Creditors compromise under Part 14

What a creditors compromise is

A creditors compromise is governed by Part 14 of the Companies Act 1993. It is a proposal put to a company's creditors to compromise the debts owed to them, for example by accepting a reduced amount, by rescheduling payments over time, or by a combination of the two. If the proposal is approved in the way the Act requires, it becomes binding on the creditors it covers.

The purpose is to give a company that is in difficulty, but that still has a future, an orderly way to resolve its debt position without going into liquidation. Creditors often support a well-prepared compromise because a sensible arrangement can return more than they would expect to receive in a liquidation, and it preserves the prospect of an ongoing trading relationship.

Who can propose a compromise

Part 14 allows a compromise to be proposed by a defined group of people connected with the company. In broad terms, a proposal may be put forward by the company's directors, by a receiver or liquidator if one has been appointed, or, with the leave of the court, by a creditor or shareholder of the company. The person who proposes the compromise is responsible for preparing the proposal and the supporting information that creditors need in order to make an informed decision.

Whoever brings the proposal forward, the quality of the information matters. Creditors are asked to give up part of what they are owed, so a compromise stands the best chance of success when it is clear, realistic and properly explained.

How creditors vote, by class

Creditors do not all vote together as a single group. The proposal divides creditors into one or more classes, grouping together creditors whose interests are sufficiently similar that it is fair for them to consider the proposal as one body. Each class then votes on the compromise separately.

For a compromise to be approved by a class, it must receive the required majority of that class. The Act sets this as a majority in number, representing at least three quarters in value, of the creditors of the class who actually vote on the resolution, whether in person or by proxy. In other words, more than half of the voting creditors by head count, representing at least three quarters of the total amount owed to the voting creditors in that class, must be in favour. Where there is more than one class, the proposal needs the required majority in each class.

Because the test looks at both the number of creditors and the value of their claims, a compromise needs broad support rather than the backing of one or two large creditors alone. Getting the class definitions right at the outset is an important part of preparing a proposal that is both fair and capable of being approved.

When a compromise binds creditors

Once a class approves the compromise by the required majority, it binds every creditor in that class. That includes creditors who voted against the proposal and creditors who did not vote at all. This is the central feature that distinguishes a Part 14 compromise from an informal arrangement, where each creditor must agree individually before they are bound.

The Act also contains safeguards. Creditors must be given proper notice and the information they need to decide, and a creditor who is unfairly prejudiced by a compromise, or by the way it was approved, may apply to the court for relief. The rights of secured creditors and the priority of preferential creditors are protected, so a compromise generally cannot override those interests without the creditor's agreement.

Advantages and limitations

A compromise can be a practical and relatively cost-effective way to restructure debt while a company keeps trading. It avoids the disruption of a formal appointment, it can be tailored to the company's particular circumstances, and it allows creditors to be dealt with class by class rather than requiring unanimous agreement.

It is not suitable in every situation. A compromise depends on the company being able to put forward a credible proposal and to perform it once approved, which usually means there must be a genuinely viable business and a reliable source of funds. It offers no automatic statutory moratorium, so it does not, by itself, stop a determined creditor from taking action before the proposal is voted on. And if creditors do not approve it, the company will need to consider its other options. We give an honest assessment of whether a compromise is realistic before any proposal is prepared.

How it compares with voluntary administration

A creditors compromise and voluntary administration are both ways to deal with company debt outside a liquidation, and they can lead to similar destinations, but they work differently. A compromise under Part 14 is a proposal put directly to creditors by the company or another eligible person, with no independent administrator stepping in to run the company and no statutory moratorium pausing creditor action.

Voluntary administration under Part 15A places the company in the hands of an independent administrator and triggers a moratorium that holds most creditor action while the company's position is assessed. It can result in a Deed of Company Arrangement, which performs a comparable function to a compromise. Where protection from creditor pressure and independent oversight are important, voluntary administration may be the better route. Where the company simply needs the agreement of its creditors to a clear repayment proposal, a compromise can be the more direct and less costly path. We help you weigh the two against your particular circumstances.