The recent economic difficulties have given wider prominence to the uses and importance of compromises and schemes of arrangement, for both solvent and insolvent companies and groups. They may be used in a wide variety of circumstances including reconstructions, reorganisations and demergers as well as for mergers and acquisitions, redomiciliations and return of capital to members. They may be used on a stand-alone basis or in conjunction with other procedures such as reduction of share capital and may provide useful alternatives to administration and other insolvency procedures, often with a cross border element. The latter was demonstrated by the Drax Power cases where schemes in Jersey, Cayman and England were used to restructure well over a billion pounds worth of debt and were contemporaneously sanctioned in those jurisdictions.
What Is A Compromise Or Arrangement?
A compromise or scheme of arrangement is a court sanctioned compromise or arrangement made by a company with its members and/or creditors (or a class of them). It is a statutory procedure carried out in Jersey pursuant to Article 125 of the Companies (Jersey) Law 1991 (the "Law"). The Jersey provisions are very similar to the English ones and as a consequence of this, English authorities supplement local Jersey cases. In Re The Representation of TSB Bank Channel Islands Limited 1992 JLR 160, the court held that the wording of the Jersey provisions was so similar to their corresponding English counterpart that the court would, therefore, have the fullest regard to the interpretation given by the English Courts to the relevant sections of the English legislation at that time. Accordingly it held that Article 125 of the Law should be broadly construed to enable a wide variety of schemes to be put forward. The main procedural steps are described below.
An application is made to the court by the company (or any member, creditor or liquidator) for directions to convene a meeting of the relevant class(es) of members and/or creditors to be summoned in such manner as it directs. The applicant is represented by a Jersey advocate. The following documents are required:
- a representation (a formal document which originates the process summarising the basic facts and the orders sought);
- supporting affidavits (which sets out the background facts and exhibits the documents to be sent to the members/creditors);
- a skeleton argument setting out the legal submission to be made; and
- a draft order.
The court does not consider the merits or fairness of the compromise or arrangement at the directions hearing. However, issues relating to class(es) of members and/or creditors should be raised at this hearing. As in England the classification of creditors into either a single class or different classes can be problematic but revolves around similarity of rights and common interests (Re Telewest Communications plc  EWHC 924 and Re Telewest Finance (Jersey) Limited  JRC 109).
Notice To Members And/Or Creditors
A notice is sent to the members and/or creditors summoning the meeting(s) in accordance with the court's directions. The notice must include an explanatory statement as required by Article 126 of the Law:
- explaining the effect of the proposed compromise or arrangement; and
- setting out the effect of the compromise or arrangement on the material interests of directors; and
- if applicable, setting out the effect of the compromise or arrangement on the material interests of the trustees of a deed for securing issue of debentures of the company (if the compromise or arrangement affects the rights of debenture holders of the company).
Whilst the court may not retrospectively sanction a compromise or scheme of arrangement agreed at an unauthorised members or creditors meeting, it may order a new meeting to take place at short notice for the purposes of authorising the arrangement previously proposed and may allow proxy votes already cast at the unauthorised meeting to remain valid (In Re Royal Bree's Hotel Ltd 1994 JLR Notes 6a and In Re Plus 500 Emerging Mkts. High Yield Fund Ltd 1996 JLR Notes 8a).
Approval of the scheme by the requisite class(es) of the members and/or creditors must be given at the meeting(s) convened in accordance with the court's directions. If a majority in number representing shareholders with 75% of the voting rights and/or representing 75% in value of the creditors agree to the compromise or arrangement and it is then sanctioned by the court, the arrangement will be binding on the Company and the members and/or creditors. In some cases an EGM may be required after the relevant creditors meeting (e.g. to approve a reduction of capital necessary on a cancellation scheme as occurred In the Matter of Real Estate Opportunities Limited  JRC 025).
The court exercises its discretion when deciding whether or not to sanction the compromise or arrangement at the sanction hearing. Affidavit evidence is required dealing with the holding of the meeting and exhibiting the chairman's report.
The court will primarily consider whether the compromise or arrangement is fair and proper and one which the shareholders or creditors could reasonably consider to be in their interests (as in Telewest and also In the matter of Real Estate Opportunity Limited  JRC 025). Thus the court will ensure that the compromise or arrangement is one which "an intelligent and honest man, a member of the class concerned in acting in respect of his interest, might reasonably approve". Also relevant is whether the provisions of the Law have been complied with, whether the shareholders, creditors and relevant classes were fairly represented by those who attended and voted at the meeting(s) and whether the statutory meeting majority are acting bona fide and not under coercion.
Delivery Of The Court Order
Once made, the order must be delivered to the registrar of companies within 14 days in order for the compromise or scheme of arrangement to become effective. Also, where the company is subject to the City Code on Takeovers and Mergers, the Rules of the Takeover Code have to be followed as well as any applicable competition and regulatory laws.
In the current economic climate we are likely to see increasing use of this flexible statutory procedure to implement compromises and arrangements, particularly those involving creditors which are not fully consensual.
This article first appeared in the winter 2008/09 issue of Appleby Jersey's Finance newsletter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.