A scheme of arrangement is a plan for a company to remove debt, organize a takeover, or other financial matters that require cooperation between the company and its creditors and investors. It must be approved by a court and can be used in various situations, such as rescheduling debt or canceling long-term debts. It can also be used in liquidating a business.
Sometimes known as a rebuilding scheme, a scheme of arrangement is a plan of action that allows the company to make arrangements to remove debt, organize a takeover, or other financial matters that involve the need for cooperation between the company and its creditors and investors. . In most cases, a scheme of arrangement must be reviewed and approved by a court before it is considered binding on all parties involved.
The range of situations in which an arrangement scheme can be used will vary, based on government regulations on business operations and financial lending applicable in the jurisdiction in which the business is located. Typically, this particular approach is used when other methods are not available or not feasible in light of the company’s current situation. At that point, preparing a scheme of arrangement that can be submitted to a court, reviewed and, hopefully, approved is often the most prudent course of action for all involved.
A common example of using a settlement scheme is to organize debt owed to creditors so that it can be retired in a manner that allows the business to continue operating. In this scenario, the debt is rescheduled so that each creditor is paid in full, with the court overseeing this distribution and protecting creditors and the company in the process. Here, the idea is to prevent the company from having to liquidate or enter into some kind of bankruptcy situation that could lead to creditors receiving reduced values.
Another application of a settlement scheme has to do with canceling certain long-term debts. This type of event can occur with a life insurance provider that wants to establish itself with select customers, paying them a lump sum to effectively purchase their current life insurance policies. This helps eliminate future obligations, possibly opening the door for the insurance provider to restructure the business so that the model is more sustainable for years to come.
An arrangement scheme can also be used in liquidating a business. Here, the idea is to structure the disbursement of payments to creditors and investors to coincide with the sale of the company’s assets. As assets are sold, a select group of creditors receive payments to settle balances on accounts previously issued to the company. Creditors are prioritized as part of the scheme, allowing everyone to have an idea of when to expect payment on open accounts.
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