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Over the past few years, as the availability of cheap corporate debt has rapidly diminished, companies have been increasingly forced to turn to restructuring options in an effort to deal with downturns in business performance in a more restricted economic climate. Among the hardest hit have been those businesses where the pre-credit crunch craze for leveraged buyouts has resulted in heavily overleveraged balance sheets, comprising of multiple tiers of debt, and a growing difficulty in meeting financial covenant tests and interest payment obligations based on pre-recession performance forecasts.
These increasingly complex debt structures, combined with the difficulty of finding any lenders interested in providing refinancing solutions, has left companies searching for new measures to enable them to reach workable compromises with their financial creditors, without having to undergo potentially damaging and business-disruptive insolvency processes. Recent restructurings such as McCarthy & Stone, Crest Nicholson, IMO Carwash and La Seda are evidence of a trend toward the use of schemes of arrangement as a means to implement restructurings of bank debt, and repair the balance sheets of such companies in circumstances where unanimous lender consent has, for one reason or another. not been forthcoming.
Overview
Schemes of arrangement are courtsanctioned compromises entered into between a company and one or more classes of creditors. Schemes are not insolvency processes: The procedure is set out in Part 26 of the Companies Act 2006. Schemes can give effect to anything that could be contractually agreed by way of compromise between the parties, provided that no party be obliged to enter into additional obligations (such as the provision of new lending.
The terms of a scheme will become effective if ( 1 ) it is approved by at least a majority of creditors by number, and at least 75 percent of creditors by value, in each class; and (2) the court exercises its discretion to sanction the scheme. Once sanctioned by the court, the terms of a scheme will be binding on each creditor in the classes subject to the scheme, regardless of whether that creditor voted in favor of the scheme.
Why a Scheme of Arrangement?
Given that there are a variety of other restructuring tools available in the market (pre-pack administrations, CVAs, etc.), it is worth examining why...