A Scheme of Arrangement helps a company in the restructure of its debt, and aids recovery from financial distress. It is not an insolvency process and is utilised under the Companies Act 2006 rather than insolvency legislation, but it must still be sanctioned by court process.
Once voting on the scheme has taken place and the required number of creditors has agreed to its use, the arrangement is binding on all, even if they voted against it or chose not to vote.
Although Schemes of Arrangement can be proposed by the company itself, an administrator or liquidator, the company’s creditors, or its members, it is often the company that makes the proposal.
What is the Scheme of Arrangement process?
- 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.
What are the benefits of using a Scheme of Arrangement?
- A company can avoid the negative publicity and loss of goodwill that is generally associated with procedures under the Insolvency Act, 1986
- A Scheme is binding on all creditors within their class once sanctioned by the court
- This type of arrangement allows a company to continue trading, thus benefiting both its shareholders and creditors
- It offers greater flexibility and selectivity when compared with some formal insolvency procedures
- The use of a Scheme of Arrangement means that directors do not have the obligation to report under the Company Directors Disqualification Act, 1986 (CDDA)
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
- Schemes of Arrangement are generally more expensive than insolvency procedures such as Company Voluntary Arrangements, due to their added complexity
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 – We have an extensive network of 55 offices offering confidential director support across the UK.