In the matter of Morses Club Scheme Limited

The court sanctioned a scheme of arrangement under Part 26 of the Companies Act 2006 to compromise specified consumer redress claims and related Financial Ombudsman Service fee liabilities. Key legal principles applied were the statutory requirements for sanction under s.899 and the established fourfold inquiry (compliance with statutory requirements; fair representation and bona fide voting; whether an intelligent and honest person might reasonably approve the scheme; and any blot or defect), derived from authorities including Re Telewest and KCA Deutag. The court accepted that SchemeCo’s assumption of liabilities by Deed Poll raised no jurisdictional objection, that a single class was properly constituted (with administration as the appropriate comparator), and that the claims methodology and notification materials were adequate. Having regard to funding arrangements, FCA engagement and the voting outcomes, the court concluded there was sufficient commercial certainty to permit sanction.

Background and parties. Morses Club Limited is a regulated home-collected credit business with a large number of customers. SchemeCo, a wholly owned subsidiary incorporated to implement the proposal, sought court sanction of a scheme of arrangement under Part 26 Companies Act 2006 to compromise certain redress claims arising from alleged failings in affordability and sustainability checks and related FOS fee liabilities.

Nature of application. The application was for court sanction of the Scheme under s.899 of the Companies Act 2006 following convening hearings and a creditors’ meeting. The principal relief sought was the court’s approval of the compromise and release mechanism, claims determination and distribution process and the funding arrangements to create a compensation fund.

Procedural history. The convening application came before Leech J on 7 March 2023 and was adjourned for further work after concerns raised by the Financial Conduct Authority, which included the certainty of funding, the claims methodology and class composition. Revisions were made and a further convening process followed. A scheme meeting was held on 18 May 2023, with votes in favour representing 97.7% by number and 97.4% by value of those present and voting. The sanction hearing was before Mr Justice Trower on 26 May 2023.

Issues framed by the court. The court applied the fourfold sanction inquiry: (i) compliance with statutory requirements (s.899); (ii) whether the class was fairly represented and whether the majority acted bona fide; (iii) whether the proposal is one that an intelligent and honest person might reasonably approve; and (iv) whether there was any blot or defect (including uncertainty of funding or other matters that would make the court reluctant to act).

Court’s reasoning. The court concluded that statutory requirements had been met and the single class had been properly constituted, accepting Leech J’s prior rulings on jurisdiction and class composition. The court accepted administration as the appropriate comparator and considered turnout and voting levels materially relevant. It found the claims methodology and adjudication process to be capable of fair application and gave weight to the FCA’s scrutiny and eventual position that it did not intend to oppose sanction. The court assessed the funding package (shareholder funding of at least £15 million, a further £5 million from cash flows and a turnover-triggered realisation) and found a reasonable prospect that conditions for funding would be achieved. On balance the Scheme offered a substantially better prospect of recovery for Scheme creditors (estimated c.20p in the pound) than likely administration outcomes, and there was no identifiable blot or defect sufficient to refuse sanction.

Wider context. The judgment records the active role of the FCA, the customer committee and a customer advocate, and emphasises the court’s cautious approach to consumer schemes while recognising that well-supported creditor votes and regulator scrutiny are important considerations.

The court sanctioned the scheme of arrangement. The judge held that the statutory requirements under s.899 Companies Act 2006 had been satisfied, the single class was properly constituted and fairly represented, the claims methodology and notification materials were adequate, the funding arrangements had a reasonable prospect of success, and there was no blot or defect warranting refusal of sanction.

Convening application under s.896 was heard by Leech J on 7 March 2023 and adjourned for refinements after FCA concerns; Leech J determined jurisdiction and class composition points at the convening stage (referring to Re Lecta Paper [2020] EWHC 382 (Ch) and Re Provident SPV Ltd [2021] EWHC 1341 (Ch)). A scheme meeting was directed and held on 18 May 2023. Sanction hearing before Mr Justice Trower on 26 May 2023 resulted in sanction of the Scheme.