What is a Scheme of Arrangement?
A scheme of arrangement is a compromise or arrangement between a company and its creditors (or a class of them) that, once approved by the required majority and sanctioned by the court, binds every creditor in that class, including those who voted against it. That is what makes a scheme more than an ordinary negotiation: a minority cannot hold the restructuring hostage.
Singapore enhanced its scheme regime and placed a set of restructuring tools in Part 5 of the IRDA, including:
A moratorium
to hold off creditor action while a scheme is developed.
Cross-class cram-down
which can bind a dissenting class in defined circumstances.
Super-priority rescue financing
to fund a company through the process.
Pre-packaged schemes
where the court can approve a compromise without a creditors’ meeting, which can shorten the timeline where creditors are already aligned.
What a scheme is not: it is not a process that strips control from management. The company’s directors generally remain in charge, working under court oversight, which distinguishes a scheme from judicial management.
Who should consider a Scheme of Arrangement?
Directors
of a company that is viable but carrying unsustainable debt, who want to restructure liabilities and keep trading.
Companies
facing a creditor or group of creditors blocking a sensible restructuring, where a binding, court-sanctioned compromise is the way through.
Creditors
who would recover more from a structured compromise than from a winding up.
When does a scheme make sense, rather than judicial management?
A scheme suits a company that has a workable plan and broad creditor support, and where management is capable of steering the restructuring. Judicial management suits a company that needs an independent manager and deeper protection while a turnaround is worked out. The two can connect: one statutory purpose of judicial management is precisely to bring about a scheme of arrangement.
How does a scheme of arrangement work?
1. Assessment and design
We test the company’s viability and design a compromise that creditors can realistically accept.
2. Moratorium (where needed)
Where protection is required, an application is made to hold off creditor action while the scheme is prepared.
3. Application to convene meetings
The company applies to court for permission to call meetings of creditors. Creditors are divided into classes where their interests differ.
4. Creditor vote
Each class votes. Approval requires a majority in number representing at least 75% in value of the creditors present and voting in that class.
5. Court sanction
If the required majorities are met, the court is asked to sanction the scheme. The court reviews fairness before approving.
6. Implementation
Once sanctioned, the scheme binds all creditors in the class and is carried out on its terms.
Scheme of Arrangement vs Judicial Management
| Scheme of Arrangement | Judicial Management | |
|---|---|---|
| Who runs the company | ||
| Who runs the company | Existing management, under court oversight | Independent judicial manager |
| Core mechanism | ||
| Core mechanism | Court-sanctioned, binding compromise | Management handed to a manager behind a moratorium |
| Binds dissenting creditors | ||
| Binds dissenting creditors | Yes, within an approved class | Through the proposals process |
| Best when | ||
| Best when | A workable plan and creditor support exist | The business needs independent control and protection |
Why DHA+ pac
A scheme succeeds or fails on the quality of the proposal and the credibility of the people putting it forward. DHA+ pac has advised on restructurings in Singapore since 1994, and our Licensed Insolvency Practitioners bring both a working command of the IRDA framework and the practical sense to build a deal creditors will support. We are candid about what a scheme can and cannot achieve in your circumstances.
FAQ
In each class of creditors, approval requires a majority in number representing at least 75% in value of those present and voting. The court must then sanction the scheme before it takes effect.
Yes. Once a scheme is approved by the required majority in a class and sanctioned by the court, it binds every creditor in that class, including dissenters. In defined circumstances, a dissenting class may also be bound through cross-class cram-down in the same way.
That is usually the point. A scheme is designed to let a viable company continue operating while its debts are restructured.
A pre-pack is a scheme where the terms are largely agreed with creditors in advance, which can significantly shorten the court process. The IRDA allows the court to approve a compromise without a creditors’ meeting in suitable cases.
Not sure where to start?
If your company is viable but weighed down by debt, a scheme of arrangement may let you restructure and keep trading.
Contact us for a confidential review.