Summary
Almost a year to the day since the High Court rejected the Amigo loans group's previous proposal for a scheme of arrangement, on 23 May 2022, Mr Justice Trower sanctioned the group's latest scheme proposal which would create the conditions for the group to resume lending and resolve the claims of thousands of the group's customers arising from its lending practices.
Following its aborted effort in Summer 2021, Amigo loans had taken the novel approach of proposing two alternative schemes: one which would result in an orderly work-out of the group's existing loan book, and another which would either allow the group to resume lending and settle customer claims, depending on the outcome of an FCA investigation into the group's lending practices and its ability to raise funds in the market, or to work out the existing loan book with a prospect of a better return than the first scheme.
Creditors approved both schemes and at the request of the group the Court sanctioned the scheme that gave the group the prospect of returning to trading.
The Court's approach to the two-scheme strategy, and the conditionality built into the New Business Scheme, will inform many schemes and restructuring plans in the future. The judgment also provides helpful guidance on the appropriate comparator and the approach to communicating with consumer creditors, which were both important factors in light of the reasons Mr Justice Miles gave for refusing to sanction the group's scheme proposal in 2021.
Highlights:
- Mr Justice Trower sanctioned a scheme of arrangement proposed by the Amigo group, the provider of guarantor loans which had taken the novel approach of proposing two alternative schemes.
- Trower J sanctioned the scheme that provided for the alternative options of the continuation of Amigo's lending business, or an orderly wind down of the group's loan book depending on the outcome of an FCA investigation and the group's ability to raise additional equity financing.
- The Judge considered the appropriate comparator to the schemes in light of Amigo's failed attempt to promulgate a scheme in 2021 and the subsequent work done by the board, concluding that it was mostly likely that if the schemes failed the group would be wound down through a distributing administration.
- Amigo had gone to great lengths to consult creditors on the schemes, appointed an independent customer advocate to review the schemes and report to the court, and taken steps in the lead up and at the meetings to address the questions and concerns of customer creditors. This all lead Trower J to conclude that consumer creditors had been provided with the necessary information to be able to vote on the scheme and to understand the contingencies in each scheme.
- Trower J re-emphasised the principle that, when applying the "rationality test" to the scheme, the court should be slow to differ from the majority vote of the creditors.
Re ALL Scheme Limited1
Almost a year to the day since the High Court rejected the Amigo loans group's previous proposal for a scheme of arrangement, on 23 May 2022, Mr Justice Trower sanctioned the group's latest scheme proposal which would create the conditions for the group to resume lending and resolve the claims of thousands of the group's customers arising from its lending practices.
Following its aborted effort in Summer 2021 (which we covered here), Amigo loans had taken the novel approach of proposing two alternative schemes: one which would result in an orderly work-out of the group's existing loan book, and another which would either allow the group to resume lending and settle customer claims, depending on the outcome of an FCA investigation into the group's lending practices and its ability to raise funds in the market, or to work out the existing loan book with a prospect of a better return than the first scheme (the "Wind Down Scheme" and the "New Business Scheme" respectively).
We covered the convening hearing and the background to the proposals in our update in March 2022 (available here), in which Snowden J ordered meetings to be convened for a single class of creditors to vote on each scheme.
Both schemes were approved by creditors at meetings held during May 2022, with 145,523 creditors voting in favour of the New Business Scheme (88.8% by number and 90% by value) and 134,677 voting in favour of the Wind Down Scheme (83.1% by number and 81.7% by value). Creditors could vote on both schemes, and turnout was around 15% of all customer creditors of amigo. At the sanction hearing Amigo requested that the Court consider whether to sanction the New Business Scheme first, and only if sanction was refused, to consider whether to sanction the Wind Down Scheme.
The Court's approach to the two-scheme strategy, and the conditionality built into the New Business Scheme, will inform many schemes and restructuring plans in the future. The judgment also provides helpful guidance on the appropriate comparator and the approach to communicating with consumer creditors, which were both important factors in light of the reasons Mr Justice Miles gave for refusing to sanction the group's scheme proposal in 2021.
The schemes as alternatives to administration
In his judgment in May 2021, Miles J had found that his refusal to sanction the scheme would not lead to the imminent insolvency of the Amigo group, and that accordingly the creditors had not been fairly presented with the realistic and probable alternatives to that scheme. The Judge considered that what was more likely to happen was for the board to explore alternative options, including in particular a proposal that would result in a more equitable allocation of the benefits and losses of the scheme between shareholders and creditors – it had been proposed that the equity remained intact while customer creditors would take haircuts of around 90% on their claims.
Trower J considered in his judgment whether, in contrast to summer 2021, the appropriate comparator to these schemes was an insolvency process, and in particular a distributing administration. The Judge held that Amigo had now successfully established that a distributing administration was the inevitable consequence if the schemes were not sanctioned.
In making this judgment, Trower J considered the fact that, as of 31 December 2021, Amigo Loans had net liabilities of £123 million, that an informal moratorium which was currently in place from the FCA and the FOS would not be permitted to continue indefinitely and that, if the schemes were not sanctioned and Amigo did not enter into administration, the resulting "pay-as-you-go" satisfaction of creditor claims would be unacceptable. In short, the group was balance sheet and cash-flow insolvent and that if one of the schemes was not sanctioned, the directors would need to file for administration. That was materially different to the situation in summer 2021, and reflected a year of further negotiation and planning by Amigo that meant that the Judge could be satisfied that these schemes reflected the best terms available.
The rationality test
The key question for Trower J to consider in light of the vast and disparate consumer creditor class was whether it was "rational" for creditors to have voted to approve one or either of the schemes. Trower J described this question as a process in which the court must determine whether the scheme is one for which an honest and reasonable members of the class of creditors would vote.
Crucially, he said that if the required statutory majority of creditors voting in favour of the scheme had been met, then the court would be slow to differ from that view as an assessment of what is indicative of good reason to approve a scheme by those affected by it. The Judge undertook this assessment by considering two propositions:
- the majority vote must be representative of the class that it purports to represent; and
- the applicant must be able to demonstrate that the members of the class are able to properly appreciate the alternative open to them.
In respect of the first question, it was notable in these schemes that the overall turnout of customer creditors was approximately 15.6%. This was a high turnout in comparison to other consumer schemes including the Instant Cash Loans (4%) and Provident (10%) schemes, and Trower J considered that this did not point to an unrepresentative vote.
In relation to the second question, Trower J was satisfied that the customer creditors could properly understand the schemes and therefore could appreciate the possibilities available to them and that the appointment of an independent customer advocate (Mr Jonathan Yorke) had been important in helping him reach that conclusion.
Mr. Yorke's role in the schemes was to engage with customers creditors and consumer bodies and consider any representations made by them. Mr. Yorke then reported to the court on any issues raised and his views of them. Mr Yorke had reported that very few customers expressed confusion as to what the schemes entailed and that the majority of interactions with the customers concerned discussion of how to participate in the schemes. There was one issue that raised the concern that some customer creditors were misled as to whether they could vote on both schemes proposed in the scheme meetings but Amigo had taken steps to rectify the issue and Mr. Yorke and the court took the view that this rectification exercise was satisfactory.
In addition to the appointment of an independent customer advocate, Amigo had also formed a creditors' committee for the purpose of working with them in the development of the schemes. This was an attempt to avoid the issue of a lack of explanation of the scheme to customers that was raised by Miles J in the refusal of the 2021 scheme. Mr Jamie Drummond-Smith was appointed as the chairman of that committee which was comprised of eight randomly selected customer creditors from the 4,000 that had volunteered.
Trower J noted in particular that, through engaging with this committee, it was made clear to Amigo that the customer creditors wanted as much certainty as possible in the composition of the funds for payment of a distribution on their claims and that this had caused Amigo to set a fixed sum of £15 million that would be contributed to the scheme fund from the share issue rather using some form of equity option or profit share over a period of years.
In working with the committee to formulate the schemes, Amigo satisfied Trower J that the schemes were sufficiently explained to the customer creditors.
Conditionality and a blot on the scheme
The final point of note that Trower J had to consider was whether there was a 'blot' on the schemes, and in particular whether the conditionality attached to the New Business Scheme was a reason not to sanction the scheme.
The Judge said that he needed to be satisfied that there was sufficient certainty so that the court would not be acting in vain in sanctioning the scheme, that there was clarity and certainty on the face of the scheme and that it would be self-executing following sanction, rather than needing a further decision-making process.
He found that the conditionality attached to the New Business did not raise the possibility that, if any of the conditions were not satisfied there would be no scheme at all – the scheme would be immediately effective and if the conditions that would allow Amigo to continue trading were not met, the alternative was already built into the scheme to allow an orderly work out of the group's loan book, and ultimately dissolution of the relevant entities.
As to the second question, Trower J considered the conditions had been clearly explained to creditors and there was sufficient clarity as to the uncertainties that might arise. Having made that finding, interestingly the Judge went on to establish that there was sufficient evidence that there was a "real and substantial prospect" that the FCA would allow the group to resume lending and that there was a "realistic prospect" that the group will be able to raise new equity capital. Given that the New Business Scheme provided for different processes depending on whether those conditions were met or not, this seemed to be an unnecessary finding, but it will be interesting to see how this point develops if the two scheme approach is adopted more widely and more risky proposals are put forward.
Comment
The sanctioning of the New Business Scheme demonstrates the efficacy of the English scheme of arrangement process for compromising large numbers of claims, and the court's flexibility to allow the implementation of commercially practicable solutions that achieve better results for creditors than an alternative insolvency process.
The scheme featured a number of useful technologies that can be carried over into other schemes or restructuring plans, including the novel two-scheme approach, the appointment of a customer advocate to help address concerns arising from the high concentration of "consumer" creditors, and the now well established process of consolidating scheme liabilities in a single SPV in order to implement a scheme.
