A Scheme of Arrangement is a a court-sanctioned agreement between a company and other parties utilised by a company to restructure its debt and recover from financial distress.
It is essentially a legally binding agreement between the company and its creditors that sets out a plan for the repayment of outstanding debts.
The Scheme of Arrangement can be used to renegotiate payment terms, reduce the amount of debt owed, or convert debt into equity. This can provide the company with the breathing room it needs to get back on its feet and avoid insolvency.
By working closely with creditors to find a mutually acceptable solution, a Scheme of Arrangement can help to preserve the company’s business and ensure that it continues to operate in the long term
What is a Scheme of Arrangement?
A fantastic way for companies to navigate debt restructure and overcome financial distress is through a Scheme of Arrangement. Unlike insolvency processes, this legal tool falls under the Companies Act 2006 and still requires court approval.
It’s worth noting that once approved, all creditors must comply with the agreed-upon terms, regardless of their initial stance. While a Scheme of Arrangement can be proposed by various parties, it’s often the company itself that takes the lead in seeking this effective solution.
What is the Scheme of Arrangement process?
The scheme of arrangement process is as follows:
- When a corporation determines that a Scheme of Arrangement is a practical option, discussions about debt restructuring begin. The court schedules a “Class Hearing” to confirm that the creditor classes are accurate.
- Classes of creditors are established, such as secured creditors, unsecured creditors, and creditors with shared traits. A majority of the creditors in each class must approve the Scheme in order for it to become enforceable, with a minimum of 75% (by value) approval required in order for the Scheme of Arrangement to be implemented.
- The first creditors’ meeting is announced to creditors, and they also get an explanation statement (ES) outlining the proposed changes to the Scheme. There are separate meetings for each class of creditors.
- If more than 50% of the creditors in each class vote in favour of the Plan in person or by proxy (and more than 75% of the total amount of the votes), the court holds a “Sanction/Fairness Hearing” and takes testimony from all pertinent parties into consideration.
- One of the most contentious issues at this point is whether or not creditors have been accurately categorised. If the court finds the Plan of Arrangement unjust, it may refuse to sanction it.
- Unless the firm is first placed into administration, there is no automatic moratorium period or protection from creditor legal action when a Plan of Arrangement is employed. Thereafter, the Scheme can be used to end administration.
- If approved, the Scheme goes into effect after a court order is sent to the Registrar of Companies. After then, creditors have three months to file a proof of debt form.
What are the benefits of using a Scheme of Arrangement?
- A company can escape the bad press and repetitional damage typically connected with Insolvency Act of 1986 proceedings.
- Once approved by the court, a Scheme is binding on all creditors in a given class.
- This sort of arrangement enables a firm to continue operating, which is advantageous to both its shareholders and creditors
Compared to some traditional insolvency proceedings, it allows more freedom and selectivity. - Directors who employ a Scheme of Arrangement are exempt from reporting requirements under the Company Directors Disqualification Act of 1986. (CDDA
Are there any disadvantages?
- Except in the event that the company first enters administration, there is no moratorium period to protect it.
- Even if enough creditors accept the Plan, court approval is still necessary.
Due to their extra complexity, we can offer more in-depth assistance on the use of schemes of arrangement and if they are appropriate for the circumstances of your firm. Schemes of arrangement are typically more expensive than insolvency procedures like company voluntary arrangements. This is a complicated area that needs expert assistance.
Frequently asked questions
A UK Scheme of Arrangement is a court-approved procedure in the United Kingdom that allows companies to restructure their debt, shares, or assets. It is a legal process that involves obtaining approval from a company's shareholders and creditors, followed by a court sanction.
A Scheme of Arrangement can be used by any company that is registered in the United Kingdom, regardless of its size or sector. It is often used by companies that are facing financial difficulties or need to restructure their debt, shares, or assets. However, it can also be used by companies that are looking to implement a corporate reorganization or a merger or acquisition. What is a UK Scheme of Arrangement?
Who can use a Scheme of Arrangement?
Conclusion
Under Part 26 of the Companies Act 2006, a Scheme of Arrangement can provide a way for a company to reach a compromise or arrangement with its members or creditors (or any class of them). It is a versatile tool that can be used to effect a solvent reorganisation of a company or group structure, including by merger or demerger, or to effect insolvent restructurings such as through debt reduction strategies or debt for equity swaps.
For a scheme to be approved, at least 75% in value and a majority in number of each class of members or creditors who vote on the scheme must approve it. If the scheme involves a reduction in share capital, a separate special resolution of the company’s members (requiring a 75% majority of those voting) is also necessary.
The court’s permission is needed to convene meetings of members and creditors to vote on the scheme and to review whether any division of members and creditors into classes is appropriate. If the scheme is approved, the court will determine whether to sanction the scheme and whether it is fair. Once sanctioned, the scheme becomes binding on all affected parties.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.