In the midst of financial difficulty, it can be hard to see a way out. Being insolvent means you’re not making enough money to pay your debts or you owe more money than the total value of your assets.

Neither situation is ideal, but there are ways around it to avoid company liquidation, receivership or administration.

Your best option is being upfront with your creditors. Trying to avoid them limits your options, and gives them more grounds to hire a debt collector or petition the court for your liquidation.

A creditor compromise is an informal agreement between you and your creditors to either reduce your debt, or alter your payment plan to something you can afford. While a creditor’s compromise is an informal agreement in that it’s not set through the courts, you will still need to approach a lawyer to help you draft one.

After finding a lawyer you will need to:

• - Gather all relevant information about your finances.
• - This includes statement of affairs, financial accounts, profit and loss statements, and asset portfolios.
• - Show how much money you will be able to pay.
• - Propose a plan to help you repay your creditors.

To be accepted, at least half of your creditors, representing 75% of the total money you owe any must agree to it. If enough creditors vote to accept your compromise, the agreement will be binding on them and on you with no need for approval through the courts. It’s a good idea to offer more to your creditors than they would receive by placing your business in liquidation.

If your business is to pay a lump sum off a reduced debt total, your creditors will write off the debt balance and cut their losses. If you’re making repayments over time, during the period of the compromise debts are frozen and creditors can’t take action against your company. You’ll be temporarily protected against liquidation proceedings, receivership and administration.

The perils of a creditor compromise

Many creditor’s compromises are based on hope and promises that can’t be delivered. Such action only delays insolvency, and isn’t helpful for you or your company. To implement a practical plan, you may appoint a compromise manager. For the sakes of both parties any manager should be independent, and not the debtor company’s director or solicitor. An independent compromise manager will help the debtor company keep trading, while ensuring the creditors receive what they are promised. This role also provides a level of oversight and accountability to ensure the terms of the agreement are met. In some cases, if your repayment plan is close to what a creditor would receive through liquidation, a compromise manager can mean the difference between a positive or negative vote.

A creditor’s compromise is a good option if your business is financially sound, but is going through a period of financial difficulty. It’s a second chance to help you keep trading and turn your company’s future around. If you would like help drafting a creditors compromise, or an independent party to act as credit manager, contact the experienced team at McDonald Vague.

For more information about options if you have a company in financial trouble, download our FREE Guide for NZ Companies in Financial Difficulty.