What is a Scheme of Arrangement?

A scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors to facilitate debt restructuring.

The process involves obtaining court approval, negotiations, voting by members/creditors and consideration of the rights & interests of all parties involved.

Advantages include binding all creditors/members and lower expenses. Potential challenges such as lack of an automatic moratorium may be present.

Let’s dive into this versatile and powerful business tool that can reshape a whole person, company, whole person, company, business and shareholder’s financial future.

Defining a Scheme of Arrangement

A scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors to resolve issues or matters relating to debt restructuring.

Typically used when a company is in insolvency process facing financial hardship, an application to the court can be made by a creditor, shareholder, or appointed insolvency practitioner to initiate the first insolvency proceedings and procedures under a scheme of arrangement.

The process consists of several key phases, including the proposal of the scheme to target shareholders, obtaining approvals from both target shareholders and the Court. This flexible solution to corporate well is provided for under Part 5.1 of the Corporations Act.

Purpose of a Scheme of Arrangement

The main objective of a scheme of arrangement is to reorganise the company’s commitments to its creditors and shareholders.

For transparency in voting, the target company prepares a scheme booklet containing all key information for shareholders to decide on the proposed scheme during meetings.

It also includes an independent expert report assessing the value of the target shares and determining whether the scheme is in the best interests of target shareholders.

Key Components

One of the primary elements in a scheme of arrangement is the Scheme Implementation Agreement, which is a contract between the bidder and the target prior to the public announcement of the scheme proposal.

This agreement often includes deal protection mechanisms and further information becomes public upon execution by unanimous agreement.

The Legal Framework for Schemes of Arrangement

The legal framework for schemes of arrangement is grounded in insolvency acts and regulations, with international enforcement possible.

For a scheme of arrangement to be legally binding, it must be provided for under Part 26 of the Companies Act 2006 and involves filing an application to court.

Holding meetings to gain court approval, of the proposed scheme, and obtaining a full court approval in a court order to approve or sanction the schemes is also necessary for the scheme to be legally binding.

Insolvency Acts and Regulations

Part 26 of the Companies Act 2006 specifies the formal statutory procedure that enables a company to reach a compromise or arrangement with its members or creditors, regardless of whether the company is solvent or insolvent.

To implement a scheme of arrangement, an application must be submitted to the court, followed by dialogue with creditors and members and convening a court hearing.

The impact of a scheme of arrangement on creditors and members can be considerable, potentially affecting their rights and interests.

While a scheme of arrangement offers a mechanism to reorganise a company’s debts and liabilities, it may also have drawbacks, such as the potential for creditors and members to be disadvantaged.

International Enforcement

The international enforcement regulations for a scheme of arrangement vary depending on the country and jurisdiction.

Part 26 of the Companies Act. The Act 2006 outlines procedures that allow a company to enter into a compromise or arrangement with its members or creditors.

The court plays a significant role in this process, directing that court hearing or a meeting of the company’s creditors or members be summoned in accordance with its instructions.

As a result, international enforcement regulations can greatly impact a scheme of arrangement, influencing the company’s ability to enter into such agreements with its members or creditors.

Process of Implementing a Scheme of Arrangement

The process of implementing a scheme of arrangement involves several steps, as outlined by the Companies Act 2006. These steps must be approved by a majority of the directors and the approval of a majority of the court to be valid.

Some of the commonly negotiated terms in a scheme of arrangement include the amount and type of consideration to be paid, the conditions precedent to the scheme becoming effective, and the timetable for implementing the scheme.

Once a successful application for a scheme of arrangement has been made, the relevant parties due to the scheme will be notified of its existence and given further information and the opportunity to discuss its terms.

Application and Negotiations

Various parties, such as the company, an administrator or liquidator, the company’s creditors, or its members, may propose a scheme of arrangement.

When applying to the high court, certain written information is required, including statutory company details, scheme proposals, and a witness statement from a director, liquidator, or administrator.

The court will then consider the application and decide whether to approve the scheme.

If approved, the court sanctions on the scheme will be binding on all parties involved, including the court sanctions the company under administration, its directors, its creditors, and its members.

The court may also appoint a supervisor.

Voting and Court Hearings

Two court hearings are necessary for a scheme of arrangement.

The initial meeting after two court hearings involves relevant parties. The following meeting, or the one after the second hearing, sanctions and approves the arrangement scheme.

In evaluating a scheme of arrangement, the court must consider the effectiveness of its implementation.

If the court deems the scheme likely to be approved, it will order the assembly of a meeting of the relevant creditors and/or members to vote on the scheme.

To obtain a court order of approval or sanction, at least 75% of each class of creditors must vote in favor of the scheme of arrangement.

Impact on Creditors and Members

A scheme of arrangement is a court-sanctioned agreement between a company and its creditors or members, often used as a tool by companies in financial difficulty to reach a binding agreement with creditors to pay back all or part of its debts over an agreed timeline.

The scheme, if approved, will be binding on all creditors and shareholders, including those within each class who voted against the scheme.

The impact of a scheme of arrangement on secured creditors is notable, as they are bound by the scheme, unlike a company voluntary arrangement (CVA), which means debts owed to them may be canceled or reduced without their unanimous agreement.

Rights and Interests of Creditors

Creditors have the right to participate in a scheme of arrangement, and if approved, the scheme will be binding on all creditors and shareholders, regardless of how each class voted.

The court must take into consideration the creditors’ rights in and out of the scheme when determining the amount and value of money they will receive.

Role of Members in Schemes of Arrangement

Members of creditor classes play a crucial role in the whole process of courts approving a scheme of arrangement, as they have the right to vote on it.

Once the scheme is approved by the court, it is binding on all members of classes in the applicable class or classes, including secured creditors.

Members have the right to vote on the scheme of arrangement schemes, receive relevant information regarding the scheme or schemes of arrangement schemes, vote, and take legal action against the scheme of arrangement scheme or schemes if they deem it unfair or unreasonable.

The benefits and drawbacks of a scheme of arrangement for members depend on their individual and business circumstances, but it can offer a more equitable distribution of assets than other insolvency processes.

Advantages and Disadvantages of Schemes of Arrangement

The benefits of a scheme of arrangement include its ability to bind all creditors and/or members in the applicable creditor class or creditor class of classes, its adaptability, and lower expenses when compared to other insolvency procedures.

However, drawbacks include the absence of legal requirements for an automatic moratorium and the potential for time and cost involved with legal requirements.

Benefits for Companies and Stakeholders

A scheme of arrangement can facilitate a company’s debt restructuring and avert its insolvency proceedings, benefiting both the company and its stakeholders.

Stakeholders benefit from the versatile approach a scheme of arrangement provides in rescuing the company from insolvent companies to the insolvency process for insolvent companies.

Additionally, a scheme of an arrangement scheme can be advantageous to a bidder looking to acquire a majority or 100% ownership of a target person or business.

Potential Challenges and Limitations

One potential challenge of a scheme of arrangement is obtaining approval from each class of target shareholders, which can be difficult to achieve.

The lack of an automatic moratorium also presents a drawback, as an insolvent company may need to resort to entering administration in order to acquire the necessary breathing space to negotiate the terms of the scheme.

Frequently Asked Questions

What is meant by scheme of arrangement?

A scheme of arrangement is an arrangement approved by the court, which offers protection to both companies and their creditors or members.

It is generally used when a company wishes to reorganise its debt or to effect a merger or acquisition with another company.

It allows the meeting of all relevant parties to reach a consensual agreement in an efficient manner.

What is an example of a scheme of arrangement?

Schemes of arrangement are agreements between companies and either the holders of its securities or creditors.

These arrangements are typically used to reschedule debt, for takeovers, and to return capital to shareholders, and must be approved by a court before they can take effect.

Therefore, an example of a scheme of arrangement would be a court-approved agreement made between a company and its stakeholders to address a specific financial situation.

What is a scheme of arrangement in the UK?

In the UK, a scheme of arrangement is a statutory procedure under the Companies Act 2006 that enables a company to reach an agreement with its members and creditors regarding compromises or arrangements.

This is often used in corporate restructuring situations.

What is a scheme of arrangement shares?

A scheme of arrangement is an agreement between a company and its shareholders which sees the shareholders transferring their shares for consideration, in order for the company to gain control.

It serves as a compromise between the two parties.

The arrangement is beneficial to both parties, as it allows the company to gain control of the shares, while the shareholders receive their share capital or something of value in return.

This can be in the form of cash, shares in the company, share capital, or other assets. The arrangement is good.

Summary

In conclusion, a scheme of arrangement is a powerful and versatile tool that can help companies navigate financial difficulties and reshape their future.

Though it may present some challenges and limitations, its ability to bind all creditors and members, adapt to various circumstances, and offer lower expenses compared to other insolvency procedures makes it an attractive option for companies and stakeholders alike.

By understanding the intricacies of schemes of arrangement and the arrangement and schemes of arrangement themselves, businesses can make informed decisions and take advantage of this valuable financial lifeline when the need arises.

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