Intermediation and Bondholder Schemes of Arrangement
Intermediation and Beyond (L Gullifer and J Payne, eds) (Hart Publishing, 2019)
11 Pages Posted: 21 Mar 2018 Last revised: 13 Dec 2018
Date Written: March 14, 2018
Abstract
The global shift from securities being held directly by an investor to many securities being held via an intermediary raises numerous important legal issues. One difficulty created by intermediation relates to the ability of corporate bonds to be restructured via an English scheme of arrangement. Schemes of arrangement are commonly used to restructure debt and involve the creditors being divided into classes to consider and vote on the proposed restructuring. The approval level is 75 per cent in value and a majority in number of each class. It is the majority in number requirement which creates a potential difficulty for bondholder schemes of arrangement. In particular, it requires careful application of the concept of a “creditor” in this situation since if it is the intermediary that is regarded as the relevant creditor for this purpose, rather than the underlying bondholders, the “majority in number” requirement becomes impossible to apply, and thus the scheme of arrangement cannot progress. Practitioners have fashioned a practical solution to this issue, but there are reasons to doubt the validity of this fix. Instead, this paper proposes that the simplest, and best, solution is a legislative one, namely to remove the “majority in number” requirement. This would have benefits for a range of scenarios including, but not limited to, bondholder schemes of arrangement.
Keywords: intermediation, debt restructuring, bondholders, schemes of arrangement
JEL Classification: K22
Suggested Citation: Suggested Citation