Scheme of arrangement
M&A / Merger ModelA court sanctioned compromise between a company and a class of its creditors or members under Part 26 of the Companies Act 2006, binding dissenters inside an approving class.
Also written: Part 26 scheme, scheme
A scheme is not an insolvency procedure. A solvent company can use one, the directors stay in control, there is no moratorium and no office holder is appointed. It is a statutory way of making a deal binding on people who did not agree to it.
It runs through two hearings. At the convening hearing the court decides how creditors are divided into classes, and that is where most of the fighting happens, because a class is made up of creditors whose rights are not so dissimilar that they cannot consult together. Draw the classes differently and you change who holds a veto.
Each class then votes. Approval needs a majority in number of those voting in that class, representing at least 75% in value. At the sanction hearing the court decides whether to approve, and it can decline even where the votes passed.
The limit is the reason Part 26A exists. Every class must approve, so a class that is plainly out of the money and has nothing left to lose can block a restructuring the rest of the structure supports. The same statutory machinery is also used to implement UK takeovers, which is a different use of the same tool.
Worked example
Three classes vote on a scheme. Senior lenders approve at 95% in value, mezzanine at 88%, and a small subordinated class at 60%. Illustrative figures.
The subordinated class fails the 75% test, so the scheme fails, even though the two classes above it hold most of the debt and are in favour. A restructuring plan would be the answer to that outcome.