New Zealand businesses can struggle to pay all debts in full. This can occur for a variety of reasons.
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.
Creditor compromises are often commenced after a creditor has commenced debt collection steps. It is important that debtors get advice from an insolvency lawyer with dispute resolution expertise.
At Norling Law we have expert creditor compromise lawyers who offer a FREE 30-minute Legal Consultation where we can discuss the issues and we can add strategic value. After the discussion, we can decide whether we can help you and at what cost.
Pros and Cons of Creditor Compromises
The advantage for the debtor is that it can avoid being put into liquidation. The advantage for creditors is that they expect to receive a better outcome than they would otherwise dealing with a liquidator or receiver.
Accordingly, the key to a successful compromise or proposal is a credible and achievable plan to sell assets or for a third party to advance funds. This can provide more to creditors than they may otherwise achieve.
We have significant experience in identifying those situations where a compromise is likely to work. We advise our clients of alternatives if success appears unlikely.
Requirements for a Compromise with Creditors
Information must be provided to creditors of the company who will be impacted by the compromise.
The following information must be provided to creditors:
Names and addresses of the proponents and the capacity in which they are acting;
Events that led to the need for a compromise;
What the compromise proposal entails in relation to the amount and timing of the payment(s);
An assessment of what creditors would be likely to receive in the event of a liquidation; and
A copy of the list of creditors who will be affected by the proposal and the amount owing or estimated to be owing to each of them.
Effect on Debtor and Creditors if Creditor Compromise is Approved
If approved, the compromise binds all creditors to whom notice of the proposal was given, even those creditors who voted against the proposal and, once payment has been made under the terms of the compromise, any residual balance must be written off by the creditor.
Impact of Related Creditor Votes
Related creditors (or insider creditors) are sometimes included for voting to support a proposal.
The Court’s have stated that classes of creditors should be created using a pragmatic, business-oriented approach, which is based on considering both the legal rights and the economic interests of the creditors.
Accordingly, creditors should be separated into different classes if their legal rights or economic interests are so different that they cannot meaningfully consult with each other.
Related creditors’ interests are too dissimilar from the other creditors, and they should be put into a separate class for the purpose of voting on the compromise.
A careful consideration should be considered to “related” creditors so that they do not unfairly prejudice third party creditors.
Approval by Creditors
For the compromise to go ahead, it must receive the approval of at least 50% by number and 75% by value of the creditors in each class of creditor who vote on the proposal either at a formal creditors’ meeting or by way of postal votes.
It is crucial that the classes of creditors, based on their legal rights and economic interests are identified. If correct classes are not identified, the compromise may be overturned by the High Court.
More Information for Creditor Compromise
We assist clients to navigate this process correctly. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience and how we can help you.
We have offices on the North Shore in Auckland, New Zealand or can have the consultation by phone.