In Short
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A Scheme of Arrangement allows a company to restructure its debts or share capital or implement mergers/takeovers through a court‑approved agreement with creditors or shareholders. LegalVision UK+
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For the scheme to bind all parties, even those who object, at least 75 % (by value) of each class of creditors or members must vote in favour, followed by court sanction.
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Once sanctioned, the scheme is final and enforceable: the company can continue trading, and the compromise takes effect across the agreed classes.
Tips for Businesses
Before pursuing a Scheme of Arrangement, assess your company’s financial position and consult advisers to discuss the plan with creditors or shareholders early. Ensure creditor classes are clearly defined, and aim for broad support, intense preparation and negotiation to raise the chances of court approval.
A scheme of arrangement provides a flexible legal tool for companies to restructure obligations or operations, whether they are solvent or insolvent. Governed by the Companies Act 2006, schemes allow companies to secure court-approved compromises with creditors or shareholders, binding even dissenting parties. Failure to implement a scheme correctly can result in legal and financial complications, including stakeholder disputes or court challenges. This article will explore the practical aspects of schemes of arrangement, covering their uses, requirements, and procedural steps.
What Is a Scheme of Arrangement?
A scheme of arrangement is a court-approved agreement between a company and its creditors or shareholders, used to restructure obligations or implement significant corporate changes. It is governed by Part 26 of the Companies Act 2006.
| Key Features | Common Uses |
| Flexibility: Schemes can facilitate debt-for-equity swaps, mergers, demergers, and other restructuring strategies. | Corporate Restructuring: Simplifying debt structures or streamlining operations. |
| Binding Effect: Once sanctioned, the scheme binds all creditors or shareholders involved, including dissenters. | Mergers and Acquisitions: Facilitating the transfer of assets and liabilities. |
| Approval Thresholds: Requires approval by a majority in number and at least 75% in value of each class of creditors and shareholders. | Insolvency Solutions: Compromising debts to avoid liquidation. |
Role of the Court
The court plays a critical role in schemes of arrangement, such as:
- Initial Hearing: Reviews and approves the proposal to convene meetings of creditors or shareholders; and
- Sanctioning Hearing: Ensures the scheme is fair and reasonable.
Stakeholder Classification
Stakeholders must be grouped into classes based on sufficiently similar rights. For instance, secured and unsecured creditors are usually treated as separate classes. Improper classification can lead to disputes and may invalidate the scheme.
Approval Requirements
Approval thresholds for a scheme to proceed include:
- 75% by value of votes cast in each class; and
- a majority of those voting in each class.
These dual requirements ensure both numerical and financial support.
Continue reading this article below the formProcedural Steps
Implementing a scheme of arrangement involves meticulous planning and compliance with legal requirements.
1. Preliminary Planning
Identify objectives and assess whether a scheme is the most appropriate solution.
2. Drafting the Scheme Document
This document outlines the scheme’s terms, effects on stakeholders, and justification for its implementation. Clear communication in the document can help reduce opposition during the approval process.
3. Court Permission
An initial court application is made to secure permission to convene meetings of creditors or shareholders. The court ensures the proper formation of voting classes and compliance with procedural requirements.
4. Stakeholder Meetings
Separate meetings are held for each class of creditors or shareholders. Approval must meet the statutory thresholds to proceed. Transparent communication and pre-meeting discussions with stakeholders can help secure support.
5. Sanctioning Hearing
The court assesses whether the scheme is fair and reasonable, particularly to dissenting stakeholders. Once sanctioned, the scheme becomes binding.
6. Implementation
After sanctioning, the company executes the scheme’s terms. This might include the following:
- debt restructuring;
- asset transfers; or
- operational changes.
Common Challenges
Common challenges that can arise include, but aren’t limited to:
- Stakeholder Dissent: Resistance from creditors or shareholders can complicate proceedings. Negotiation and transparent communication are essential to addressing concerns.
- Judicial Scrutiny: Courts rigorously assess schemes, especially where dissenting stakeholders are involved.
- Cross-Border Issues: Companies operating internationally may face additional hurdles, such as ensuring enforceability in foreign jurisdictions.
Advantages of Schemes of Arrangement
Advantages of schemes of arrangement can include, but aren’t limited to:
- Flexibility: Tailored solutions for complex restructuring challenges.
- Binding Nature: Once approved, schemes reduce litigation risks by binding dissenting parties.
- Business Continuity: Allows companies to restructure without ceasing operations.
Comparison with Other Restructuring Tools
Schemes of arrangement differ from other restructuring mechanisms, such as:
- Part 26A Restructuring Plans: Introduced by the Corporate Insolvency and Governance Act 2020, these plans allow “cross-class cram-down,” enabling approval despite class-wide dissent.
- Administration: While administration focuses on creditors’ priorities, schemes offer greater flexibility to align restructuring with broader business goals.
Case Study: A Successful Scheme
A UK-based company in financial distress used a scheme of arrangement to restructure its debt obligations. Facing mounting liabilities and the risk of liquidation, the company proposed a scheme to creditors offering partial repayment over several years.
The scheme was approved by creditors and sanctioned by the court, enabling the company to stabilise operations, preserve jobs, and avoid insolvency.
This example demonstrates how schemes can be a lifeline for companies facing financial challenges.
This template helps you document important and major decisions or actions reached in board meetings.
Key Takeaways
Understanding schemes of arrangement is critical for businesses and advisors dealing with restructuring. These arrangements can:
- offer tailored solutions for financial and operational restructuring;
- bind dissenting stakeholders to ensure collective compliance;
- be derailed by improper classification or stakeholder resistance, underscoring the need for meticulous planning; and
- require collaboration with legal and financial professionals to navigate complexities and ensure compliance.
By following the procedural steps and engaging experienced advisors, companies can successfully leverage schemes of arrangement to achieve strategic goals.
If you have any questions regarding company obligations, our experienced business 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.
Frequently Asked Questions
What is a scheme of arrangement under the Companies Act 2006?
A scheme of arrangement is a court-approved agreement used by companies to restructure obligations with creditors or shareholders, governed by Part 26 of the Companies Act 2006.
What is required for a scheme of arrangement to be approved?
Approval requires a majority in number and 75% in value of votes cast within each class of creditors or shareholders, followed by court sanctioning.
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