A Scheme of Arrangement is a legal procedure under which a company can make an agreement with its shareholders or creditors to restructure its operations or financial affairs. It is a mechanism provided by law to facilitate a compromise between a company and its members or creditors.
A scheme of arrangement is not the end of the company. A scheme of arrangement is essentially what it is called. It is a scheme by the company to come to an arrangement with the creditors on its outstanding debt. It is a compromise. The intention for the scheme of arrangement is for the company to be able to trade its way out of its current financial predicament and back to good financial health. A scheme of arrangement is called a “haircut” because it involves the creditors taking accepting a discount off the debt which they are owed. For example, the total debt from say 5 creditors may be $1,000,000. The company may propose a scheme to these creditors to pay them 70% of the total debt over 4 instalments over 2 years. This may be a better alternative for the creditors than the company merely crumbling under the weight of the debt.
In a Scheme of Arrangement, the company proposes a plan to its shareholders or creditors for the reorganization of its affairs. The proposed plan may involve a variety of changes, such as a debt restructuring, a merger, an acquisition, or a spin-off. The plan must be approved by a majority of the shareholders or creditors who vote on it, and also by the court.
Once the plan is approved, it becomes binding on all shareholders or creditors of the company, even those who voted against it. The company can then implement the plan and make the necessary changes to its operations or financial affairs.
A good point to note would be that the scheme of arrangement does not involve removing the company’s existing management. There will be a scheme document, or a contract, which will bind all creditors, even dissenting ones. The scheme of arrangement will have to be submitted and approved by the court.
The company does not have to have an actual scheme ready. It can make the application as long as it intends to propose a scheme.
Upon application to the Court by the company, the Court will have the power to restrain proceedings against the company.
A Scheme of Arrangement is often used in situations where a company is in financial distress and needs to restructure its debt or operations. It can provide a more flexible and cost-effective way to achieve a compromise with creditors and avoid insolvency or bankruptcy proceedings. However, the process can be complex and time-consuming, and it is important to seek legal advice before proceeding with a Scheme of Arrangement.
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