Creditor compromises: A guide for companies

Even profitable and viable companies can find themselves unable to pay their creditors. This can be due to a variety of reasons, such as the failure of a major customer, unprofitable contracts, employee theft, lengthy litigation and, unfortunately, a pandemic or extreme weather events.

Time to read: 5 mins

Companies have a number of options in these circumstances. One is a formal creditor compromise under the Companies Act 1993, through which a company can restructure its debts and obligations.  

The purpose of a creditor compromise is to support companies that have a viable future, and to provide a better financial result to creditors and shareholders than they would otherwise receive in a liquidation or receivership. We have experts at Baker Tilly Staples Rodway who can advise you on the process.

What is a creditor compromise?

A creditor compromise is a prescribed process under the Act 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.

Voluntary administration

In certain cases, there is a need for an independent party to take control of the company.  This may be due to, for example, overwhelming financial or legal pressure.

Voluntary administration is a further option under the Companies Act 1993, and is an alternative to liquidation and receivership. It enables the restructure of a company’s debts and obligations, and provides a further form of creditor compromise known as a deed of company arrangement (“DOCA”). Control of the company can then revert back to its directors.

The key benefits of a voluntary administration include:

  • Creation of a “breathing space” for a company to address and remedy its problems, as creditors are unable to take enforcement action against the company or debt guarantors during a “moratorium” period, except in certain circumstances.
  • Increased creditor trust through the involvement of an independent licensed insolvency practitioner who becomes temporarily responsible for the management of the company.
  • Prospects of a better financial return to creditors than a liquidation or receivership.

For further information on voluntary administration and deeds of company arrangement please contact one of our experts at Baker Tilly Staples Rodway.

How we can support a successful creditor compromise 

Based upon our experience, companies are likely to face several challenges when putting forward a compromise proposal. We can help maximise its chance of success by: 

  • Helping you understand potential alternatives (including financial and cash flow requirements) and outcomes so that the best option can be chosen, and a realistic recovery plan can be drafted and implemented.
  • Developing an action plan to lead you through the legal process.
  • Helping with the drafting of the creditor compromise proposal.
  • Assisting with creditor, lender and stakeholder communications during the process so that you can focus on managing the company’s business and to help build trust and support for the compromise proposal.
  • Acting as a trustee or deed administrator to supply independent oversight and management of the formal compromise process.
  • Leveraging our significant experience and expertise to assist you in helping the business recover. 

For further information please contact one of our experts at Baker Tilly Staples Rodway.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

Find one of our business recovery experts

Sign up to our newsletter

Thanks for signing up!

Our website uses cookies to help understand and improve your experience. Please let us know if that’s okay by you.

Cookies help us understand how you use our website, so we can serve up the right information here and in our other marketing.