The Two Amigos – Amigo Loans propose alternative schemes of arrangement to address mis-selling claims

Highlights

• In the Judgment of Lord Justice Snowden (sitting as an additional Judge of the High Court) handed down on 15 March 2022, permission was granted for meetings of creditors to be convened to consider two alternative schemes for the first time;
• Appointment of an independent "Customer Advocate" by the company to advocate for its creditors, being thousands of the group's customers;
• Further use of deeds of contribution and SPVs to pool liabilities of a corporate group for the purposes of a scheme; and
• The Judgment is handed down against the backdrop of the FCA's recent Guidance Consultation on Compromises for Regulated Firms using company or insolvency law procedures (including schemes of arrangement, restructuring plans and voluntary arrangements) to manage their liabilities. Click here to read more about the Guidance Consultation.

The previous scheme proposal
Amigo Loans were successful in their second attempt to persuade the High Court to grant permission to convene meetings of certain creditors to vote on alternative schemes of arrangement to resolve the claims of thousands of its customers arising from its lending practices.

The group had been unsuccessful in Spring 2021 in seeking court sanction for a previous proposal for a scheme of arrangement. Mr Justice Miles rejected the scheme, finding, in agreement with submissions by the Financial Conduct Authority (FCA), that there was insufficient evidence that the company would fall into administration if the scheme was not sanctioned. Miles J considered that, rather than immediately placing the company into administration, the board would consider alternative restructuring options, including a recapitalisation through the issue of new shares in its listed parent, and that therefore the company had failed to justify to its creditors why the scheme was necessary and why they should agree to receive a distribution of around 10p/£ while shareholders retained 100% of the equity and the benefit of any future value created. We covered this Judgment last year and you can read more about that here.

The alternative schemes
ALL Scheme Ltd (ALL), an SPV which pooled the liabilities of a number of Amigo Loans entities via a deed of contribution, returned to creditors in early 2022 with two alternative restructuring proposals and sought the permission Court to convene meetings for those proposals to be voted on.

The first proposal consists of a "New Business Scheme", which itself is divided into two alternative outcomes depending on a decision by the FCA in its investigation into Amigo's lending practices, as to whether to allow Amigo to begin lending again, and the group's ability to raise funds in the market. If both conditions are achieved, customer creditors are estimated to be likely to receive a return of 41p/£ on their claims. If unsuccessful, Amigo would seek to work-out its existing loan book and distribute the proceeds to creditors, described as the Fallback Solution, with a return to customer creditors of between 33p/£ and 37p/£.

The second proposal, the "Wind Down Scheme", follows the Fallback Solution in providing for a work-out of the existing loan book, with a return of 33p/£ for customer creditors.

ALL propose that both schemes should be voted on by creditors, and in the event that both are approved, the Court should consider sanctioning the New Business Scheme first, to avoid the need for the Wind Down Scheme.

In each case, customer claims would be compromised, following a claim assessment process run by PwC as "Scheme Supervisors", in return for a pro-rata payment from a fund established by the group and funded by a combination of cash from the group, new capital raised in the market, and a "Turnover Amount" which would be the amount of loan recoveries the group made above the cash amount up to 31 October 2023 (after reserving an amount for the group's liquidity). Alternatively, current customers of Amigo with outstanding loans could set off their entitlements under the schemes against the balance to be repaid. The Financial Ombudsman Service, which is entitled to a fixed fee for each claim referred to it by a customers of Amigo, would also be entitled to claim on the fund in respect of its £12.5m claim.

The approach by ALL of presenting two alternative proposals for a scheme of arrangement is novel but clearly aimed at hedging against the risk that their preferred option is either voted down by its creditors or rejected by the Court which would result in an insolvency of the group. How this is considered by the Court at the sanction stage will be of particular note.

In addition, one of the concerns raised by the FCA in relation to the previous scheme proposals was a lack of organisation among the customer creditors, and therefore representation and input in the scheme process. Financial institutions which participate in restructuring processes frequently group together to coordinate and engage with the company to help shape the restructuring proposals, a process which the Courts encourage as leading to more balanced proposals that are more likely to be approved and sanctioned. However, ALL's scheme creditors (aside from the FOS) are thousands of customers, the majority of which may be relatively unsophisticated and certainly not accustomed to reviewing the explanatory documentation that support a scheme or restructuring plan. To mitigate this issue for these proposals, a committee of customers was convened to engage with ALL on the proposals, and the company appointed an independent "Customer Advocate" with experience in financial services and schemes of arrangement to liaise with customers and other interested bodies, review the proposals and then report to the Court. The Court also commended the approach that ALL took to the explanatory statement, which Snowden J said had been produced in a much more user-friendly format than the usual documentation that is provided for schemes and restructuring plans.

The creditor meetings have been convened for 12 May 2022 with the dates for a return to Court for the sanction hearing pencilled in for 23 and 24 May, with time allocated in the event that the FCA wishes to make representations as it did in the first scheme proposal. Points to look out for will include the Court's view of ALL' s evidence of the likely alternative to the schemes, the approach of creditors in voting on the two alternative schemes, the approach of the Court to the two-scheme strategy and any intervention by the FCA at the sanction hearing.