The part 14 compromise creates an opportunity for an insolvent company to continue. Although the company may not be able to pay back its debt in full, it allows the company to provide ongoing business to creditors and a chance to save a good business trapped in an insolvent company.
Examples of compromises that could be agreed on include:
- Cancelling all or part of debt
- Varying the rights of creditors or terms of debt
Companies that can benefit from this arrangement are usually businesses that are fundamentally sound but have taken on a recent setback and still have the support of its creditors to continue trading on.
Procedure
Once there is reason to believe that a company is unable, or will be unable, to pay its debts, the board of directors may propose a compromise.
The Process
Company seeks advice
The company can engage a professional firm to explore and assess the possibility of a compromise.
Compromise proposal
The proposer prepares and distributes the compromise to all the creditors with the assistance of a professional if engaged.
Creditors meeting
A creditors meeting is called, and the compromise is voted on. Once the compromise is put to the creditors for consideration, the creditors must vote to approve the compromise. For the compromise to be approved there must be a majority in number and 75% in value of the creditors voting for it.
Approval by the board
Once the compromise is voted on and passes, the board will ratify the proposal and carry out its obligations under the proposed terms. There is often a compromise manager appointed to maintain the compromise or possibly make payments or distributions to creditors.
Why Waterstone?
Putting a compromise together that meets the needs of both the company and its creditors is not an easy task. We have a proven track record in drafting compromises, running creditor meetings and engaging with stakeholders to find this balance.