Can I compromise with my creditors to save my business?
So, your business is in distress. You would like to avoid a liquidation or a business rescue. Do you have any other option? The short answer is yes. You can put together a compromise to present to your creditors.
A formal compromise with creditors is governed by section 155 of the Companies Act. It can be used either before or during liquidation but not during the business rescue. In order to commence this process, the board of the company (or the liquidator where the company is in liquidation) “may propose an arrangement or compromise of its financial obligations to all creditors or members of classes of creditors, by delivering a copy of the proposal and notice of meeting to consider the proposal to every creditor of the company …”
The proposal looks a lot like a business rescue plan would look in that it needs to include the background to the proposal, the proposal itself and the assumptions and conditions on which the proposal is based. Essentially creditors need to get enough information to make an informed decision as to whether to agree to the proposal or possibly push for a liquidation. To make this type of decision, creditors need to understand the costs and benefits of liquidation versus accepting the proposal.
In order for the proposal to be adopted it not only has to be approved by a majority of creditors attending the meeting but this majority must hold at least 75% in value of all of the claims of either all creditors or by each class of creditor. A class of creditor is a group of creditors whose claims are similar enough for their interests to be aligned.
The company may approach a court to confirm the arrangement once voting has taken place – but is not obliged to do so. If the company chooses to go to court and the compromise is approved by the court, a copy of an order of the court must be filed with CIPC within 5 business days of receiving the order and thereafter attached to each copy of the Company’s Memorandum of Incorporation stored at its registered office.
Whether or not the company goes to court, if the voting is in favour of the proposal it is binding on ALL creditors, not just those who voted for it.
This process does not affect the rights of a creditor to go after a surety.
A compromise is a difficult legal option and requires specialist advice but it can be far better than liquidation or business rescue with a better outcome for creditors and control of the company staying in the hands of the board rather than in those of a liquidator or business rescue practitioner.
Written by Robyn Hey