TODAY, the unfortunate shareholders of Compass Resources are asked to attend an extraordinary general meeting to approve (or not) a proposal to recapitalise the company.

As a result of a deed of company arrangement (DOCA), shareholders face huge dilution, to less than 9 per cent of the total equity of the company, compared with 93 per cent prior to it going into administration.

How can this be, you may ask? Why would any creditor really care about the shareholders of a company that is in administration? Once a company gets to this stage, shareholders have lost all their money.

I don't know, but the plot thickens for Compass shareholders, who again through a small shareholder action group call for help. The only help lies in the future with a larger Australian Shareholders Association informing, educating and representing small shareholders before it's too late.

Compass was listed on the ASX with the fourth-largest lead deposit in the world, plus numerous other deposits with the potential value in excess of $15 billion.

The company was awarded major project facilitation status by the federal government. The significance of the project also attracted a joint venture partner in Hunan Non-Ferrous Metals Corporation (HNC) from China. The share price was rising, and attracting the novice small shareholder, in search of easy money.

So, can someone please explain to me how any competent management and board could obliterate all shareholder value and drive Compass into administration?

Ferrier Hodgson was appointed on January 29, 2009, as deed administrators of a DOCA. Shareholders need to understand that Ferrier's job is to recover as much money as possible for the creditors first, and shareholders are last.

As Compass undertook capital projects to develop and extract the ore, costs certainly appear to have blown out. A US hedge fund, YA Global, was introduced by the board and made loans to the company. ASX filings appear to show that at least some loan repayments were made by way of equity issues, and then those shares were disposed of on-market at different times. The chairman of Compass also made a significant loan to the company.

Over time, the combination of increasing analyst and media scrutiny, the cost blowouts and the increased selling pressure on the stock price caused Compass shares to decline sharply from their peak, until the cash ran out and voluntary administrators were appointed.

Ferrier Hodgson reports show that creditors would receive about 34c in the dollar in liquidation, but there is no certainty. The largest unsecured creditor, YA, proposed an arrangement under the DOCA that involves a swap of its debt for equity plus other arrangements to inject cash and repay other creditors.

Interests associated with the chairman, through a company called Coffee House Group, also swapped the debt for equity. This is where distressed debt makes its money.

Through a complex structure, Hunan controls the assets. If the shareholders reject the proposal and Compass proceeds to liquidation, YA and Coffee House would be unsecured creditors and rank behind the secured creditors for return of capital. Ferrier's documents show there is an arrangement between Hunan and YA in the event of liquidation, where the assets of Compass will be sold to a party identified by YA, with the agreement of Hunan.

This alternative provides for YA, Coffee House and Hunan to be effectively in a similar position as under the DOCA, and the DOCA shows that YA and Coffee House will increase their stake in Compass from a negligible amount to 77.4 per cent and 12.5 per cent respectively.

Under the DOCA, YA also concedes the grant of options to "non-associated" shareholders. These options have a six-month exercise period and are priced at 28c. There seems little chance of exercise when compared with the deemed issue price of equity of 4c under the debt to equity swap.

No matter how you look at it, it is fair to say that inexperienced shareholders have again lost significant value, which now will be transferred to some extremely experienced distressed debt fund managers.

In hindsight, the existence of a hedge fund, combined with the ASX disclosures and the falling share price, should have alerted shareholders that Compass was not going to be a place for amateurs.

Vas Kolesnikoff is chief executive of the Australian Shareholders Association