Definition
A Scheme of Arrangement is a court-approved agreement between a company and its shareholders or creditors that reorganizes their rights. It's often used in mergers, debt restructuring, and capital reorganizations, particularly in Commonwealth jurisdictions.
Mechanics
- A company proposes the scheme.
- Shareholders/creditors vote on it (usually requires a 75% supermajority).
- If approved, the scheme is submitted to a court for sanction.
- Once sanctioned, it becomes legally binding on all parties, even those who voted against it.
Example – Merger via Scheme
Company A wants to acquire Company B. B proposes a scheme where its shareholders get 2 shares of A for every 1 share of B. If approved and sanctioned by the court, all B shareholders are bound by the deal, ensuring a smooth transfer of ownership.
Interview Q / Model Answer
Q: Why is a scheme of arrangement often used in mergers?
A: Because once it's court-approved, it becomes binding on 100% of shareholders, which is a more certain and efficient way to complete a takeover than a traditional tender offer that relies on individual acceptance.
Definition
A legal process where an external administrator is appointed to take control of a company that cannot meet its debt obligations. The goal is typically to protect creditors by attempting to rescue the business, sell it as a going concern, or maximize asset value before liquidation.
Shareholder Impact
Shareholders usually lose control of the company, and their equity value often drops significantly, sometimes to zero. A successful restructuring that preserves shareholder value is rare.
Interview Q / Model Answer
Q: What is the key difference between receivership and liquidation?
A: Receivership (or administration) is primarily a rescue attempt—it aims to save or sell the business as a viable entity. Liquidation is the end—it's the process of closing the business down completely and selling off its individual assets.
Definition
Liquidation is the final stage of a company’s life. It ceases all operations, a liquidator is appointed to sell all its assets, the proceeds are used to pay off creditors in a specific order of priority, and the company is legally dissolved.
Priority of Payout
- Secured creditors
- Preferential creditors (e.g., employees for unpaid wages)
- Unsecured creditors
- Subordinated debt holders
- Shareholders (who often receive little to nothing)
Interview Q / Model Answer
Q: In what order are stakeholders paid during liquidation?
A: The order is strictly defined: secured creditors are first, followed by preferential and unsecured creditors. Shareholders are last in line and only get paid if any funds remain after all other debts have been settled.
| Event | Purpose | Key Outcome | Shareholder Impact |
|---|---|---|---|
| Scheme of Arrangement | Reorganize rights / M&A / debt terms | Court-approved change to capital or structure | Shares may be swapped, converted, or bought out |
| Receivership / Administration | Rescue business or repay creditors | External manager takes control | Control lost, shares often lose value |
| Liquidation / Winding Up | Close business and distribute assets | Assets sold, company dissolved | Shares often become worthless |