09Jun

The High Court has rejected the scheme of arrangement proposed by a large guarantor lender. This comes despite the firm’s creditors voting to approve the scheme, under which they would have received much less for their complaints claims than would have been the case under normal circumstances – they might have received as little as 10p per £1.

Judge Mr Justice Miles said that he had been convinced by the Financial Conduct Authority’s argument that the creditors who voted lacked the expertise to accurately judge the merits of the various options available to the firm.

He added that the firm should re-structure its business instead of adopting the scheme of arrangement strategy and noted that the firm’s share price had risen by 250% since the scheme was first mooted. The share price immediately fell by 51% following the announcement of his ruling though.

The FCA had also argued that the firm’s shareholders and bondholders should be asked to provide additional support.

The lender had warned that it could be forced into administration or liquidation were the scheme to be rejected, so it has to be said that the future remains uncertain for the firm.

The firm says it may appeal against the ruling. Gary Jennison, chief executive, said: “[name of firm] is incredibly disappointed that the scheme has not been approved despite the 74,877 customers who voted in favour of the Scheme, representing over 95% of those who voted. We are currently reviewing all our options and will provide an update at the earliest opportunity.”

The FCA said in response:

“The FCA has, through its continued engagement with [name of firm] and participation in the Court hearing, sought to get a better, fairer deal for [name of firm]’s customers due redress. We believe that a fairer compromise could have been offered to customers but was not.

“The FCA considered it necessary in this case to share with the Court its view that the Scheme as proposed was inherently unfair, as it placed a disproportionate burden on customers, as opposed to shareholders and bondholders, to keep the company afloat.

“The FCA believes that [name of firm] can propose a fairer Scheme to customers. It should also ensure that its customers are fairly represented and advised on alternative proposals for a scheme.

“FCA regulated firms must maintain adequate financial resources which includes taking account of the need to pay redress liabilities. We have significant concerns about Schemes of Arrangement being used by firms to unfairly avoid paying customers redress.

“Firms should be regularly assessing the adequacy of their financial resources and report to us immediately if they assess they are or will be in financial difficulty.

“This is an important judgment and any firm considering a scheme of arrangement should take it into consideration.

“We believe that a fair compromise can still be proposed to customers. Under the proposed Scheme, redress creditors would have had their claims significantly reduced and rights restricted, whilst shareholders and bondholders were not contributing what the FCA considers to be their fair share to enable the firm to remain solvent.”

This ruling may have implications for a doorstep lender which is pursuing a similar scheme of arrangement.