Amigo Holdings is teetering on the brink of collapse after a judge refused to approve its customer compensation scheme.
The lender, which hands loans to customers with a poor credit score if they have a friend or family member willing to repay the debt if they cannot, had warned it would go bust ‘in short order’ if its plan did not get the green light.
But the Financial Conduct Authority cast doubt on Amigo’s claims in a last-minute intervention before last week’s hearing at the High Court – and in a judgment published yesterday, Mr Justice Miles sided with the watchdog.
On the brink: Amigo hands loans to customers with a poor credit score if they have a friend or family member willing to repay the debt if they cannot
Amigo shares crashed 55 per cent, or 10.31p, to 8.32p. Doorstep lender Provident Financial, which is trying to put together a similar compensation scheme of its own, also fell more than 6 per cent.
Reacting to the court ruling, the FCA said: ‘This is an important judgment and any firm considering a scheme of arrangement should take it into consideration.’
Gary Jennison, Amigo’s chief executive, said he was ‘incredibly disappointed’ with the judge’s decision. He added: ‘We are currently reviewing all our options and will provide an update at the earliest opportunity.’
Amigo is creaking under a pile of compensation claims from its customers after rules around affordability checks were changed last year.
Close to 1m borrowers and guarantors, encouraged by claims management companies, tried to claim redress from the lender, saying that they should never have been handed Amigo’s high-cost loans.
Estimating that it could be forced to pay out up to £151million in compensation, Amigo realised that it did not have the money.
So it set up a scheme which would see all customers get a part of the redress they were due – but this could be as little as 10p for every £1 they were owed.
Amigo urged customers to approve the plan, warning them it would go bust if it was forced to pay all redress in full. If it did collapse, the firm cautioned, most borrowers would get nothing.
The scheme was put to the vote, and 95 per cent of Amigo customers who took part gave it the thumbs-up.
But they only constituted 8.7 per cent of the borrowers who could have voted, as the rest did not make their feelings known.
But the FCA said the scheme was unfair, and Amigo’s shareholders should put some money in and share the burden of the compensation scheme.
Jennison said this was unlikely – Amigo has just two major institutional shareholders and the rest of its stock is held by around 8,000 individual investors.
Many were enticed into buying stock by the presence of Amigo’s founder and former boss James Benamor, who frequently interacted with shareholders on Twitter.
But he sold down his entire 61 per cent stake last year after his attempted comeback failed.
Despite the lack of deep-pocketed shareholders, the FCA said in court documents that the ‘allocation of burden and benefit’ between Amigo investors and customers was ‘unfair’ and ‘disproportionate’.
While borrowers would get just 10 per cent of their redress, shareholders would still be left with their entire holding. It said customers may have simply agreed to the compensation scheme because they didn’t think they had another option.
In his judgment, Mr Justice Miles agreed with the FCA and urged Amigo to come back with a better offer.
He said: ‘The court’s refusal to sanction the scheme will probably not lead to the imminent insolvency of the group.
‘There is no evidence of any immediate (or even medium-term) liquidity crunch, and the directors will doubtless wish, if possible, to preserve the value of the enterprise for its various stakeholders.
‘The FCA expects the directors to continue to explore and promote a restructuring which fairly allocates the benefits and losses among the various stakeholders.’