For businesses facing financial distress, a creditor compromise can be a valuable tool to restructure debt and avoid liquidation. This legal process allows a company to come to an agreement with its creditors on how to settle debts, typically for less than the full amount owed, allowing the business to continue operating. Below is a step-by-step breakdown of how the general creditor compromise process works. We at Principle Insolvency would like to share that general process.
Step 1: Assessing Financial Viability
Before entering into a creditor compromise, the company must assess whether this solution is suitable. This includes reviewing its debts, cash flow, and future revenue projections. A compromise works best when the business is fundamentally viable but facing temporary financial pressure. In most cases, directors will seek advice from insolvency professionals or financial advisors at this stage.
Step 2: Drafting the Proposal
The next step involves preparing a formal compromise proposal. This document outlines how much the company can realistically pay, the payment schedule, and the timeframe for the compromise. It should also include a statement of the company’s financial position and explain why creditors should agree to the compromise rather than push for liquidation, where they may receive even less.
Step 3: Appointing a Compromise Administrator
The company must appoint a compromise administrator—usually a licensed insolvency practitioner or accountant—who acts as a neutral party. The administrator will manage the creditor voting process and oversee the implementation of the compromise if it’s approved.
Step 4: Notifying Creditors
Once the proposal is finalised, all known creditors must be notified in writing. They are provided with a copy of the proposal and supporting documents, along with details about the voting process. Under New Zealand’s Companies Act 1993, the company must give creditors at least 5 working days’ notice before the vote.
Step 5: Creditor Voting
To approve the compromise, it must be accepted by a majority in number and 75% in value of each class of creditors who vote. Creditors can vote in person at a meeting or submit their vote in writing. If this threshold is met, the proposal becomes binding on all creditors in that class, including those who voted against it or did not vote at all.
Step 6: Court Oversight (If Needed)
Although not always required, court involvement may be sought to approve the proposal, especially if there’s significant disagreement among creditors or concerns about fairness. The court will assess whether the proposal is in the best interest of all parties.
Step 7: Implementing the Compromise
Once approved, the compromise terms are legally binding. The company must strictly follow the agreed-upon terms, including making payments as scheduled. The compromise administrator may continue to monitor the company’s performance and report to creditors.
Step 8: Moving Forward
If the company completes all its obligations under the compromise, it can move forward with a clean slate. Successful creditor compromises allow businesses to preserve jobs, maintain operations, and eventually restore their financial standing.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
At Principle Insolvency, we understand the challenges that come with financial distress. Our team provides tailored creditor compromise services to help New Zealand businesses restructure debt, protect assets, and avoid liquidation. With clear guidance and expert support, we help you negotiate fair terms with creditors and regain control of your financial future. Contact Principle Insolvency today to explore your options and take the first step toward business recovery.