Determining Courts’ jurisdiction to sanction schemes of arrangement involving third party releases: A policy analysis

It is often necessary for a company to reach a compromise with its creditors, and where necessary, third parties. A useful tool for facilitating such a compromise is the scheme of arrangement, a court-controlled procedure for restructuring the relationship between the company and its members or creditors. The scheme provisions are, however, silent on whether a third-party release may be incorporated into a scheme. Since the mid 2000s, the Australian and UK courts have developed two different tests, namely the nexus test and the necessity test, to fill this statutory gap. This paper discusses policy concerns, if any, that the alternative tests have given cause to, and if the answer is ‘yes’, how these concerns should be addressed. The paper concludes that the necessity test does, and the nexus test does not, give cause for concern and that the latter should be adopted for determining scheme jurisdiction in all cases.