SECTION 155 COMPROMISE

A Compromise, as provided for in Section 155 of the Companies Act of 2008, entails that a Company Compromises or propose an arrangement of its financial obligations with its creditors, or certain classes of its creditors.

If the proposal is accepted, it will Compromise the creditors’ claims against the Company, and they will have no further claims against the Company in terms of that specific debt.

Companies who are in financial trouble often attempt to trade itself out of trouble, while the recurring monthly financial constraints and commitments makes it difficult, and often have the consequence that it cannot pay its debts. 

Companies then consider Business Rescue or Liquidation.

The danger is that a Company- or business’s attempt to trade out of trouble, is often tantamount to reckless trading or trading under insolvent circumstances, which  have the effect that the directors of a Company may be held personally liable for the debts of the Company.( Apart from the other contraventions of the Companies Act.)

It is therefore often the right advice to Liquidate the Company, or if the board is of the opinion that the Company is only in financial distress and that it can be rescued, to place the business in Business Rescue.

The Covid-19 pandemic brought many businesses to a standstill, and debt accrued whilst the businesses could not operate. Many of those businesses will be liquidated because of its inability to pay their debt as it becomes due, although the structure and business model is sound.

Liquidation is very often the answer to financial problems of a Company, and the longer you wait, the bigger the problems, but it is not the only remedy.

Liquidation means loses, not only for the proprietors, but it also for the employees, contractors, landlords and other creditors. On Liquidation, the business closes down, a liquidator is appointed whose task is basically to sell all the assets and pay the creditors a dividend from the proceeds.

Creditors often then focus on the Directors by having interrogations and investigations as provided for in the Companies- and Insolvency Act, to see how the business was conducted and to find personal liability, because the dividend they receive normally does not cover the debt.

Business Rescue is another option, but it is often expensive and a tedious process during which much time and unnecessary costs are wasted.

In Business Rescue, a Business Recue Practitioner gets appointed who takes over the management of the Company, then meets with creditors, draft a business rescue plan, and then if the creditors accept the business rescue plan, has the task to trade the business out of trouble, until it is rescued.

It happens frequently that the Business Rescue procedure is not successful, and the Company get liquidated in any event.

My references to Liquidation and Business Rescue proceedings herein is not intended to cover all aspects thereof, and there are much more to be explained about it.

The focus of this article is about the Compromise procedure, and therefore Liquidation and Business Rescue procedures and workings are not addressed in detail. 

An under-utilized alternative to Liquidation and Business Rescue, is to make use of the provisions of Section 155 of the Companies Act and enter into a Compromise with Creditors.

As stated before, a Compromise means that a Company makes financial arrangements with its creditors, or some of its creditors, in an attempt to avoid Liquidation, or to become profitable again.

Although there are many similarities between Business Rescue proceedings and a Compromise, the benefits of a Compromise in my view often outweighs that of Business Rescue.

 

The main benefits and differences are the following:

v  In a Compromise, the board of Directors remains in charge of the Company, unlike Business Rescue, where the Business Rescue Practitioner takes over management.

v  There are less formalities and timelines in the Compromise procedure.

v  A Company can at any time commence with the Compromise procedure, it does not have to be in financial distress, as is the case in Business Rescue.

v  In a Compromise, you can choose a class of creditors whom you want to Compromise with, it does not have to affect all the creditors.

v  There are fewer reporting requirements as it can be tailor made, and the Master of the High Court is not involved, as long as the Company is not liquidated.

v  The costs are also less than with Business Rescue because the Company does not have to pay a Business Rescue Practitioner its hourly- and administration fees. The fees for the Receiver in a Compromise is less burdensome.

v  You can initiate a Compromise after a Company has been liquidated. The effect hereof is that once the Compromise is sanctioned by the Court, the Company can be brought out of Liquidation.

v  Because there is no moratorium on legal proceedings against the Company until the proposal is sanctioned by court, it creates a sense of urgency from the side of the Company and from the Creditors to accept or reject the proposal and move forward.

The procedure is shortly as follows:

A proposal gets drawn up and presented to the creditors. The proposal must contain all information reasonably required to facilitate creditors in deciding whether or not to accept the proposal.

The Companies Act stipulates very clearly what the format of the proposal must be and what it should contain.

In short, it requires the proposal to be divided into 3 parts:

Firstly, it must give a background, which is to supply a list of the material assets of the Company , a list of the creditors and their ranking, and the probable dividend that will pay put should the Company be placed in Liquidation.

Secondly, the proposals most explain the nature and the duration of any proposed debt moratorium, the extent to which a Company will be released from payment of its debts, the treatment of contracts and ongoing role of the Company, the property of the Company that is proposed to be available to pay creditors claim’s, the order of preference which shall be applied if the proposal is adopted and the benefits of adopting the proposal as opposed to the benefits that would be received by creditors if the Company were to be liquidated.

Thirdly, it must address assumptions and conditions that must include a statement of the conditions that must be satisfied for the  proposal to come into operation and fully implemented, the effect it will have on the employees as well as a projected balance sheet and statement of income and expenses for the ensuing three years.

After the proposal is drawn up, a meeting is held with the creditors. At the meeting, the proposal is discussed, and a vote takes place.

If more than 50% of the creditors present at the meeting, whose combined claims represent 75% of the debt in value, vote for the proposal, the proposal is adopted.

The proposal may be made an order of court, or sanctioned by court, and all creditors, even those who did not vote in favour thereof, is held by the proposal.

In practice, a receiver gets appointed to administer all the claims of the creditors of the debtor Company and the Compromise process.

On successful implementation of the proposal, the business carry on as usual.

 

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