High Court hands down judgment in Amigo Loans’ proposed scheme of arrangement

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management
• Financial services

02-07-2021

On 24 May 2021, the High Court handed down the judgment following the sanction hearing in respect of the Scheme of Arrangement (the “Scheme”) of ALL Scheme Limited (the “Company”). The Scheme was principally intended to compromise the claims of customers and guarantors in respect of claims against the Company arising from unaffordable and unsustainable lending complaints and fees owed to the Financial Ombudsman Service (“FOS”) for handling such complaints (the “Scheme Creditors”).

Background

Amigo Loans Limited (“ALL”), part of the Amigo group of companies (“the Group”) is a guarantor lender for borrowers with poor credit. In recent years, there has been an increase in complaints from ALL’s customers regarding unaffordable lending driven by claims management activity, which in turn has led to an increase in redress payments to customers, and an increased liability for FOS fees.

The Company was incorporated on 6 January 2021 and is part of the Group. The Company has assumed joined liability with ALL (and two other entities of the Group) in respect of potential redress claims by borrowers and guarantors and for approximately £12.5 million due to the FOS regarding their case fees.

The Group has publicly affirmed that its financial circumstances have been affected by the pandemic, payment holidays and the temporary pauses in lending in March 2020 and November 2020. This has had the effect of reducing revenue, and customer numbers. The Group has also been impacted by the number of customer complaints with an estimated value of £150.9 million as of 31 December 2020. Also in December 2020, the FCA agreed an informal moratorium on the payment of the redress claims.

ALL proposed to assist the Company with managing the complaints via the Scheme. The Scheme was approved by 97% of the creditors present at the Creditors’ Meeting (which in turn amounted to 8.7% of the total potential class of Scheme creditors), which took place on 12 May 2021. Following this, ALL sought to have the proposed scheme of arrangement sanctioned by the Court pursuant to s.899 of the Companies Act 2006 (“CA 2006”).

The Scheme

The Scheme provided that the Scheme Creditors would have had a period of 6 months to bring their respective claims to the Company. Following receipt, the Company would have assessed its liability and would have made a determination as to the claim’s value (considering any other liability owed by the Scheme creditors to other entitles of the Group). This would have resulted in a pro rata distribution of the fund in return of release from any liability. The level of distribution was anticipated to be approximately 10p in the pound.

The Scheme was to be funded by the following:

(a) an initial contribution of £15m by ALL;

(b) a further balance adjustment contribution, (calculated by making necessary adjustments to customers' outstanding balances pursuant to a valid claim (by way of set-off), ALL was to pay any sum by which the adjustments are less than a reasonable estimate of £85 million at a rate of 38.85%) capped at £20m; and

(c) ALL will pay an amount equal to 15% of its annual consolidated profits before tax for each of the next four years starting from 1 April 2021.

The FCA’s position

Ordinarily such schemes require the FCA’s approval by way of a letter of non-objection. In this case, the FCA provided feedback on the Scheme and two days before the Creditors’ Meeting, announced that it was going to oppose the Scheme.

In summary, the FCA objections were:

(a) that the Scheme Creditors were not fairly represented at the Creditors’ Meeting as the turnout was low (less than 8.7% of the whole potential class);

(b) the Scheme Creditors attending the Creditors’ Meeting lacked the financial literacy required to make an educated decision, and they did not benefit from any independent legal advice. Here the FCA did not seek to argue that legal advice was a prerequisite for the Scheme to be sanctioned, but it submitted that it should be taken into consideration by the Court when assessing the appropriate level of weight given to the casting of the votes at the creditors’ meeting;

(c) ALL’s parent’s share price increased had increased by 250% since December 2020 when the Scheme was announced. The FCA considered that the market's perception is that there is substantial surplus value in the enterprise, over and above the amounts attributable to the secured creditors; and

(d) The Scheme proposed that the Scheme Creditors exclusively bore the burden of the liabilities being compromised by the Scheme whilst shareholder’s interest remained intact. It was noted that there was no proposal for debt for equity swap with Scheme Creditors.

The FCA disagreed that the Scheme was the best proposal the Group could put forward to the Scheme Creditors and that the lack of negotiations before the Creditors’ Meeting suggests that the Scheme Creditors were faced with a “take it or leave it” situation. Also, the FCA submitted that the Explanatory Statement (which was published before the Creditors’ Meeting and contained a series of questions regarding the Scheme) failed to inform the Scheme Creditors of the alternatives which were open to them in the event that they opted to reject the Scheme, and why the shareholders would be entitled to retain their rights.

Finally, the FCA submitted that it did not believe that the Scheme was the only alternative to avoid the Group’s insolvency. Given its recent market capitalisation, the directors ought to be considering alternative restructuring options, in the best interest of the Group.

s.899 of the CA 2006

S.899(1) of the CA 2006 provides that “If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members [...] the court may, on an application under this section, sanction the compromise or arrangement”.

Judgment

The Court considered and applied the four-steps listed in Re Noble Group Ltd [2018] EWHC 3092 (Ch), being whether:

1. The provisions of statute have been complied with (including class composition, statutory majorities and the adequacy of the explanatory statement);

2. The class meeting was fairly represented or whether the majority coerced the minority to promote interests adverse to the class whom they purported to represent;

3. The scheme is fair; and

4. There is any defect (or "blot") in the scheme that would make it unlawful or otherwise inoperable.

The Court has a wide discretion in sanctioning a scheme that has been voted by the appropriate amount of creditors.

Mr Justice Miles agreed with most of the FCA’s submissions and concluded that the Explanatory Statement did not provide sufficient detail to allow the Scheme Creditors (particularly those lacking financial literacy) to make a proper assessment. The Explanatory Statement failed to give details about the alternative options that may be available and therefore Mr Justice Miles concluded that the Scheme Creditors were led to believe that they have a “binary choice” - the only alternative to the Scheme not being voted was the immediate insolvency of the Group. On that basis, Mr Justice Miles concluded that the Court cannot place any reliance on the vote at the Creditors’ Meeting. The Court noted that the Scheme Creditors (with the exception of the FOS) comprised individuals who were involuntary creditors that were not legally and financially unsophisticated, did not have the benefit of a steering committee and had not received any legal advice on the Scheme.

The judgment also notes that there was no evidence from the Company as to: (i) when ALL and the Group would run out of money and/or cease trading; (ii) of an imminent or medium term cashflow crisis; and (iii) financial advice or analysis to the Group which would support the 15% contribution over 4 years from future profits.

Mr Justice Miles also agreed with the FCA’s submission that there is insufficient evidence to support that the Scheme was the only alternative to insolvency, as submitted by the Company. Noting the informal moratorium granted to the Group by the FCA, Mr Justice Miles urged the directors to consider other restructuring options and noted the directors statutory and fiduciary duties to ALL/the Group including to promote the success of ALL/the Group.

The Court also disagreed with the Company’s submissions that a revised proposal for a Scheme would entail further substantial delay and further costs estimated at £15m. The Court considered that the existing work done to date could be built upon to produce a revised Scheme.

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