The proposed scheme of arrangement (the "Scheme") was sanctioned and thus allowed to proceed by Mr Justice Richards ("Richards J"), despite objections from dissenting creditors (the "Opposing Creditors") at both the stage of the initial court hearing (convening) and the second (sanction) stage. The Link Case provides a helpful reminder of the interaction between the Financial Ombudsman Service (the "FOS"), the Financial Services Compensation Scheme (the "FSCS") and the question of whether or not a company admits liability for either or both of operational or regulatory failings. The judgment also underlines how important it is for any company proposing to compromise claims against it through the use of a Companies Act 2006 scheme of arrangement to engage early with creditors, the Financial Conduct Authority (the "FCA") the FSCS and other key stakeholders.

Background

On 3 June 2017 (the "Suspension Date"), the LF Woodford Equity Income Fund (the "WEIF") was suspended due to a deteriorating liquidity profile. That in turn had followed a period of fund underperformance, during which many investors had sought to exit from the fund. As a result of the suspension, investors who remained in the WEIF ("Suspension Date Investors") were unable to redeem their investments.

As authorised corporate director of the WEIF, Link Funds Solutions Limited ("LFSL") was subject to an investigation by the FCA. The FCA found that (i) LFSL was in breach of certain regulatory obligations; (ii) investors who had exited the WEIF prior to the Suspension Date benefited disproportionately and (iii) Suspension Date Investors had in consequence been treated unfairly.

Following its investigation, the FCA ordered LFSL to pay a restitution sum of £298 million (the "FCA Total Amount"). Certain Suspension Date Investors also issued civil claims against LFSL. On 19 April 2023, LFSL entered into a conditional settlement agreement with the FCA, in consequence of which LFSL agreed to propose the Scheme. The Scheme established a settlement fund of up to £230 million to settle liabilities to Scheme Creditors (the "Settlement Fund"), the purpose of which was  to settle LFSL's liabilities to Suspension Date Investors.  £46.5 million (the "Reserve Amount") was set aside from the Settlement Fund to meet liabilities that were not released under the Scheme.   The effect of the Scheme's provisions was that a total sum of between £183.5 million and £230 million would be made available for distribution to creditors under the Scheme ("Scheme Creditors"). In return, the FCA agreed that its final notices would require LFSL to pay to Suspension Date Investors the FCA Total Amount to or the amount available under the Scheme. The FCA also agreed not to seek an additional penalty of £50 million.

Proposed Scheme

Under the Scheme (which will take effect at 09:00 am on 5 March 2024), LFSL agreed to make the Settlement Fund available to Scheme Creditors in proportion to the number of shares held by each Scheme Creditor. In return, Scheme Creditors agreed to release all claims against LFSL and its affiliates. Scheme Creditors were also required to enter into a Third Party Contribution Deed. That deed restricted Scheme Creditors' rights to retain payments of any amounts they recovered through proceedings that they took against a party other than LFSL in respect of the WEIF. The reduction would apply if and to the extent that LFSL would in consequence of the creditor's actions against the third party itself end up reimbursing the third party in respect of the claim against LFSL. Another result of the compromise set out in the Scheme would be Scheme Creditors' losing the ability to seek redress from LFSL through the FOS. Scheme Creditors lost in addition the right to bring claims against LFSL to the FSCS. Each of these matters is addressed further below.

The FOS and FSCS

The Opposing Creditors' objections to the Scheme focused on the apparent removal of their ability to seek redress through both FOS and the FSCS.

The FOS was created under section 225 of the Financial Services and Markets Act 2000 ("FSMA") to enable the resolution of disputes between financial services firms and retail investors. Retail investors can complain to FOS following a final response by a firm against whom it has brought a complaint. FOS can then order the firm to pay a monetary award to the retail investor if a complaint is successful.

The FSCS is a compensation scheme of last resort. It protects retail investors by offering them payments of up to £85,000 in the event of a financial service institution defaulting on an obligation to pay a "protected claim" against it.

The Opposing Creditors' primary argument was that it was illegal for a scheme of arrangement to strip Scheme Creditors of their statutory rights to complain to the FOS and to recover compensation from the FSCS. Richards J was "quite unable to accept this submission" on the basis that there was no free-standing right to complain to the FOS or to make a claim to the FSCS. Each of these regimes required the company to which it was to apply first to have incurred a "liability" before they could operate.

LFSL, however, strenuously denied any liability for the losses facing Suspension Date Investors. In any event, Richards J found that statutory claims "do not benefit from any special protection which precluded them from being [released by a scheme of arrangement]". The language of section 859 of the Companies Act 2006 was sufficiently broad to allow a scheme to cover statutory rights in connection with the compromised liabilities.

The Opposing Creditors' second argument was that no intelligent and honest person, appropriately informed, could vote in favour of the Scheme given their consequent inability, if the Scheme went ahead, to complain to the FOS and FSCS. Richards J was unconvinced by this claim, noting the "obvious difficulty" with the fact that the majority of Scheme Creditors who voted at the scheme meeting voted in favour of the Scheme.

Richards J held that the Scheme "offered a straightforward choice between an immediate receipt of cash on the one hand and the prospect, albeit uncertain, of obtaining more by rejecting the Scheme and continuing to pursue claims." Richards J also noted that "there was a degree of unreality" about the Opposing Creditors' submissions based on the FOS given they "sought to portray the rights of retail investors to notify a complaint to FOS as some kind of voucher that would result in a money award compensating them for all losses". Richards J found that there was "nothing obviously irrational" about a Scheme Creditor opting to accept the payment of a certain amount sooner rather than choose to accept the possibility of receiving payment of an uncertain amount at an indeterminate future date.

Engagement with the FCA

The Link Case is distinguishable from a number of the preceding consumer redress schemes on account of the strong co-operation from the outset between LFSL and the FCA. Unlike in ALL Scheme Limited, Re [2021] EWHC 1401 (Ch) (the "Amigo Case"), in which the FCA actively opposed the proposed Scheme, in the Link Case, the FCA positively supported it. When considering whether information about the Scheme was communicated adequately, Richards J was "reinforced in [his] conclusion [that it was] by the fact that the FCA […] [had] reached the same conclusion", that is, that "the explanatory statement set out sufficient information to enable the a Scheme Creditor to exercise a reasonable judgement on whether the Scheme [was] in his or her interest or not".

The FCA was involved with the Scheme from its inception. Indeed, the Scheme formed part of the proposed settlement between the FCA and LFSL. The FCA continued to cooperate with LFSL throughout the scheme process, including by publishing notices on its website about the Scheme and contacting investment platforms to instruct them to share information with Scheme Creditors. Given the FCA's role in protecting consumers, it is unsurprising that early and continued engagement between a company proposing a redress scheme and the FCA will make a successful outcome more likely.

Engagement with Investors

Another key feature of the Scheme process was the engagement between LFSL and the investor community, both through an independent investor committee (the "Investors' Committee") and my appointment as an independent investor advocate (the "Investor Advocate"). The Investors' Committee and Investor Advocate combination has been used successfully in a number of Scheme cases such as the Amigo Case referred to above.

The Investors' Committee was made up of 9 investors, both retail and institutional, and it was consulted on the terms of the Scheme. The Investors' Committee was given the opportunity to ask questions of the FCA, LFSL and its parent. As a result of these discussions, the Reserve Amount under the Scheme was reduced, thus increasing the size of the Settlement Fund. The chair of the Investors' Committee was responsible for preparing a report for the court at the convening hearing. He was also tasked with chairing the scheme meeting and preparing a report for the court on the voting process, which was presented at the sanction hearing.

The purpose of my appointment as Investor Advocate was to address general questions and concerns in relation to the proposed Scheme and to report both to the Court and LFSL on the adequacy of the way in which the proposed Scheme was presented and the way in which investor concerns were addressed. The Investor Advocate provided a single point of contact for Scheme Creditors and was able to provide feedback to LFSL on how information about the Scheme could be made more "user friendly".  Given the number of Scheme Creditors in this case (approximately 250,000), the presence of the Investor Advocate provided a helpful mechanism for ensuring that Scheme Creditors were (and remained) engaged throughout the process.

Conclusion

While much ink has been spilt on restructuring plans in recent weeks following the Re AGPS Bondco plc [2024] EWCA Civ 24, judgement, the Link Case provides a useful reminder of the flexibility and broad ranging powers of schemes of arrangement. While it does not create or test any novel points of law, the Link Case demonstrates that where there is sufficient engagement with creditors, the Court will be slow to interfere with creditors' wishes. It further demonstrates the importance of constructive engagement with all stakeholders from an early stage. Frontloading the engagement process by ensuring that the views of regulators and creditors are heard is crucial to minimising opposition further down the line.