Schemes Of Arrangements: Legal Requirements

INTRODUCTION

Under the provisions of Sections 86 and 87 of the Companies

Law (2007 Revision) (the "Law"), a

Court can sanction a compromise or arrangement between a

company and its creditors, or any class of its creditors, or

its members or any class of them, or any combination or

permutation of the creditors and members. The proposals are set

out in a formal Scheme document to be approved by a majority in

number representing three-fourths in value (a dual majority) of

each class meeting (as set out below). Once the requisite

sanction of the classes of members and creditors has been

obtained and the Court has approved the Scheme, it will bind

all dissentients.

A Scheme of Arrangement will not be sanctioned by the Court

if it is beyond the powers of the company as stated in the

memorandum and articles of association.

Section 87 of the Law specifically provides for the Court to

order the transfer of any undertaking or property from one

company to another when sanctioning a reconstruction or

amalgamation between two or more companies.

Further, Section 87 of the Law expressly provides for the

transfer of the undertaking or property of the Cayman Islands

Company to a body corporate established in the islands or in

any other jurisdiction.

THE REQUIRED PROCEDURE

The Scheme proposals

Whilst in Cayman there are no express legal requirements in

the Law, the accepted practice is to send out with the Scheme

document an explanatory memorandum detailing the proposals of

the Scheme to be considered by the company's members and

creditors. The Scheme document should set out in detail the

mechanics of the Scheme; the circular should describe the

effect the Scheme will have on the existing rights of members

and/or creditors in clear and unambiguous terms. If the

circular is inadequate or misleading the proposed Scheme risks

being rejected by the Court. The draft explanatory memorandum

or proxy statement which provides the shareholders or creditors

with all the information reasonably necessary to enable them to

make an informed decision about the merits of the proposed

Scheme must form part of the evidence presented to the Court in

support of the proposed Scheme.

Classes of members and creditors

One of the procedural requirements is that meetings of the

various classes of creditors and members be summoned by the

Court and, in this regard, it is only necessary to call

meetings of those classes whose existing rights will be

directly affected by the Scheme. It is...