What is a Scheme of Arrangement and why do lenders want one?

The legal framework

A Scheme is an arrangement under Part 26 of the Companies Act that allows a firm to vary the rights of some or all of its creditors and/or shareholders.

Creditors have to vote to approve the Scheme and it has to be sanctioned by the Court, see Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006).

A Scheme is set up as follows:

1. The firm issues a Practice Statement Letter describing the Scheme and a longer document known as the Explanatory Statement.
2. A first court hearing – called the Convening Hearing – gives approval for creditors to be divided into classes to vote to approve the Scheme.
3. Creditors will be told how they can vote on the Scheme. A meeting will be arranged for each class and there may be provisions to vote online. The creditors in each class have to vote to approve the Scheme which must be passed by 50% by number and 75% by value of the creditors in that class.
4. A second court hearing – called the Sanction Hearing – is held after the creditors have voted. This hearing will consider the result of the voting and the fairness of the proposed Scheme.

Capping affordability refunds and the FCA

In 2018 and 2019, several payday lenders proposed Schemes in order to cap the amount of money they would have to pay out to customers who had an affordability complaint.

Legally a Scheme doesn’t have to be approved by the FCA. But any FCA-authorised firm would want to be sure that the FCA was not unhappy with its proposal.

We know from administrators’ reports that Wageday Advance and QuickQuid both tried to set up Schemes that would allow them to continue lending but neither was acceptable to the FCA.

For a lender to carry on trading after restricting refunds to former customers could be seen as being anti-competitive. See Amigo’s Scheme – who’s next? Implications for the bad credit market where I look at this issue.

The FCA also needs to be happy that the Scheme proposed is fair for customers and that customers have been properly informed about it. In a statement after the Amigo hearing (see below) the FCA said:

We have significant concerns about Schemes of Arrangement being used by firms to unfairly avoid paying customers redress.

ICL’s Scheme – the main payout has been made

Instant Cash Loans (the Money Shop) proposed a Scheme to limit payouts to affordability complaints in 2019:

• ICL had already ceased trading and would be dissolved whether or not the Scheme was approved;
• when ICL proposed the Scheme, it said customers would get about 80% of their assessed compensation. Pigs might fly, I commented.
• later the projection dropped to 14p in the pound, then 10p;
• all ICL previous customers were emailed in August 2019 and asked to vote on the scheme;
• the Scheme came into effect in October 2019 then six months were allowed for all customers to submit complaints;
• the main payout has been made in May and June 2021. A second much smaller amount was paid in  January 2022 bringing the total payout to just under 5%.

Comment – the ICL Scheme did not raise issues about competition or customer fairness as the company was going into liquidation. It was a technical device that increased the amount customers would receive from what they would get in administration.

Amigo’s proposed Scheme – rejected by the court

In December 2020 Amigo proposed a Scheme to cap affordability refunds to customers:

• Amigo’s Practice Statement Letter.
• The Convening hearing on 30 March 2021 approved the voting arrangements for the Scheme. Customers voted in favor of the Scheme by about 95%
• The week before the Sanctioning hearing on 19 May, the FCA informed Amigo it would appear in court to oppose the Scheme
• On 24 May the court accepted the FCA’s arguments and rejected the Scheme.
• Amigo has now put forward a Second Scheme. See Amigo proposes a new Scheme – but is it fairer? for a summary of it.

See Amigo’s  Schemes for all articles looking at these Scheme.

Provident’s Scheme – now approved

See Provident’s Scheme for all articles looking at this Scheme.

In March 2021 Provident proposed a Scheme to cap affordability refunds to Provident home credit and Satsuma payday loan customers:

• Provident’s Practice Statement Letter.
• The Convening hearing on 22 April 2021 approved the voting arrangements for the Scheme. Customers voted in favour of the Scheme by about 98%.
• The FCA said on 13 July that it did not support the Scheme which was not consistent with its objectives, but as Provident was closing the business it did not intend to appear in court to object.
• The Sanctioning Hearing was held on 30 June. The decision was given on 4 August – Scheme was approved. The judge sounded irritated by the lack of clarity from the FCA.

The Scheme is now underway. See Provident Scheme – 4 million people can now claim a refund for a practical guide to the Scheme. The time to make a claim has now ended and the first few decisions are being made.