To those familiar with both U.S. and Australian insolvency regimes, Australia's creditors' scheme of arrangement (Scheme) may appear, at first glance, to resemble a Chapter 11 restructuring in disguise. This is because both regimes facilitate creditor compromise, allow incumbent management to remain in control, involve court supervision and rely on class-based voting structures to approve a restructuring outcome.
Chapter 11 is a U.S. court-supervised corporate restructuring process that does not require a formal declaration of bankruptcy.1 Its objective is to implement a reorganisation plan that may restructure liabilities, facilitate asset disposals, or combine both, with the approval of affected creditor (and sometimes shareholder) classes, subject to approval by the U.S. Bankruptcy Court.
Despite these surface similarities, the resemblance masks deeper structural and functional differences. If Schemes truly mirrored the Chapter 11 regime, one might expect them to be used more frequently in Australia, particularly given Chapter 11's popularity and debtor-friendly reputation in the United States. The fact that Schemes are used irregularly when compared with voluntary administration invites closer examination.
This article considers whether a Scheme is, in substance, Chapter 11 in disguise, or whether it is a fundamentally different restructuring mechanism within Australia's insolvency framework.
Debtor-in-Possession Status and Ownership of Property
Chapter 11 is a debtor-in-possession regime. While the debtor company retains control of its operations, all property and associated legal and equitable interests form part of a bankruptcy estate overseen by the Bankruptcy Court.2 This estate-based framework reflects Chapter 11's foundation in bankuptcy law and is designed to protect creditors, while allowing management to continue operating the business during the restructuring process.
Schemes, by contrast, are for the most part designed to adjust stakeholder rights rather than to effect a comprehensive restructuring of the company as a whole. Although management remains in control throughout the process, no bankruptcy estate is created and ownership of the company's assets remains unchanged.
This distinction is central. Chapter 11 enables a whole-of-company restructuring and temporarily insulates assets from creditor enforcement. A Scheme, on the other hand, is capable of being used as a targeted mechanism to restructure specific contractual or capital arrangements without requiring universal control over the company's assets.
Automatic Stay of Proceedings
A powerful feature of Chapter 11 is the automatic stay on litigation, which immediately halts virtually all creditor enforcement action upon filing, including actions by secured creditors.
Schemes offer no equivalent protection. While a stay may be granted under section 411(16) of the Corporations Act 2001 (Cth) (Corporations Act), this requires a court application and is typically only available once Scheme proceedings are underway. Any stay granted is discretionary and usually more limited in scope and duration than the Chapter 11 moratorium.
This absence of an automatic stay reflects the more limited purpose of the Scheme. Where a restructuring is confined to particular rights or instruments, a broad moratorium may not be necessary. The discretionary nature of section 411(16) of the Corporations Act allows Australian courts to tailor relief to what is required, balancing debtor protection against the rights of affected creditors.
Rejection/Repudiation of Contracts
Chapter 11 permits the rejection and repudiation of contracts with court approval under the "business judgment" rule. This is treated as a breach rather than a termination, converting the counterparty's claim into a claim against the bankruptcy estate.
Schemes do not provide an inherent power to reject or repudiate contracts. While contractual obligations may be compromised through a Scheme, doing so requires meeting high voting thresholds and does not benefit from the judicial review afforded under Chapter 11. Importantly, the contractual rights of non-consenting third parties are not automatically affected by the approval of a Scheme.
Where the rejection of onerous contracts is critical to the ongoing viability of the business, an Australian company may instead consider voluntary administration and restructure via a deed of company arrangement. This highlights a strategic flexibility available under Chapter 11 that Schemes cannot replicate.
Class Composition and Cross-Class Cramdowns
Both regimes rely on the classification of creditors and class voting. Under Chapter 11, a reorganisation plan generally requires approval by a majority in number and two-thirds in value of each impaired class. However, the Bankruptcy Court may approve a plan despite dissent via a cross-class cramdown, provided certain fairness requirements are met.
Schemes require approval by 75 per cent in value and a majority in number in each class, with no equivalent cramdown mechanism. Although Australian courts have adopted a more flexible approach to class composition, a single dissenting class may still defeat a Scheme. This rigidity can make Schemes vulnerable to creditor hold-outs and contrasts with Chapter 11's ability to overcome dissent in complex capital structures.
Secured Creditors
In both regimes, secured creditors may be included in voting classes. Under Chapter 11, secured creditors may be bound by a plan even if they dissent, either through class voting or cramdown.
Similarly, Schemes may bind dissenting secured creditors where class approval thresholds are met. This can make Schemes more effective than voluntary administration in dealing with a secured debt, given that secured creditors in Australia may otherwise retain enforcement rights and can avoid being bound by a deed of company arrangement promoted through voluntary administration.
Exclusivity and Judicial Supervision
Chapter 11 provides the debtor with an exclusive period to propose a reorganisation plan, subject to court extension. This exclusivity gives debtor companies breathing space and reinforces the debtor-friendly nature of the regime.
Schemes offer no such exclusivity. Competing proposals may be advanced by other stakeholders, potentially undermining deal certainty.
Judicial supervision also differs in scope. In a Chapter 11, the court oversees asset sales, financing arrangements and significant operational decisions. In a Scheme, the court's role is largely confined to procedural oversight and final approval.
Third Party Releases
Following the recent judgment in the United States regarding Purdue Pharma,3 Chapter 11 no longer permits non-consensual releases of third-party claims. Any claims directly held by creditors against such parties cannot be extinguished through a plan without individual consent.
By contrast, Australian schemes of arrangement adopt a more flexible approach with respect to third-party claims (albeit the scope of a third-party claim in an Australian context is far narrower). While a scheme formally compromises rights as between the company and its creditors, courts may sanction a scheme that affect claims against third parties on the basis that those claims are sufficiently connected to the underlying debt or restructuring.4
Australia and International Reach
Schemes remain a predominantly domestic restructuring tool. They are generally used by Australian-incorporated companies and are not designed to attract foreign debtors or encourage forum shopping. Australia's more traditional approach limits the Scheme's attractiveness on the global stage.
In contrast, Chapter 11 has become a global restructuring tool. Its recognition globally (including in Australia) has enhanced the international effectiveness of Chapter 11 restructurings. As a result, Australian companies with dealings in the United States may view Chapter 11 as a more effective restructuring vehicle than a Scheme.
Conclusion
While Schemes and Chapter 11 share superficial similarities, their underlying philosophy and mechanics are distinct. Chapter 11 is a comprehensive, debtor-led reorganisation regime designed to preserve enterprise value within a highly protective court-led framework. By contrast, Schemes are targeted tools for adjusting stakeholder rights within Australia's creditor-focused insolvency system.
A Scheme is not a Chapter 11 in disguise. It is a different mechanism altogether, best suited to targeted restructurings of complex debt and equity instruments. For wholesale or cross-border restructurings, Chapter 11 remains the more effective and internationally portable regime.
With the influx of foreign investment, Australia may eventually face pressure to modernise its Scheme regime or expand the existing insolvency framework to accommodate the debtor friendly, cross-border restructuring realities that Chapter 11 can provide.
1 In the United States, 'bankruptcy' has a similar meaning to the way 'insolvency' is used in Australia, in that both terms refer to corporate insolvency. 'Bankruptcy' in Australia only applies to individuals. In this article we use 'bankruptcy' and 'insolvency' synonymously to refer to corporate insolvency only.
2 11 U.S.C. § 541.
3 Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., 603 U.S. 204 (2024),
4 See for example; In the matter of Opes Prime Stockbroking Limited [2009] FCA 813 at [55]; Re Lehman Brothers Australia Ltd (in liq) (No 2) [2013] FCA 965 at [79]; and In the matter of Angas Securities Limited v Angas Securities Limited (No 5) [2019] FCA 482 at [62].
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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