Introduction
The scheme of arrangement is a legal and financial mechanism used by companies to reorganize their corporate structure, alter their capital, or facilitate a merger or acquisition. It is a court-approved agreement between a company and its shareholders or creditors that requires their approval for implementation. The scheme of arrangement is a commonly used process in Malaysia especially by the companies which are financially distressed as a “repayment plan” with the main objective to restructure its debts and keep the company as going concern.
Purpose
The scheme of arrangement serves several purposes, including:
- Merger or Acquisition: Companies can use a scheme of arrangement to facilitate mergers or acquisitions by reorganizing their share capital, transferring assets or liabilities, or combining businesses. This mechanism allows for the consolidation of entities and the creation of synergies.
- Capital Restructuring: Companies may opt for a scheme of arrangement to alter their capital structure. This can involve actions such as reducing share capital, issuing new shares, or converting debt into equity. The scheme allows companies to adjust their financial position to meet specific objectives, such as reducing debt burdens or raising capital.
- Creditor Arrangements: A scheme of arrangement can be used to negotiate and implement a repayment plan with creditors. This allows a company facing financial distress to restructure its debt obligations, reschedule payments, or seek debt forgiveness, with the consent of the affected creditors.
Process
The process of implementing a scheme of arrangement typically involves the following steps:
- Proposal Development: The company, with the assistance of legal and financial advisors, formulates a scheme proposal outlining the intended changes or arrangements. This proposal includes details about the purpose, terms, and conditions of the scheme, as well as the rights of shareholders or creditors.
- Leave Application: In order to approve the proposed scheme, a company must first obtain the leave of Court to hold a creditors’ meeting wherein the company will have to satisfy certain statutory requirements under the Companies Act 2016.
- Shareholder or Creditor Meetings: Upon obtaining the leave of Court, meetings are convened where shareholders or creditors vote on the scheme. The scheme must receive approval from a prescribed majority, usually a specified percentage or number of shareholders or creditors, as well as a majority in value of those voting.
- Court Approval: If the scheme is approved by the requisite majority at the meetings, the company seeks final court approval. The court reviews the outcome of the meetings, ensuring that the scheme is fair and reasonable to the affected parties. If satisfied, the court grants its approval, and the scheme becomes binding on all shareholders or creditors, even those who did not vote or voted against it.
- Implementation: Following court approval, the company proceeds to implement the scheme in accordance with its terms. This may involve various actions, such as the issuance of new shares, transfer of assets or liabilities, or the restructuring of debt obligations. The company must comply with all legal and regulatory requirements during the implementation process.
Benefits
The scheme of arrangement offers several benefits compared to other restructuring mechanisms:
- Binding Effect: Once approved by the court, the scheme is binding on all shareholders or creditors, including those who opposed it. This ensures a comprehensive and enforceable resolution for the company's reorganization or transaction.
- Flexibility: The scheme allows for flexibility in designing the terms and conditions, enabling companies to tailor the arrangement to their specific needs. It provides a platform to negotiate and reach agreements with stakeholders on matters such as capital structure, debt repayment, or business combinations.
- Court Oversight: The involvement of the court provides a layer of scrutiny and protection for the interests of shareholders or creditors. The court ensures that the scheme is fair, reasonable, and complies with legal requirements, offering an impartial assessment of the proposal.
- Efficient Process: The scheme of arrangement typically offers a more streamlined and expedited process compared to other legal mechanisms. It allows for a single set of meetings and court approval, reducing complexity and timeframes associated with multiple approvals.
- Restraining Order: Malaysia’s scheme of arrangement framework allows for a restraining order to be granted. The restraining order would restrain any further legal proceedings to be initiated against the applicant company applying for a scheme of arrangement. A restraining order can be a powerful tool to allow the distressed applicant company to have a moratorium from creditors’ actions.
Case Example
Company XYZ was in the business of civil engineering and principally engaged in a wide range of construction services. Company XYZ was forced to restructure its financial affairs due to the outbreak of COVID-19. Since Company XYZ could not pay its debt to the creditors but was still an active business enterprise with on-going construction projects which were revenue-generating, a member of Company XYZ applied for sanction of court in respect of Scheme of Arrangement pursuant to s 366(3) of the Companies Act 2016.
The total outstanding debts owing to creditors was approximately RM11million. Under the said scheme, the scheme creditors were categorised into two categories known as Category A and Category B. Category A, the scheme creditors comprised to a settlement sum of RM0.50 for every RM1.00 owed on the principal sum. Whereas Category B, the scheme creditors comprised to a settlement sum of RM0.70 for every RM1.00 owed on the principal sum. The method of settlement for both categories were the same whereby 20% of the scheme creditors’ compromised sum would be paid in cash and the remaining 80% would be paid via conversion into redeemable preference shares issued by Company XYZ.
An ex parte order was granted by the court for Company XYZ to convene the creditors’ meeting. Subsequently, the creditor’s meeting was called, and the explanatory statement was explained to all the scheme creditors. At the end of the process, majority of the scheme creditors had voted in support of the proposed scheme.
Ultimately, a “win-win” solution was achieved satisfactorily whereby the creditors agreed to claim only a portion of instead of the full amounts owed to them. In exchange, Company XYZ committed to paying portions of debts rather than defaulting on the entire debts altogether.
Conclusion
The scheme of arrangement is a valuable legal tool that enables companies to reorganize, alter capital structures, or negotiate repayment plans with creditors. It provides a structured and court-approved mechanism for implementing significant corporate changes while safeguarding the interests of shareholders or creditors involved.