Corporate Insolvency Options – Part 2: Schemes of Arrangement and Compromise

This is the second of a four part series of articles considering various corporate insolvency and restructuring options.

Part 1: Liquidation – of which there are three types – Members Voluntary Liquidation, Creditors Voluntary Liquidation and Compulsory Liquidation
Part 2: Schemes of Arrangement and Compromises
Part 3: Examinership
Part 4: Receivership

Clearly, the next few months are of critical importance for all businesses. Diversification is key in maintaining a steady and profitable business.

Now that we are all working in a different way, it is prudent that you consider the options in a different way too.

PART 2: SCHEMES OF ARRANGEMENT AND COMPROMISE

Schemes of arrangements or comprises are for financially distressed companies. They offer an opportunity for companies to reach an agreement with their creditors and/or shareholders in relation their debts through a re-structuring programme.

Schemes of arrangements are typically viewed with some suspicion being the lessor known and indeed less used option in the event of corporate insolvency. This article aims to dispel some of the myths and enlighten your views on the potential that arrangements or compromises have to offer.

How do they work?

• A compromise or arrangement is proposed between a company and its creditors or its members or both;
• A scheme meeting is called – this is a meeting of the creditors or a meeting of the members in which a resolution is proposed that a compromise or arrangement be agreed;
• Where an arrangement or a compromise is proposed but the directors have not exercised the power to convene a scheme meeting, an application to court can be made by the company, a creditor, a member or liquidator seeking an order that such a scheme meeting be convened;
• Where a scheme meeting has been called, the company, its directors, any creditor, any member or a liquidator may apply to court to stay proceedings or restrain further proceedings and the court has jurisdiction to do so for a period as it sees fit;
• Along with each notice of a scheme meeting there is a scheme circular – this effectively explains the effect of the particular compromise or arrangement, it states any material interests of directors and where the compromise or arrangement affects the rights of debenture holders of the company it will explain how;
• An arrangement or compromise is binding provided the following three requirements are met:-

– The arrangement or compromise has been approved by special majority at the scheme meeting (this means a majority in number representing at least 75 per cent in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting either in person or by proxy at the scheme meeting);
– Notice of the passing of the resolution and the application to court is placed in two daily newspapers;
– Court sanction of the compromise or arrangement has been obtained.

A scheme of arrangement or compromise is worth considering for the following reasons:-

• It is a cost effective alternative to examinership;
• There is limited court intervention;
• It can be proposed when the company is in liquidation or where a receiver has been appointed;
• The directors remain in control (unless of course a company has first been placed into liquidation);
• It maintains business continuity;
• Once sanctioned by the court, it is binding on the creditors, the company, any liquidator appointed and any contributories.

Disadvantages relating to a scheme of arrangement or compromise:-

• It does not provide the same level of protection as examinership;
• A receiver may still be appointed during the process;
• There is no provision for the repudiation of leases;
• It does not prevent creditors enforcing retention of title provisions;
• There is a higher voting threshold at a scheme meeting when compared to examinership;
• In order to be binding, it must be sanctioned by the court;
• A court has a very broad discretion in approving an arrangement or compromise.

While a scheme is a viable and cheaper alternative to examinership, it obviously does not provide the same level of protection. Nonetheless, in some cases, it may be suitable and should be considered carefully as a corporate insolvency option.

For further information contact Elaine McGrath emcgrath@reddycharlton.ie