to be an alternative to receivership, administration or liquidation, which gives the company the opportunity to survive. Although the directors may not be able to arrange for the company to pay its debts in full, they anticipate being able to provide continuing business to those creditors who have supported them.
The legislation can be found in Part 14 of the Companies Act 1993. The following sections and schedules apply:-
- Sections 227 - 234 (note: further sections, 235-239, deal with court involvement)
- Fifth Schedule - proceedings at meetings of creditors
Each class of creditors affected by a compromise must vote as a class. Classes of creditors can include:-
- Trade creditors
- Other unsecured creditors
- Hire purchase creditors
- Other secured creditors including General Security Agreement holders
- Employees for preferential wages & holiday pay
- Inland Revenue Department for preferential GST and PAYE
- Subordinated creditors
Clause 5(2) of the Fifth Schedule provides as follows:-
"At any meeting of creditors or a class of creditors held for the purposes of section 230, a resolution is adopted if a majority in number representing 75 % in valueof the creditors or class of creditors voting in person or by proxy vote or by postal vote in favour of the resolution."
Whether to accept a compromise or vote against it: some factors to consider
- 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 the directors trying to avoid Insolvent Transaction claims against creditors to whom they have given a personal guarantee?
- Are there actions which should be brought against the directors?
We comment that many compromises are based on hope, and make promises which cannot be delivered.
The proposal should have an independent and experienced professional Compromise Manager. In our view, it is not appropriate to have either a complete absence of manager, or have the director or their solicitor acting as manager. An independent experienced Compromise Manager will be working for the creditors to ensure they get what has been promised. We, for example, will only accept the role if we believe the compromise will succeed and is in the best interests of creditors.
The documentation must be professionally prepared and as provided for by the Companies Act, and there must be a separate document explaining the proposal and giving details of those affected. The documentation should be comprehensive and informative.
Particularly in the case of a large company, the creditors may want there to be a committee of creditors to work with the Compromise Manager. The committee will also represent the views of creditors as a whole.
Powers of a Compromise Manager
We have seen compromises where the Compromise Manager has few powers and merely acts as a buffer between the company and its creditors.
It seems extraordinary to us that creditors will vote for a compromise where there is no external supervision of the compromise by an independent party with experience in this area. If the directors want a second chance they must be prepared to relinquish some of their powers to a Compromise Manager acceptable to creditors. The compromise itself can provide for the Compromise Manager to oversee the terms of the compromise and provide regular reports to creditors on progress and likelihood of success.
A Compromise Manager must have the power to bring a compromise to an end if he or she perceives it is not going to work. Never vote for a compromise which, for example, provides for a first payout after a year if there is no power to monitor progress. On the other hand, there should also be a power to extend the compromise for say three months, or a longer period with the consent of creditors.
Meeting of creditors
There should be a meeting of creditors at which 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.
We were consulted some time ago about a failed compromise. In that case, we had the following major criticisms:-
- Documentation was sparse and did not comply with the Companies Act
- There was no Compromise Manager
- There was no meeting of creditors (postal voting was used)
- There were no scrutineers in respect of the voting
Compromises are capable of working well for creditors and at the same time can give a company a second life. If you have clients in financial difficulty who have a fundamentally good business, a compromise might be the answer. If you have to vote on a compromise, do so with an open mind. At the same time, be prudent and be satisfied before voting that the compromise is genuine and deserves to succeed.
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.