A Scheme of Arrangement helps an indebted company restructure its liabilities, and aids recovery from financial distress. It is not a formal insolvency process and is covered by the Companies Act 2006 rather than the Insolvency Act 1986. Despite this, it must still be sanctioned by court process.
Creditors will be invited to vote on any proposed scheme, and will be divided into 'classes' of creditor as part of the process. Once voting on the scheme has taken place and the required number of creditors has agreed to it being implemented, the arrangement is binding on all creditors even if they voted against it or chose not to vote at all.
Although Schemes of Arrangement can be proposed by an administrator or liquidator, the company’s creditors, or its members, it is often the company that makes the proposal.
Once a Scheme of Arrangement has been identified as a viable tool for a company, negotiations take place with regard to restructuring its debt. The court calls a ‘Class Hearing’ to establish that the classes of creditor are correct.
Creditors are divided into classes, for example those with a fixed charge, unsecured creditors, or those with common characteristics. For the Scheme to become legally binding, a majority of creditors within each class must vote, with a majority of 75% (by value) in favour being needed within each creditor class, for the Scheme of Arrangement to take effect.
Creditors are notified of the first creditors’ meeting and receive an explanatory statement (ES) detailing the proposals to be included in the Scheme. Each class of creditor holds its own meeting.
If sufficient creditors in each class vote in favour of the Scheme, either in person or by proxy (more than 50% in number and 75% by value), the court holds a ‘Sanction/Fairness Hearing’ and considers representations from all relevant parties.
If the court deems it unfair, it can refuse to sanction the Scheme of Arrangement - one of the most contentious areas at this point is whether creditors have been classified correctly.
There is no automatic moratorium period or protection from creditor legal action when a Scheme of Arrangement is used, unless the company is placed into administration first. The Scheme can then be used as an exit from administration.
Once sanctioned, a court order is sent to the Registrar of Companies, and the Scheme becomes effective. Creditors must then submit a proof of debt form within three months.
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Are there any disadvantages?
There is no moratorium period to protect the company unless it enters administration first
Even when sufficient creditors have agreed to the Scheme, it still requires court approval
Real Business Rescue can provide further detailed guidance on the use of Schemes of Arrangement, and whether they are appropriate for your company’s situation. This is a complex area that requires professional support from a licensed insolvency practitioner.
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