What Is A Scheme Of Arrangement? Our Guide
If your company needs to restructure debt but directors want to continue trading, you may be considering a scheme of arrangement.
This is a different process to a company voluntary arrangement (CVA) which is also covered by different legislation.
And it differs from other solutions to address debt such as a creditors’ voluntary liquidation (CVL) or a company administration process.
In this article we’ll explain how a scheme of arrangement works and the ways it differs from other options for companies that are struggling financially.
But before we begin, if your company is failing one of the three tests of insolvency, seek advice from qualified and experienced insolvency practitioners without delay.
What is a scheme of arrangement?
A scheme of arrangement can help your company restructure debt. It is a way of supporting your company’s recovery from financial difficulties.
However, it also has other purposes. A company can also use a scheme of arrangement for a takeover or return of capital – it is not exclusively for insolvent companies.
Creditors must vote on the arrangement and a set proportion of them – 75% by value – need to agree before it becomes binding.
The arrangement also requires court approval to be valid. After this, the court order must be filed with Companies House.
The struggling company itself can put forward a scheme of arrangement. Alternatively the creditors, a liquidator or an administrator can propose it.
Putting a scheme of arrangement in place means that the company will continue trading and its directors can keep control.
While there are a few similarities to the CVA process, there are several notable differences.
Differences between a scheme of arrangement and CVA
Firstly, while the CVA is a legal process under the Insolvency Act 1986, different legislation covers the scheme of arrangement – the Companies Act 2006.
For some companies, a scheme of arrangement could provide more flexibility and less publicity.
However, one of the biggest differences is that unlike a CVA, a scheme of arrangement does not necessarily provide the right to apply for a moratorium.
If granted, a moratorium protects the company in question from legal action – receiving a winding-up petition, for example.
This is a feature of administration proceedings. The appointment of an administrator also provides the struggling company with a moratorium.
Therefore, the company could enter administration first to enact a moratorium. Then the administrator could propose a scheme of arrangement – as mentioned though, it’s common for the company itself to propose it.
Under administration, directors are no longer in control of the company. An administrator or insolvency practitioner runs the company in their place.
Some companies consider using a scheme of arrangement to exit administration.
Other differences
It’s important to bear in mind that there is a substantial amount of court involvement in a scheme of arrangement process. The court calls a class hearing to determine creditor classes at the outset.
Creditor classes include those holding floating and fixed charges, as well as secured and unsecured creditors. A scheme of arrangement is binding even for secured creditors.
After creditors vote on the scheme of arrangement, the court then holds a sanction/fairness hearing to check the representation of different creditor groups.
It is not a given that the court will sanction a scheme of arrangement which creditors have voted on. There are several aspects that the court could challenge including:
- Correct notice given before creditors’ vote on the scheme
- Fair representation of different creditor classes at the vote
- Outstanding conditions attached to the scheme
- Creditors’ final approval of the scheme
Therefore, arguably a scheme of arrangement tends to be more complex than a CVA. There is also a risk that a scheme of arrangement becomes much more expensive than a CVA due to this complexity.
Summary: What is a scheme of arrangement?
For insolvent companies, a scheme of arrangement can help to restructure company debt. In some circumstances, it is a more flexible solution to insolvency that can decrease reputation damage for the company.
Unless the company enters administration first, there is no automatic moratorium preventing further legal action against it. There is also a high degree of court involvement which can cause complexity, risk rejection of the scheme and incur higher costs.
For more information on the different options for insolvent companies, take a look at our article on the differences between a CVA and a CVL.
In addition, we’ve also written an in-depth guide on what happens when a company goes into administration.
If you would like to know more about the recovery options for insolvent companies, please don’t hesitate to get in touch.
