Re All Scheme Ltd

The court was asked, under section 899 of the Companies Act 2006, to sanction a scheme of arrangement between All Scheme Limited (incorporated to promote the scheme) and certain creditors (principally customers with redress claims and the Financial Ombudsman Service). The judge applied leading authorities on scheme sanction hearings, including the requirement that creditors be properly consulted and provided with sufficient information so that an "intelligent and honest" member of the class could reasonably approve the scheme. The court found that the explanatory materials and the convening process did not fairly and fully inform a largely unsophisticated class of consumer creditors about realistic alternatives to the scheme, in particular the prospect of further restructuring options and the rationale for shareholders retaining equity while creditors faced a significant haircut. Because the principal constituency lacked financial sophistication, had no independent advice, there was no creditor steering committee, and turnout was under 9% by number, the court could not place reliance on the meeting result. The sanction was refused on the basis that the statutory safeguards had not been satisfied and the creditors had not been properly consulted.

This was a first instance sanction hearing under Part 26 of the Companies Act 2006. The applicant company, All Scheme Limited, promoted a scheme to determine and compromise the redress claims of borrowers and guarantors (and to address sums payable to the Financial Ombudsman Service) arising from lending by Amigo group entities. The Scheme proposed an initial cash contribution, a capped balance adjustment contribution and a "Future Business Contribution" equal to 15% of consolidated pre-tax profits for four years; in return Scheme Creditors would release claims and receive a pro rata distribution from an earmarked scheme fund. The convening hearing had approved a single creditors' class and a creditors' meeting was held; the meeting voted overwhelmingly in favour by number and value among those who participated, but turnout was about 8.7% of the estimated potential class by number.

Nature of the application: sanction of a scheme of arrangement under section 899 Companies Act 2006.

Parties and posture: the Company (proposing the Scheme) sought sanction; the Financial Conduct Authority opposed. The convening hearing had been held and the creditors' meeting had approved the Scheme by the statutory majority of those present and voting.

Issues framed by the court:

• whether statutory requirements and court practice directions were complied with;
• whether the creditors' meeting fairly represented the class and whether voting majorities had acted bona fide;
• whether the explanatory statement and other disclosures gave the consumer creditor constituency sufficient information to make an informed decision, including realistic alternatives to the Scheme;
• whether the Scheme was such that an "intelligent and honest" member of the class might reasonably approve it.

Court's reasoning and conclusions:

• The court reviewed authorities emphasising that part 26 schemes impose a "formidable compulsion" on dissenting creditors and that the court must ensure proper consultation and adequate disclosure.
• The court found several salient features adverse to reliance on the creditors' vote: the creditor constituency comprised largely financially vulnerable and unsophisticated consumers; there was no creditors' steering committee and no negotiated compromise with creditors; most creditors lacked independent legal or financial advice; turnout was modest (c.8.7% by number though high in absolute terms); and the explanatory statement presented an overly binary picture (scheme or immediate insolvency) without adequately explaining other realistic alternatives, including further restructuring or the possibility of creditors obtaining an equity stake.
• The court was not satisfied on the evidence that the alternative to the Scheme was imminent administration. Cash position evidence and an informal moratorium agreed with the FCA meant the directors likely had time to consider alternative restructurings. The explanatory statement failed to explain why shareholders would retain equity and why the Future Business Contribution was fixed at the level proposed; there was insufficient financial analysis to allow creditors to assess whether the allocation of losses and benefits was fair.
• Because the Scheme creditors were not properly consulted and informed, the court could not place reliance on the affirmative vote and therefore refused to sanction the Scheme.

The court refused to sanction the scheme. Mr Justice Miles concluded that, having regard to the statutory safeguards and authorities governing scheme sanction hearings, the explanatory statement and supporting material did not adequately or fairly inform a largely unsophisticated class of consumer Scheme Creditors of realistic alternatives or the rationale for the allocation of losses between creditors and shareholders; accordingly the court could not place reliance on the creditors' meeting result and the Scheme could not be sanctioned.