If you believe you may need to restructure your business you should consider not only what structure you would like to move towards but also the processes involved in corporate restructuring. Some restructures are as simple as altering the corporate constitution. Others, however, are more complex. Ensuring that the method chosen is appropriate for the structure being sought is key to a smooth transition. Below the two main methods of restructuring via a scheme of arrangement are discussed – for financial restructuring, creditors’ schemes can be used and for more internal-oriented restructuring, members’ schemes are relied on. Both have particular requirements that must be met for a successful restructure to occur. If not managed properly, restructuring can be needlessly disruptive and resource intensive, and at worst outright ineffective at law. It is therefore crucial to ensure that the proper processes are followed in implementing such schemes.
A. Creditors’ Scheme to Restructure your Business
Creditors’ Schemes are used where corporations wish to alter existing payment plans to creditors. They are commonly relied on where a corporation is approaching liquidation but is still viable and can trade its way out of danger with the agreement of creditors. However, it is not a requirement of implementing a scheme that the corporation be in financial difficulty. This enables a more proactive approach to be taken, giving creditors’ schemes a preventative dimension as well. Under s 411 of the Corporations Act 2001, for a valid scheme to come into effect, there must be meetings of creditors and a court order in favour of the scheme. If these requirements are met,individual creditors who oppose the scheme will still be bound by its terms.
Where the arrangement may also affect the rights or obligations of corporate members, a meeting of members will also need to be called in addition to the above 2 requirements.
B. Members’ Schemes to Restructure Your Business
Members’ schemes are relied on where there the intended restructure will affect the rights or interests of corporate members. Similar to creditors’ schemes, if the meeting of members and the court approves the scheme, dissenting members will still be bound by the terms of the scheme. Unlike creditors’ schemes, members’ schemes are often relied on to effect structural change. By binding the members to agreements to transfer shares or convert their interests, amalgations, mergers, demergers and reconstructions can all be implemented through a members’ scheme. Such schemes can also be made conditional, in that they are only intended to come into effect should some state of affairs arise (as is commonly the case where a scheme is part of a larger transaction).
C. Implementing a Scheme to Restructure Your Business
The four main steps in implementing a scheme of arrangement are:
- Obtaining a court order to convene a meeting of creditors and/or members;
- Approval by those bodies of the scheme by special majority;
- Court order in favour of the scheme;
- Lodging a copy of the court’s order with ASIC.
Courts will ordinarily not order a meeting unless the scheme is one that it would approve should it gain the requisite special majority. In other words, the initial hearing and the subsequent meetings are often the biggest hurdles to overcome. However, it is the final court order that gives life to the scheme.
Determining how a corporation is to be restructured can be as important a decision as settling on restructuring in the first place. A well-determined plan of restructuring can make all the difference in ensuring that the desired outcomes are achieved and that strong foundations for future success are put in place. In order to ensure that the substantive and procedural requirements of schemes of agreement are met, it is recommended that you act with the benefit of legal representation. If you need such representation please get in touch using the form below!
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This article was authorised by Warwick Heeson.