On 19 May 2021 the Sanction Hearing was held for Amigo’s proposed Scheme of Arrangement. On 24 May, judgment was given and the Scheme was rejected.
The Amigo Board says :
The Board is reviewing all options including an Appeal. A further update will be given in due course.
This article looks at the Scheme, the judgment and what may happen next.
The proposed Scheme
The Scheme was proposed by Amigo in December 2020 to cap the cost of paying refunds to borrowers and guarantors. Poor affordability checking meant it was losing 88% of cases at the Financial Ombudsman (FOS).
See Amigo seeks refuge from complaints for more details about the Scheme.
On 30 March 2021 the Convening Hearing approved the proposed voting arrangements.
More than 75,000 customers voted on the Scheme, with c. 95% in favour of it.
The FCA’s stance before the Sanction Hearing
On 23 March, before the Convening Hearing, the FCA wrote to Amigo expressing its concerns about the fairness of the proposed Scheme but said:
FCA does not anticipate direct engagement with the Court during the Scheme process, should it proceed (although the FCA reserves its right to do so).
But on 10 May, before the Sanction Hearing, the FCA again wrote to Amigo, saying:
the FCA considers that a fair compromise could have, but in this case has not been, proposed to Scheme Creditors to vote upon
and that it intended to oppose the Scheme in court:
“on the basis that the Court cannot be satisfied that the Scheme in its current form is fair”.
The arguments at the Sanction Hearing
The court heard arguments from Amigo and from the FCA. The following are my short summaries.
Amigo argued that:
- it would go into administration very shortly if the Scheme was not approved;
- a large majority of creditors voting wanted the Scheme to go ahead. It would be most unfortunate if the 74,000 creditors who had voted for the Scheme got nothing if Amigo went into administration;
- it did not know why the FCA had decided to raise objections at such a late stage as it had previously said it did not expect to appear at the second court hearing and nothing had changed;
- the FCA had not been specific about what would need to be changed for the FCA to think the Scheme was fair;
- it was not the court’s job to decide if the Scheme was the fairest possible but to decide to approve or reject the Scheme presented to it in the light of the creditor voting.
- creditors are usually the best judges of what is in their interest. FOS, a sophisticated creditor, had voted for the Scheme.
The judge asked why Amigo would have to go into administration very shortly as there was no immediate cash crunch. Amigo said a Board meeting held the previous week after receipt of the FCA’s letter had confirmed it would have to go into administration if the Scheme was not approved.
The judge asked why no assessment had been presented from Amigo’s expert advisers to explain why any other alternative Schemes would not be feasible. He said the court appeared to be being asked to make a decision with the sword of Damocles hanging over it with the threat of immediate administration.
The FCA argued that:
- the Scheme disproportionately benefited the shareholders despite them ranking behind the redress creditors in insolvency. The capping of the claims of the redress creditors was being used to recapitalise the company;
- Amigo had not attempted to quantify the benefits to shareholders, nor suggested why the terms of the offered profit share – 15% over four years – were reasonable;
- the share price had tripled since the announcement of the Scheme in December, suggesting a large shareholder gain from the Scheme;
- presenting the alternatives to customers as the Scheme or administration was a false choice as other Schemes were possible, including a debt for equity swap;
- Amigo customers were unlikely to be familiar with Schemes or restructuring, and unable to afford professional advice. So deference to the creditors voting may not be appropriate;
- Amigo had said shareholders would be unable to afford a rights issue as part of the restructuring, but this was contradicted by its statement that a rights issue would likely be used to finance further lending;
- Amigo is in a strong cash position to do a restructuring and to negotiate with the creditors to produce a scheme that is fairer;
- the FCA had changed its position to a certain extent but Amigo was overstating this. The FCA had reflected at a senior level and decided to attend court to oppose the Scheme.
The judge asked if it was the FCA’s view that administration was not likely if the court rejected the Scheme. The FCA agreed, saying that an extension of the moratorium on redress payments would mean Amigo did not have a cash flow crisis.
The judge asked why the FCA had not said what it thought would be fair. The FCA said that was not its role – if there had been negotiations with creditors a proper process would have been followed.
This is a 33 page judgment. It is pretty readable to a non-lawyer, but as it is so long I will give some brief extracts, shown here in italics.
- where it says the Company, ALL, AMSL or the Parent, you can think of this as being “Amigo”.
- Scheme Creditors are the customers who may make a claim and the Financial Ombudsman.
- “I” is the judge.
23 ALL’s unsecured creditors, including the Scheme Creditors, would not receive a dividend in an insolvency (although those Scheme Creditors who have outstanding balances as borrowers would benefit from insolvency set-off). Equally, the shareholders of ALL (and therefore the shareholders in the Parent) would receive nothing.
39 The level of the distribution to be made in relation to Ascertained Scheme Claims is currently anticipated to be approximately 10p in the pound, although this is dependent on a number of variables such as response and uphold rate, and the distribution may therefore be higher or lower.
my comment – I still consider 10% to be unrealistically highunless either there is a surprisingly low number of claims made or Amigo rejects complaints about a large number of loans where the Ombudsman would have upheld them.
40 The estimated value of the Future Business Contribution is set out in a confidential exhibit to Mr Jennison’s witness statement… There is no need to set out the contents of the exhibit here, but I record that the Company’s forecast total Future Business Contribution is materially lower than the amount of Initial Contribution.
my comment – so 15% of profit over next four years is expected to add up to a lot less than £15m.
46 The Company did however fairly point out that the FCA’s decision to oppose the Scheme came very late in the process… it argued that the FCA appears simply to have changed its mind, but has not explained why.
47 the Company had limited time to answer the FCA’s evidence. I shall bear that in mind, but I also note that the Company did not ask to adjourn the sanction hearing and served further evidence from its directors…. the Company said that the unexplained change of mind by the FCA suggested that the objections should be treated with some caution. The FCA did not apparently consider at the date of the convening hearing that the Scheme was so flawed as to invite opposition and the Scheme has not changed since then. Again I bear this in mind, but it seems to me that in the end I have to consider the FCA’s objections on their merits.
70 Much of the FCA’s concerns about the Scheme stem from the respective positions of the Scheme Creditors and shareholders; and whether the Scheme Creditors are being treated fairly in being required to suffer a 90% haircut while the shareholders retain their economic interest in the Group.
74 The FCA says that the dramatic rise in the share price since the announcement [of the Scheme] … suggests strongly that the market regards the Scheme as (so to speak) shifting value from the unsecured creditors to the shareholders. In other words, the promoting of the Scheme itself has generated shareholder value. I consider that there is real force in these points.
86 The FCA has agreed since December 2020 (when the intention to promote a scheme was announced) to an informal moratorium on the payment of redress claims. The FCA’s Counsel confirmed during the hearing that were the court to refuse to sanction the Scheme but the Group wished to consider and promote another restructuring scheme or plan the FCA would agree to the continuation of the existing moratorium.
My comment – it is interesting that the FCA says it has agreed to this “informal moratorium”. Is this a DISP waiver?
95 Any further restructuring proposals would build on the existing ones. I do not see why a further restructuring would take as long as six months. For similar reasons I am unable to accept the suggestion that the further costs would be or approach £15m (a figure anyway not supported by any evidence).
97 The evidence adduced by the Company has failed to persuade me that the most likely alternative to this Scheme is the imminent collapse of Amigo into insolvency. I agree with the FCA that there is nothing in the evidence to suggest any imminent cashflow event that would force Amigo into insolvency.
105 it is very unlikely that [Amigo customers] will have any knowledge or experience of schemes of arrangement or corporate reorganisations. These are esoteric processes unknown to most people outside the financial world, let alone people with low financial literacy.
107 The FCA does not suggest that the provision of advice to creditors is a precondition for a scheme to be sanctioned, even in a case involving financially unsophisticated consumers. That must be right and each case turns on its own facts. But I consider nonetheless that there is force in the FCA’s observation that this is a relevant consideration when the court comes to assess the weight to be given to the casting of votes at the Creditors’ Meeting.
133 The Redress Creditors would also have very little grasp of the usual range of outcomes available to distressed companies seeking to recapitalise themselves. They are unlikely to have understood that the choice was not necessarily the binary one presented – it’s this Scheme or nothing.
134 There was nothing [in the Explanatory Statement] to explain why the directors of the Company were proposing that the shareholders should (subject to the contributions of ALL to the Scheme Fund) retain the whole of their interest in the Group while the Scheme Creditors should accept a 90% haircut. There is no material or analysis to explain why the directors were saying that this outcome was in the best interests of the Scheme Creditors (as expressly represented by the Explanatory Statement).
138 I have therefore concluded that, given the limited financial sophistication and literacy of the constituency of Redress Creditors, the Explanatory Statement was insufficient to inform them about the Scheme and the realistic alternatives to it. Scheme Creditors were therefore not properly consulted for the purposes of the Creditors’ Meeting. The information was not sufficiently full or accurate to enable the constituency of Scheme Creditors to form a reasonable judgment on whether or not the Scheme was in their interests. This itself means that the court is most unlikely to be able to place any reliance on, or give effect to, the affirmative vote at the Creditors’ Meeting (see Sunbird at  and the cases cited therein). This conclusion is reinforced by the other features listed above: the Scheme Creditors lacked any advice; there was no steering group; there was no negotiation; and the turnout at the meeting was less than 9% by number. In all these circumstances I am not persuaded that I can properly place any reliance on the vote at the Creditors’ Meeting or give effect to it. [my bold]
142. I am not satisfied that the court should sanction the Scheme… Some form of restructuring of the Group is clearly desirable and indeed needed. But the question is whether, in all the circumstances, this Scheme should be approved. As explained above, I have accepted the submissions of the FCA that the Redress Creditors lacked the necessary information or experience to enable them properly to appreciate the alternative options reasonably available to them; or to understand the basis on which they were being asked by Amigo to sacrifice the great bulk of their redress claims, while the Amigo shareholders were to be allowed to retain their stake.
143. I have also accepted the FCA’s submission that the court’s refusal to sanction the Scheme will probably not lead to the imminent insolvency of the Group; there is no evidence of any immediate (or even medium-term) liquidity crunch, and the directors will doubtless wish, if possible, to preserve the value of the enterprise for its various stakeholders. The FCA expects the directors to continue to explore and promote a restructuring which fairly allocates the benefits and losses among the various stakeholders. I agree with that, and would urge the directors to continue their efforts to promote a suitable restructuring. [my bold]
What happens next?
The Amigo Board is considering its options. These would seem to be:
- to Appeal the judgment.
- to enter administration as they said they would if the Scheme was not approved by the court.
- to set about negotiating a revised Scheme – Scheme 2.0 – which would be fairer to the customers.
- some other company restructuring.
The FCA has issued a statement saying:
The FCA believes that Amigo can propose a fairer Scheme to customers. It should also ensure that its customers are fairly represented and advised on alternative proposals for a scheme.
Options 3 &4 would take some months. I suggest the FCA should urgently consider the position of customers during this period.
The FCA statement originally said that customers can take complaints to the Financial Ombudsman if Amigo has not handled them fairly – but FOS has paused all Amigo complaint handling. The statement has now been corrected.
The FCA needs to consider if the temporary moratorium on redress payments it has agreed to should be two-way, with Amigo agreeing not to demand payments from borrowers or guarantors where a complaint has been started.
This legal article Back to the drawing board for Amigo points out the possible implications for other Schemes, with Provident’s court hearing to sanction its proposed Scheme due to take place on 30 July 2021.
In December 2021, Amigo published details of its proposals for a new Scheme.
See Amigo proposes a new Scheme – but is it fairer? for my thoughts on this.