Creditor compromises: how a Part 14 compromise works, and its limits

A creditor compromise sits between informal negotiation and a full insolvency process. It’s a way for a company to put a formal proposal to all its creditors at once, have them vote, and, if enough agree, bind everyone in each class to the new terms. For the right business, it can be a lifeline. It also has real requirements, and it isn’t always the best fit when IRD is the main creditor. If you’re still weighing every route, start with alternatives to liquidation, which puts a compromise alongside funding, arrangements and administration.

What is a Part 14 compromise?

Part 14 of the Companies Act 1993 lets a company (or certain others, such as a creditor or liquidator) propose a compromise to creditors. A compromise can involve:

• paying creditors a reduced amount;
• paying over a longer period;
• converting some debt to other arrangements; or
• a combination.

How is it approved?

Creditors are grouped into classes and vote. Law firms describe the threshold as a majority in number and 75% in value of the creditors in each class who vote (Waterstone, secondary). Once approved, the compromise binds all creditors in that class, including those who voted against it. Courts can be involved if a creditor objects that the process was unfair.

When does a compromise suit a business?

• The business is viable but can’t pay all its debts on current terms.
• Several creditors are owed money, not just one.
• Creditors would likely get more from the compromise than from a liquidation.
• The directors want to stay in control, rather than hand the company to an administrator (compare voluntary administration).
• There’s time to prepare a proposal and run the vote properly.

How does IRD fit in?

When tax debt is the trigger, IRD is often the largest creditor by value, which means its vote can decide the outcome. A compromise that IRD won’t support may fail.

There’s also a technical question about whether IRD can be bound in a compromise for certain tax types, such as GST and PAYE. One law firm suggests it can’t for those taxes. We couldn’t verify that from an official source, so we don’t state it as fact. If your debt is mostly GST or PAYE, ask your lawyer about this before relying on a compromise.

IRD your biggest creditor? Paying IRD in full may be simpler than a compromise vote. Ask us, with no credit check to enquire.

How does a compromise compare with other options?

	Funding	Instalment arrangement	Part 14 compromise	Voluntary administration
Directors in control	Yes	Yes	Yes	No
Creditor vote needed	No	No (IRD decides)	Yes	Yes
Debt reduced?	No, paid in full	No	Possibly	Possibly via DOCA
Professional costs	Loan costs	None to apply	Legal or practitioner fees	Administrator fees
Speed	Can be quick	Weeks	Weeks to months	Weeks to months

What does preparation involve?

• A full list of creditors and amounts, by class.
• A clear proposal showing what each class gets and when.
• Evidence that creditors would do better than in a liquidation.
• Financial forecasts showing the business can meet the compromise terms.
• Legal advice on process, notice and voting.

Many companies use a lawyer or a licensed insolvency practitioner to prepare and run a compromise. Check credentials and fees first; see choosing an adviser.

An illustrative example

Illustrative only. Not a real client and not an offer.

A Southland agricultural machinery dealer owed about $600,000 across suppliers, a finance company and IRD after a dairy downturn. A compromise proposed paying suppliers 70 cents in the dollar over 18 months, while the GST and income tax owed to IRD would be paid in full from a property-secured loan over the directors’ farm. With IRD’s debt cleared, the remaining creditors voted on the compromise alone, and it passed.

What happens if a compromise fails?

If creditors vote it down, nothing is binding, and you’re back to the options you had before, usually with less time. If IRD has already started enforcement, it will continue. That’s why it helps to know your fallback, such as funding, before the vote. For some businesses, a failed compromise leads to administration or liquidation, which is why preparation and early talks with major creditors matter so much.

Should you talk to creditors before proposing a compromise?

Usually, yes. A compromise that arrives out of the blue is more likely to be voted down. Talking to your main creditors first, including IRD, tells you what they’d accept and gives them time to get internal approval. For IRD, that conversation is similar to negotiating an arrangement: come with numbers, a forecast and a clear explanation of why creditors do better under the compromise than in a liquidation.

Be careful not to pay some creditors ahead of others in the lead-up, especially related parties. If the company later goes into liquidation, payments made while it was insolvent can be examined and sometimes clawed back. Your lawyer can explain what’s safe.

How long does a compromise take?

It depends on the number of creditors, how complex the classes are and whether anyone objects. Preparing the proposal, giving notice and holding the vote typically takes weeks, and a court challenge can add more. If you’re facing a statutory demand or liquidation application with a fixed deadline, a compromise may not be quick enough on its own, and paying the urgent debt with a loan can buy the time to run one properly. See loans to pay IRD debt.

Look at the simpler route too

If you’re considering a creditor compromise because of IRD debt, talk to us alongside your adviser. There’s no credit check to enquire, your enquiry stays with our team, and a real person will tell you whether paying IRD directly could simplify the plan. Give us accurate figures for IRD and other creditors so we can see the whole picture.