Clifford Chance

International restructuring - have schemes of arrangement come of age?

4 May 2011

Using a scheme of arrangement, an English law pre-insolvency procedure, to reduce the complexity of international restructurings is growing in popularity.

In the context of a restructuring, a scheme of arrangement will operate as a statutory contract between a company and its creditors. It binds all of the creditors identified by the company to the scheme and provides a relatively simple mechanism, sometimes in conjunction with the enforcement  mechanics in the relevant finance documents, to deal with various stakeholders such as shareholders and senior lenders, as well as mezzanine or unsecured lenders.

One of the main advantages of a scheme of arrangement is that it can be used by a company to restructure its debts without the need for unanimity in circumstances where this would otherwise be required under the terms of the relevant credit documentation.

For a scheme of arrangement to become effective, it has to be approved at a meeting of the creditors, or in separate meetings of different classes of creditors, by at least 75% in value and a majority in number of those registering a vote on the scheme and then be sanctioned by the English court.

However, not all the creditors have to agree to the scheme, or even receive notification of it, for it to become binding. The scheme can be made to work providing the requisite majorities agree to be bound by it.

Another advantage of an English scheme of arrangement is that it can be applied to an overseas company irrespective of where its centre of main interest (COMI) is located.

So long as it can be shown that the overseas company has sufficient connection with the UK for an English court to have jurisdiction over it, it can be subjected to a scheme of arrangement to deal with its creditors as part of an international restructuring. In this context, English law debt will be sufficient to demonstrate such connection.

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