The Two Amigos – Amigo Loans Offers Alternative Arrangement Schemes to Handle Mis-Selling Claims | Insights and Events
- In the judgment of Lord Justice Snowden (sitting as an additional judge of the High Court) delivered on 15 March 2022, leave was granted to convene meetings of creditors to consider for the first time two alternative regimes;
- Appointment of an independent “Customer Advocate” by the company to defend its creditors, i.e. thousands of group customers;
- Subsequent use of deeds of contribution and SPVs to pool the liabilities of a group of companies for the purposes of a plan; and
- The judgment is made in the context of the FCA’s recent guidance consultation on compromises for regulated businesses using company law or insolvency proceedings (including schemes of arrangement, plans of restructuring and voluntary arrangements) to manage their liabilities. Click here to learn more about the orientation consultation.
The previous diet proposal
Amigo Loans has succeeded in its second attempt to persuade the High Court to grant leave to call 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 failed in the spring of 2021 to seek court approval for a previous proposed plan of arrangement. Judge Miles dismissed the scheme, finding, in line with submissions from 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 believed that, rather than immediately placing the company into receivership, the board would consider other restructuring options, including recapitalization through the issuance of new shares of its listed parent company, and that, therefore the company had not justified to its creditors why the was necessary and why they would have to agree to receive a distribution of around 10p/£ while shareholders retained 100% of the capital and the benefit of any future value created . We covered this judgment last year and you can read more about it here.
ALL Scheme Ltd (ALL), an SPV that consolidated 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 court permission to convene meetings for these proposals to be voted on.
The first proposal consists of a “New Business Scheme”, which is itself split into two alternative outcomes based on a decision by the FCA in its investigation into Amigo’s lending practices, as to whether to allow Amigo to resume lending, and the group’s ability to raise funds in the market. If both conditions are met, customer creditors are estimated to be likely to receive a 41p/£ return on their claims. If unsuccessful, Amigo would seek to liquidate its existing loan portfolio and distribute the proceeds to creditors, described as the fallback, with a return to client creditors of between £33p and £37p/£.
The second proposal, the “Wind Down Scheme”, follows the fallback solution by providing for a liquidation of the existing loan portfolio, with a yield of 33p/£ for client creditors.
ALL propose that both schemes be voted on by creditors, and in the event that both are approved, the Court should first consider sanctioning the New Business Scheme, to obviate the need for the Wind Down Scheme.
In each case, client claims would be compromised, following a claims assessment process managed by PwC as “Scheme Supervisors”, in return for pro-rata payment from a fund established by the group and funded by a combination of group cash, new capital raised in the market, and a “revenue amount” which would be the amount of loan recoveries the group has made above the cash amount up to as of October 31, 2023 (after setting aside an amount for group liquidity). Alternatively, current Amigo customers with outstanding loans could deduct their entitlements under the plans from the outstanding balance. The Financial Ombudsman Service, which is entitled to a fixed fee for each claim submitted to it by an Amigo customer, would also be entitled to seek a £12.5 million claim from the fund.
ALL’s approach of presenting two alternative scheme of arrangement proposals is novel but is clearly intended to guard against the risk of their preferred option being rejected by its creditors or rejected by the Court, resulting in insolvency of the group. How this is considered by the Court at the sanction stage will be particularly noteworthy.
In addition, one of the concerns raised by the FCA with respect to previous Regime proposals was a lack of organization among client creditors, and therefore of representation and input into the Regime process. Financial institutions that participate in restructuring processes frequently band together to coordinate and engage with the company to help shape restructuring proposals, a process the courts are encouraging as leading to more balanced proposals that are more likely to be approved and sanctioned. However, the creditors of the ALL scheme (outside the FOS) are thousands of customers, the majority of whom may be relatively unsophisticated and certainly unaccustomed to consulting the explanatory material which supports a scheme or restructuring plan. To mitigate this issue for these proposals, a client committee has been convened to dialogue with ALL on the proposals, and the company has appointed an independent “client advocate” with experience in financial services and schemes of arrangement to ensure the liaising with clients and other interested agencies, reviewing proposals and then reporting to the Court. The Court also praised ALL’s approach to the explanatory memorandum, which Justice Snowden said was produced in a much more user-friendly format than the usual documentation provided for schemes and restructuring plans.
Creditors’ meetings have been convened for May 12, 2022 with return-to-court dates for the penalty hearing penciled in for May 23 and 24, with time allocated in case the FCA wishes to make representations like it did it in the first proposed scheme. Points to watch will include the Court’s opinion on the evidence provided by ALL regarding the likely alternative to the schemes, the approach of creditors when voting on the two alternative schemes, the Court’s approach to the two-tier strategy and any intervention by CAF during the sanction hearing.