Compromise between company and its creditors

Introduction
The Insolvency Act (Chapter 6:07), or the Act provides for a compromise between a company and its creditors. Such a compromise provides financial relief to the company.

Compromise provided for in section 147
According to section 147(1) of the Act this section applies to a company, irrespective of whether or not it is financially distressed unless it is engaged in corporate rescue proceedings in terms of this Act.

In terms of section 121(f) “financially distresses” in reference to a company means that:

It appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing (next) six months; or It appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

Section 147(2) authorises the board of a company, or the liquidator of such a company if it is being liquidated, to propose an arrangement or a compromise of its financial obligations to all of its creditors, or to all of the members of any class of its creditors, by delivering a copy of the proposal, and notice of meeting to consider the proposal, to:

Every creditor of the company, or every member of the relevant class of creditors whose name or address is known to, or can reasonably be obtained by, the company; and The Registrar of Companies.

Information contained in the compromise proposal;

Section 147(3) requires the compromise proposal to contain all information reasonably required to facilitate creditors in deciding whether or not to accept or reject the proposal.

It must be divided into three parts, namely:

. Part A—background
. Part B—proposals
. Part C—assumptions and conditions.
Part A — background
This part must contain the following minimum information:
A complete list of all the material assets of the company, as well as an indication as to which assets are held as security by creditors as of the date of the proposal;

A complete list of the creditors of the company as of the date of the proposal, as well as an indication as to which creditors would qualify as secured, statutory preferent and concurrent in terms of the laws of insolvency, and an indication of which of the creditors have proved their claims;

The probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation;

A complete list of the holders of the company issued securities, and the effect that the proposal would have on them, if any;

Whether the proposal includes a proposal made informally by a creditor of the company.

Part B — proposals
This part must contain the following minimum information:
The nature and duration of any proposed debt moratorium;
The extent to which the company is to be released from the payment of its debts, and the extent to which any debt is proposed to be converted to equity in the company, or another company;

The treatment of contracts and ongoing role of the company;

The property of the company that is proposed to be available to pay creditors’ claims;
The order of preference in which the proceeds of property of the company will be applied to pay creditors if the proposal is adopted;

The benefits of adopting the proposal as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation.

Part C — assumptions and conditions

This part to contain, at the least, the following information:
A statement of the conditions that must be satisfied, if any, for the proposal to come into operation, and be fully implemented;

The effect, if any, that the plan contemplates on the number of employees, and their terms and conditions of employment;

A projected balance sheet (Statement of Financial Position) for the company and statement of income and expenses for the ensuing three years.

Certificate
A proposal must conclude with a certificate by an authorised director or prescribed officer of the company stating that any:

Factual information provided appears to be accurate, complete, and up to the date; Projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement.

Approval of the plan
The plan requires a minimum vote of 75 percent by creditors or class of creditors in value. If the proposal is approved the company may apply to the Court for an order approving the proposal.

Filing and effect of Court order
According to section 147(8) a copy of the order:
Must be filed by the company within five business days; and Must be attached to each copy of the company’s Memorandum of Incorporation Is final and binding on all of the company’s creditors or all of members.

Conclusion

A compromise with creditors can bring about much needed financial relief.

Disclaimer
This simplified article is for general information purposes only and does not constitute the
writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal
practitioner / conveyancer, chartered accountant, corporate rescue practitioner,
registered tax accountant and consultant in deal structuring and is an experienced
director of companies. He writes in his personal capacity. He can be contacted on +263
772 246 900 or gohofisi@gmail.com-The Herald