If your company is considering restructuring its debt while continuing to trade, you may find a scheme of arrangement to be a suitable option. This process is distinct from a company voluntary arrangement (CVA) and is governed by different legislation. It also stands apart from other debt resolution methods such as a creditors\’ voluntary liquidation (CVL) or company administration.
In this article, we will outline how a scheme of arrangement functions and how it differs from other financial recovery options.
Before we delve deeper, it\’s crucial to note that if your company fails any of the three tests of insolvency, you should seek immediate advice from qualified and experienced insolvency practitioners.
What Is a Scheme of Arrangement?
A scheme of arrangement is a court-approved process that allows a company to restructure its debt, aiding recovery from financial difficulties. However, its use is not limited to insolvent companies; it can also facilitate takeovers or the return of capital.
For the scheme to take effect, 75% of creditors by value must vote in favour. It also requires court approval to become binding, following which, the court order must be filed with Companies House.
The proposal for a scheme of arrangement can be initiated by the company itself, its creditors, a liquidator, or an administrator. This flexibility allows the company to continue trading under the direction of its current management.
While there are similarities to the CVA process, several important differences need to be considered.
Differences Between a Scheme of Arrangement and CVA
The key distinction lies in the governing legislation: the scheme of arrangement falls under the Companies Act 2006, whereas the CVA is regulated by the Insolvency Act 1986. A scheme of arrangement may offer more flexibility and potentially less public exposure than a CVA.
One significant difference is that, unlike a CVA, a scheme of arrangement does not automatically provide the right to a moratorium, which protects the company from legal actions like winding-up petitions. This protection is typically a feature of administration, wherein a company may enter administration to secure a moratorium before transitioning to a scheme of arrangement.
Under administration, the company\’s directors relinquish control to an administrator or insolvency practitioner. Some companies use a scheme of arrangement as a strategy to exit administration.
Other Considerations
The process involves substantial court interaction, beginning with a class hearing to define creditor classes. These classes can include holders of floating and fixed charges, and both secured and unsecured creditors. Once approved, a scheme of arrangement is binding on all these creditors.
Following the creditors\’ vote, the court conducts a sanction/fairness hearing to ensure fair representation of different creditor groups and to verify that the scheme meets all legal requirements. The court may challenge the scheme on several grounds, including the adequacy of notice given to creditors, the representation of creditor classes, and the fulfilment of conditions attached to the scheme.
This extensive court involvement means that a scheme of arrangement can be more complex and potentially more costly than a CVA.
Summary
For companies facing insolvency, a scheme of arrangement offers a way to restructure debt with a degree of flexibility that might help in reducing reputational damage. However, unless preceded by administration, it does not automatically prevent further legal action against the company. The high level of court involvement can add layers of complexity and increase costs.
Understanding these nuances is vital for any company considering this approach to financial recovery. For more detailed advice and guidance on insolvency or liquidation, consulting with an insolvency expert is highly recommended.
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