Members And Creditors Voluntary Liquidations

September 2003

Schemes Of Arrangement


This part deals with schemes of arrangement under the Companies Act 1985 and is divided into four sections as follows:

Section 1 - Introduction and definitions (paragraphs 56.187 to 56.188).

Section 2 - Official receivers’ involvement in schemes of arrangement (paragraphs 56.189 to 56.190).

Section 3 - The Scheme Of Arrangement Procedure (paragraphs 56.191 to 56.199).

Section 4 - Reconstruction, takeovers and mergers (paragraphs 56.200 to 56.204).

Part 1 - Introduction

56.187 Definition of scheme of arrangement

A scheme of arrangement (scheme) is a compromise or arrangement proposed between a company and its creditors and/or members and approved by the court. Schemes of arrangement are provided for in Sections 425 to 427A of the Companies Act 1985. Prior to the Insolvency Act 1986, a scheme was the only form of binding agreement between a company and its creditors. Schemes are rarely used and are unpopular because of their cost, complexity and the lack of a moratorium. The exception to this is the insurance industry where due to the special difficulties of their winding up (see Chapter 59 for further details of insolvent insurance companies) a scheme of arrangement is the preferred option.

The Companies Act 1985 does not define either a compromise or arrangement and the court takes a broad view of what should be included. Examples of schemes of arrangements range from a complex merger of several businesses, and the reorganisation of their share capital, to a simple arrangement varying the rights of a class of creditors. The scheme must involve compromise on both sides not just the surrendering of a right.

The format and content of a scheme is not laid down in legislation and is decided by agreement between the company and its creditors and members and is subject to the approval of the court. It cannot, however, authorise anything contrary to general law.

56.188 Situations where a scheme is not appropriate

The Companies Act 1985 and the Insolvency Act 1986 have other provisions relating to takeover, mergers of public limited companies, reduction of capital or a reconstruction, that may also be the subject of a scheme. The court may refuse to give sanction to a scheme, under section 425, where it considers another provision (see paragraphs 56.201 to 56.204) more appropriate, or may make special provision within the scheme to ensure fairness to those who have not agreed to the scheme.

Notes: [Companies Act 1985, ss135 to 141, ss427-430] [ss110 - 111]

Part 2 - Official Receiver’s Involvement In Schemes Of Arrangement

56.189 Power to propose scheme

The official receiver when acting as liquidator has the power, with the sanction either of the court or the liquidation committee, to make a compromise or arrangement with creditors. A scheme could be used where it is proposed to make distributions to creditors otherwise than in accordance with their rights (Re Trix Limited [1970] 1 WLR 1421). Where the official receiver is the liquidator of a company that he considers suitable for the proposal of a scheme, he should consider employing solicitors to deal with the formalities of the application (see Chapter 32.2).

Notes: [Companies Act 1985 s425(1)] [s167(1)]

56.190 Effect of scheme on the winding up

It is often a term of the scheme that all proceedings against the company shall be stayed and the court may make an order staying the winding up. This will remove control of the company from the official receiver and the company can resume trading. Further details on the stay of winding-up proceedings are at Chapter 6, Part 7.

Part 3 - The Scheme Of Arrangement Procedure

56.191 Outline of procedure

The scheme of arrangement procedure is formal and complex, which also makes it expensive. It applies to all companies which can be wound up under the Act. The procedure is divided into three steps:

  1. a without notice application (see Chapter 19 paragraph 29 for an explanation of this term) to court for an order that meetings of each class of creditors and members should be called;
  2. the meeting of creditors (or class of creditors) and members (or class of members); and
  3. an application to court, by petition, for sanction of the scheme.

All three steps are necessary for a scheme to be approved. Sanction of a scheme approved by a creditors meeting called without the order of court will not be given.

56.192 The application to hold meetings for the approval of a scheme of arrangement

The application to hold meetings of creditors and members for the approval of a scheme can be made to the court by the company, any member, any creditor, the liquidator or the administrator. It should be supported by:

  • full details of the scheme,

  • the proposed timing and venue of the meetings, and

  • any required advertisements.

At this stage the court will look at the proposals and consider whether they are reasonable and that they constitute a compromise or arrangement. The court has discretion to order the calling of meetings but will not do so where it considers the proposals do not meet the criteria. If meetings are to be called the court will order when, where and what meetings should be held, what notice is to be given and the forms of advertisement, if required, and proxies to be used.

Note: [Companies Act1985 s 425]

56.193 Calling the meetings of creditors

The proposed scheme is considered at meetings of the creditors and members of the company called under the terms of the court order above. There may be meetings of each of the separate classes of creditors and members but it is not necessary for a class meeting to be called if that particular class cannot benefit in a winding up. A "class" of creditors would consist of persons whose rights are not so dissimilar as to make it possible for them to consult together with a view to their common interest (Re Sovereign Life Assurance Co. v Dodd [1892] 2 QB 573). For example, the secured creditors may form one class of creditors.

The meetings of creditors and members must be called in accordance with the court order. If for any reason this is not possible - for example where the date or venue have to be changed - the court must be requested to amend the order.

Notes: [Companies Act 1985 s 426]

56.194 The explanatory Statement

Every notice of the meeting must include a statement which explains the effect of the scheme. The explanatory statement must be fair and, as far as possible, give all information reasonably necessary to enable the recipients to decide how to vote. In particular, the explanatory statement must include any material interest of the directors and how these may be affected by the scheme. Failure to comply with these requirements may result in a fine both for the company and every officer, which can include the liquidator or administrator. Even if no prejudice is suffered as a result of the omission, the court will be unable to dispense with the requirements and new meetings with proper notice then become necessary.

Where the notice was given by advertisement, the advertisement should include either the information required in the explanatory statement or details of where a copy of the explanatory statement may be obtained.

56.195 Required majorities

To be approved the scheme must be supported by a majority in number of the creditors and members, present and voting, representing 75% in value of those creditors or members.

Notes: [Companies Act 1985 s425(2)]

56.196 Application for sanction of the scheme

If the appropriate majorities are obtained at the meetings, the company should apply to the court, by petition, for sanction of the scheme.

The court will ascertain:

  • that the meetings have been called in accordance with the previous order;

  • that there was full disclosure of the explanatory statement;

  • that the required majorities have been obtained; and

  • that the scheme is reasonable (Re Dorman, Long & Co Limited [1934] Ch635).

The court has discretion as to whether to sanction the scheme as approved, make an order conditional upon modifications being made to the scheme or reject the scheme.

Note: [Companies Act 1985 s425(2)]

56.197 Dissenting parties

The court will hear any objection to the scheme from individual creditors and the order made on the application for approval of the scheme may make provision for any person who dissents from the arrangement.

Notes: [Companies Act 1985 s425]

56.198 When the order becomes effective

The order becomes effective when delivered to the Registrar of Companies for filing, which must be within seven days of its making. The filing of the order is the responsibility of the company which will be liable to a fine if the order is not delivered.

Once sanctioned by the court, the scheme binds all the creditors and members as well as any liquidator or members if the company is being wound up. Creditors whose debts are governed by foreign law are not bound by the scheme and may apply to their local court for enforcement of their claims against the company.

Notes: [Companies Act 1985 s425 (3) & (4)

56.199 Amendments to the scheme

Once sanctioned by the court, a scheme cannot be varied or departed from without the further sanction of the court.

Notes: [Companies Act 85 s427]

Part 4 - Reconstruction, Takeovers And Mergers

56.200 Reconstruction and amalgamation

Section 427 confers specific power on the court to make certain orders where the proposed scheme is for the reconstruction or amalgamation of companies. The order should be for any or all of the following:

  1. the transfer of the whole or part of the undertaking, liabilities and property from the transferor company to the transferee company;
  2. the allotment of shares, debentures or similar interests by the transferee company;
  3. continuation of legal proceedings by or against the transferee company which originated with the transferor company;
  4. dissolution of the transferor company without winding up;
  5. provision for persons who dissent from the scheme; and
  6. any incidental orders which the court considers necessary to carry out the scheme fully and effectively.

Notes: [Companies Act 1985 s427]

56.201 Takeovers

Where the object of a scheme is the acquisition of the whole of the share capital of another company, amounting to a takeover, the preferred provisions are contained in section 428 which gives greater protection to minority and dissenting shareholders who have the right to compel the acquiring company to purchase their shares.

Notes: [Companies Act 1985 s 428]

56.202 Mergers and divisions of public limited companies

Mergers and divisions of public limited companies are governed by additional provisions in the Companies Act 1985, section 427A which was inserted by the Companies (Mergers and Divisions) Regulations 1997 (SI 1987/1991). These provisions were added as a result of EU directives but have had little effect as most British companies use either takeovers (see paragraph 56.201) or hive-downs (see paragraph 56.203) in preference to mergers and divisions as outlined in this section.

Notes: [Companies Act 1985 s427A]

56.203 Definition of hive-down

A hive-down is the simplest possible form of company reconstruction. In return for a monetary price, or shares, a company in formal insolvency proceedings will sell its business to a wholly owned subsidiary which does not have the burden of the liabilities incurred in the past. The new company can be sold or transferred to the creditors as part of a voluntary arrangement.

56.204 Reconstruction

Section 110 of the Insolvency Act 1986 provides for the ‘reconstruction ‘ of a company in voluntary liquidation and a voluntary liquidator may use this provision, which does not require the sanction of the court, in preference to a scheme under the Companies Act 1986, section 425.

Notes: [s110]

[Back to Part 3 - Voluntary liquidation] [On to Part 5 - Company Voluntary Arrangements]