High Court sanctions Amigo scheme of arrangement following creditors' meeting

The decision, handed down on 22 May 2022, followed creditors’ meetings at which 88.8% by number and 90% by value voted in favour of the New Business Scheme and 83.1% by number and 81.7% by value voted in favour of the Wind Down Scheme.

Notably, Amigo made clear that it would only propose sanction of the Wind Down Scheme by way of an alternative, if the court considered the New Business Scheme should not be sanctioned. Given the court sanctioned the New Business Scheme, it was not necessary for the court to consider the Wind Down Scheme in depth.

In March, the court granted leave to Amigo to convene meetings at which creditors could consider and vote on the two proposals. The concept of dual schemes being proposed and voted on is novel and indicative of the court's efforts to ensure that restructuring tools like schemes of arrangement are flexible.

The High Court previously rejected a proposal by Amigo after the Financial Conduct Authority (FCA) objected to the scheme.

The sanction hearing decision

In sanctioning the New Business Scheme, the court noted that that it was satisfied that the terms of the statute had been met; the requisite statutory majorities had been achieved at the creditors’ meeting, the constitution of a single class of creditors was valid and the explanatory statement appropriately explained the effect of the New Business Scheme.

Referring to the turnout of over 15% of customer creditors at the scheme meetings, which is relatively high in the context of consumer schemes, the court was satisfied that the customer creditors were fairly represented at the meetings.

The court was also satisfied that the scheme was one on which an honest, intelligent and reasonable member of the customer creditors could vote. Echoing comments made by Lord Justice Snowden in the convening hearing decision, the court looked favourably upon Amigo’s appointment of an independent customer advocate and its establishment of a customer committee that was chaired by an experienced accountant and had legal representation.

In considering any factors which may be ‘blots’ on the New Business Scheme, the court was satisfied that there were none, in particular, noting that there was a sufficient prospect of the conditions in the New Business Scheme being satisfied and if one or more was not met, the New Business Scheme would still have effect, just its outcome would differ.

Finally, the court heard submissions from a representative of a small number of Amigo’s shareholders who objected to the scheme as proposed. However, the court gave little weight to those submissions as they were from 'out-of-the money' existing shareholders and had no legal relevance.

The sanction hearing decision reinforces the takeaways from the convening hearing decision and provides a helpful reminder of the factors the court will consider in deciding whether to sanction a scheme, particularly in the context of consumer schemes.

Background

The Amigo group (Amigo) is a well-established subprime provider of guarantor loans to those unable to borrow from mainstream lenders due to their credit histories. Following a number of consumer complaints and the effects of the Covid-19 pandemic, Amigo deemed that it was not making enough money to pay all of its creditors. It therefore proposed a scheme of arrangement to compromise its liabilities and incorporated a special purpose vehicle, ALL Scheme Limited (ALS), to promote the scheme.

This original scheme incorporated a mechanism, including a bar date, to determine the claims of creditors who were seeking redress against Amigo where it had granted loans to borrowers who could not afford them. It also incorporated the claim of the Financial Ombudsman Service (FOS) for case handling fees in relation to complaints made by customers or their guarantors. Although this scheme was approved by 95% of creditors attending and voting, it was challenged by the FCA and the court ultimately refused to sanction it.

Rejecting the scheme, Mr Justice Miles noted that he considered that the redress creditors had not been provided with the necessary information for them to properly consider the proposed scheme, particularly in relation to the reasons why the redress creditors were required to forgo the majority of their redress claims while the shareholders of Amigo were not impacted. In addition, he did not accept the directors’ evidence that the failure of the scheme would result in Amigo’s immediate administration.

The alternative scheme proposals

Amigo then proposed that redress creditors vote on two, new, alternative schemes: the ‘New Business Scheme’ and the ‘Wind Down Scheme’ (together, ‘the alternative schemes’). The New Business Scheme incorporates a ‘preferred solution’ in which Amigo resumes lending, and a ‘fallback solution’ which will become effective if the conditions of the preferred solution are not met. Under the Wind Down Scheme, Amigo will not resume lending and will wind down its business before being solvently liquidated.

Each of the alternative schemes provides for the creditor redress claims to be compromised and a trust fund, the ‘scheme fund’, to be established from which redress creditors will receive a distribution, provided that they have submitted claims before a ‘bar date’ to be adjudicated on.

Under the New Business Scheme, the following payments will be made:

• a first payment of £60 million into the scheme fund, no later than five business days after the New Business Scheme becomes effective;
• a second payment of £37m into the scheme fund no later than nine months after the New Business Scheme becomes effective;
• £15m from a recapitalisation of Amigo or such other higher amount as the directors are able to obtain from investors at the time of the rights issue; and
• a ‘turnover amount’, to be calculated by reference to the amount of loan recoveries on Amigo’s existing loan book in excess of the sum of the first and second payments into the scheme fund (£97m), after making an allowance for a ‘liquidity reserve’ to pay Amigo’s operating costs – currently £8.4m.

The New Business Scheme is conditional upon Amigo resuming lending within nine months of its effective date and requires Amigo to undertake a successful capital raise within 12 months, pursuant to which current shareholders’ holdings will be reduced to 5% of their current holdings. Should either of those conditions fail, or if any of the first three payments noted above are not made, Amigo will switch to the fallback solution.

Under the Wind Down Scheme, Amigo will collect its book as the business is wound down, with an anticipated £95m to be available for redress creditors.

The convening hearing decision

Lord Justice Snowden noted that the purpose of the convening hearing was for the court to determine the class compositions, to verify that the explanatory statement is in a satisfactory form and to make directions for the holding of the scheme meetings. The court may also consider whether the scheme - or, in this case, the schemes - contains any obvious defects.

On the latter point, Lord Justice Snowden noted that Amigo had taken steps to address Mr Justice Miles’ concerns with the previous scheme. Redress creditors’ potential lack of financial or legal advice was addressed by Amigo appointing an independent ‘customer advocate’ – a solicitor with schemes of arrangement experience, whose role is to liaise with customers and interested bodies – to review the scheme materials and report to the court. Amigo also engaged a separate independent financial advisor to chair a ‘customer committee’ which was appointed to negotiate the terms of the New Business Scheme with Amigo on behalf of the redress creditors. The chair of this Committee also published online videos to explain the alternative schemes to the broader redress creditor group.

Mr Justice Miles’ concerns around the shareholders not being impacted under the previous scheme have also been addressed. Under the New Business Scheme preferred solution, the condition to conduct a capital raise of 19 new shares to each current share addresses this concern as it will result in a dilution of current shareholdings to 5%. Under the fallback solution or the Wind Down Scheme, Amigo will not resume lending so shareholders will not receive any benefit.

Amigo has also addressed the second criticism from Mr Justice Miles. Lord Justice Snowden said he was satisfied that Amigo’s evidence showed that Amigo is insolvent and that Amigo will go into administration if one of the schemes is not implemented. The relevant comparator to the alternative schemes is therefore the administration of Amigo. This point was also relevant in considering the appropriate method of valuing the votes of existing customer claims for the purpose of voting on the schemes with Lord Justice Snowden considering at length points raised via the customer advocate – in particular from a well-known debt advisory service, Debt Camel. While understanding of the argument made by Debt Camel, Lord Justice Snowden agreed with Amigo’s vote valuation proposal and noted that Amigo had chosen the correct comparator to determine voting rights at the meetings, being administration.

It should also be noted that while the FCA has reserved its rights in respect of the alternative schemes, it did not appear at the convening hearing or otherwise make any objections.

In granting leave for ALS to hold the creditors’ meetings to vote on the alternative schemes, Lord Justice Snowden was satisfied that the rights of customers, guarantors and the FOS in an administration would be sufficiently the same to justify those creditor types being placed in the one class.

Lord Justice Snowden also commended the drafting of the explanatory statement which had been tailored to redress creditors by using plain language and adopting flow charts and tables to assist the reader; further noting that Amigo would make available a helpdesk, accessible by phone and email, in the lead up to the meetings and that the customer advocate would remain available to assist customers.

In granting leave to convene the meetings, Lord Justice Snowden was content for the two alternative schemes to be voted on at the same meeting, noting that steps would need to be taken at the meeting to ensure it was clear which of the alternative schemes was being voted on each time. Lord Justice Snowden was also satisfied that it was appropriate for the meetings to be held virtually, notwithstanding that the easing of Covid-19 restrictions meant that the meetings could be held in person or by way of hybrid online and in person meetings. In reaching this conclusion, it was noted that Amigo was an online business, it was more convenient for redress creditors to attend online and the number of potential redress creditors who could vote on the Schemes meant that a hybrid meeting would be logistically complex.

Assuming that the redress creditors vote in favour of one or both of the alternative schemes – which seems likely given the outcome of voting on the previous scheme – the real test for Amigo will come at the sanction hearing. However, this convening hearing decision is significant, as it demonstrates that the court will, in appropriate circumstances, be prepared to allow creditors to vote on two simultaneously proposed schemes of arrangement offering alternative solutions for the relevant scheme company.

The decision is also significant in that it signals a potential ‘new norm’ in holding online creditors meetings, particularly where the size of the creditor group could pose logistical challenges to holding physical or hybrid meetings, perhaps even more so in scenarios such as this where it can be evidenced that there is a reasonable assumption that the relevant creditors have access to, and familiarity with, the internet.

Co-written by James Thompson of Pinsent Masons. Pinsent Masons acted for the chair of the committee of redress customers in the case.