Vol 6 (2009) - Issue 6

Article preview

Schemes of Arrangement: IMO Car Wash Case

1. Introduction

A scheme of arrangement is a statutory procedure pursuant to Part 26 of the Companies Act 2006 (‘CA 2006’) whereby a company is able to reach a compromise or arrangement with its creditors and members (or any class of them). The procedure is available to both solvent and insolvent companies. Schemes of arrangement are becoming an increasingly popular restructuring tool because of the flexibility they allow a company in its proposals which can implement a wide range of internal reorganisations merger or demerger. Recent examples include the use of schemes for homebuilders McCarthy & Stone, foam manufacturer British Vita, and in the restructuring of holiday company MyTravel.
The procedure for a scheme of arrangement essentially involves three stages:
(i) the company (or any creditor, shareholder, administrator or liquidator) applies to court for an order convening a meeting of each class of creditor or shareholder affected by the proposed scheme;
(ii) the meeting or meetings are held and, for the scheme of arrangement to be approved, a majority in number representing 75% in value of each of the different classes of creditors and shareholders must vote in favour of the proposed scheme; and
(iii) if the proposal has been approved at each meeting, a further application is made to court to sanction the scheme.

A number of issues will commonly arise in this process. For instance, the ‘fairness’ of the scheme is considered. This means that the court must be satisfied that a number of conditions are met, including that the statutory procedure has been complied with, that the majority in every class is acting bona fide and that the arrangement is one which an intelligent and honest man who is a member of the relevant class and acting in respect of his own interest might approve. Other issues arise in connection with the composition and proper identification of the particular 'classes' for the purposes of voting and a number of principles have been set out by the courts in this respect.

However, a further key issue which is becoming increasing prevalent in schemes of arrangement (and upon which this article focuses) concerns the question of which classes of creditors or members need to approve the scheme, and the principle that it is not necessary for the company to consult any class of creditors (or contributories) who are not affected, either because their rights are untouched or because they have no economic interest in the company. In In re Tea Corporation Ltd Vaughan Williams LJ, confirming the view that it would be nonsensical to allow those with no economic interest in the assets of a company to prevent the implementation of a scheme to restructure such a company, said:
'It would be very unfortunate if a different view had to be taken, for if there were ordinary shareholders who had really no interest in the company’s assets and a scheme had been approved by the creditors… the ordinary shareholders would be able to say that it should not be carried into effect unless some terms were made with them.'