What are Schemarios? Schemarios are “scheme-scenarios” which form governing rules to establish when a parallel scheme of arrangement is necessary. We believe that the Schemarios will be helpful to practitioners of cross-border restructuring around the world. Our Schemarios illustrate how the operation of the “rule in Gibbs” can be used to distinguish between cases where further steps (in particular, a parallel scheme of arrangement) are likely to be necessary to ensure the practical effectiveness of a cross-border restructuring and those cases where such steps may not strictly be necessary for that purpose.

You can listen to the 5 Schemario Rules on episode one of our restructuring podcast, R&I over Wi-Fi, published on 14 April 2021 featuring Ian Mann and Chai Ridgers.

Knowing when to initiate a parallel scheme of arrangement has become a hot topic of late. A scheme company will want to ensure that the compromises are effective not only in the Cayman Islands (as the jurisdiction of incorporation) but in other jurisdictions where its assets are located. The locus classicus  on the issue is contained in: Re Drax Holdings  [2004] 1 WLR 1049, which concerned parallel Cayman Islands, Jersey and English schemes in respect of Cayman and Jersey incorporated entities. As Lawrence Collins J (as he then was) explained at [30]: “In the case of a creditors’ scheme, an important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made, not only by the court in the country of incorporation, but also where (as here) by the courts of the country whose law governs the contractual obligations. Otherwise dissentient creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation”. A parallel scheme is unnecessary when the compromise is not at risk from dissentient creditors.

As will be familiar to restructuring practitioners on the ground, at the coal-face, who assess whether a parallel, second or even third, scheme of arrangement is necessary, the exercise takes place over many months of complex negotiations and strategic positioning. In the vast majority of cases, creditor support builds up over time, and at the early stages, creditors and stakeholders jockey in negotiations for better terms, reluctant to make a binding commitment through increasingly complicated “lock-up letter” arrangements. Creditor “hold-out” is the norm and the demands for “sweeteners” go to the wire. On the day of the vote, and even the day of a scheme sanction hearing, the wrecking ball can hang over the restructuring professional team. The Drax  point is the incontrovertible foundation of this exercise. Any assessment as to whether the parallel scheme was necessary should apply a legal test in “real-time”, based on evidence adduced for the dedicated purpose of determining that issue.