Directions for FundingSecure Limited – Part 1

This was a directions hearing concerning the matter of the so-called Peer-to-peer lending company FundingSecure Limited (in administration). FundingSecure acted as an agent in the facilitation of loans between borrowers and often many hundreds of retail investors. In October 2019 the company entered entered administration leaving some £80m to 3,500 investors outstanding.

Background
Mr Mark Cawson QC, appearing on behalf of the company, explained to the court that when the administrators were appointed, they “found a state of confusion” at the company with regards to the state of the paperwork. He explained how the administrators dealt with the issue of whether loan recoveries should be treated as funds held on trust by way of an agreement with the charge holders.

The background to the trust monies issue and its resolution can be found in part 5 of the Administrators progress report dated 30th May 2020

5% Issue
Mr Cawson QC then came to the main issue in dispute – the ability of the company to deduct a 5% fee on loan recoveries. He explained that the administrators have adopted a neutral position on the matter and hence have asked the court for directions.

Mr Sam Cheesbrough, representing the three investor respondents, told the court that their position was there was no basis to charge the 5% fee. They relied on, among other things, statements made by the company that the fee would be not be deducted before investors received their full return.

In response Mr Cawson QC said he had not seen the respondent’s evidence and until then it would not be possible to formulate the issues. He explained a clause in his draft order had been written deliberately vague to allow for the respondent’s arguments to be placed before the court.

Disclosure Request
Mr Cheesbrough submitted a request for disclosure of the loan book records in order that the respondents could determine which loans had been subject to the 5% fee. The suggestion that if none had been pre-appointment of administrators this caused a so-called ‘Estoppel by convention’ preventing the fee from being charged.

In response Mr Cawson QC told the court that in order for his client to review some 3000 loans for the required information, given the state of the records, could take some 1000-1500 hours. “At whatever hourly rate you charge this will cost some several hundreds of thousands of pounds”.

Opposing such an order for disclosure at this stage Mr Cawson QC described it as “premature and unusual for disclosure before evidence”.

Mr Andrew Shaw explained that as his client, the 4th respondent and ex-director Raj Kumar, was a charge holder of the company he had an interest in keeping costs down and spending £100k’s on a “fishing expedition” would not be appropriate.

Responding to a request for disclosure of creditors committee meeting records Mr Cawson QC told the court that its content may be confidential and as one of the respondents was on the creditors committee the information would be known already.

A suggestion was made by Mr Cheesbrough that a sample of the loan book could be made. Mr Cawson QC responded by saying any such search of the loan book needed to be “fairly robust” with Mr Shaw adding he wasn’t clear how such a sample could work. “If there’s 3000 loans how will 50 be any good?”.

The judge told the court he is not persuaded to make an order for disclosure at this stage.

Application to “hold the ring” and preserve 5%
Mr Cheesbrough told the court that in December 2019 an agreement was reached for the costs of the administration to be paid from a 2.5%(+VAT) fee on loan recoveries. In early 2020 he explained that it was realised there was “insufficient money” to fund the administration and the company then “tried to construct the contract” in such a way to justify the additional 5% fee.

It was also alleged that in July 2020 the company changed the way it was charging the fee by applying it to the whole loan rather than just the amount recovered.

Mr Cheesbrough submitted that the administrators should be prevented from disbursing the amounts claimed under the 5% fee as “substantial sums of money” were being removed to fund the administration and if the respondents were successful the company wouldn’t be able to pay them back.

Mr Cawson QC replied that if such an application were successful that the administration would have to be paused as there would not be enough money for the administrators to continue their work. He explained that RSM had retained Fundingsecure employees who were currently working on recovering loans for investors and this activity would have to be halted.

The judge explained that it seemed the respondents were seeking an injunction, and this would have to be done by separate application to the court, with what was described as a “cross-undertaking for damages”.

Next Steps
The parties have 28 days to file evidence and 28 days to respond. A provisional hearing date of Nov 20th 2020 will have to be vacated to a date next year. Costs in the case.

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In the High Court of Justice
Business and Property Courts in Manchester
Before His Honour Judge Halliwell
Sitting as a Judge of the High Court

Sitting remotely
At the Manchester Civil Justice Centre, 1 Bridge Street West, Manchester
On Friday 16 October 2020

Insolvency and Companies (ChD)
10:30 CR-2019-MAN-001065 Fundingsecure Limited Appl 2 hours (Teams)