Third-party release in schemes of arrangement: debating the preferable jurisdictional test

This article assesses two judge-made tests, namely, the necessity test and the sufficient nexus test, on the court’s jurisdiction to sanction creditors’ schemes of arrangement (‘the scheme’) involving a release of third-party liabilities. The scheme is a court-controlled statutory procedure enabling a company to restructure its relationship with shareholders or creditors. The success of a scheme often requires rightsholders to release their claims against both the company and third parties. The legislation is silent on the court’s jurisdiction to sanction the type of schemes just mentioned. To close this gap, courts have developed tests mentioned above. The courts, in a number of recent cases, expressed a preference to the nexus test with insufficient explanation on their reasonings. This article evaluates the tests according to their doctrinal pedigrees, replicability, and ability to maximise the flexibility of the scheme. It concludes that the sufficient nexus test is preferable by all three standards.