Wonga: The Death of a Payday Lender?
Rumours are circulating that Wonga, the UK’s leading payday lender, is heading for insolvency, with Sky News reporting it could enter a pre-pack administration within days.
The firm itself, has stated it is still considering all options.
Wonga’s rise and fall
Once the UK’s leading payday lender, Wonga in 2007 revolutionised how short-term loans were provided, with customers being able to apply online for short-term loans that were often paid into banks accounts within 15 minutes of being applied for.
However, the firm quickly courted controversy over their interest rates and practice of giving additional loans when borrowers couldn’t repay their initial loans: a practice often compared to those of illegal loan sharks. This then led to accusations of people being provided with unaffordable loans.
The firm then faced complaints of unfair debt collection practices after it sent out fake law firm letters demanding payment of debts. In 2014 this led to an order by the Financial Conduct Authority for the firm to pay £2.6 million in compensation to 45,000 customers.
So, what does this mean for Wonga customers?
So, what does this mean if you owe Wonga money or are one of the thousands who have claimed compensation from them?
Well, unfortunately, if you owe them money and are still repaying a loan, then you will still owe them money and will still have to repay it, even if they enter insolvency.
If you think Wonga owe you money, because they provided you with an unaffordable loan, then you can still make a claim, but whether you will ever see any compensation will depend on what happens to Wonga once it enters insolvency.
What is a Pre-pack Administration?
A pre-pack administration is a type of corporate insolvency that is provided for ailing companies struggling with their debts. In the case of Wonga, this is believed to be money that is owed to tens of thousands of customers who have claimed compensation from them. Once a company enters administration, it is protected from those that it owes money to and a licenced insolvency practitioner is appointed to administer the firm’s affairs.
The idea is the administrator then uses that time to review the business to see if it can be saved and if he thinks it can, to use the time to re-organise the business, and if he feels it would help, begin to sell off some of the company’s assets to repay its debts.
If the administrator feels the firm cannot be saved, he may then put it into liquidation, which is effectively bankruptcy for companies.
Pre-pack administrations are different in that before the administrator is appointed the firm sells off some of its assets to help pay back its secured lenders and then leaves the remaining money in the business for the administrator to pay off the remaining debts.
In the case of Wonga, as Sky news has suggested, this is what is being considered, which is likely to mean all or some of its current loans will be sold off. So, anyone who currently owes money to Wonga, will still owe them money, but if it is not repaid by the time any sale takes place, may receive a letter stating it has been sold onto another company.
In terms of historical claims against Wonga for making loans that resulted in people suffering financial hardship, these still exist and are believed to be the primary reason Wonga is now considering entering an insolvency procedure.
If Wonga enters administration, the Administrator appointed by Wonga, will have to deal with these and make compensation claims where that is possible.
The problem is it is believed tens of thousands of these claims exist and people can still make new claims (see here). If the Administrator decides there are too many and there is not enough money to pay them, he may decide that Wonga cannot be saved and put the business into liquidation, which effectively means death for Wonga.
He would then realise what remaining money is available from the sale of the firm’s assets, pay off any remaining secured creditors and sums due to employees and then treat all the unpaid claims as ordinary creditors.
In such a scenario, those waiting for compensation would then likely be offered a per centage of their outstanding claim.
Is it still worth claiming?
It is still worth claiming if you felt one of Wonga’s loans made your situation worse and you couldn’t afford to repay it.
No-one knows what the eventual outcome of any administration will be. Even if Wonga eventually enters liquidation, no-one knows how much funds will be available to the Liquidator to settle claims. So even if people don’t get all their money back, they may still get some compensation.
Even once Wonga enter insolvency, claims can still be made, but once the Administrator is appointed all claims must be made to him, rather than Wonga. Updates should be provided on Wonga’s website, if that happens, showing how a claim can be made.
If you are struggling with debts owed to Wonga or other payday lenders, you can get free advice by contacting a Creditfix adviser on 0808 2085 198.