Practice and Procedure: Creditor Schemes

Set out below is an indicative timetable and documents list for a bank debt scheme of a type commonly used in practice.

Meaning of Key Legal Terms and Concepts

Schemes of arrangement implemented pursuant to Part 26 of the Companies Act 2006 can be used to effect a ‘compromise or arrangement’ between a company and: (i) its creditors or any class or them; or (ii) its members or any class or them. The meaning of the term ‘company’ has already been considered in Chapter 2.

Court Hearings, Creditor Or Member Meetings and Disclosure Requirements

This chapter sets out some of the key practical points relating to the process of implementing a scheme of arrangement under Part 26 of the Companies Act 2006. It includes issues relating to the first application to the court and subsequent hearing, the sanction hearing, the member or creditor meeting(s) and the disclosure requirements imposed by the Companies Act 2006. It does not consider the additional requirements that apply in the case of a cancellation member scheme of arrangement or a member scheme to effect a takeover, as these are set out in detail in Chapters 9 and 10 respectively.

Creditor Schemes in Practice

In order for the court to have jurisdiction to sanction a scheme the ‘company’ or debtor must have agreed—by the necessary resolutions being approved by the requisite majorities at the scheme meeting(s)—a ‘compromise’ or ‘arrangement’ with its ‘creditors’. Every person who has a quantifiable pecuniary claim against the company, whether actual, contingent, unliquidated or prospective, is a creditor within the meaning of the Companies Act 2006—Re Midland Coal, Coke and Iron Co.

Takeovers by Scheme of Arrangement

Historically, the most popular mechanism to effect a takeover of a public company incorporated in the United Kingdom (particularly one publicly traded in the United Kingdom) was via a contractual offer whereby a bidder makes a general offer to all shareholders on the register of members of the target to acquire their shares. However, as discussed in Chapter 1, this has been shifting and in more recent times schemes of arrangement appear to have become the structure of choice (at least with respect to higher value transactions) for implementing a recommended takeover of a public company that is both incorporated and traded in the United Kingdom.

Jurisdiction and the Types of Companies that may Propose Schemes

The court has power to sanction a scheme in relation to a ‘company’. For the purposes of Part 26 of the Companies Act 2006 (except section 900), a ‘company’ means ‘any company liable to be wound up under the Insolvency Act 1986’ or the Insolvency (Northern Ireland) Order 1989 (SI 1989/2405 (NI 19)). This includes companies formed and registered under the Companies Act 2006 and other unregistered companies, such as chartered companies and, subject to the issues outlined further below, foreign companies.

Introduction and Outline of Process

A scheme of arrangement, or simply a ‘scheme’, is a statutory procedure which allows a company to reach an arrangement or compromise with its members or creditors (or any class of them).

Company Voluntary Arrangements Compared with Schemes

Company Voluntary Arrangements (CVAs) were introduced following the publication of the Cork Report, and consideration of its recommendations after complaints were made about the scheme process, particularly in respect of the need to obtain approval from each class under a scheme and the difficulties associated with determining them. A CVA is an insolvency proceeding under Part I of the Insolvency Act 1986 (although most of the content of the law is set out in the Insolvency Rules 1986 (the ‘IR’)) and it is listed as an insolvency proceeding for the purposes of Article 2(a) (and Annex A) of the Insolvency Regulation.

Types of Member Schemes

Member schemes implemented pursuant to Part 26 of the Companies Act 2006 can be used to effect a wide variety of compromises and arrangements between a company and its shareholders. As described in Chapter 1, examples of these arrangements include: (i) the takeover of that company; (ii) a demerger of, or involving, that company; (iii) the addition of a new holding company above that company (often used to effect a corporate redomiciliation of the company’s group or to help facilitate making a capital reduction); (iv) a return of capital to shareholders of that company; (v) the removal of minority shareholders of that company; and (vi) group reorganisations combining one or more elements of (ii) to (v).

Listed Company Considerations

Whilst a scheme of arrangement is a court-sanctioned process, any company that proposes a scheme to its members or creditors or is otherwise involved with the scheme (for example, as a bidder in a takeover offer that is affected by way of a scheme of arrangement) must consider whether the corporate action at the centre of the scheme is governed by other applicable laws and regulations. These laws will include the laws of the country of its incorporation and, where the shares of the company are publicly listed, the rules of the relevant market or markets.