Vol 11 (2014) - Issue 3

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Creditor-led Schemes of Arrangement: The Creditor as Claimant

Introduction
Part 26 of the Companies Act is a mercurial beast. One minute it slays minorities under a takeover offer, the next a complex intragroup reorganisation and then, especially as of late, minority creditors. It simply provides for 'a compromise or arrangement … proposed between a company and (a) its creditors, or any class of them, or (b) its members, or any class of them,' and this breadth has been the device’s greatest strength.
Almost always, the company or companies that are the target of a scheme are central to the planning and outcome. Even under creditor schemes designed to cramdown dissenting creditors, the company or companies will usually be the conduit for sending out information and the claimant for the court process. In these situations, the company is often in the position where it will be the beneficiary of the result of the scheme, usually as the result of a stabilised capital structure.
As a practical matter, although creditor schemes are becoming increasingly common (especially as they continue to be used to restructure foreign companies), the process is still very expensive given the labourintensive, complex documentation and need to instruct counsel both in relation to issues of court interpretation and court process. No matter the cost, it is usually the company that ends up paying for the scheme under various costs indemnities that are typically present in leveraged buy-out documentation or through negotiation. In most situations, then, it makes commercial sense for the company to control these costs by having its own solicitors draft the scheme documents and its own counsel present it in the most economical way.

Why would a creditor be the claimant?
The recent spate of ‘amend and extend’ schemes have generally been used to deliver the requisite creditor consent required under the finance documents for the extension of facilities and certain amendments, which are otherwise subject to the elusive 'all Lender' threshold. Ostensibly these are primarily intercreditor issues outside the company’s purview, albeit undertaken for the benefit of the company in question as well as its creditors. These schemes, nevertheless, have all been proposed by the company. In fact, there are no instances of schemes having been sanctioned that were proposed and conducted by creditors where the creditor was the claimant instead of the company.
Just because it has not happened does not mean it cannot happen. The Companies Act specifically provides that any creditor of the company may make an application for a scheme of arrangement. Any creditor may thus be the claimant for the purposes of the Part 8 Claim Form – but why would a creditor want or need to be the claimant?
As described above, costs will always be a motivator and if the company will not be picking up the tab for the scheme costs (e.g. in the absence of an effective costs indemnity) or where the company does not have access to funds to pay for the scheme, then the creditors paying for the legal costs to implement the scheme would likely seek to control the process and its associated costs. The company’s management might also have little appetite to spend management time on organising a scheme that only really affects intercreditor interests and so may push the major responsibilities onto a creditor. In these circumstances, as well as others where the company might not have much interest in the proposals, a creditor might very well find itself listed as the claimant.
In a situation with a creditor claimant, there are a number of important practical differences in the implementation of a scheme that are not well set out in the statute or in case law, since there has not been a sanctioned scheme of this nature. A number of these practical considerations are set out below.