Out-Law Legal Update | 17 Aug 2021 | 1:55 pm | 6 min. read
The High Court in London has ruled that a scheme of arrangement relating to a company regulated by the Financial Conduct Authority (FCA) could be sanctioned, despite the FCA raising several 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.
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 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 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.
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.
Co-written by Sara Segura, a restructuring expert at Pinsent Masons.
Out-Law Legal Update
02 Jul 2021