Module 7.6 Part 26 Schemes of arrangement

Question 1

Who does a compromise or scheme of arrangement apply to?

Answer 1

its creditors or any class of them
or
its members or any class of them

Includes reorganisation of company’s share capital by the consolidation of shares of different classes or by division of shares into shares of different classes, or by both methods

Question 2

Can a Part 26 scheme of arrangement be used by a solvent company?

Answer 2

Yes

Question 3

What are the stages for a Part 26 Scheme of arrangement?

Answer 3

1. Negotiations
2. Practice statement letter
3. Application to court
4. Convening hearing
5. Notice of Meeting(s)
6. Meeting(s) of members and/or creditors
7. Chairman’s report
8. Sanctioning hearing
9. Filing court order with Registrar of Cos

Question 4

What is the similarity test?

Answer 4

Persons sufficiently similar that they can consult together with a view to their common interest, should be summoned to a single meeting
(Persons so dissimilar that they cannot sensibly consult together with a view to their common interest, must be given separate meetings)
Similarity based on legal rights against the company - Not broader private or commercial interests

Question 5

What are the contents of a Practice Statement Letter?

Answer 5

 that the scheme is being promoted
 the purpose which the scheme is designed to achieve and its effect
 the meetings of creditors and/ or members which the applicant considers will be required and their composition
 the other matters that are to be addressed at the convening hearing
 the date and place fixed for the convening hearing
 that such persons are entitled to attend the convening and sanction hearings, and
 how such persons may make further enquiries about the scheme

Sent allowing sufficient time to enable proper consideration/ take advice

Question 6

What is the court order for holding of meeting? (convening meeting)/

Answer 6

The court may order a meeting of the creditors or class of creditors, or meeting of the members of the company or class of members (as the case may be) to be summoned in such manner as the court directs

Question 7

Who can apply to the court for a meeting to be convened?

Answer 7

Application for meeting can be made by
 the company (NOT DIRECTORS)
 any creditor or member of the company
 Iiquidator
 administrator

NB if Part A1 moratorium then company applies, giving notice to monitor. (Court may order moratorium to be extended to such a date as is specified in the order)

NB Each class of affected creditors/ members meets separately

Question 8

How must notice convening a meeting to consider a Part 26 scheme of arrangement be given?

Answer 8

Sent to creditors/ members
By advert

Question 9

What must be provided to creditors/ members (as applicable) where a meeting is summoned to consider a Part 26 scheme of arrangement?

Answer 9

An explanatory statement. (Either with notice or details of how creditors or members entitled to attend the meeting can obtain it.

Question 10

What must be in the explanatory statement?

Answer 10

The statement must explain the effect of the compromise or arrangement

In particular must state:
 any material interests of the directors of the company (whether as directors or members or creditors or otherwise) and
 the effect on those interests of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons

Court will expect statement to be fair and provide sufficient information
 Enabling creditors/ members to exercise their judgement
 Explaining commercial impact of the scheme and alternatives if not approved

Where the compromise or arrangement affects the rights of debenture holders of the company, the statement must give the like explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company’s directors

Question 11

Who commits an offence in default off giving notice?

Answer 11

Default in giving notice/ making an explanatory statement is an offence
 By the company
 Every officer who is in default [e.g. director]
 Including an insolvency office holder in default [e.g. liquidator or administrator]
 Or a trustee of a deed for securing the issue of debentures

Question 12

How long is the notice period for convening a meeting to consider a Part 26 scheme proposal?

Answer 12

No period specified - typically 21 days

Question 13

What happens if somebody entitled to vote has objections?

Answer 13

Objections should be raised at the time

Question 14

What is the requisite majority for a Part 26 scheme of arrangement?

Answer 14

2 stage majority within each class:
 A majority in number of those present and voting
 Representing 75% in value of those present and voting

Question 15

When can the court decline to sanction a Part 26 scheme of arrangement?

Answer 15

 if those participating do not fully represent the class E.g. if low participation; or
 Creditors have not been provided with sufficient information to make an informed decision

Question 15

When can the court sanction a Part 26 scheme of arrangement?

Answer 15

If a majority in number representing 75% 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 meeting summoned under section 896, agree a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.

Question 16

Who can apply to the court to sanction a Part 26 scheme of arrangement?

Answer 16

 the company
 any creditor or member of the company
 Liquidator
 Administrator

Dissatisfied creditors/ members may oppose the sanctioning of the
scheme

Question 17

What are the criteria for a court to sanction a Part 26 scheme of arrangement?

Answer 17

 Jurisdiction – “sufficient connection”
 Compliance with statutory procedures
 Requisite majorities obtained
 Scheme terms fair and reasonable

Question 18

When does a court order for a Part 26 scheme of arrangement take effect?

Answer 18

The court’s order HAS NO EFFECT UNTIL a copy of it has been delivered to the registrar

Question 19

Who is a Part 26 scheme binding on?

Answer 19

A compromise or agreement sanctioned by the court is binding on:

 all creditors or the class of creditors or on the members or class of members (as the case may be)
 and the company (or, in the case of a company in the course of being wound up, the liquidator and contributories of the company)

Question 20

What is the impact of a Part 26 scheme of arrangement on Moratorium debts

Answer 20

The relevant creditors may not participate in the meeting summoned under section 896. But relevant creditors:
 Are entitled to receive the explanatory statement; and
 To attend the meeting

The court may not sanction the compromise or arrangement under section 899 if it includes provision in respect of any relevant creditor who has not agreed to it

Question 21

What are the powers of court to facilitate reconstruction or amalgamation under Part 26?

Answer 21

The court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters
 the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company
 the allotting or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person
 the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company
 the dissolution, without winding up, of any transferor company
 the provision to be made for any persons who, within such time and in such
manner as the court directs, dissent from the compromise or arrangement
 such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out

Question 22

How long does a company have to deliver to the Registrar of Cos a copy of an order to facilitate reconstruction of amalgamation?

Answer 22

7 days

Question 23

What are the obligations of a company with respect to articles etc?

Answer 23

If the order amends the company’s articles, or affects a company’s constitution
 the copy of the order delivered to the registrar by the company…must be accompanied by a copy of the company’s articles, or the resolution or agreement in question, as amended
 Every copy of the company’s articles issued after the order is made must be accompanied by a copy of the order unless the effect of the order has been incorporated into the articles by amendment

Question 24

When might a company use a Part 26 scheme of arrangement?

Answer 24

Flexibility as to nature of scheme or compromise required: EG:
 Debt refinancing no longer viable
 Increasingly complex debt structures with syndicate lending
 Multiple debtl ayers
 Cross-border corporate structures
 Debt for equity swaps

It is NOT an insolvency process

Question 25

When can creditors object to the determination of classes for voting?

Answer 25

At the convening hearing
Court will assess whether the allocation of persons to classes has been carried out correctly at the sanctioning (convening) hearing

Question 26

When a class is sanctioned, who does it bind?

Answer 26

All creditors/ members in that class (although more than 25% can vote against the proposal).

Will include a minority of SECURED creditors

Question 27

What is the impact of a Part 26 scheme of arrangement on SECURED creditors

Answer 27

Classes of secured creditors can be bound into “new” lending terms

(Unlike CVA where secured creditors rights cannot be varied without consent.)

Question 28

What is the role of the valuer in a Part 26 proposal?

Answer 28

Of central importance:

 Where does economic interest lie?
 What is value of company?
 How is it valued?
 Importance of valuation and method of valuation
 Qualification and experience of the valuer?
 Are there sufficient assets to pay entire debt or just certain classes?
 Senior debt vs. junior debt

Question 29

What is the role of an IP in a Part 26 scheme?

Answer 29

Not insolvency = no official role

BUT: The scheme may need a scheme supervisor/ administrator

Functions, powers and duties need to be defined
 Getting in, realising and distributing scheme assets
 Adjudicating claims
 Monitoring compliance
 Periodic reporting to committee and/ or scheme creditors
 Attending meetings

Powers will be as defined in the scheme

Question 30

How do you obtain protection from creditors whilst a Part 26 scheme is being proposed etc?

Answer 30

 Use administration to obtain moratorium with Scheme as exit route?
 Use moratorium process? –Limiting impact of “priority status”