What’s the difference between a Restructuring Plan and a Scheme of Arrangement?

What’s the difference between a Restructuring Plan and a Scheme of Arrangement?

A business can restructure its debts or manage financial troubles, using both restructuring plans and a Scheme of Arrangement. The main distinction between the two is that while a Scheme of Arrangement has been used in the UK for many years, Restructuring Plans are a relatively new mechanism introduced by the UK Corporate Insolvency and Governance Act 2020.

What is a Restructuring Plan and when would you use one?

A financially troubled firm might propose a restructuring of its debts or affairs to its creditors and shareholders through the use of a restructuring plan, which is a legal method. Compared to other insolvency processes like administration or liquidation, it is intended to give a corporation a more adaptable and effective means to restructure its finances. When businesses are struggling financially but still want to carry on with business operations and believe they may be salvaged, they could adopt a restructuring plan.

Who is eligible for the Restructuring Plan?

A Restructuring Plan can be used by any UK-based firm that is having financial issues. Both solvent and insolvent companies may participate in the process, and there are no strict eligibility requirements.

What can a Restructuring Plan contain?

A restructuring plan may include a number of ideas for reorganising a business’s debts or other financial matters. The plan may contain suggestions for debt write-offs, debt for equity exchanges, and changes to shareholders’ or creditors’ rights. It may also provide suggestions for adjustments to the management or operations of the business.

What are the qualifying conditions to the Restructuring Plan?

A business must have had financial issues that affect its capacity to continue operating in order to be eligible for a restructuring plan. Additionally, the plan must be approved by the required majority of creditors or shareholders and there must have a realistic chance of being saved as a going concern. The plan must be fair and equitable to all parties concerned in order for the court to adopt it.

Does valuation play any part in a Restructuring Plan?

Undoubtedly, an asset valuation is important to a restructuring plan. Making informed decisions about the restructuring approach is made easier with the help of a meaningful valuation, which helps to evaluate the value of the business or assets being affected by the plan. With the help of this data, the right amount of investment should be more capable of accurate prediction; potential buyers or investors will have confidence in their decision making; and there should generally be more confidence in the prospects of success in the viability and feasibility of a restructuring plan.

The timing of a Restructuring Plan

The timing of a restructuring plan is determined by the state of the business’s current financial condition, and the reorganisation’s specific objectives. Recognising current or future changes in the market that are likely to have an impact on the businesses financial performance, may determine when to start planning for a restructuring.

What’s the difference between a CVA and a restructuring plan?

A corporate business can come to an arrangement with its creditors regarding the repayment of debts through a Company Voluntary Arrangement (CVA), which is a particular kind of restructuring plan which is structured by Part 1 of the Insolvency Act 1986. On the other hand, a restructuring plan is an alternative process that encapsulates a strategy to reorganise a businesses operations, finances, or structure in order to improve overall performance.

What is a Scheme of Arrangement?

A scheme of arrangement is a formal statutory procedure under Part 26 of the Companies Act 2006 under which a company may enter into a compromise or arrangement with its members or creditors (or any class of them). There is no need for a company to be insolvent under the prevailing law for a scheme of arrangement to be available to it. The scheme of arrangement may, however, be used in conjunction with a formal insolvency procedure. Schemes of arrangement are flexible: the legislation does not prescribe their terms. Creditor approval and court sanction are necessary, however Companies can legally change their corporate structure or business activities by using a scheme of arrangement. It enables businesses to come to an understanding with their shareholders and creditors, frequently through a difficult, highly regulated procedure that is supervised by the courts.

What is the Scheme of Arrangement process?

The drafting of a thorough plan explaining the planned modifications; presenting this for the board of directors approval; and engagement with creditors and shareholders, are normally all elements in the Scheme of Arrangement process. The plan must be submitted to the court for examination and approval after it has been authorised.

What are the benefits of using a Scheme of Arrangement?

One of the advantages of employing a Scheme of Arrangement is the potential to significantly alter a company’s operations or structure, frequently in a way that is more adaptable and effective than other restructuring alternatives. A Scheme of Arrangement can also offer some level of defence for the business against legal proceedings or other problems connected to the restructuring process.

What are the disadvantages of a Scheme of Arrangement?

The process’s length, expense, and complexity, as well as the possibility of arguments between creditors and shareholders, are all drawbacks of utilising a Scheme of Arrangement. The proposal must also be approved by the court, which might add more complication and time.

Who should consider a Scheme of Arrangement?

Companies in financial crisis, those trying to reorganise their business or corporate structure, or those looking to resolve disputes or other issues with their creditors or shareholders may all benefit from a scheme of arrangement. To pursue a Scheme of Arrangement, however, should be decided on a case-by-case basis, taking the company’s objectives and unique circumstances into consideration.