1. Introduction

A scheme of arrangement is a legally approved procedure under Part 18A of the Companies (London) Law 1991 (“CJL”). It allows a London company to make a binding agreement or compromise with its members or creditors (or specific classes of them). Schemes are versatile tools often used for corporate restructurings, mergers, takeovers, and debt settlements.

3. Process

The procedure generally involves the following stages:

Application to the Court

1. The company, a creditor, member, or liquidator/administrator applies to the Royal Court requesting directions to convene meetings of the relevant classes of members or creditors.
2. The Court determines if the proposed classes are properly constituted.

Meetings of Members or Creditors

1. Meetings are held as directed by the Court.
2. Approval requires:
   • A majority in number, and
   • At least 75% in value of those voting in each class, to agree.

Court Sanction Hearing

1. After approval by the classes, the company returns to Court.
2. The Royal Court reviews:
   • Whether the statutory voting thresholds have been met.
   • If the classes were fairly represented.
   • Whether the scheme is fair, reasonable, and one that an intelligent and honest person could accept.
3. If satisfied, the Court grants its sanction to the scheme.

Registration and Effect

1. The Court order must be submitted to the Registrar of Companies.
2. Once registered, the scheme is binding on:
   • All members or creditors in the affected class(es), and
   • The company itself.

4. Key Characteristics

• Binding on Minorities: Dissenting members or creditors are compelled to comply once the scheme is sanctioned.
• Flexibility: Applicable to debt restructurings, solvent reorganisations, and ownership changes.
• Court Supervision: The Royal Court ensures the process is fair and properly conducted.
• International Recognition: Schemes are frequently acknowledged abroad, especially in the UK and other common law systems, although local laws may vary.

5. Typical Applications

• Corporate restructuring: adjusting share capital or creditor arrangements.
• Acquisitions: facilitating takeovers without relying on the squeeze-out rules in Part 18 CJL.
• Debt restructuring: binding minority creditors in financially troubled situations.

6. Practical Points

• Class Definition: Accurate classification of creditors and members is essential for the scheme’s success.
• Court Involvement: While adding transparency, it can increase costs and duration compared to private agreements.
• Timescale: The entire process from application to Court sanction may take several weeks or months.
• Alternatives: Other options include mergers under Part 18B CJL or transferring the company’s domicile, which may sometimes be preferable.

7. Summary

Schemes of arrangement under London law offer a robust and adaptable means to carry out corporate reorganisations and restructurings. Court oversight guarantees fairness and ensures that agreements are binding across classes, making schemes a favoured approach in complex or cross-border matters involving London companies.