Court rejects Amigo compensation cap scheme

Amigo Loans had hoped to cap the amount of compensation claimants were entitled to in a bid to reduce the financial pressure on the lender.

The Financial Conduct Authority (FCA) welcomed the High Court ruling, having changed their stance following the initial court hearing in March.

Amigo had previously said they may be forced to go into administration if the scheme was rejected and are currently considering their options.

Credit: Africa Studio/Shutterstock.com

Rejected scheme

Amigo's proposed Scheme of Arrangement had jumped several hurdles already, with the courts allowing them to put the proposal to customers and customers overwhelmingly voting in favour of it.

Yet that positive vote masks the poor turnout figures: while 95% of voters agreed to the Scheme, only 8.7% of customers actually voted on the proposal.

Given that most creditors would have lacked the advice needed to vote effectively, the judge therefore concluded he could not rely on the vote as conclusive proof the scheme was wanted.

So, while the judge was sympathetic to the reasons behind Amigo's proposal, he said creditors were unable to assess the alternatives or understand why shareholders were to be allowed to retain their stake while customers were expected to give up the bulk of their compensation claim.

FCA intervention

Also key to the judgement was the intervention by the FCA who had previously abstained from getting involved with the court proceedings.

However, they wrote to Amigo in early May highlighting that creditors had not been provided with a fair compromise and so it intended to oppose the Scheme in court.

Some of their key arguments included:

• Capping compensation claims was being used to recapitalise the company and benefit shareholders, even though they would rank behind creditors if Amigo did go into administration
• The share price of the Amigo had tripled since the announcement of the Scheme, suggesting shareholders were set to gain
• Customers were given a binary choice between the Scheme or administration, ignoring other options available to Amigo
• Customers were unlikely to be familiar with Schemes and unable to afford professional advice

The FCA also argued that Amigo's claims they would go into immediate administration if the Scheme was not approved was overstated because the company is in a strong position to restructure and negotiate a fairer scheme for creditors.

While Amigo were frustrated by the FCA's about-turn, their arguments ultimately did little to sway the judge from his opinion.

What happens next?

Amigo gave a brief update after the judgement, saying they are currently considering their options including a potential appeal.

Their insistence they would need to enter administration if the Scheme was rejected hasn't yet come to fruition, although they could be exhausting other options first.

Yet many Amigo compensation claimants are still in limbo since the Financial Ombudsman Service (FOS) paused their work in relation to Amigo in March and have said they are also considering what the judgement means for claimants.

The judgement may also have a wider impact on the sector, as Amigo's success would have signalled to other beleaguered lenders that they could potentially cap compensation claims and move on from the mis-selling saga.

Provident Financial announced in March that they were following Amigo in trying to cap compensation at around 10% for claimants.

Although Provident Financial has since announced their doorstep lending business will close, that doesn't impact the process of their Scheme. The first stage was approved by the court in late March and customers now have until mid-July to vote on it.

Now the FCA has staged an intervention on Amigo's proposals, it may just be a matter of time until they do the same on Provident's plans too.