High Court rejects scheme of arrangement on FCA objections

The case is a reminder of the court’s unfettered discretion over whether or not to sanction a scheme of arrangement. It also provides helpful guidance, particularly in relation to where a scheme does not involve financially sophisticated creditors. The judgment once again highlights the importance of disclosure when compromising the rights of creditors.

• Proposed scheme rejected despite submissions from Amigo that the court should comply with the outcome of the creditors’ meeting
• Level of disclosure and form of information provided should be considered against the financial sophistication, or otherwise, of the particular scheme’s creditors
• ALL Scheme Limited, Re [2021] EWHC 1401 (Ch) (24 May 2021)

The Amigo group is a subprime provider of guarantor loans to those unable to borrow from mainstream lenders due to their credit histories. Further to a considerable number of consumer complaints and the effects of Covid-19, 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, to promote the scheme.

The purpose of the scheme was to provide 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. A fund was to be set up which would be used to pay the redress creditors’ compromised claims. In summary, the details of the scheme were:

• redress creditors would be entitled to submit a claim within a six-month period;
• Amigo would then assess the claim and inform each redress creditor of the outcome of their claim;
• the approved claims would be paid out in a pro rata distribution from the redress fund, with top ups potentially, depending on the circumstances, available from the balance adjustment contribution and the future business contribution;
• Amigo would then be released from the redress creditors’ claims.

Amigo anticipated that redress creditors could, subject to various factors, expect to receive, based on the initial contribution under the proposed scheme,  approximately 10p in the pound on the agreed value of their claims, with potential additional amounts, depending on the circumstances, available from the balance adjustment contribution and the future business contribution under the terms of the scheme to top up this return. Meanwhile, shareholders would retain their economic interest in the Amigo group.

On 12 May 2021, Amigo convened the creditors’ meeting where the scheme was voted in favour of by 95.1% in number of the scheme creditors, representing 95.7% by value of those voting. However, while the percentage voting in favour was high, and the turnout of over 78,000 creditors at the creditors’ meeting in absolute terms was reasonably high, as a percentage of the number of the total potential class it was actually very low.

The FCA’s objections and the court’s refusal to sanction the scheme

Following approval at the creditors meeting, Amigo applied to court for sanction of the scheme. However, despite the creditors’ approval, the FCA strongly opposed the scheme at the sanction hearing. The FCA contended that the scheme did not represent a fair compromise for the redress creditors, noting that the shareholders would remain whole. The FCA was also concerned that the scheme had been presented to creditors as a binary choice between the scheme or insolvency, without them having the opportunity to be involved in the negotiation of the terms of the scheme and without explanation of other alternatives.

In considering the court's general discretion to sanction the scheme, the judge, Mr Justice Miles, considered at length the principles involved in the exercise of this unfettered discretion, noting the creditor vote in favour. The judge referred in particular to the guidance provided in respect of the Sunbird Business Services Ltd scheme of arrangement, and the Noble Group Ltd scheme.

At issue in this case was the ‘fairness’ of the scheme. In considering whether the scheme was fair, the court accepted Amigo’s argument that the court should not apply its own discretionary views of what it sees as ‘fair’ or ‘just’ in preference to the views of the creditors. However, the judge was not persuaded, in the circumstances, that the fact of the creditors voting in favour was reason to deem the scheme fair and order its sanction. He accepted the FCA’s description of the redress creditors as “financially vulnerable people who do not have access to mainstream credit”. Given the nature of the business, it was relatively likely that these creditors would have low levels of financial literacy and would not fully comprehend schemes of arrangement or corporate insolvencies. The judge did not therefore consider that the creditor vote, albeit overwhelmingly in favour of the scheme, was sufficiently persuasive, noting that “[t]he court may properly ask whether the creditors are likely to understand the process and this may depend on their experience in finance or business”.

However, on the question of turnout, while the creditors voting at the creditors’ meeting only represented a small percentage of the whole potential class by number, the court was satisfied that Amigo had done what it reasonably could to bring the meeting to the attention of creditors.

In considering the information and disclosure provided to the creditors, and against the backdrop of his findings in respect of the type of creditors in the present case and the creditor vote, the judge agreed with the FCA that the level and form of the information provided to creditors was insufficient to consider those creditors “properly consulted” for the purpose of the creditors’ meeting, nor had Amigo arranged for those creditors to be provided with any legal advice. The judge did not consider that Amigo had provided sufficient evidence on the rationale for the restructuring terms, including in respect of the most likely alternative to the scheme, to justify the level of return to creditors and in inadequately explaining why shareholders were excluded from the scheme and retained their level of equity.

The judge accepted the FCA’s argument that the explanatory statement gave the impression to the redress creditors that a formal insolvency would be the automatic and immediate consequence if the scheme was not approved. The information provided to the redress creditors offered them the binary choice to accept this scheme, and get something, or a formal insolvency, where they would receive nothing. Amigo had been consistent in the statement that if the scheme was not approved, it would likely enter administration, but the court considered that there was insufficient evidence to support this in the circumstances. The court accepted that some form of restructuring was necessary but was not persuaded that, without this scheme, Amigo would face imminent insolvency.

The court also held that there was insufficient evidence provided to justify the level of contribution being made into the redress fund. The judge considered that, absent this disclosure, the court was unable to determine whether the board’s conclusion that the level set was the highest possible was correct.

In considering the exclusion of any impact on the shareholders, the judge was not persuaded on the evidence that the shareholders should be entitled to retain the whole of their equity interests while creditors were taking a 90% haircut. Amigo’s share price had risen following the launch of the scheme, which indicated that the market considered there to be value in the restructured group. The judge was not persuaded that the shareholders being a wide and disparate was a reason to not involve them in the scheme.

According to its public statements, Amigo continues to consider the options available.

Editor's note: this piece was updated on 12/07/2021