Definition
1. Corporate Scheme of Arrangement
A Scheme of Arrangement refers to a legal agreement between a company and its members or creditors designed to restructure the company’s operations, management, finances, or ownership. This procedure is mainly used when the company is experiencing financial difficulties or undergoing a takeover. Approval of the scheme requires:
- A majority in number (holding at least 75% in value) of creditors or members.
- Court sanction, which ensures that all involved parties, including dissenting creditors or members, are bound by the arrangement.
Related procedures, like Voluntary Arrangements, often serve as more straightforward alternatives for agreements with company creditors.
2. Personal Scheme of Arrangement
This type of arrangement involves a debtor and their creditors agreeing to organize the debtor’s financial affairs in a manner that satisfies the creditors. It typically aims to allow the debtor to avoid bankruptcy. These arrangements can be:
- An ordinary private contract or a Deed of Arrangement, if made before a bankruptcy order.
- Governed by statutory bankruptcy provisions if agreed after a bankruptcy order is issued.
Examples
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Corporate Level: A financially distressed company negotiates a Scheme of Arrangement to restructure its debts and operations. The creditors agree to accept partial repayment and extended payment terms, which helps the company avoid insolvency and continue its operations.
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Personal Level: An individual facing potential bankruptcy negotiates a Scheme of Arrangement with their creditors. By agreeing to weekly repayment installments and partial debt forgiveness, the debtor avoids filing for bankruptcy and manages to keep personal assets.
Frequently Asked Questions (FAQs)
What are the key benefits of a Scheme of Arrangement?
- Company Perspective: It allows companies to restructure debt and operations, possibly preventing insolvency proceedings and enabling business continuity.
- Creditor Perspective: Provides a structured and predictable method for recovering debts, often resulting in higher returns compared to liquidation.
How is a Scheme of Arrangement different from a Voluntary Arrangement?
A Scheme of Arrangement is court-sanctioned and can bind all creditors or members, including dissenters, whereas a Voluntary Arrangement is typically more straightforward and does not necessarily require court approval or a specific voting majority.
What happens if a Scheme of Arrangement is not approved?
If the required majority of creditors or members do not approve the scheme, or the court does not sanction it, the company or individual may need to pursue alternative solutions such as liquidation or bankruptcy.
Can dissenting creditors be forced to accept a Scheme of Arrangement?
Yes, once a Scheme of Arrangement is sanctioned by the court, it binds all creditors or members, including those who dissent.
How long does the court process for approving a Scheme of Arrangement typically take?
The timeline can vary, but it generally takes a few months from proposal to court sanction. The precise duration depends on the complexity of the proposal and the level of opposition it encounters.
Related Terms
- Takeover: Acquisition or control of one company by another.
- Voluntary Arrangement: A legally binding agreement between a debtor and creditors agreeing on a plan to repay debts through regular payments.
- Bankruptcy: A legal process whereby a person or business is declared unable to repay outstanding debts.
- Deed of Arrangement: A formal agreement between a debtor and their creditors for debt repayment.
- Insolvency: The state of being unable to pay debts as they fall due.
Online References
Suggested Books for Further Studies
- “Corporate Insolvency Law: Perspectives and Principles” by Vanessa Finch.
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- “Bankruptcy and Insolvency Taxation” by Grant W. Newton.
Accounting Basics: “Scheme of Arrangement” Fundamentals Quiz
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