Many small business owners find themselves swamped in debt. A big client falls over and leaves a large unpaid bill, or a planned expansion goes terribly wrong and suddenly what was a profitable little business is facing ruin.
The Companies Act has a simple process, called the Part 14 Compromise (named after part 14 of the Companies Act) that allows a company to ask its creditors for help. The process is deceptively simple.
Someone, usually a director of the troubled company, comes up with a proposal, formally called the Compromise. It can be complicated, but the best ones are very simple. Something like; “We propose to pay our creditors 70% of what we owe them and we will pay this over two years.”
This proposal is then sent to the creditors. If half of the creditors vote yes and those who vote yes have over 75% of the total amount of debt then this deal is passed. It is binding on those creditors who voted no and on those who didn’t vote.
There are some catches. Of course. If there is unpaid GST and PAYE. this cannot be included in the deal. Although often the IRD will agree to forgive some of the debt if the rest of the creditors also agree to take a loss.
Secured creditors can still come and collect their gear. So a finance company that has a security over a truck can ignore the proposal and just take-back the truck. Any shortfall, however, will be captured by the compromise.
Creditors who vote against the proposal are bound by it but any personal guarantees given by the directors are still enforceable.
Helpfully, if a creditor does not vote in the compromise, their debt isn’t counted in the total. As mentioned earlier, you need 50% of your creditors who vote to agree to your proposal, not 75% of all creditors.
Companies that do well from a Part 14 Compromise are those who are profitable month to month but have historical legacy debt or those that are seeking fresh investors who do not want to pay money to clear old creditors. It isn’t a quick-fix for a business that is losing money and expect the larger creditors to ask difficult questions during the process.
It is usual to get a lawyer or insolvency firm to help with preparing these proposals, although, this isn’t required. This is the sort of service Waterstone offers. The cost isn’t large and the process is private.
If you would like to talk to us in confidence, please get in touch via email damien@waterstone.co.nz.