Real Alternatives to Examinership

Article by Jim Stafford partner with Friel Stafford

The commencement of the Companies Act 2014 (“the 2014 Act”)on 1 June 2015 brings with it a much more streamlined approach to many company law issues, one of which, Schemes of Arrangement, will be seen by many struggling companies to be a much improved tool for companies looking to enter a compromise agreement with its creditors.

The old Scheme of Arrangements under the Companies Act 1963(“the 1963 Act”) was rarely used by companies due to a number of factors,including the costly number of court appearances required. Under the 2014 Act a Scheme of Arrangement is possible with only one court appearance. Schemes of Arrangement are now a real alternative to Examinership which can be very costly. It is expected that the number of Schemes of Arrangement is likely to increase considerably in the coming years.

Unlike Examinerships, the business need not be viable.Schemes of Arrangement may be used to wind up a company’s affairs and pay a greater dividend to creditors. In such “wind up” schemes, monies could be set aside for voluntary strike off.

So what exactly is a Scheme of Arrangement?

Scheme of Arrangement is a procedure which can be used by a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time. A Scheme of Arrangement can be proposed by the directors of the company.

Where scheme meetings are convened, the court may place a stay on all proceedings against the company or restrain further proceedings for such time as it sees fit.

A scheme meeting can be convened by sending the appropriate notices to each class of creditor, or members, giving them 14 days notice of the Scheme of Arrangement meetings. The notice must include a “scheme circular”which sets out the effect of the compromise or agreement and additional requirements as set out in the 2014 Act.

The Scheme meetings decide whether to approve the Scheme of Arrangement. If 75% of the creditors present and voting in person or proxy (or members as the case may be) agree to the proposal, it is then binding on all creditors, or class of creditors.

The Company can continue trading during the Scheme of Arrangement and afterwards.

Who Can Benefit From A Scheme of Arrangement?

• Businesses that have experienced trading difficulties since start up and need time to prove their business model.

• Businesses that want to avoid the stigma of liquidation.
• Businesses that know they can be profitable and successful in the future but need a bit of time.
• Businesses that need some time to put together anew business plan for the company.
• Businesses that will be profitable in the short term but are under pressure from creditors.
• Businesses that are profitable but have experienced bad debts or late payers thus affecting the short term health of the company.
• Businesses that need to restructure.
• Companies that wish to wind down trading in an orderly fashion.
• Companies that wish to close down over a certain time.

A Scheme of Arrangement proposal can be drafted by the directors with assistance from their professional advisors. The approved Scheme of Arrangement binds every person who in accordance with the rules had notice of, and was entitled to vote at, that meeting (whether or not they were present or represented at the meeting) as if he were a party to the Scheme of Arrangement.

Advantages of Scheme of Arrangement

• The government, banks and large creditors are keen on promoting the “rescue culture” and so they are generally prepared to work with troubled businesses to save them.
• Scheme of Arrangements allow structured payment of tax arrears.
• A Scheme of Arrangement is a cost effective method for avoiding outright insolvency for a company with financial problems.
• A Scheme of Arrangement allows the core business to trade on and so provides the company directors with continued income.
• A Scheme of Arrangement allows the directors time to re-organise and restructure the company without the threat of creditor action.
• A Scheme of Arrangement costs less than other more serious insolvency procedures such as Receivership, Liquidations or Examinership.
• Some tax losses may be retained.

Scheme of Arrangement or Examinership?

Schemes or Arrangement have the following advantages over Examinerships:

1. Less Costly
2. Less publicity
3. No need for an independent Expert’s Report to commence the process.
4. No advertising of the “Business for Sale”.
5. No need to prove to the High Court that there is a “reasonable prospect” of the company surviving.
6.  No need for approval of the High Court to enter the process. This can be particularly relevant where the directors have, for example, deliberately under-stated liabilities on tax returns. The
7. High Court might reject an Examinerhsip in such a case.
8. The shareholders will not lose control of their company. In an Examinership, the Examiner is required to evaluate possible investments from interested parties. As some shareholders have discovered, they might be ousted by a new investor, even though they spent their lifetimes building up the company.
9. No strict deadlines to adhere to.

However, there are some disadvantages of Schemes of Arrangement,namely:

1. The bank may still appoint a Receiver. (In practice,many banks will be supportive of their customers.)
2. Trade creditors may claim retention of title.
3. There is no provision for compulsory repudiation of leases.
4. The voting thresholds for a Scheme of Arrangement are higher at 75%, as opposed to 51% in an Examinership.
5. Leasing companies may repossess assets.

Costs of a Scheme of Arrangement

The 2014 Act has substantially reduced the complexity and costs of Schemes or Arrangement. Most cases would be suitable for a “two stage”Process:

1.      Stage 1 – Send out Scheme of Arrangement proposals to shareholders and creditors and hold scheme meetings. If shareholders and creditors meetings vote in favour of scheme, then move onto stage 2.

2.      Stage 2 – Instruct solicitors to bring an application to the High Court to have the Scheme approved. This process would involve placing advertisements in 2 daily newspapers stating that the creditors voted in favour of the scheme and that an application will be made to court to approve the scheme.

In summary, the 2014 Act has reduce the burdensome court appearances previously required for Schemes of Arrangement which will lead to a considerable cost saving when compared to Examinership. It is therefore expected to see an increase in the number of Schemes of Arrangement being approved before the courts in the coming years.