Après-scheme

Schemes of arrangement look set to remain popular in smoothing the path of restructurings, report Christian Pilkington and Kevin Heverin

The English law scheme of arrangement has proven to be a valuable tool in complex financial restructurings, in particular where a wholly consensual solution is not achievable. Some high-profile schemes effected during the recent ­economic downturn, including those relating to Wind Hellas Telecommunications, La Seda de Barcelona, European Directories and Cattles, demonstrate the versatility of this English company law procedure as part of a corporate restructuring strategy.

A scheme of arrangement under the Companies Act 2006 allows companies to effect a ’compromise’ or ’arrangement’, including a restructuring of their liabilities with creditors or members, outside the scope of formal insolvency proceedings.

A scheme of arrangement is available where a company is insolvent, but also where no grounds for insolvency exist.

In a restructuring scenario a distressed company typically negotiates the details of the scheme with its creditors – or with an ad hoc committee of creditors – and then submits the agreed proposal to the court, seeking ­permission to convene appropriate creditor meetings to vote on the scheme proposal.

A scheme can only be approved by a ­creditor meeting if it is supported by a ­simple majority (by number) of the creditors present and voting (in person or by proxy), representing at least 75 per cent by value of the liabilities involved. If approved by ­creditors, a company then seeks the sanction of the scheme by the court.

Lowering the bar

A key advantage of a scheme is that it can provide an opportunity to implement a restructuring solution at a lower approval threshold than would ordinarily apply under the terms of financing ­documentation, often avoiding the need for the unanimous or near-unanimous consent of a particular group of creditors.

A scheme therefore allows a company to counteract the potential hold-out value of dissident creditor minorities who could ­otherwise frustrate a widely supported restructuring process. Given the diversity of creditor groups and the increasingly ­complex nature of financial restructurings in the UK and Europe generally, this has proved particularly attractive.

Transfer window

In several recent high-profile restructurings, schemes have been used to transfer the ­business and assets of the company to a newly incorporated entity or other holding structure. In consideration of their ­agreement to this transfer, together with the cancellation and/or amendment of all or part of their debt, creditors are typically offered an equity stake in the new holding structure so that they may benefit from any increase in the underlying value of the business.

The value of that equity stake will depend on the relative strength of the creditors’ ­bargaining position, and in particular whether the value of the business ’breaks’ within the value of their outstanding debt. From the company’s perspective, the ­advantage is that the scheme in this situation will effect a significant deleveraging of the group’s capital structure.

In order to effect the transfer of the ­company’s business and assets, schemes have recently been coupled with pre-­packaged administration sales, as was done recently in the Wind Hellas restructuring. In such a case the scheme provides ­certainty to the company that all creditors are bound to the terms of the wider restructuring, therefore avoiding any leakage of cash to minority creditors who vote against the scheme proposal.

The pre-pack, which effects the transfer of the group’s business to the new holding structure, is carried out by the administrator, who assumes the risk of any challenge on valuation, allowing directors to distance themselves from the transaction.

A company may also propose a ­distribution scheme, which acts as an ­alternative to liquidation if the company’s objective is to facilitate the distribution of its assets between its creditors. A distribution scheme allows the company and its creditors to reach a binding agreement on the terms of the distribution, including the criteria for valuation of assets and the terms of the distribution mechanism.

Such an agreement can prove more ­flexible and ultimately more favourable to creditors than the realisation of a ­distribution to creditors through formal liquidation proceedings.

Distribution schemes were initially developed in relation to insurance companies where the claims of creditors were often difficult to quantify as a result of uncertainty about the company’s outstanding liabilities.

The English law scheme of arrangement has recently re-emerged as the tool of choice for those engaged in complex financial restructurings, in particular where a ­consensual solution has not been capable of implementation.

For example, in the early part of the ­credit crunch the restructurings of IMO, British Vita Group, Countrywide and McCarthy & Stone were all implemented, in part, ­pursuant to schemes. More recently the Wind Hellas, La Seda de Barcelona, Gallery Media, Orion Cable, European Directories and Cattles restructurings have also all involved schemes. The accompanying table summarises the key terms of the most high-profile schemes of the recent economic downturn.

It is interesting to note that, during this period, schemes have become instrumental in restructuring the indebtedness of ­overseas-incorporated companies, such
as Tele Columbus (Germany), La Seda de Barcelona (Spain), British Vita ­(Luxembourg) and Gallery Media (Russia). From the company’s perspective, the ­attraction of the scheme in this situation is that it can bind dissident creditors into a restructuring where no similar process is available in the local jurisdiction.

International agreement Furthermore, although a company must demonstrate a ’sufficient connection’ to the UK for the court to exercise its jurisdiction to sanction the scheme, in practice this has not proved to be a high threshold. Indeed, in the recent High Court judgment in ­Rodenstock (2011), which involved a scheme in relation to a German-incorporated ­company, the English court approved the scheme based primarily on the English ­governing law and jurisdiction clause in the facility agreement.

Every scheme is fact-specific, and the underlying compromise or arrangement being proposed to scheme creditors will be influenced by different factors and ­stakeholder interests.

However, the scheme of arrangement looks set to remain a popular restructuring option for both English and overseas ­companies, in particular where the ­involvement of divergent creditor groups, the impact of complex capital structures and high voting thresholds in documentation necessitate the need to ’cram down’ min­-orities and achieve the certainty of ­outcome that an approved scheme can help to ­deliver.

Christian Pilkington is a partner and Kevin Heverin is an associate at White & Case