Part XV of the Companies Act 1997 offers a company in difficulty an alternative to liquidation: a binding deal with its creditors.
Section 241 — the definitions
(a) cancelling all or part of a debt of the company; or
(b) varying the rights of its creditors or the terms of a debt; or
(c) relating to an alteration of the company’s constitution that affects the likelihood of the company being able to pay a debt.
(a) a person who, in a liquidation, would be entitled to claim under section 351 that a debt is owing; and
(b) a secured creditor.
The “proponent” is the person who proposes the compromise under section 242.
The word “including” in the definition means paragraphs (a) to (c) are examples, not limits. A compromise may reschedule debt, convert it to equity, provide for payment of a dividend in the kina, or restructure the company’s constitution.
Note that secured creditors are creditors for this Part, and that the definition of creditor picks up contingent and prospective claims through the reference to section 351 — so a guarantor or a party with a disputed claim is within it.
Section 242 — who may propose a compromise
(a) the board of directors;
(b) a receiver appointed in relation to the whole or substantially the whole of the assets and undertaking;
(c) a liquidator;
(d) with the leave of the Court, any creditor or shareholder.
A compromise cannot be used by a solvent company to escape inconvenient contracts. The proponent must have reason to believe the company is or will be unable to pay its debts as they become due in the ordinary course of business — the cash flow limb of the solvency test, and the test in section 335.
Note that a compromise can be proposed while a liquidation is on foot — paragraph (c) — and after a receiver has been appointed. It is not confined to companies still under board control.
Where the Court gives a creditor or shareholder leave under paragraph (d), it may order the company to supply a list of the names and addresses of its creditors, showing the amounts owed, or such other information as may be specified, to enable that person to propose a compromise.
Without that order an outsider could not comply with the section 243 notice requirements, since only the company knows who its creditors are.
Section 243 — the notice and statement
(a) the amount owing or estimated to be owing to each; and
(b) the number of votes each is entitled to cast on a resolution approving the compromise.
(a) notice in accordance with Schedule 7 of the intention to hold a meeting of creditors, or of two or more classes, to vote on the resolution; and
(b) a statement containing — (i) the name, address and capacity of the proponent; (ii) an address and telephone number for inquiries during normal business hours; (iii) the terms of the proposed compromise and the reasons for it; (iv) the reasonably foreseeable consequences for creditors of approval; (v) the extent of any interest of a director in the compromise; (vi) an explanation that the compromise and any amendment proposed at the meeting will be binding on all creditors, or all creditors of that class, if approved; and (vii) details of any procedure for varying the compromise after approval; and
(c) a copy of the list or lists of creditors.
Under section 243(3), the proponent shall submit to the Registrar a certified copy of the notice and statement within one month of their being given.
Creditors must be told, in the statement, that the compromise and any amendment proposed at the meeting will bind them if approved. A creditor who does not attend, or who votes against, is still bound.
Note also paragraph (b)(v): the extent of any interest of a director must be disclosed. Compromises frequently involve directors who have guaranteed the company’s debts, or who are themselves creditors.
Section 244 — approval and binding effect
(1) A compromise, including any amendment proposed at the meeting, is approved where, at a meeting conducted in accordance with Schedule 7, it is adopted in accordance with section 5 of that Schedule.
(2) An approved compromise is binding on the company and on (a) all creditors, or (b) where there is more than one class, all creditors of that class, to whom notice of the proposal was given under section 243.
The compromise binds those to whom notice was given. A creditor the proponent did not know about, and did not notify, is not bound — and remains free to sue or to petition for liquidation.
That makes the creditor list under section 243(1) critical. A proponent who overlooks creditors may find the compromise undermined by claims from outside it. It is also why section 242(2) allows the Court to order the company to produce a full creditor list.
Where a resolution is put to more than one class, it is presumed, unless the contrary is expressly stated in the resolution, that approval by each class is conditional on approval by every other class voting on it.
So a compromise approved by unsecured creditors but rejected by secured creditors does not take effect in part — unless the resolution expressly says the classes stand independently.
Under section 244(4), the proponent shall submit a notice in the prescribed form of the result of the voting to the Registrar, and give a copy to each known creditor, the company, and any receiver or liquidator. That notice starts the one-month period in which a dissatisfied creditor may apply to the Court under section 246(3).
Section 248 — who pays
(a) shall be met by the company; or
(b) where incurred by a receiver or liquidator, are a cost of the receivership or liquidation; or
(c) where incurred by any other person, are a debt due to that person by the company and, if the company is put into liquidation, are payable in the order of priority specified in Schedule 9.
Paragraph (c) matters for a creditor or shareholder proponent: the costs are recoverable from the company, and rank in the Schedule 9 priority order if the company later fails.
Sources
- Companies Act 1997 — ss 4, 241–248, 249–253, 335, 351, 360; Schedules 7 and 9
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.