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Editor's Note: The U.K. does not have a debtor-inpossession process in any form that would be recognisable by U.S. bankruptcy practitioners familiar with chapter 11. However, the U.K. schemeof-arrangement process does at least offer some similarities. A scheme allows the requisite majority of affected creditors to drag a dissenting minority on restructuring fundamental debt characteristics without involving an insolvency officeholder so that management remains in control while the corporate balance sheet is reorganized.
Whether or not linked to those similarities, schemes of arrangement have become the tools of choice in many restructurings in the economic downturn (the well-known process of administration offers an effective moratorium, but no comparable debt-restructuring option). Most recently, we have seen the English courts accepting jurisdiction to sanction schemes of arrangement for non-English debtors. Given that schemes of arrangement have been a feature of English law for many years, this is a very modern development and has opened up new solutions for troubled non-English debtors.
The popularity of English law as the choice for loan agreements across Europe when money was borrowed has enabled the English courts to find that they have jurisdiction to assist in a foreign restructuring. However, this has required a careful step through the relevant transnational laws and conventions, the route of which suggests that the profile of U.K. schemes as restructuring tools may still have room to grow.
The current economic crisis is creating a lasting impression on companies once swept up in the leveraged buyout frenzy. The legacy of overleveraged balance sheets and an inability to meet financial covenants and service-debt obligations coupled with a lack of refinancing solutions have, in part, given rise to a notable increase in the use of English law schemes of arrangement.
Schemes are not just being sought by English companies. In recent years, foreign companies have increasingly been looking to take advantage of English law schemes to implement their own restructurings, particularly where local insolvency and restructuring regimes do not permit the requisite level of flexibility for complex debt structures. However, despite the recent successful use of schemes by foreign companies, this recent development has raised its own questions of jurisdiction and enforceability.
What Is a Scheme of Arrangement?
A scheme is an English company law procedure under...