Vol 14 (2017) - Issue 2

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Schemes of Arrangement – Part 1

Introduction
Schemes of arrangement are a popular and flexible tool, well-tested in court and yet still evolving in practice. Recent cases have demonstrated a trend towards closer judicial scrutiny of both the process and the substance of schemes. This article, which is the first of two parts, will highlight a number of the themes that have emerged from these cases. Part 2 will cover what has lately been, and continues to be, an area of particular focus: the English court’s jurisdiction in relation to cross-border schemes, in particular those of foreign companies.

What is a scheme of arrangement?
A scheme of arrangement is a statutory procedure under Part 26 of the Companies Act 2006 which allows a company to enter into a compromise or arrangement with its members or creditors.
The key feature of a scheme is its ability to ‘cram down’ dissenting members or creditors (as applicable) within a class. Provided the requisite majority have approved the scheme and it has been sanctioned by the court (about which see further below), it is binding on all affected members or creditors of the class. This makes it an invaluable tool for a company seeking an arrangement which, absent the use of a scheme, would require a higher level of consent.
Originating in company law, schemes are not formally an insolvency proceeding or part of the legal framework for insolvency. However, creditor schemes are often used in circumstances where the company is insolvent or likely to become so in the near future, with a view to implementing a restructuring that secures the company’s financial viability.
Member schemes are beyond the scope of this article but can be used to implement a variety of corporate transactions, for example share reorganisations and or takeovers/mergers.

Brief history of the use of the scheme of arrangement
Initially created in the Companies Act 1862, the scheme of arrangement has been around for over 150
years. Until relatively recently, its use in practice was largely focused on member schemes.
The earliest creditor scheme of the modern era may be that of Heron International Finance B.V. which completed in September 1993. There followed a reasonably steady flow of creditor schemes, with other early notable examples including the Telewest and Marconi schemes. However, it is only since the 2008 credit crunch that the use of creditor schemes has become increasingly prevalent. As practitioners sought ways to address over-leveraged balance sheets, a legacy of the pre-crunch leveraged buy-out boom, the scheme quickly emerged as the restructuring tool of choice. There are a number of reasons for this and it is worth mentioning three in particular. First, the debtor can choose which creditors to compromise (secured or unsecured, financial or trade, lenders or bondholders, some or all). Second, the scheme is very flexible and can be linked with other processes to implement a wider restructuring. This includes debt for equity swaps, amend and extends or, as demonstrated several times recently, an interim moratorium to prevent enforcement while restructuring terms are negotiated. Third, it is subject to the supervision of the English court, the independence, expertise and commerciality of which ensures that schemes are used properly and command international respect.
After nearly a decade at the forefront of practice, the creditor scheme has become recognised as top in class among restructuring tools in Europe and beyond. In the last few years, attempts have been made to develop equivalent regimes in other jurisdictions in order to emulate this success, for example the ESUG in Germany and homologation in Spain. On paper, it could be argued that these regimes are better than the English scheme and indeed there is some evidence that they are being increasingly used in practice. For example the recent restructurings of both Abengoa and Isolux, Spanish multinational businesses, were implemented through homologation. Both are being challenged, however, which perhaps points to the advantages that the scheme enjoys as a well-established process. It will be interesting to see for how long it retains this. In the meantime, a considerable number of foreign companies continue to use the scheme and indeed this is one of the most rapidly developing areas in scheme jurisprudence, as will be discussed further in Part 2.