What Is A Scheme of Arrangement, And What Do They Do?

If your company is at risk of insolvency, you’re probably looking hard for a potential solution other than going into administration or a Creditor’s Voluntary Liquidation (CVL). If that’s the case, you may be wondering ‘what is a scheme of arrangement?’, or ‘what is a scheme of arrangement going to do for me?’. Well, by the time you have finished reading this article, you will know exactly what a scheme of arrangement is, how it works and the up and downsides of using them.

What is a Scheme of Arrangement?

First and foremost, what is a scheme of arrangement? Fundamentally, it is an agreement between a company and its members or creditors in regards to the structuring of its debts and how they are paid. What It is not is a form of insolvency procedure, though an insolvency practitioner may be directly involved.

This scheme’s implementation must comply with the standards set out under the Companies Act 2006 and must be sanctioned by the court across two sessions – one to convene meetings between the correct creditors and another to officially sanction the arrangement – in order to be legally put into effect.

If approved, the arrangement is legally binding for all creditors and shareholders – including those that voted against the scheme or did not vote at all.

How does a Scheme of Arrangement work?

Once proposed, negotiations will take place in terms of restructuring the debt. schemes of arrangement are usually proposed by companies, but this can also be done by administrators, liquidators, creditors or members of the company. The court will call a hearing to confirm that each creditor is in the correct class.

After this is done and the court is happy that each creditor has been placed into the correct band, meetings between creditors will take place. Each creditor class will have its own meeting in which they will vote to continue with or deny the scheme. In order for the process to continue, more than 50% of creditors by number and 75% by value must vote in favour of the scheme.

Assuming that creditors do opt to continue with the scheme, then it moves back to the court. The court will hold a sanction / fairness hearing where it will hear the standpoints of all involved parties and ensure that everybody has been properly represented. If the court deems the scheme unfair in any way, it will not go ahead despite having a creditor majority in favour. If, however, the court agrees then the scheme will go ahead.

From that moment, the court order is sent to the Registrar of Companies and creditors will have up to three months to submit proof of debt. The scheme goes into effect as soon as the Registrar of Companies is notified of the court order.

What are the Benefits of a Scheme of Arrangement?

So what is a scheme of arrangement going to do for your company? There are many benefits to it:

• Unlike an insolvent company, a company entering into a scheme of arrangement may continue trading. This is a huge benefit for creditors and shareholders, as the company is still capable of generating revenue.
• Once sanctioned, the scheme is binding for all creditors of the company. Creditors cannot threaten or harass you with further action against you.
• Opting to enter into a scheme of arrangement over insolvency procedures allows a company to majorly save face and avoid damage to its reputation.
• There is no obligation for company directors to report on the arrangement under the Company Directors Disqualification Act (1996)
• It offers much greater flexibility and selectivity than insolvency procedures.

Are there any downsides?

As with anything in life, there are a few downsides to entering a scheme of arrangement over insolvency procedures:

• You are not given a Moratorium Period. There is no protection from legal action afforded to the company unless the company enters administration before setting up a scheme of arrangement. The scheme can then be used as a plan to exit administration.
• The vote threshold for creditors is quite high – requiring more than 50% by number and 75% by value to vote in favour of the process to go ahead.
• Even if creditors successfully vote for the scheme of arrangement, it still requires court approval before it can go ahead. The court may well reject it even if creditors are satisfied with the agreed plan.
• Normally, schemes of arrangement are more expensive than insolvency procedures. This is due to the added complexity of the process.

What other options are available?

If a scheme of arrangement doesn’t sound like the solution for you, there are several alternatives that are well worth exploring in detail:

• For a company that is viable going forwards but is being dragged down by past debts, a creditor’s voluntary arrangement (CVA) may be the best option. It is a formal agreement between a company and its creditors for the terms of an existing debt. Overseen by an insolvency practitioner such as ourselves as My Liquidation, a CVA will ease pressure on the business and give far more financial flexibility.
• CVL may end up being the option for you. CVL, or creditors’ voluntary liquidation, is a process suitable for companies that have been declared insolvent. Key advantages of CVL include the expedient removal of creditor pressure on the business, prevention of further legal action against the company, and being able to benefit from claim redundancy and other government services. My Liquidation can even work with you to get a new company incorporated for your next business endeavour.
• Entering administration means appointing an administrator to take complete control of the business and its affairs to the effect of rescuing the business in a better way than what could be achieved through liquidation. This administrator may well restructure the business or sell off assets as needed to attain this result. Administration is a good way to continue trading while also restructuring the business where needed.

If you were wondering ‘what is a scheme of arrangement and what can I do for me?’you should now have your answer. If you’re in need of expert advice and insight or would like to make use of our services, then please don’t hesitate to get in contact with My Liquidation today.