Getting creditors to accept less: three paths to debt reduction

Why creditors sometimes agree to less

Creditors may accept less than full repayment if they believe a proposal delivers a better return than immediately winding up the company. The calculation is commercial: receiving 50 cents in the dollar today may be worth more than spending money on legal action and waiting years for a liquidator to find nothing. Your task is to show creditors that your proposal produces a better outcome than the alternative.

Creditors also consider whether your business is viable. A proposal that depends on future trading profits must demonstrate realistic assumptions about income and costs. If the business cannot afford the plan you offer, creditors will reject it and push for liquidation. The ATO's power to compromise must be exercised to secure the highest net return taking into account good management and administrative common sense. Commercial creditors apply similar reasoning.

Informal negotiation: direct contact before formal processes

Informal negotiation means contacting creditors directly to propose a reduced settlement or extended payment terms. Creditors are encouraged to adopt a flexible approach to repayment arrangements, and once negotiated, an informal arrangement should be put in writing and provided to the debtor. This path works best when you have a small number of creditors, enough cash to offer a realistic lump sum or short payment schedule, and a willingness to explain your position honestly.

The proposed compromise must not disadvantage any other creditors, and such a proposal should be refused unless all affected creditors consent to the arrangement. If you negotiate different terms with different creditors, those disadvantaged may reject the plan and take enforcement action. Informal deals require unanimous consent because no statutory process binds dissenting creditors.

Source: Official guidance

Small business restructuring: a formal plan for eligible companies

A small business restructure is a formal process under Part 5.3B of the Corporations Act 2001 that allows an eligible company to restructure their debts by proposing and agreeing to a restructuring plan with their creditors, usually involving a debt compromise, while the directors stay in control of the business. For a company to be eligible, the total liabilities on the day the company enters the process must not exceed $1 million.

A plan is accepted if, at the end of 15 business days, the majority in value of affected creditors who returned statements stated that the plan should be accepted. The ATO is a creditor of most companies using the small business restructuring process and is often the majority value creditor, so the ATO's vote on a restructuring plan is often decisive. Before a company can issue a restructuring plan, all employee entitlements currently due, including super, must be paid and all lodgements must be up to date.

Voluntary administration and deeds of company arrangement

A deed of company arrangement is a binding arrangement between a company and its creditors governing how the company's affairs will be dealt with, agreed to after the company enters voluntary administration and generally proposed by the director or any third party, usually in consultation with the voluntary administrator. Around half of appointments that proceed to a second creditors' meeting include a DOCA proposal, and of those, 87% result in creditors accepting the proposal.

The DOCA binds all unsecured creditors, even if they voted against the proposal, and also binds owners of property, lessors and secured creditors if they voted in favour of the DOCA. DOCAs commonly include mechanisms intended to improve returns to unrelated creditors, including third-party contributions in almost two-thirds of approved DOCAs and exclusion of related party claimants in most approved DOCAs. Voluntary administration involves loss of director control during the process, higher costs and formal reporting, but it offers a statutory mechanism to bind dissenting creditors if the majority vote in favour.

Prepare honest figures and get advice before you approach creditors

Before approaching creditors through any path, gather your list of all creditors and amounts owed, current bank balance and realistic forecast of cash available for a settlement or plan, up-to-date profit and loss statement showing whether the business is viable, details of any third-party contribution such as director loans or family funds, and confirmation that tax lodgements and employee entitlements are current. Creditors will ask these questions, and incomplete or unrealistic information destroys trust.

If total debts exceed your ability to pay, or the ATO holds the majority of the debt, seek advice from a qualified accountant or registered liquidator before making contact. CRP coordinates independent professionals who can assess whether informal negotiation, small business restructuring or voluntary administration suits your position, prepare a realistic proposal and manage creditor communication. Use the contact form below to explain your situation. Bring the documents listed above and any notices or formal demands you have received. Early advice gives you the best chance of presenting a proposal that creditors will accept.