Getting the Creditors’ Compromise Right

Getting the Creditors’ Compromise Right
Thursday August 25, 2011

A case I’ve been working on recently emphasised how important it is to be aware of your rights as a creditor when faced with an insolvent debtor. Part 5, subpart 2 of the Insolvency Act 2006 governs the procedure to be used by those who wish to avoid bankruptcy by obtaining approval from their creditors to receive a return less than what they are entitled to, but generally more than what they would receive if the debtor went into bankruptcy. To kick off the process, the insolvent has to make an accurate and not misleading statement of his/her affairs and a proposal on how his/her debts can be paid to all his/her creditors (“the proposal”). The person nominated by the insolvent to look after his/her affairs, the trustee, then has to hold a meeting of all creditors so that they can vote on the proposal. A proposal will only pass if a majority of creditors in number AND 75% in value, of those creditors who vote at the meeting approve it. The proposal can be a serious compromise to what is actually owed. I know of proposals approved as low as $0.01 return for each dollar owed. It is also very apparent that the nominated trustee only needs to be satisfied, based on the information provided by the insolvent, that the creditors are doing better than they would do if the debtor went into bankruptcy. The process is extremely process-driven, and realistically, the trustee doesn’t have to dig too deep into the information supplied by the debtor if none of the creditors kick up a fuss. Related parties are even able to vote at a creditors meeting. This may mean that the friendly related party holds the casting vote (in number) and depending on how much is owed in relation to others, could even hold 75% of the vote by value. If the proposal is approved, the trustee is then obliged to make an application to the High Court for approval of the proposal. If you remain of the view that the proposal should not be approved then you have the right to oppose the application, however a hugely important consideration for the Court will be the view of the majority of the creditors as expressed at that creditors meeting. As such, to some extent, the horse has already bolted unless you can provide some compelling reasons for the Court to intervene and oppose that majority view. As such, it is crucial as a creditor to ensure you get accurate information about the assets and liabilities held and who the debts are actually owed to. Unless you have reliable intelligence on the likely view of the other creditors to the proposal such that your vote is likely to make no difference whatsoever, my advice to all those who are owed money is to attend the creditors meeting and share as much information with the other creditors as possible in order to ensure you have accurate information, and only then vote.

 

By Chris Patterson