Schemes of Arrangement: How They Work and How to Apply
What is a Scheme of Arrangement?
A scheme of arrangement is an agreement, between a company in financial distress and its creditors, to assist the company in fulfilling its debt obligations.
A scheme of arrangement works by restructuring the company’s debts and varying creditors’ rights.
For example, the creditors may agree to claim only a portion of instead of the full amounts owed to them by the company. In exchange, the company may commit to paying these portions of debt rather than defaulting on the entire debt altogether.
The scheme is subject to the court’s supervision and sanction. This means that a scheme will be binding on all creditors if the court approves the scheme. This is even if not all the creditors approve of the scheme.
This article will cover:
- Why a company might wish to undertake a scheme of arrangement over judicial management
- The process of effecting a scheme of arrangement in Singapore
- Effect(s) of the scheme of arrangement
- Alteration of a scheme of arrangement
- Termination of a scheme of arrangement
A scheme of arrangement is often preferable to a judicial management in various situations. These include:
- Where the company wishes to avoid publicity of its financial woes;
- Where the company directors are unwilling to cede control over the company to a judicial manager; and/or
- Where the company and/or the creditors seek to leverage the possible orders that the court may grant in order to achieve their desired ends.
Process of Effecting a Scheme of Arrangement in Singapore
The following infographic provides a quick summary of the application process for a scheme of arrangement:
(Click on the image to download it in a new tab.)
Who may apply for a scheme of arrangement?
The following persons may apply to the court to convene a creditors’ meeting for obtaining the creditors’ approval of the scheme:
- The company itself
- Company creditors
- Company members
- The company’s judicial manager
- The company’s liquidator
Making the application
When applying for a scheme, the applicant has to unreservedly disclose all material information to the court. This is to assist the court as it decides how the creditors’ meeting would be conducted.
Such material information includes any issues relating to a possible need to hold separate meetings for different classes of creditors. For example, where certain creditors have such different rights and interests from others that it will be inappropriate for them to consult each other on whether to vote for or against the proposed scheme.
Notice of Meeting and (if needed) appointment of scheme manager
If the court approves the creditors’ meeting, the company will send notice(s) summoning the meeting, as well as statement(s) explaining the effects of the proposed scheme to all creditors. A scheme manager may also need to be appointed by the company or court to administer and manage the scheme or facilitate negotiations.
Upon receiving these documents, prospective scheme creditors can submit their proofs of debt (together with any supporting documents) to the chairman of the creditors’ meeting. The chairman will then decide which debts to admit or reject.
The chairman’s list of approved creditors – and the corresponding amounts of their admitted claims – will be posted at the meeting venue before the meeting.
Approval via creditors’ voting
During the meeting, the scheme creditors will cast their votes. As mentioned earlier, scheme creditors may be classified differently for voting purposes if they have differing interests.
This classification is aimed at protecting minority creditors whose rights may be crammed down upon (i.e. forced into being bound by the scheme, also known as cross-class cram down) should they be outvoted.
At the same time however, the court has to ensure that not too many classes of creditors are created, or this could possibly lead to minority creditors being able to veto the scheme for no good reason.
After voting, the chairman will tabulate the votes and announce the results. If at least 50% of the creditors or class of creditors (present and voting) holding at least 75% in value of debt claims agree to the proposed scheme, the court will then decide whether to approve it.
Sanction by the court
For the court to approve the scheme, it must be satisfied that:
- All statutory requirements for the scheme have been complied with;
- The creditors present at the meeting were fairly representative of the class of creditors;
- The statutory majority did not coerce the minority at the meeting in order to promote interests detrimental to them; and
- The scheme is one which a man of business or an intelligent and honest man, being a member of the class concerned and acting in his interest, would reasonably approve.
Where necessary, the court has the power to call for a new creditors’ meeting and order a re-vote before it decides whether or not to approve the scheme.
The court may call for a re-vote where, for example, there are objections to the approval process or terms of the scheme, but the court does not want to restart the entire scheme process and incur additional costs.
The court also has the power to approve a scheme, notwithstanding objections from dissenting classes of creditors, if:
- A majority in number of creditors, who were present at the meeting and are to be bound by the scheme, voted in favour of it;
- These creditors represented 75% in value of the debt claims; and
- The court is satisfied that the scheme does not discriminate unfairly between 2 or more classes of creditors, and is fair and equitable to each dissenting class.
Once the court has approved of the proposed scheme, a copy of the court’s order must be lodged with the Accounting and Corporate Regulatory Authority (ACRA). The scheme will then be binding on all creditors.
The alternative method: A “pre-packed” scheme of arrangement
Under the Insolvency, Restructuring and Dissolution Act 2018 (IRDA), there is also a faster and less costly method of implementing a scheme of arrangement.
Known informally as the “pre-packed” scheme, the court can approve a scheme fulfilling certain requirements even without calling a creditors’ meeting to vote on it.
The requirements of such a “pre-packed” scheme are:
- Each creditor must have been provided a notice containing information on the company and the proposed scheme. The notice must also be filed with ACRA as well as published in the Gazette and at least one English local daily newspaper; and
- The court must be satisfied that the proposed scheme would have been approved if the creditors had voted on it.
Effect(s) of the Scheme of Arrangement
The effect(s) of the scheme of arrangement will depend on its terms.
For example, rights of creditors can be affected only if the scheme has expressly provided for this. The same applies to the alteration of third-party rights.
After a scheme has been proposed, the court may grant a moratorium (i.e. a temporary suspension of a certain activity) to restrain further legal action or proceedings against the company in question unless the court has granted leave for these proceedings to go ahead.
For example, the company may apply to the court under section 64 of the IRDA to restrain the commencement of certain legal actions, such as the:
- Passing of a resolution to wind up the company
- Suing of the company without the court’s permission
- Repossession of goods held by the company under a hire-purchase agreement without the court’s permission
After the company has applied to the court to restrain the commencement of such legal actions:
- An interim moratorium will automatically kick in. This moratorium takes effect until the court hears the application or until 30 days after the date of the application, whichever is earlier; and
- Companies related to this company (e.g. its subsidiaries and/or holding companies) may also apply for a moratorium under section 65 of the IRDA. For example, these related companies may apply to restrain certain legal actions such as the passing of a resolution for their own winding up.
To ensure that creditors’ interests are protected, the court may also grant orders under section 66 of the IRDA to prevent the company from taking certain actions during the moratorium period. These orders can:
- Restrain the company from disposing of its property other than in good faith and in its ordinary course of business; and/or
- Restrain the company from transferring any of its shares or altering the rights of any of its members.
Super priority financing
To successfully implement a scheme of arrangement, a company typically needs a fresh capital injection to continue operations and pay off short-term debts. However, distressed companies often face significant difficulties in obtaining rescue financing (i.e. essential loans) due to the risk of the restructuring failing, and the rescue financiers being unable to recover their loans. The lack of such financing then makes it much harder to maintain the company’s operations and would itself reduce the chances of a successful restructuring.
To encourage lenders to provide rescue financing, the court has the power under the IRDA to grant a super priority order to give rescue financiers priority over the other creditors if restructuring fails and the company is wound up.
In the most extreme cases, this could even provide rescue financiers with priority access to secured assets. However, the court will not make such an order unless it is satisfied that rescue financing cannot be obtained otherwise, and that there is adequate protection for the interests of existing secured creditors.
Alteration of a Scheme of Arrangement
Once sanctioned by the court, a scheme of arrangement is binding on all parties to the scheme and cannot subsequently be altered. This is even if the company’s shareholders and creditors agree to alter the scheme.
Termination of a Scheme of Arrangement
The scheme may include terms on how it is to be terminated. For example, the terms of a scheme of arrangement may state that the scheme ends:
- Upon complete implementation of the scheme;
- After a stipulated period of time; and/or
- At the scheme manager’s discretion.
Schemes of arrangement grant companies in financial distress temporary relief from their debt obligations. As not all creditors have to approve the scheme for it to go ahead, this avoids the impracticability or even impossibility of procuring the unanimous approval of all creditors.
In certain situations, the scheme of arrangement may also prevent a minority of creditors from frustrating a beneficial scheme by withholding consent.
If you need legal advice on whether your company will benefit from undergoing a scheme of arrangement, feel free to get in touch with one of our corporate and commercial lawyers.
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