High Court sanctions scheme of arrangement despite FCA objections

The decision can be contrasted with the recent Re ALL Scheme Ltd case, in which the High Court declined to sanction a scheme proposed by Amigo, another subprime lender, following objections by the FCA.

• Likelihood of company continuing to trade is key to scheme fairness and relevant alternatives
• No one factor on its own is likely to prove unfairness to creditors
• Re Provident SPV Limited, [2021] EWCH 2217 (Ch)

Important factors considered by the court in this case were that the companies in question were to be wound up following implementation of the scheme; and that the FCA stopped short of formally opposing sanction, making the purpose of its criticisms unclear.

The case shows that the result of a sanction hearing very much depends on the facts of each specific case. What at first seemed like a very similar case to Re ALL Scheme was decided in a different way because, on closer inspection, a number of details differed. The case also highlights the need for the FCA to present strong arguments and alternative mechanisms where relevant, and to make its position on any proposed scheme clear.

Provident SPV Limited (the SPV) was an SPV within the Provident Finance group (the group), a subprime lender providing small loans to individuals at high interest rates. Two lending entities within the group (the lenders) faced numerous claims for redress from individual borrowers or their guarantors (the claimants) in relation to whom the lenders had failed to carry out creditworthiness checks or suitability assessments. The total redress claimed was such that the lenders recognised that they would not be able to pay all liabilities, particularly as it was not clear how many more redress claims were still to come.

The lenders set up the SPV to assume liability for the redress claims and, as part of a proposed scheme of arrangement with the claimants (the scheme), planned to fund the SPV for the purpose of creating a pool from which the claims could be paid. Under the scheme, claimants would release their claims against the lenders and make claims against the SPV, subject to a six-month time bar. After the claims had been assessed and validated, a portion of the claim could be paid out from the funds initially received from the lenders. It was anticipated that the claimants would only recover up to 6% of their claims under the scheme, but the lenders put forward that this was better than the alternative: immediate liquidation, and the claimants not receiving anything at all.

The claimants were the only creditors involved in the scheme. Once they had been paid, the group proposed to wind up the lenders and pay other creditors from any assets available for distribution following liquidation and any surplus would be transferred to the scheme.

FCA objections and court sanction of the scheme

As the lenders were FCA-regulated, it was necessary to obtain the FCA’s views on the terms of the scheme. Although the FCA was present at the convening hearing it declined to attend the sanction hearing, opting instead to list several objections to the scheme in a letter addressed to the lenders but expressly intended to be reviewed as evidence during the hearing. Despite this letter, and a further statement that it did not support the scheme, the FCA did not formally oppose the scheme. It was also unprepared to provide a letter of non-objection.

While the facts of the case are very similar to those of Re ALL Scheme Ltd, in Re ALL Scheme there was a realistic possibility that the company would continue trading and that the relevant alternative was not in fact insolvent administration. In that case, the court ruled that the explanatory statement provided to creditors had not been accurate and did not draw enough attention to the fact that although creditors would only recover 10% of their claims, shareholders would retain all their interest in the scheme companies. This last point was relevant as the share price had significantly increased after the scheme had been announced.

The judge was not able to find any “blot or defect” in the In Re Provident scheme and, accordingly, sanctioned it. He addressed each of the FCA’s objections in turn.

• The FCA expressed concern that the scheme would be used to avoid having to pay the claimants the full value of their claims. Certain support arrangements from the group which had so far permitted the lenders to keep trading had been withdrawn, and the FCA stated that this was unsatisfactory. The FCA was also concerned that the scheme might be sanctioned at a time when an FCA investigation of the group, which had started in March 2021, was still ongoing. The court ruled that all these points were regulatory in nature and were not relevant to a sanction hearing.
• The group was proposing to provide £50 million in funding to the SPV to deal with liabilities owed to the claimants. The FCA claimed that the group could contribute more but had decided not to do so. Although the court recognised that the amount was based on a commercial decision, and that the basis of this commercial decision had not been tested, the judge said that the FCA was the most appropriate body to conduct such a test, noting that it had just done so in the Re ALL Scheme case. Here, the FCA had declined to do so despite its involvement in the scheme from an early stage. Since the FCA was not prepared to produce material showing the form that a better offer for the claimants might take, or why the commercial reasons presented by the group were unsatisfactory, the judge was unable to find that this objection was valid.
• The FCA said that some claimants might be worse off under the scheme than they would be in an insolvency – as borrowers of the lenders, insolvency set-off would apply without any time limitation. The court did not find anything unfair about the existence of the six-month time limit. The court also pointed out that, although parts of the lenders’ portfolio had been transferred to third parties which had not yet all entered into agreements with the lenders to preserve rights of set-off, these were nevertheless preserved under the scheme and under normal principles of law.
• At the convening hearing, 98% of claimants in value and by number of those voting had been in favour of the scheme. However, since it was not yet known how many potential additional claimants could come forward, it was estimated that this number only represented around 10% of potential claimants, similar to the Re ALL case. The FCA claimed that this low turnout was contrary to its expectation that regulated firms should do their best to engage customers in scheme processes. The court agreed that this was a concern – indeed, it had been one of the factors why the Re ALL scheme was not sanctioned. However, here “the communications were appropriately phrased for the recipients”, and this did not suggest that sanction should be refused. It would not be appropriate to assume that the non-voters were against the scheme when, in all likelihood, they may not have realised they had a claim, did not understand the terms of the scheme or were simply not interested.
• There had been no prior consultation with the claimants on the terms of the scheme. A customer advocate had been appointed to advise claimants and review the scheme documentation, but this person had not been involved in negotiating the terms of the scheme on behalf of the claimants. The judge recognised that this could potentially be an important issue. However, the FCA had not formally raised any concerns on this point and had not suggested any way in which a better outcome could be reached. On the facts, the judge ruled that this did not adversely affect the scheme.
• The FCA raised concerns about the voting mechanism. However, as this mechanism had been determined at the convening hearing without any objections from the FCA, it was not necessary to revisit it at this stage.
• The FCA criticised the fact that the SPV had been set up to essentially assume the liabilities initially owed by the lenders to the claimants, on the basis that this was confusing for individual customers. The court stated that all schemes, by nature, were bound to appear complex to a layperson, and the introduction of the SPV was not likely to add any further complexity.

Co-written by Sara Segura, a restructuring expert at Pinsent Masons.