What is a Scheme of Arrangement in England?

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’s 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.

Schemes of Arrangement

Schemes of arrangement refer to any court-approved arrangement between a company, its shareholders, and its creditors executed under English company law. A company’s key stakeholders can use schemes of arrangement to restructure or reorder the company’s obligations to its creditors and shareholders. 

A company’s creditors, members, and other key stakeholders can use schemes of arrangement throughout the company’s life cycle. However, in practice, most schemes of arrangement arise in the context of a company experiencing financial difficulties. Consider the following example. 

Overview of the Process  

A Part 26A Plan is a restructuring process that companies and their creditors can use to refinance and reorganise the company’s 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. 

1. File an Application

The parties who can apply to a court to initiate a scheme of arrangement include:

• the company via its directors; 
• the company’s shareholders; 
• any creditors, including any lenders or trade creditors; and
• any administrator or liquidator that has been appointed over the company.

If the court is satisfied with the application, it will notify all the relevant parties that it is convening a meeting.

2. Negotiations 

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. 

Some common terms to be negotiated include:

• which party will provide additional cash; 
• which class or classes of creditor(s) will be repaid; and 
• which creditors will improve their position or receive shares in the company.  

3. Voting

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.

4. Obtaining the Court’s Sanction

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’s decision include whether the scheme:

• appropriately defines the classes of creditors and other stakeholders;
• complies with the relevant laws; and
• is reasonable and necessary.

Key Takeaways 

Schemes of arrangement are one of the main restructuring tools stakeholders in a company can use to rescue the company from insolvency. A creditor, shareholder, or appointed insolvency practitioner can apply to the court to initiate a scheme of arrangement. Provided 75% of each creditor class agrees to the plan’s terms, the court has the power to make the arrangement legally binding. 

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