Scheme of Arrangement
A Scheme of Arrangement, often referred to as a “Scheme,” is a legal mechanism governed by the Insolvency, Restructuring and Dissolution Act 2018 (IRDA 2018). This procedure enables a company to negotiate and formalize agreements with its creditors, shareholders, or both, regarding various aspects of its operations. These arrangements can include debt restructuring, share capital modifications, or business reorganization.
Here’s a comprehensive overview:
The process begins with the company’s directors proposing a Scheme, typically in situations involving financial distress, insolvency, or the need for operational restructuring.
To proceed with the Scheme, the company must obtain approval from the Singapore High Court. This entails filing an application outlining the particulars of the proposed arrangement and providing supporting documentation.
Following court approval, the company is mandated to convene meetings of its shareholders and creditors (or specific creditor classes) to cast votes on the proposed Scheme. The court establishes meeting requirements, such as quorum and majority approval thresholds.
Shareholders and creditors, or their representatives, attend these meetings to vote on the acceptance of the Scheme. Approval usually necessitates a special majority, such as a 75% majority in value of creditors or shareholders present and voting.
If the Scheme garners the required majorities at the meetings, the company must apply to the court for formal approval. The court conducts a thorough review to ensure the Scheme’s fairness and equity.
After receiving court sanction, the Scheme becomes legally binding on all affected parties, including dissenting creditors or shareholders. The company proceeds to execute the Scheme’s terms.
Execution of the Scheme may entail diverse actions, such as debt restructuring, debt-to-equity conversions, asset sales, or other provisions specified in the Scheme document.
The company is obligated to file the court’s order with the Accounting and Corporate Regulatory Authority (ACRA) to formalize the Scheme’s effectiveness.
- Debt Reduction:
A Scheme can reduce the company’s debt burdens, enhancing its financial stability.
- Share Capital Reorganization:
It facilitates changes in share capital, such as buybacks or capital reductions.
- Business Restructuring:
A Scheme aids in asset sales, mergers, or reorganizations for improved financial health.
- Liquidation Avoidance:
In cases of insolvency, a Scheme can prevent compulsory liquidation by offering creditors more favourable terms.
The court ensures the fairness and equity of the Scheme, safeguarding all parties against unfair treatment.
Companies seeking to implement a Scheme typically engage legal and financial advisors to navigate the intricate process, ensure legal compliance, and optimize approval prospects.
In conclusion, a Scheme of Arrangement is a legally regulated mechanism enabling companies to reach agreements with creditors, shareholders, or both, often addressing financial challenges, operational restructuring, or complex financial matters. It offers a flexible and court-supervised process for formalizing compromises and arrangements that benefit all stakeholders while averting the need for liquidation or insolvency.
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