Compromises & Proposals

 

This can be an informal process outside of the statutory regime or a formal process under the legislation. If a cashflow problem is identified and acknowledged early enough then drafting a proposal or compromise may be a viable option.

Fundamentally entering into an informal compromise with its creditors allows a company to trade on without all of the additional costs, publicity and complexities that a formal creditor compromise can entail. Essentially the company’s creditors agree by contract to defer, compound or compromise their debts, with or without additional injections of working capital or other supporting mechanisms; (for instance debt for equity swaps).

The advantages of a workout are flexibility, more control, less expense and complexity but it still requires the agreement of all of the company’s creditors however depending on the state of solvency and type of creditors a compromise in some circumstances may be achieved by working with a limited number of key creditors that have confidence in the rescue package.

If the latter situation is not the case then a compromise as a form of corporate rescue is unlikely to be a practical proposition unless the company’s creditors are a limited and a relatively homogenous group.