Solvent Schemes of Arrangement – How to Reorganise Companies with Court Approval

What is a solvent scheme of arrangement and why companies use them

A solvent scheme of arrangement is a court-approved legal process that allows a company to restructure its share capital, liabilities, or corporate arrangements while remaining solvent. It is governed by Part 26 of the Companies Act 2006 (sections 895 to 901) and requires approval from affected stakeholders and sanction by the court.

Unlike insolvency procedures, a solvent scheme is used where a company can pay its debts as they fall due but needs a binding and orderly way to reorganise its affairs. It is often chosen where flexibility, certainty, and the ability to bind dissenting minorities are critical.

Solvent schemes of arrangement are commonly used in complex reorganisations, including group restructurings, shareholder reorganisations, debt compromises, capital restructurings, and preparatory steps ahead of demergers, refinancing, or sale transactions. While powerful, schemes are procedurally demanding and require careful planning, robust evidence, and precise execution.

When a Solvent Scheme of Arrangement Is the Right Solution

Common commercial scenarios for using a scheme
Solvent schemes of arrangement are typically considered where:

• A binding outcome is required, particularly where unanimity cannot be achieved through contractual arrangements alone.
  
• Minority shareholders or creditors may dissent, and the company needs a mechanism to bind them once statutory thresholds are met.
  
• Complex capital or debt restructurings are required, involving multiple classes of shareholders or creditors with differing rights.
  
• Group reorganisations, where liabilities, guarantees, or ownership structures need to be rationalised across multiple entities.
  
• Pre-transaction structuring, such as preparing a company for sale, investment, demerger, or refinancing, where certainty is essential.
  

Schemes are often selected because they provide finality once sanctioned by the court and registered.

When a solvent scheme may not be appropriate
A solvent scheme may not be suitable where:

• The company is unable to demonstrate solvency.
  
• The proposed changes are straightforward and can be achieved contractually.
  
• The cost and timing of a court process outweigh the benefits.
  
• Stakeholder classes cannot be properly constituted or justified.
  

Early legal and financial analysis is essential to test proportionality and to assess whether simpler mechanisms, such as capital reductions or share exchanges, could achieve the same goal without a court process.

How Solvent Schemes of Arrangement Work in Practice

The statutory framework explained clearly
Solvent schemes of arrangement are governed by sections 895 to 901 of the Companies Act 2006. The process typically involves:

• Identifying the affected classes of shareholders or creditors.
  
• Applying to court for permission to convene class meetings.
  
• Circulating an explanatory statement and holding meetings for each class.
  
• Securing approval from each class by the required statutory majority.
  
• Returning to court for sanction of the scheme.
  
• Registering the court order at Companies House.
  

Once sanctioned and filed, the scheme becomes effective and binding.

Approval thresholds and class voting
For a scheme to be approved, each class must vote in favour by:

• A majority in number of those voting, and
  
• At least 75 percent in value of those present and voting.
  

Correct class composition is one of the most critical aspects of a scheme. Errors at this stage can derail the entire process. Courts have repeatedly emphasised this point, for example in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241.

Binding effect of a sanctioned scheme
Once sanctioned, the scheme becomes binding on all members of the affected classes, including those who voted against it. This binding effect arises under section 899(3) of the Companies Act 2006, ensuring that the arrangement takes effect uniformly once the court order is registered.

Solvency and Evidence Requirements

Demonstrating solvency
Although a scheme is not an insolvency process, the court must be satisfied that the company is solvent and that the scheme is fair. The court expects credible, contemporaneous financial evidence and clear confirmation that no creditor prejudice will result.

Evidence typically includes:

• Up-to-date financial statements and management accounts.
  
• Detailed cash flow forecasts.
  
• Solvency statements from directors.
  
• Independent valuation or expert evidence, where relevant.
  

Failure to provide robust evidence can result in the court refusing to sanction the scheme.

Fairness and court discretion
The court will consider whether the scheme is one that an intelligent and honest person, acting in their own interests, might reasonably approve. This fairness test provides important protection for minority stakeholders. The principle was articulated in Re British Aviation Insurance Co Ltd [1989] 1 BCLC 142 and remains the leading authority on scheme fairness.

Legal and Procedural Challenges in Solvent Schemes

Class composition risks: Determining who belongs in each class requires careful legal analysis. Stakeholders with sufficiently different rights must be placed in separate classes. Incorrect classification can lead to challenge, delay, or refusal of court sanction.

Disclosure obligations: Explanatory statements circulated to stakeholders must provide sufficient information to allow informed voting, including the effect of the scheme and alternatives considered. This obligation arises under section 897 of the Companies Act 2006, which requires disclosure in sufficient detail to enable stakeholders to make an informed decision.

Timetable and coordination: Schemes involve strict procedural steps and court timetables. Coordinating advisers, stakeholders, meetings, and filings is essential to avoid procedural defects or missed deadlines.

Using Solvent Schemes in Wider Reorganisations

Schemes as part of group restructurings
Solvent schemes are frequently used alongside other restructuring tools, including:

• Capital reductions.
  
• Share for share exchanges.
  
• Debt for equity swaps.
  
• Refinancing arrangements.
  

The scheme often acts as the binding mechanism that allows these steps to be implemented cohesively and with court approval.

Interaction with alternative court-based tools
Where greater flexibility is needed, for example to bind dissenting creditor classes even without their approval, a Part 26A restructuring plan may be a better fit. Selecting the correct court-based tool is a strategic decision that depends on stakeholder dynamics and objectives.

Directors’ Duties and Governance Considerations

Directors’ responsibilities in schemes
Directors proposing a solvent scheme must comply with their duties under sections 171 to 177 of the Companies Act 2006. These include acting in good faith, promoting the success of the company, and exercising reasonable care and skill.

Where stakeholder rights are being altered, directors must ensure the scheme is genuinely for proper commercial purposes and not oppressive or unfairly prejudicial.

Stakeholder and governance considerations
Even in solvent situations, directors must carefully consider the interests of affected shareholders and creditors. Poor governance or inadequate engagement can result in challenge or personal exposure.

Risks of Poorly Planned Solvent Schemes

Court refusal or delay: Procedural defects, inadequate evidence, or flawed class composition can lead to refusal of sanction or costly amendments.

Stakeholder challenges: Dissenting shareholders or creditors may challenge schemes, particularly where disclosure or fairness is disputed.

Cost and complexity overruns: Schemes are resource-intensive. Poor planning can lead to escalating costs and missed commercial deadlines.

Why Jonathan Lea Network Is Trusted for Solvent Schemes of Arrangement

Deep restructuring and court process expertise: Jonathan Lea Network advises on solvent schemes of arrangement as part of complex corporate reorganisations. We understand the technical, procedural, and strategic requirements for securing court approval.

Clear, pragmatic advice: We focus on achieving commercially workable outcomes while managing legal risk. Court processes are explained in plain English so stakeholders can make informed decisions.

Partner-led teamwork: Clients work directly with experienced lawyers who coordinate with counsel, financial advisers, and tax specialists to ensure schemes are robust and defensible.

Transparency and value for money: We provide clear scoping, realistic timelines, and proactive project management to control cost and complexity.

Common Client Concerns We Help Address

Is a scheme only for distressed companies?
No. Solvent schemes are commonly used by healthy companies that need certainty and binding outcomes.

Can minority stakeholders block a scheme?
If statutory voting thresholds are met and the court sanctions the scheme, it becomes binding on all affected parties.

How long does a solvent scheme take?
Timelines vary but often span several months due to court involvement and stakeholder consultation.

Is a scheme better than a contract-based solution?
In many cases, yes, particularly where unanimity is unlikely or legal certainty is required.

Take the Next Step – Speak to Our Solvent Scheme Specialists

Court-approved restructuring with confidence
Solvent schemes of arrangement provide a powerful mechanism to implement complex reorganisations with binding effect and legal certainty. Our UK scheme of arrangement lawyers advise on corporate restructurings, capital reorganisations, and debt compromises requiring court approval.

Jonathan Lea Network advises companies, shareholders, and creditors on solvent schemes of arrangement with clarity, precision, and commercial insight. We manage the process from initial feasibility through to court sanction and post-implementation support.

To discuss whether a solvent scheme of arrangement is appropriate for your business, call us on +44 (0)1444 708 640 , or email us to arrange a confidential discussion with one of our corporate restructuring specialists. 

This overview is for general information only and does not constitute legal or tax advice.