If your business is undergoing restructuring, you will likely be a party to a scheme of arrangement. A scheme of arrangement is a proposal to reorder a company\u2019s liabilities and obligations to its creditors and members. However, a court must approve a scheme of arrangement for it to become legally binding. This article will explain what a scheme of arrangement is and some of the essential legal concepts surrounding schemes of arrangement.<\/p>\n\n\n\n
Schemes of arrangement refer to any court-approved arrangement between a company, its shareholders, and its creditors executed under English company law. A company\u2019s key stakeholders can use schemes of arrangement to restructure<\/a> or reorder the company’s obligations to its creditors and shareholders. <\/p>\n\n\n\n A company\u2019s creditors, members, and other key stakeholders can use schemes of arrangement throughout the company\u2019s life cycle. However, in practice, most schemes of arrangement arise in the context of a company experiencing financial difficulties. Consider the following example. <\/p>\n\n\n\n Suppose there is a company that owes money to various creditors. However, the company could no longer meet its debt obligations due to the pandemic. While the company could become insolvent, many creditors will not be paid back in full if the company goes insolvent.<\/p>\n \n Hence, a scheme of arrangement would allow all the parties to renegotiate the company\u2019s debt and equity. For example, the company\u2019s unsecured lenders might agree to give the company additional cash to pay off its debts in exchange for granting them 25% equity in the company. This way, the scheme could ensure:<\/p>\n \n A Part 26A Plan<\/a> is a restructuring process that companies and their creditors can use to refinance and reorganise the company\u2019s debts to continue trading. However, a court must approve a scheme to have any effect. Consequently, all the parties to a Part 26A Plan must follow several formal steps. <\/p>\n\n\n\n The parties who can apply to a court to initiate a scheme of arrangement include:<\/p>\n\n\n\n If the court is satisfied with the application, it will notify all the relevant parties that it is convening a meeting.<\/p>\n\n\n\n Following a successful application, the parties to the scheme will have notice of the scheme. As a result, the parties will have the opportunity to negotiate the terms of the scheme. However, some parties will have a superior negotiating position compared to others. <\/p>\n\n\n\n Some common terms to be negotiated include:<\/p>\n\n\n\n At least 75% of each class of creditors must vote in favour of the scheme to obtain the court’s sanction. Otherwise, the scheme cannot progress.<\/p>\n\n\n\n You should note that different creditors will have different rights and interests during negotiations. However, the law recognises that sometimes these rights and interests can diverge so much that the law should place creditors in separate classes when negotiating the outcome of a restructuring process.<\/p>\n<\/div>\n\n\n\n The court must approve the scheme for the parties to implement the scheme. However, the court has some discretion if it approves the scheme. The factors affecting the court\u2019s decision include whether the scheme:<\/p>\n\n\n\n\n
Overview of the Process <\/h2>\n\n\n\n
1. File an Application<\/h3>\n\n\n\n
2. Negotiations <\/h3>\n\n\n\n
3. Voting<\/h3>\n\n\n\n
4. Obtaining the Court’s Sanction<\/h3>\n\n\n\n