Another way for companies to avoid winding up is to negotiate compromises and settlements with all its creditors. However, it is not easy to obtain the agreement of each and every creditor as they may be afraid of being disadvantaged in terms of their priority in the repayment process.
The law mitigates the difficulty of obtaining the agreement of each and every creditor, by allowing companies to propose a Scheme of Arrangement. Similar to Judicial Management, Schemes of Arrangement are a flexible form of debt restructuring which can help your company avoid winding up. For example, your company could propose a creditor scheme to make arrangements for deferred payment or even a waiver of some of its debts. Once your company receives the requisite approval and the Court approves the scheme, all creditors will be bound to this arrangement.
The Scheme under Section 210 of the Companies Act (Cap. 50) (the “Companies Act”) ultimately removes the need for the difficult and tedious process of negotiations with creditors. Critically, it removes the need for the unanimous consent of all members and creditors of your company.
General process before obtaining an effective Scheme of Arrangement
- Apply to Court to convene a creditors meeting
- The proposed Scheme is put before the meeting for consideration and approval by the requisite majority
- If the Scheme is approved by the requisite majority, the Court may sanction the Scheme
Some Useful Tips
It is important that creditors are grouped into separate classes in separate meetings according to their legal rights. When creditors rights are so dissimilar (e.g. some creditors interests are secured to your company’s assets while others are unsecured), they are unlikely to be able to sensibly consult together with common interests.
Approval by creditors
Section 210(3AB) of the Companies Act lays out the requirements to obtain the requisite approval:
- Approval by the members, creditors, or a class of them, by a majority in number; and
- Approval constituting three-fourths in outstanding debt value of all the members, creditors, or that class of members or creditors present and voting.
Prior to Court approval of your proposed Scheme, the Court may issue a temporary moratorium to restrain creditor action against your company, as per Section 210(10) of the Companies Act. This will create a temporary shield from creditors who may try to take further actions to enforce their rights against your company. Your company, directors, members or creditors may apply for this moratorium.
In the alternative, your company may apply for a moratorium under s 211B(1) of the Companies Act, which is a broader provision in light of the 2017 amendments to the Companies Act. A 30-day interim moratorium automatically arises upon any application to the Court under s 211B(1) of the Companies Act, and it will be in place for either 30 days after the application or until the Court hears the application (whichever occurs first).
The main objective of a moratorium is to prevent any resolution or any order from being passed for your company’s winding up. Creditors’ security over your company’s assets cannot be enforced, and no proceedings or execution against your company’s assets will be able to be carried out without leave of the Court. It will also give your company some time to restructure.
Effect on creditors
Once the Court sanctions the Scheme, the Scheme is binding on all creditors, including those who objected to the scheme at the meeting or in Court. The Scheme of Arrangement may only be set aside if a creditor challenges the Scheme on the basis of fraud or an obvious mistake in the attainment of the requisite approval.
Pros and Cons of Schemes of Arrangement:
- Minimal shareholder/creditor involvement
- Binds all parties, even those who vote against it, as long as requisite approval attained
- 50% of those present and voting; or
- 75% of the value held by outstanding debt owners
- Much easier to attain than the normal contractual meeting requirements (which requires the approval of every party related to the company).
- Usually only works for friendly/supportive creditors as Scheme of Arrangement are often seen to be highly disadvantageous to creditors
In summary, these two options – Judicial Management order and Schemes of Arrangement – may be prudent options to take when avoiding a winding up action against your company. We hope this series has provided the necessary assistance to you. Please do not hesitate to contact us if you wish to speak to our team regarding your options.