What you need to know about Scheme of Arrangement

Section 201 (Schemes of Arrangement) of the 1963 Act was rarely used for doing compromise agreements with creditors due to a number of factors, including the costly number of court appearances required. However, under the 2014 Companies Act it is now possible to do a Scheme of Arrangement with just one court appearance, which will make such schemes much more attractive.

What 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, or the liquidator of the company. Before the Scheme of Arrangement proposal is made, an application can be made to court for a moratorium which prevents creditors from taking action against the company or its property. However, if no legal proceedings are imminent, then the costs of such a court application could be avoided. The meeting decides whether to approve the Scheme of Arrangement. If 75% of the creditors agree to the proposal, it is then binding on all creditors who had notice of the meeting and were entitled to vote. The company can continue trading during the Scheme of Arrangement and afterwards.

Who Can Benefit From A Scheme of Arrangement?

  • Businesses that have experienced trading difficulties since start up and need time to prove their business model.
  • Businesses that want to avoid the stigma of liquidation.
  • Businesses that know they can be profitable and successful in the future but need a bit of time.
  • Business that need some time to put together a new business plan for the company.
  • Businesses that will be profitable in the short term but are under pressure from creditors.
  • Businesses that are profitable but have experienced bad debts or late payers and this is affecting the short term health of the company.
  • Businesses that need to restructure.
  • Companies that wish to wind down trading in an orderly fashion.
  • Companies that wish to close down over a certain time.
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 he was present or represented at the meeting) as if he were a party to the Scheme of Arrangement.

What makes a successful Scheme of Arrangement?

  • At the Scheme of Arrangement meeting 75% in value of those creditors entitled to and who vote either in person or by proxy at the meeting must approve the Scheme of Arrangement.
  • The proposals are then sent to the company’s shareholders and appropriate classes of creditors giving them 14 days notice of the Scheme of Arrangement meetings.

The Scheme of Arrangement Procedure

  • The company directors must be fully honest and transparent about the company’s affairs. The Scheme of Arrangement should have a detailed memorandum outlining the company’s history and the reasons for its current financial difficulties.
  • 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.
  • A Scheme of Arrangement must offer the creditors more money than would be received if the company went into liquidation.
  • If the company wishes to trade during the Scheme of Arrangement period, it must have sufficient working capital to trade and pay day to day expenses.
  • The creditors must support the rescue process. It is therefore advantageous for the company directors to canvass support of the creditors in advance of the Scheme of Arrangement.

Advantages of Scheme of Arrangement

  • The government, banks and large creditors are keen on promoting the ”rescue culture” and so they are generally prepared to work with troubled businesses to save them.
  • Scheme of Arrangements allow structured payment of tax arrears.
  • A Scheme of Arrangement is a cost effective method for avoiding outright insolvency for a company with financial problems.
  • A Scheme of Arrangement is legally binding.
  • A Scheme of Arrangement allows the core business to trade on and so it provides the company directors with continued income.
  • A Scheme of Arrangement allows the director’s time to re-organise and restructure the company without the threat of creditor action.
  • A Scheme of Arrangement costs less than other more serious insolvency procedures such as receivership, liquidations or examinerships.
  • A Scheme of Arrangement avoids the need for a detailed investigation of the affairs of the company and if successful there would be no prospect of the directors facing reckless trading/fraudulent trading actions or Restriction/Disqualification proceedings.
  • Some tax losses may be retained.
  • Schemes of Arrangements have the following advantages over Examinerships:
  1. Less cost.
  2. Less publicity.
  3. No need for an Independent Expert’s Report to commence the process.
  4. No advertising of the “Business for Sale”
  5. No need to prove to the High Court that there is a “reasonable prospect” of the company surviving.
  6. No need for approval of the High Court to enter the process. This can be particularly relevant where the directors have, for example, deliberately under-stated liabilities on tax returns. The High Court might reject an Examinership in such a case.
  7. The shareholders will not lose control of their company. In an Examinership, the Examiner is required to entertain possible investments from interested parties. As some shareholders have discovered, they might be ousted by a new investor, even though they spent their lifetimes building up the company.
  8. No strict deadlines to adhere to.
However, there are some disadvantages of Schemes of Arrangement, namely:
  1. The bank may still appoint a Receiver (In practice, many banks will be supportive of their customers).
  2. Trade creditors may claim retention of title.
  3. There is no provision for compulsory repudiation of leases.
  4. The voting thresholds for a Scheme of Arrangement are higher at 75%, as opposed to 51% in an Examinership.
  5. Leasing companies may re-possess assets.

Costs of a Scheme of Arrangement

The 2014 Companies Act has substantially reduced the complexity and costs of Schemes of Arrangement. Most cases would be suitable for a “two stage” process: Stage 1 Send out Scheme of Arrangement proposals to shareholders and creditors and hold meetings. If shareholders and creditors meetings vote in favour of scheme, then move onto stage 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.

What questions do you have?

We are happy to help. Please post your comment below or call Paul Leonard, Partner at Cooney Carey, on 01 677 9000. Alternatively, send him an email: pleonard@cooneycarey.ie

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