What happens to creditors if a company is out of Wonga?
Digital innovators using cutting-edge mobile technology to let potential customers easily apply and test their own credit worthiness directly from their smartphones?
The short-term loan company that would let people fill the gap between now and payday and pay it back over installment periods of their choice up to £1000 over 31 days?
Or the predatory lending company that used its digital nous to deliberately target the most desperate and indenture them into an amount of debt that they couldn’t possibly hope to pay off, so sinking even deeper into debt?
All of these definitions are true to an extent and despite going into administration in 2018, Wonga are back in the news.
At its height in 2013, the company had over a million customers but it quickly became a high-profile scapegoat for the entire payday loans industry.
The company introduced a new management team in 2014 and wrote off £220m of outstanding debt after admitting that they had approved loans to people they knew could not afford to repay them.
More problematically, due to the nature of high-cost, short-term credit, firms such as Wonga were not covered by the Financial Services Compensation Scheme (FSCS) which financially support investors and customers with accounts in banks and building societies which fail.
Administrators are finally coming close to paying out a dividend to nearly 360,000 customers who were mis-sold loans that they couldn’t pay back, amongst other unsecured creditors. The final figure is £23m which sounds like a lot until you realise that it amounts to 4.3p in the £1.
The administrator said: “As has been explained throughout the course of the administration, the final dividend payment is significantly smaller than accepted claim values, owing to the fact that the total value of all accepted claims significantly exceeded the money available to be shared out.”
What this means in practice is that a customer who was owed £1,200 will only receive £48 and one who is due £7,010 will get £302.
One of the key jobs of an insolvency practitioner is to defend the interests of creditors by raising as much as possible from the sale of assets from a distressed company to repay them.
Their hands are tied a little when it comes to the order that creditors are repaid in. Creditors are divided into different classes depending on their relationship with the company. Some will get a higher priority over others when it comes to the distribution of funds.
The assets are usually distributed in the following order:
- Secured creditors – certain companies, usually banks, leasing companies or other lenders, that hold a fixed charge over a business asset. This gives them a legal right over these assets and gives them first place in the queue when it comes to repaying debts.
- Liquidation process fees & expenses – The liquidator will be reimbursed for their services and the cost of the procedure will be met from the sale of assets. They have to be paid before other creditors otherwise they’d run the real risk of doing their job for either a heavily discounted rate or for free!
- Preferred creditors – This class of creditors includes company employees who can claim for their unpaid wages and accrued holiday pay. From April 6th 2020, HMRC moves back into this class where they were previously classed as unsecured creditors. The change is controversial at best.
- Floating charge holders – Similar to secured creditors but their hold is over assets that can change in value such as stocks, fixtures and fittings or any assets that aren’t subject to fixed charges.
- Unsecured creditors – This class are lenders or individuals that have lent money or have any other claims on the distressed company’s assets including customers who’ve paid for goods and services and not received them.
- Shareholders – The final class are company shareholders who will share whatever remains from the proceeds of any sales – usually nothing.
The story of Wonga is one of those cautionary tales where nobody gets what they wanted or deserved.
The key is to act quickly if things aren’t working out and if your business is not where it needs to be then get in touch with us.
One of our expert advisors will arrange a convenient, free initial consultation where you can outline what your situation is and what you would like it to be.
We can then work out an efficient and effective plan to get you there or help you work towards more achievable and realistic goals if necessary.
What we won’t do is yes to everything if it won’t work. Wonga ended up where it did because nobody said no when they should have.