How Can I Set Up a Scheme of Arrangement? 

A Scheme of Arrangement is a legal mechanism companies in the UK use to restructure their debt, reorganise their capital, or achieve other business objectives, often as an alternative to insolvency. Governed by the Companies Act 2006, it is a court-sanctioned arrangement that binds all affected parties, provided the requisite majority of creditors or shareholders approve it. This article outlines the steps and considerations involved in setting up a Scheme of Arrangement in the UK.

Understanding the Basics

A Scheme of Arrangement can be used for various purposes, including:

1. Debt Restructuring: Modifying the terms of debt repayment to avoid insolvency;
2. Corporate Restructuring: Reorganising the structure of the company for operational efficiency; and
3. Mergers and Acquisitions: Facilitating mergers or demergers in a structured manner.

The key advantage of a Scheme of Arrangement is that once approved, it is binding on all parties. As a result, it can provide a comprehensive solution to complex financial or structural challenges.

Let us explore the step-by-step process of obtaining a Scheme of Arrangement below.

1. Preliminary Assessment and Planning

Before initiating arrangement schemes, a company should conduct a thorough assessment of its financial position and objectives.

This involves engaging financial advisors to understand the company’s current economic health. This step is crucial to determine whether a Scheme of Arrangement is the most suitable option compared to other alternatives, such as refinancing or entering into administration.

Additionally, it is important to discuss the proposed scheme with key stakeholders to gauge their support and address potential concerns. Early engagement with creditors, shareholders, and regulatory bodies can help design a scheme with a higher chance of approval.

2. Drafting the Scheme Proposal

Once the preliminary assessment is complete, the next step is to draft the scheme proposal.

This document should outline:

1. The Purpose of the Scheme: Clearly stating the objectives and expected outcomes;
2. Terms and Conditions: Detailed terms of the arrangement, including how debts will be restructured or how the corporate structure will change. It should cover specifics such as the timeline for implementation, any changes to repayment schedules, and the roles and responsibilities of different parties; and
3. Impact on Stakeholders: This is an analysis of how the scheme will affect different classes of creditors and shareholders. This includes both positive and negative impacts, ensuring transparency and fostering trust among stakeholders.

3. Court Application for Scheme Meetings

The company must then apply to the court for permission to hold meetings with the affected creditors and shareholders.

This involves submitting the drafted proposal to the court alongside witness statements from company officials explaining the scheme’s need and rationale.

Further, your company should attend a court hearing where the judge decides whether the proposal scheme meetings can proceed.  The court’s role at this stage is to ensure that the scheme proposal is sufficiently transparent and fair to be considered by the affected parties.

4. Convening Scheme Meetings

If the court grants permission, the company must organise meetings with each class of affected creditors and shareholders.

This includes the following steps:

1. issuing formal notices to all relevant parties about the time, date, and venue of the meetings; 
2. distributing the scheme proposal and any supporting documentation to attendees; and 
3. holding meetings where stakeholders can discuss, vote on, and potentially amend the scheme.

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5. Court Sanction Hearing

The company must return to court for a final sanction hearing if the scheme obtains meeting approval.

At this stage, your company should present the scheme as approved by the stakeholders and show that the scheme is fair and you have met all procedural requirements.

The court will review the fairness of the process to ensure it does not unfairly prejudice any stakeholders and consider any objections from dissenting parties. Subsequently, the court will consider whether to grant final approval to the Scheme of Arrangement.

Key Takeaways

A Scheme of Arrangement can be a powerful tool for companies in the UK facing financial difficulties or seeking to reorganise their structure. Providing a legally binding framework for achieving consensus among creditors and shareholders can help companies navigate complex challenges and emerge stronger.

However, the process requires careful planning, stakeholder engagement, and compliance with legal procedures to be successful.  Companies considering a Scheme of Arrangement should seek expert legal and financial advice to navigate the intricacies of the process and maximise their chances of achieving a favourable outcome.

If you need legal assistance setting up a Scheme of Arrangement, LegalVision’s experienced corporation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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