Scheme of Arrangment as an alternative to liquidation?

[Brendan Burgess]

I was speaking to someone recently who is planning to put his service company into liquidation. It has almost no assets and creditors of around €100k.

I don't see a liquidator being prepared to do this work,unless the directors pay the fees themselves up front.

So I am going to suggest a Scheme of Arrangement. Friel Stafford has an excellent summary of it [broken link removed].

But I have never heard of anyone doing such a Scheme. Are they common in practice? It seems so much better than a liquidation.

The advantages I see are:

"A Scheme of Arrangement avoids the need for a detailed investigation of the affairs of the company and if successful there would be no prospect of the directors facing reckless trading/fraudulent trading actions or Restriction/Disqualification proceedings."

"Less publicity"

I would hope that the company could be wound up with out much acrimony. I think that the trade creditors would be fairly flexible. Revenue is probably owed around €15k.


My concern is:
"A Scheme of Arrangement must offer the creditors more money than would be received if the company went into liquidation."

The subject company has no assets, so the creditors are not going to get anything in either a liquidation or a Scheme of Arrangement.

 

[Jim Stafford]

Brendan

As a firm we were quite excited about the changes introduced by the new Companies Act. Indeed, in early 2015 we held a morning conference on the new provisions which was attended by more than 50 firms of accountants and solicitors.

To date, the new provisions have been rarely used(less than 5 cases) to write down creditors debt. The Scheme of Arrangement provisions are mainly used for re-structuring of shareholdings in mergers and acquisitions. For example, Fyffes are using the provisions to facilitate its own take over.

There are, in my view, a number of reasons why Schemes of Arrangement have not taken off:

• Many accountants are not familiar with them.
• In practice, Examinerships offer a greater degree of protection from creditors
• "Informal Schemes" still work satisfactorily in many cases. An informal scheme is where creditors voluntarily agree to write off their debts.

One of the advantages of a Scheme of Arrangement over Examinerships is that a company does not have to be viable: it could have ceased trading.

In the case of the company that you mention, a liquidation might be the cheapest option. A liquidation that size would cost approx. €6,000 + VAT

Jim Stafford

 

[Brendan Burgess]

"Informal Schemes" still work satisfactorily in many cases. An informal scheme is where creditors voluntarily agree to write off their debts.

That makes a lot of sense. They should probably cease trading and then talk to the ordinary creditors and ask them to write off their debts.

They may well then be left with the Revenue and a bank debt, which I don't think has a personal guarantee.

The downside of that is that the ordinary creditors might be able to outvote the Revenue and bank debt in a Scheme of Arrangement. If they write off their debts, then the Revenue and bank debt would be 100% of the debt instead of less than 25%.

Brendan