Definition of a Scheme of Arrangement
A Scheme of Arrangement is a statutory legal process that allows a company to restructure its debt. It is not an insolvency procedure under the Insolvency Act, but must be approved by the Court.
The scheme is referred to in part 26 (sections 895-901) of The Companies Act 2006. If 75% (by value) of creditors approve and is then sanctioned by the Court, the company involved can negotiate with its creditors to reduce debt liabilities.
This procedure tends to be used by larger companies, particularly insurance firms, as it can be expensive (and also complex). However, it is appealing because it avoids the stigma of formal insolvency. Creditors are put into different classes (by agreement), generally based on similar characteristics or needs e.g. banks in class A, investors in class B, trade creditors in class C and so on. It is important to note in each class, 75% by value must agree for the whole scheme to go ahead. This can be altered in Court but only in exceptional circumstances. A scheme can also be used in a debt and equity swap where a certain creditor class takes a certain class of share in lieu of the debt.
Benefits of the Scheme
The procedure can benefit companies for a number of reasons, including:
- Binding secured creditors in the arrangement, meaning if the scheme is passed, they have no say on their claim. A company voluntary arrangement only binds unsecured creditors.
- Shareholders or turnaround equity can invest in equity and inject cash, which may have otherwise been difficult to do.
- Reaching an agreement with contingent claims, resolving ongoing issues. This is particularly the case for insurance companies that may have liabilities in claims that have not been processed or determined. Another good example is if a potential court case is pending - if the company is facing damages claims which it won’t be able to pay, it could put the plaintiff(s) in a certain class and say; “there is a 30% chance of success, so we will pay 30% now for your support in the scheme”.
- The company can continue and all tax losses are preserved.
The above is a brief guide and should not be taken as legal advice. For expert guidance on Schemes of Arrangement, please contact KSA Group’s insolvency lawyer and LLM FCA solicitor, Professor Grant Jones, on 07815 873370.
The new Corporate Insolvency and Governance Act 2020 introduces new measures in the form of a plan to help distressed businesses which include a cross-class cram-down measure.
- The Plan introduces ‘cross-class cram-down’, inspired by U.S. Chapter 11 proceedings. This means that, subject to meeting two conditions, stakeholders in a dissenting class or classes are bound by the Plan, even if not voting in favour. To ‘cram down’ the dissenting class or classes, at least one class that would receive a payment under the Plan, or would have a genuine economic interest in the context of the ‘relevant alternative’ must have voted to approve the Plan. Secondly, no member of the dissenting class or classes should be any worse off under the Plan than they would otherwise be under the relevant alternative.
- Whereas a scheme requires approval by 75% in value and 50% in number of creditors or members in each class, the Plan does not have the majority in number requirement. This means that, compared with the scheme, it is less likely that a high volume of creditors with low-value debt can block a Plan. However, the 75% threshold is higher that the 66.66% threshold under Chapter 11.
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Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.