Article by Jim Stafford partner with Friel Stafford
The commencement of the Companies Act 2014 (“the 2014 Act”)on 1 June 2015 brings with it a much more streamlined approach to many company law issues, one of which, Schemes of Arrangement, will be seen by many struggling companies to be a much improved tool for companies looking to enter a compromise agreement with its creditors.
The old Scheme of Arrangements under the Companies Act 1963(“the 1963 Act”) was rarely used by companies due to a number of factors,including the costly number of court appearances required. Under the 2014 Act a Scheme of Arrangement is possible with only one court appearance. Schemes of Arrangement are now a real alternative to Examinership which can be very costly. It is expected that the number of Schemes of Arrangement is likely to increase considerably in the coming years.
Unlike Examinerships, the business need not be viable.Schemes of Arrangement may be used to wind up a company’s affairs and pay a greater dividend to creditors. In such “wind up” schemes, monies could be set aside for voluntary strike off.
So what exactly is a Scheme of Arrangement?
Scheme of Arrangement is a procedure which can be used by a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time. A Scheme of Arrangement can be proposed by the directors of the company.
Where scheme meetings are convened, the court may place a stay on all proceedings against the company or restrain further proceedings for such time as it sees fit.
A scheme meeting can be convened by sending the appropriate notices to each class of creditor, or members, giving them 14 days notice of the Scheme of Arrangement meetings. The notice must include a “scheme circular”which sets out the effect of the compromise or agreement and additional requirements as set out in the 2014 Act.
The Scheme meetings decide whether to approve the Scheme of Arrangement. If 75% of the creditors present and voting in person or proxy (or members as the case may be) agree to the proposal, it is then binding on all creditors, or class of creditors.
The Company can continue trading during the Scheme of Arrangement and afterwards.
Who Can Benefit From A Scheme of Arrangement?
A Scheme of Arrangement proposal can be drafted by the directors with assistance from their professional advisors. The approved Scheme of Arrangement binds every person who in accordance with the rules had notice of, and was entitled to vote at, that meeting (whether or not they were present or represented at the meeting) as if he were a party to the Scheme of Arrangement.
Advantages of Scheme of Arrangement
Scheme of Arrangement or Examinership?
Schemes or Arrangement have the following advantages over Examinerships:
However, there are some disadvantages of Schemes of Arrangement,namely:
Costs of a Scheme of Arrangement
The 2014 Act has substantially reduced the complexity and costs of Schemes or Arrangement. Most cases would be suitable for a “two stage”Process:
1. Stage 1 – Send out Scheme of Arrangement proposals to shareholders and creditors and hold scheme meetings. If shareholders and creditors meetings vote in favour of scheme, then move onto stage 2.
2. Stage 2 – Instruct solicitors to bring an application to the High Court to have the Scheme approved. This process would involve placing advertisements in 2 daily newspapers stating that the creditors voted in favour of the scheme and that an application will be made to court to approve the scheme.
In summary, the 2014 Act has reduce the burdensome court appearances previously required for Schemes of Arrangement which will lead to a considerable cost saving when compared to Examinership. It is therefore expected to see an increase in the number of Schemes of Arrangement being approved before the courts in the coming years.
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