Consumers who are mis-sold loans are entitled to full redress – but what if the lender becomes insolvent? The High Court addressed that difficult issue in the case of a lender who was on the receiving end of a deluge of customer complaints and in danger of running out of cash to meet its liabilities.
The lender was in the business of providing guarantor loans to consumers. Its clients were typically those who, because of their credit histories, were unable to borrow from mainstream lenders. Repayment of loans was guaranteed by others, usually the borrower’s family or friends, who had stronger credit profiles. Over a period of about 17 years, the lender advanced more than 900,000 such loans and, although it was not currently writing new business, it still had over 80,000 borrowers on its books.
Significant numbers of the lender’s clients had lodged mis-selling claims against it or made complaints to the Financial Ombudsman Service (FOS). The scale of the issue was indicated by the fact that the lender had made provision in respect of redress claims of £347.5 million. The FOS claimed to be owed about £12.5 million in fees by the lender and there was an ongoing investigation into the mis-selling claims by the Financial Conduct Authority that might result in a substantial fine.
As at the end of 2021, the lender’s total liabilities were estimated at £597 million, as against estimated assets of £473 million. Its net liabilities were about £123 million and it was balance sheet insolvent. An application was therefore made to the Court to direct a meeting of creditors, the vast majority of whom were the lender’s former or current customers or loan guarantors.
Ruling on the matter, the Court noted that, if the lender did not recommence trading, there was evidence that it would, in the relatively near future, run out of cash to pay its current liabilities in full. It was clearly inappropriate for the lender to make full payment to current creditors in preference to others who had yet to establish their claims.
Two proposed schemes had been put forward that, it was hoped, would achieve a better outcome for creditors than if the lender went into administration. The first option involved the lender resuming trading and the second a winding down of its business. The first option, which was preferred by the lender, was projected to result in creditors recovering up to 41 pence in the pound. In the event of administration, it was estimated that they would receive only 31 pence in the pound.
Opening the way for the proposed meeting to be convened, the Court noted that all creditors had been given adequate notice of the event and that a solicitor had been appointed as a customer advocate to represent their interests. All creditors were in essentially similar positions and there was no necessity to break them down into particular classes.
The Court noted that the essential question to be addressed by creditors at the meeting was whether to allow the lender to resume trading, with the prospect of a somewhat enhanced and speedier return, or whether to accept a reduced and delayed return arising from formal administration or a controlled winding down of the lender’s business. Creditors would have a full opportunity to express their views at the meeting and the fairness of any scheme agreed upon would be reviewed by the Court before it could come into effect.