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amigo loans

In company voluntary arrangements and voluntary liquidations, they have a vote on the proposals at hand so depending on their exposure, can genuinely have an influence on the outcome.

But occasionally, their interests can be overridden by other factors and circumstances. 

That happened this week in the case of Amigo, the guarantor loan company that as recently as 2018 had floated on the London stock exchange with a valuation of £1.3 billion. 

The business lent money to borrowers at interest rates of 49.9% APR with a named guarantor who would ensure repayments were made or that they would have to make the payments themselves. 

While very profitable, the company also received a lot of complaints about mis-selling and was ultimately forced to repay compensation to thousands of claimants who successfully argued that they should not have been sold unaffordable products. 

Amigo decided that to best draw a line under the matter, they would pursue a scheme of arrangement to settle the claims and repay creditors at a reduced level. 


What is a scheme of arrangement?


Under the proposal the company would have set aside up to £35 million in cash for refunds along with a proportion of its profit for the next four years. 

The Financial Conduct Authority objected and brought the case to court on behalf of the claimants. They argued that the proposal would short change customers and want a fairer solution to be enacted. 

They said: “We are now carefully examining the court’s judgement and the Amigo’s response.”

“We had significant concerns about schemes of arrangement being used by firms to unfairly avoid paying customer redress. This is an important judgement in that respect and any firm considering a scheme of arrangement should take it into consideration.”

The judge, Mr Justice Miles, said he accepted the view of the FCA that borrowers had not been given the necessary information 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.” 

He also agreed with the FCA that, despite protestations to the contrary, the business valued at approximately £44 million, was not in any imminent danger of collapse and urged both sides to come to a fairer compromise deal.  

He said: “It seems to me improbable, given the evidence of surplus value, that the directors of an FCA-regulated listed group would simply force the group into insolvency without carefully assessing further, revised, restructuring proposals.”

Gary Jennison, Chief Executive of Amigo, said he was incredibly disappointed and this was shared with analysts who noted that 95% of Amigo creditors who voted for the scheme had supported it.

Amigo shares fell after the judgement as did shares in Provident who are also planning a similar scheme of arrangement to compensate claimants of their scheme.  

Provident have a creditors vote scheduled for July 19th with a High Court hearing on July 30th which will rule on the scheme and whether their proposed £50 million fund is adequate. 

Like Amigo, they have stated that if their proposal is blocked then their consumer credit division might have to go into administration or liquidation as a result. 


If your business owes money to creditors and you’re worried that they will have the whip hand when the suspension on winding up petitions and other creditor actions ends on June 30th - get in touch with us

We offer directors and business owners a free, initial consultation where we can get a better understanding of your situation. 

Once we do, we can advise you on your best options to either restructure and rescue your business or other ways you can satisfy your creditors without having to take an expensive gamble that might not pay off. 

two paths
The three most important additions introduced were:-
 

 
We’ve talked about the insolvency moratorium at length elsewhere but it’s a positive development that can only help companies by giving them breathing space to restructure their businesses while legally protected from creditor actions. 
 
Ipso Facto clauses used to allow suppliers to terminate contracts for goods and services if the company underwent an insolvency event but this orders them to keep the supply going which will give the company a better chance of trading their way back to profitability. 
 
The restructuring plan procedure, which some learned writers are referring to as the “super-scheme”, should be better known than it already is because it’s going to have a big impact in 2021 and beyond.
 
It gives professional insolvency practitioners additional tools to help protect businesses looking to restructure but with one important new power modelled on the American style “Chapter 11” bankruptcy process.
 
Whilst an insolvency practitioner does not take an active appointment on the matter, assistance from such professionals, like those at business rescue expert, is key in having these arrangements approved.
 
It runs parallel to the existing Scheme of Arrangement process, where a court can oversee corporate restructuring efforts without the business having to enter insolvency or be sold as a result. 
 
Whilst, like a CVA, 75% of creditors in value are required to approve the restructuring plan, if the threshold is not met, dissenting creditors can be legally bound to accept the restructuring plan by the court if it’s found to be fair and equitable to do so. The downside to this however, due to the costs of going to court, is the process is significantly more expensive to implement than a CVA.
 
If it can be proven that none of the creditors would be any worse off if the plan didn’t go ahead and that the plan is indeed realistic. By worse off, this is often compared to the alternative, which is often the outcome in liquidation or administration, meaning there is a wide discretion for the plan to be approved, but again the involvement of an insolvency practitioner is likely to be needed to make such a certification.
 
The CIGA Restructuring Plan Application Process
 
A CIGA restructuring plan can be applied for with or without the use of the new insolvency moratorium
 
The plan will generally take time to fully implement so the moratorium can provide the necessary breathing space to allow the restructuring plan to be considered. 
 
Because court hearings are required as well as a creditors meeting, the plan could easily take two to three months to implement, compared to the average of four to six weeks that a CVA would take.
 
How it works
 

 
Crown Preference = CIGA > CVA ?
 
There's another important calculation that businesses considering restructuring need to take into account - the return of Crown Preference.
 
We’ve previously written about how HMRC’s newly restored priority in the hierarchy of creditors will cause unintended effects throughout the economy. 
 
Practically this means that some companies that would previously have been looking at a CVA to restructure their business and readjust course will now have to enter administration or even liquidation in order to satisfy this new aggressive creditor at the expense of others who might have been prepared to back a CVA and would see little return, if any from an insolvency.
 
As a result of the return of crown preference, HMRC will mop up the first dividends issued under a CVA. With HMRC as an unsecured creditor, all creditors may stand to receive 60p/£ from the arrangement, where with the return of crown preference, HMRC may receive 100p/£, with the remaining unsecured creditors only then receiving 10p/£ after HMRC have been paid in full.
 
Where this may be too much for creditors to accept under a CVA, if it is realistically the best outcome, the alternative being liquidation, the CIGA restructuring plan would still bind creditors to accept the arrangement, even if they oppose it en-mass.
 
The good news is that you’ve got a professional friend in your corner at exactly the time you need them. 
 
Business Rescue Expert provides a free initial consultation for any business to discuss what problems they’re facing right now and how they fix them in the short, medium and long term. 
 
Get in touch with us to arrange one and we can outline all the options available to make sure that no matter how rough 2020 was, you can begin 2021 with hope.

As mentioned above, a scheme of arrangement can be used for companies in financial trouble, allowing them to reach an agreement with their creditors and shareholders regarding payment of all, or part of their debts. A scheme of arrangement may be used for rescheduling and restructuring debt, for takeovers or even returns of capital. The relevant provisions and scheme of arrangement timetable can be found under Part 26 and 27 of the Companies Act 2006.
Scheme of arrangement

Scheme of arrangement timetable

If a scheme of arrangement is deemed an option for your company, you will need to begin creditors negotiations. It’s important the company directors are completely transparent and honest about the financial difficulties the business is facing, along with the reasons and the company history.
The court will call a ‘Class Hearing’ - essentially a creditors meeting to establish the class of creditors. For instance, the creditor classes include fixed charge, floating charge, unsecured creditors etc. To ensure the scheme is legally binding, the creditors must agree to the scheme in their classes. They will hold a creditors meeting to vote, with a majority of 75% in favour required for the arrangement to take effect. More information regarding creditor classes can be found here.
The creditors will be made aware of the first creditors meeting when receiving an Explanatory Statement, outlining the proposal and the reasons for doing so. If the required number agrees to the scheme, the court will then hold a ‘Sanction/Fairness Hearing’ to ensure all parties are represented. The scheme will then become effective once a court order has been sent to the Registrar of Companies, with the creditors required to submit a proof of debt form within the first three months.

Can a scheme of arrangement be refused?

It’s possible that during the scheme of arrangement timetable, the court can refuse the proposal if deemed unfair for creditors. One notable example of refusal is if the creditors are not classified correctly. Therefore, you must ensure your proposal is clearly outlined, and all information is correct. Further to this, while there is no automatic moratorium unless applied, this procedure can be used as an exit from administration.

Who can benefit from the scheme?

As mentioned earlier, this scheme is not part of insolvency legislation, therefore avoiding the publicity involved in such procedures. Other examples of benefits include:

What are the advantages of the scheme?

A scheme of arrangement can be used as a way to exit the administration procedure, thus allowing a business to avoid any consequences of entering insolvency. This scheme is most notable for flexibility and selectivity, allowing a company to continue to trade in their market. Similarly, once agreed, the arrangement is legally binding. Therefore, creditors cannot threaten or harass you with further action.
The arrangement also avoids the negative publicity and loss of goodwill compared to an insolvency procedure, meaning suppliers and consumers will still support your business. For directors, it’s also important to note that there is no report on the arrangement under the Company Director Disqualification Act 1986.
Another major advantage to the procedure is that the costs are significantly less than that of administration, liquidation etc. in terms of monetary value and reputation.

Are there any disadvantages?

Like many other procedures for companies facing financial difficulties, there are certain considerations to look over before submitting a proposal. For instance, unlike administration, there is no moratorium period for a company. The vote threshold for the scheme of arrangement is also high, and requires 75% of creditors to be onboard. If they do agree, you must still go to court and risk the court refusing the arrangement. Due to large involvement from the court, the costs of proposing a scheme of arrangement are much higher than than of a Company Voluntary Arrangement.

Seek advice

Before considering the scheme, we suggest seeking immediate, professional advice. You must be sure the arrangement is most suitable for your company, and you have a profitable future to ensure your creditors do benefit. Likewise, all information regarding your creditors must be present and correct. Our business rescue experts can discuss your business and provide initial free, confidential advice as to your next move.

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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