As mentioned above, a scheme of arrangement can be used for companies in financial trouble, allowing them to reach an agreement with their creditors and shareholders regarding payment of all, or part of their debts. A scheme of arrangement may be used for rescheduling and restructuring debt, for takeovers or even returns of capital. The relevant provisions and scheme of arrangement timetable can be found under Part 26 and 27 of the Companies Act 2006.
Scheme of arrangement timetable
If a scheme of arrangement is deemed an option for your company, you will need to begin creditors negotiations. It’s important the company directors are completely transparent and honest about the financial difficulties the business is facing, along with the reasons and the company history.
The court will call a ‘Class Hearing’ – essentially a creditors meeting to establish the class of creditors. For instance, the creditor classes include fixed charge, floating charge, unsecured creditors etc. To ensure the scheme is legally binding, the creditors must agree to the scheme in their classes. They will hold a creditors meeting to vote, with a majority of 75% in favour required for the arrangement to take effect. More information regarding creditor classes can be found here.
The creditors will be made aware of the first creditors meeting when receiving an Explanatory Statement, outlining the proposal and the reasons for doing so. If the required number agrees to the scheme, the court will then hold a ‘Sanction/Fairness Hearing’ to ensure all parties are represented. The scheme will then become effective once a court order has been sent to the Registrar of Companies, with the creditors required to submit a proof of debt form within the first three months.
Can a scheme of arrangement be refused?
It’s possible that during the scheme of arrangement timetable, the court can refuse the proposal if deemed unfair for creditors. One notable example of refusal is if the creditors are not classified correctly. Therefore, you must ensure your proposal is clearly outlined, and all information is correct. Further to this, while there is no automatic moratorium unless applied, this procedure can be used as an exit from administration.
Who can benefit from the scheme?
As mentioned earlier, this scheme is not part of insolvency legislation, therefore avoiding the publicity involved in such procedures. Other examples of benefits include:
- Companies that have recently started up and are facing trading and financial difficulties, but need time to prove their business model.
- Those companies that want to avoid the reputational damage of an insolvency procedure.
- Businesses that are likely to be profitable, but need time and space to produce a comprehensive plan and budget.
- Companies that have suffered from supplier issues or late payments, resulting in damage to their short-term health.
What are the advantages of the scheme?
A scheme of arrangement can be used as a way to exit the administration procedure, thus allowing a business to avoid any consequences of entering insolvency. This scheme is most notable for flexibility and selectivity, allowing a company to continue to trade in their market. Similarly, once agreed, the arrangement is legally binding. Therefore, creditors cannot threaten or harass you with further action.
The arrangement also avoids the negative publicity and loss of goodwill compared to an insolvency procedure, meaning suppliers and consumers will still support your business. For directors, it’s also important to note that there is no report on the arrangement under the Company Director Disqualification Act 1986.
Another major advantage to the procedure is that the costs are significantly less than that of administration, liquidation etc. in terms of monetary value and reputation.
Are there any disadvantages?
Like many other procedures for companies facing financial difficulties, there are certain considerations to look over before submitting a proposal. For instance, unlike administration, there is no moratorium period for a company. The vote threshold for the scheme of arrangement is also high, and requires 75% of creditors to be onboard. If they do agree, you must still go to court and risk the court refusing the arrangement. Due to large involvement from the court, the costs of proposing a scheme of arrangement are much higher than than of a Company Voluntary Arrangement.
Before considering the scheme, we suggest seeking immediate, professional advice. You must be sure the arrangement is most suitable for your company, and you have a profitable future to ensure your creditors do benefit. Likewise, all information regarding your creditors must be present and correct. Our business rescue experts can discuss your business and provide initial free, confidential advice as to your next move.