He Two Amigos Become One Amigo – Insolvency/Bankruptcy

Co-authored by Tony Cunningham, Trainee Solictior

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.

Footnote

1. Re ALL Scheme Limited [2022] EWHC 1318
(Ch)

Originally published 07 July 2022

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