In today’s business environment, it is increasingly rare to find a company operating without some level of debt. Ambitious growth plans, tight margins, and unexpected shocks often lead healthy businesses into distress. When financial pressure builds, whether due to misfortune, loss of a major customer, poor cashflow management, or external market downturns, directors may feel like they are running out of options.
One powerful tool available under the Companies Act 1993 (the Act) is the Part 14 Creditor Compromise. This process allows companies under strain to formally negotiate with creditors to restructure debts, preserve business value, and avoid the destructive consequences of liquidation or receivership.
What is a Part 14 creditor compromise?
A Part 14 Compromise is a structured agreement between a company and its creditors that proposes an alternative way for those debts to be dealt with. Instead of entering liquidation, where businesses are dismantled and assets sold, directors can present creditors with a proposal that delivers a better outcome than they would receive through insolvency.
A creditors’ compromise can be incredibly flexible, offering a process that is typically cheaper, faster, and less burdensome than formal insolvency procedures such as voluntary administration or liquidation. It is particularly effective for companies that:
- Are fundamentally sound but burdened by historical debt
- Experienced a one-off setback
- Is trading profitably month-to-month but need time to stabilise their position
- Is attracting new investors who are unwilling to fund legacy liabilities
Ultimately, the purpose of a creditors’ compromise is to preserve a viable business that remains operationally strong but is temporarily trapped inside an insolvent company.
How does a compromise work?
The process is relatively simple and far more adaptable than many directors realise.
Proposal
A director or an appointed professional adviser drafts a compromise proposal. This document outlines how the company intends to repay (or restructure) its debts.
The best proposals should be clear, simple, and realistic. For example, the company assures as per proposal to paying creditors a reduced percentage of the debt owed, make an immediate lump-sum settlement, spread payments over time, offer creditors equity in the company, give creditors options (e.g., smaller payment now vs. staged payments later), or vary repayment terms or suspending interest.
The potential options for the compromise are countless, and the only restriction is the creativity of the person who proposes the companies and the willingness of the creditors to approve it.
It is also important to note that during the term of the compromise, debts are frozen and no creditor may take any action against the company.
Creditors
When the proposal is drafted it must be distributed to all creditors as prescribed process under the Act. Transparency is essential, creditors must be properly notified to be bound by the result.
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.
Voting
For a compromise to move forward, it needs the support of at least 50% of the creditors by number and 75% by value within each class of creditors who vote.
It is important to maintain the separation of the different classes of creditors. Preferential creditors, for example, can’t be combined with unsecured creditors, and if the groupings aren’t properly defined, the High Court can set the whole compromise aside.
Clear separation ensures the process is fair and reflects the different legal rights of each group.
Once the classes are correctly identified, each group votes on the proposal. If the required majorities are reached, the compromise becomes binding on everyone in that class, even creditors who voted against it or chose not to vote at all.
This gives the company the certainty it needs to move forward, while still respecting the interests of each creditor group.
Board Approval and Implementation
Once the compromise is approved by creditors, the company’s board formally signs it off and begins putting the agreed terms into action.
In many cases, a compromise manager is appointed to oversee the process, ensuring the company sticks to its obligations, manages payments, and distributes funds to creditors as required. This provides structure and accountability as the business works through the agreed pathway to recovery.
Limitations
Despite the existence of such a great tool for a good business caught in temporary financial difficulty, there are always limitations.
Preferential creditors have special protection
A compromise cannot override preferential creditor rights such as employees (holiday pay) or the Inland Revenue (GST, PAYE) unless 75% of those preferential creditors by value agree. Otherwise, the compromise may be declared void.
Secured creditors retain their security
Secured creditors also sit outside the usual compromise rules and may still enforce their security (e.g., repossessing financed equipment). However, any remaining shortfall after the asset is seized falls under the compromise.
Related-party creditors cannot influence the outcome
To prevent manipulation, related-party creditors are treated separately and cannot be used to override genuine creditor objections.
Personal guarantees still stand
A compromise does not extinguish personal guarantees. Creditors may still pursue directors personally for guaranteed amounts.
The bottom line
A Part 14 creditor compromise remains one of the most flexible and practical restructuring tools available to businesses. It gives companies the chance to reset and rebuild without the cost, complexity, or stigma that usually comes with formal insolvency processes. In the right circumstances, it can turn a struggling business back into a sustainable one, offering better outcomes not just for the company but for its creditors as well.
If you have any questions about how the process works or whether a compromise might be suitable for your situation, please do not hesitate to contact the team at Waterstone.
Get in touch with us reception@waterstone.co.nz or 0800 256 733.
