When the economic climate is tough and businesses bear the brunt, it is not uncommon to see companies fully settling their debts, for as little as 15 cents on the dollar, while continuing to trade with a legally binding agreement.
What’s more, they are often supported by their creditors, and generally everyone is happy with the arrangement.
For a business in distress, with debt spiraling out of control, this might sound like something mystical, magical, and altogether impossible. But it might not be and might just be the answer needed for your company or one you are advising.
Companies that can benefit from this arrangement need to be a business that is fundamentally sound but have taken on a recent setback. Maybe they entered a new market, just as the economy went south. Perhaps they took on work they weren’t suited to, and only realised it later. Whatever the case, they’re otherwise profitable and good at what they do, and they deserve a chance.
The mechanism to allow it is a Part XIV Compromise. The rules are found in the Companies Act 1993 and various pieces of case law.
Below is a high-level outline of the process for a Part XIV Compromise and the steps involved. Of course, the legal framework is complex, and partnering with an insolvency professional is invaluable to avoid disaster.
Step 1
The director(s) propose “the compromise” to a class of creditors, by circulating a package of documents, which includes the full terms of the agreement. The core of the contract may be an immediate payment, followed by instalments, totalling a percentage of the amounts owed.
Step 2
The reasons behind the financial strife, and why the business will succeed going forward, is explained in full to creditors. This step is crucial. It’s an opportunity to give creditors confidence the company understands what happened, what it needs to remedy the situation, and that the affairs are generally under control.
Step 3
A meeting is convened to facilitate creditor voting, and to present a final and strong case. At Waterstone, we support and act as chair. “The compromise” passes and is binding on all, if voted “for” by the majority in number, and at least 75% in value.
With liquidation figures on the rise, we are assisting with more and more compromises right now and want to help even more businesses stay afloat. If you know any companies which could benefit or would like to know if your company might be eligible, we offer a free initial consultation with parties to discuss the possibilities available for their unique set of circumstances.
