Companies may attempt to rearrange their financial affairs to minimise the financial impact of the pandemic (or for any other reason). Section 155 of the Companies Act provides an informal mechanism of restructuring a company’s obligations to creditors.
Here are 10 things to consider when entering into a compromise with creditors:
- A compromise is an informal method of restructuring the company’s obligations with all the creditors, or a certain class of creditors. A minority of non-consenting creditors can be bound if the majority agrees. The number of creditors of many companies is often so large that it may be difficult if not impossible for the company to negotiate terms with each creditor. A compromise with the consent of a majority of creditors may be necessary because it overcomes the practical difficulty of obtaining the individual consent of every creditor regarding a compromise proposal.
- The courts have given a wide interpretation as to what a compromise or arrangement can entail. For example, the courts have accepted that a compromise can provide for a special or alternative means of winding-up a company or for the take-over of a company. A compromise must entail an agreement to either resolve any disagreement between the parties regarding the terms of the financial obligations or to amend the terms of the financial obligations to allow the company to be better placed to meet its debts.
- A compromise may be entered into whether or not the company is financially distressed. It provides a proactive step that the board of a company can take to restructure the company’s financial affairs. A company is precluded from entering into a compromise with creditors if it is already engaged in business rescue proceedings.
- A compromise can only be proposed by the board of the company (or by the liquidator if the company is being wound up). This can be done by delivering a copy of the proposal and notice of the meeting to consider it, to all relevant creditors whose names or addresses are known or can reasonably be obtained by the company.
- The contents of the proposal will depend on the nature of the proposed compromise but must contain the minimum information set out in section 155. The proposal must provide sufficient information to allow creditors to decide whether to reject or accept a compromise. If there has been any material non-disclosure or an inaccurate disclosure of information in the proposal which would have induced creditors to vote differently, the court can refuse to sanction the compromise due to a lack of compliance with section 155(3). Creditors must be given sufficient information to make an informed decision.
- Unlike business rescue proceedings, a company does not have the protection of an automatic moratorium against legal action during the period of renegotiation with creditors. The approach to creditors must be carefully handled because to make or offer to make any arrangement with creditors to release the company wholly or partially from its debts is an act of insolvency under the Insolvency Act. Where a company which is not in financial distress wants to enter into a compromise with creditors, the board of the company should consider providing additional financial information in the proposal which demonstrates that the reasons for entering into a compromise are not due to financial distress.
- Prior to the finalisation of the compromise, any creditor can apply to court to put the company under business rescue or liquidation. Placing the company under business rescue or liquidation would bring the negotiations for a compromise to a stop unless a business rescue practitioner or liquidator decides to pursue the negotiations
- The proposal for compromise can only be adopted at the meeting of creditors if supported by a majority representing at least 75 per cent in value of the creditors or relevant class of creditors. The creditors can vote in person or by proxy. ‘Value’ in this context means actual value determined at the time of voting, and not at some earlier date.
- The company must consider how the section 155 restructuring process will affect the position of parties who have bound themselves as sureties for any of the company’s financial obligations. This is important because section 155(9) specifically makes provision for a creditor to retain its rights against the surety of the debtor company. A surety can, for instance, be protected from liability if the compromise itself provides that the surety is released wholly or partly from liability or the unpaid debt is not immediately enforceable against the surety.
- Once the proposal setting out the compromise or arrangement with creditors has been adopted, the company may apply to court for an order sanctioning the proposal. Court sanction is not necessary where a contractual compromise or arrangement was unanimously adopted by all creditors and the company is satisfied that there is no risk that any single minority creditor may have been excluded from the voting process. Where there has not been a unanimous approval of the proposal, the company can opt to have the proposal sanctioned by the court because then the proposal becomes binding on all the creditors whether or not they have agreed to it. This court order is final and binding on all the relevant creditors, from the date on which the court order sanctioning the compromise is filed with the Companies and Intellectual Property Commission.