In these challenging economic conditions, it is important for directors of a company to know that there are options available to the company besides liquidation or business rescue. It is also possible for a company to restructure its debt by entering into a compromise or arrangement (“compromise”) with its creditors.
The normal options such as business rescue and liquidation might not in all instances be the best suited or only options available, especially for a financially distressed company.
Although it is normally the case, a company can also enter into a compromise with creditors even if the company is not financially distressed. A company is considered to be financially distressed if it might not be able to pay all its debts as and when it becomes due and payable within the next six months or if it appears that the company will become insolvent in the next six months.
A compromise could be entered into to restructure the company’s affairs without the appointment of a business rescue practitioner, or to resort to the liquidation of the company.
In order to consider a compromise, it is necessary for a company to set out a detailed proposal of the compromise to its creditors at a formal meeting of its creditors. The creditors will have an opportunity to consider and vote on the proposal at the meeting. If the creditors support the proposal it will be presented to the court for approval.
If the court considers the proposal to be just and equitable it may approve the proposal. The court sanctioned compromise will then be binding on all the creditors.
A compromise with its creditors will allow the company an opportunity to streamline its business operations and to restructure its affairs. It will also give the company some breathing room to recover and to re-establish its business operations, especially after the Covid-19 lockdown.
Hugo van Heerden