Legal 101

To Scheme or to Plan? Which is the better insolvency process?

Mohamad KreidiehMohamad Kreidieh
Last updated on:
November 11, 2022
Published on:
September 6, 2022

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When a company encounters financial difficulties, it may commence formal insolvency proceedings to help modify its debt operations. This is called restructuring and is a common tool used to help insolvent companies. Restructuring can be consensual or court-based and serves the primary purpose of improving liquidity and securing financial longevity. This is achieved using two insolvency tools: schemes of arrangement (schemes), and restructuring plans (plans).‍ 

What is the difference between insolvency schemes and plans?

Ostensibly, schemes and plans can be considered distinct processes, however upon further analysis, they bear many similarities. Found in the 2006 Companies Act (hereafter, Companies Act) Part 26 (scheme), and Part 26A (plan), they are processes which are often described to be magic, processing the ability to restructure a company’s finances and shrink the amount of debt they owe to their creditors. They work on the basis of giving and taking, therefore the creditor must enjoy some benefit as a result of the agreement. 

Very little law is written down concerning the application for schemes and plans, most of it can be found in case law tracing back to 100 years. Both schemes and plans are the same in function and achieve the same outcome, however, there are certain differences when considering the process of achieving a scheme or plan. These differences confer their own advantages and disadvantages to the tools and are essential to the identity and effectiveness of schemes and plans. company's assets 

What are the pros and cons of schemes and plans?

The first aspect to consider when looking at the pros and cons is the classification of schemes and plans. Re Gategroup Guarantee Limited [2021] was a landmark case where the courts decided that plans were corporate insolvency processes and thus benefited from the exclusion found in the Lugano convention. This classification is very important when considering the pros and cons of insolvency plans.

As a result of the case, the scope of plans has now been narrowed to that of an insolvency process. This reduction in scope means that plans will not apply to a wide range of scenarios, but rather, its discretion is limited only to instances where insolvency proceedings are necessary. There are also wider social implications from cementing this classification, namely that public relations may be strained by a company using an insolvency process. This is contrastable to schemes, which have a more ambiguous classification and are absent of the negative social connotations associated with plans, which is a distinct strength and an aspect that schemes benefit from.

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How do the courts sanction an insolvency plan or scheme?

The next aspect to consider pertains to the majority required to sanction a scheme. Without the necessary majority, the courts will not have the right to sanction a scheme/plan. As per the Companies Act Part 26, a supermajority is needed to sanction a scheme which includes 75% in value and 50% of each voting class, while in plans, only 75% of the value is required. At the onset, the scheme undergoes the two-part test, which places a greater threshold to satisfying the established criteria. This means that plans with a simpler majority vote hold a greater advantage over schemes, and thus in theory plans will be easier to pass and implement by the insolvent company.

The biggest advantage of insolvency plans is that they possess certain tools, which they benefit from exclusively. The most important tool is the cross-class cram down (CCCD). With this tool, the courts have the power to cram down dissenting classes who vote against the proposed plan. It is dependent on two conditions being satisfied: the first being that the creditors would be no worse off if the plan was to go through; and, second, that the plan has been agreed upon by at least one class of creditor (75% of value). 

What does case law say?

In cases such as Re Virgin Active Holdings Ltd [2021] and Re DeepOcean 1 UK Ltd [2021], the courts have applied the test successfully and have shown the actual power of the tool, versus its theoretical power. It effectively dragged along the dissenting class of the company's creditors, allowing the company to get the majority they need to pass the plan. However, as shown in Re Hurricane Energy plc [2021], this test may be difficult to satisfy. The court must be satisfied that all other alternatives would place the creditors in a worse-off situation, which at times cannot be easy to prove. 

The high burden of proof is one factor which limits CCCDs. The reasoning for using the tool must be justifiable and take into account all future activities of the company. While these conditions may be a roadblock, limiting the overall efficacy of CCCDs, they ultimately are very powerful and effective tools conferring great advantages onto plans.

The Bottom Line 

From the above analysis, when comparing the two processes it is evident that both insolvency schemes and plans are powerful tools. Key court cases on both insolvency processes help to clearly outline the different advantages and disadvantages of each process. However, as an insolvency process, plans offer insolvent companies better flexibility and more effective tools, which help to make the insolvency process easier. Insolvency plans have a specialised purpose and thus can be interoperated to help insolvent companies be better equipped to deal with the insolvency process.

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