Oral and Written Submissions made on Day 1 in the Matter of Lendy Ltd at the High Court in Birmingham.
The background to this week-long-hearing here: “Lendy Directions Hearing begins“
Read the submissions made on Day 2 here: “Lendy Directions Hearing Day 2“
Read the submissions made on Day 3 here: “Lendy Directions Hearing Day 3“
Read the submissions made on Day 4 here: “Lendy Directions Hearing Day 4”
And handed down some six weeks after the trial: Read the Judgment
The Transcript
Introduction
Mr Andrea Gledhill QC, the barrister representing the respondents, read out a section from the Witness Statement of one of the Joint Administrators – Mr Damian Webb. We were told that the statement reportedly said that on 9/10 April 2019 the FCA conducted what was described as a “short notice audit” on the firm and 50 payments of £50,000 to Mr Brooke had been discovered.
The court was told that the witness statement also said that Liam Brooke had made payments of £5k for a French Ski trip and £9k towards “luxury Hotels” on his company Amex credit card.
It was said that Lendy were under FCA restrictions at the time of the audit and the firm was placed into administration some 6-weeks later.
One of the Joint Administrators, Mr Damian Webb, told the court in his written evidence that:
“Lendy was subject to serious mismanagement for a long period of time. The operations of Lendy were chaotic at the best of times, and investors’ funds were not properly protected or managed. Indeed, it is surprising that Lendy managed to survive for as long as it did.”
Issues 1 & 2:
Issue 1: Do the Model 1 Investors (in their capacity as such) have any claim other than an unsecured provable claim against Lendy?
Issue 2: Do the proceeds of security of a Model 1 Loan form part of Lendy’s general estate?
The Applicants Position
(From their Skeleton Argument)
28. It is common ground that:
28.1. the answer to Issue 1 is “no”. The Model 1 Investors only have unsecured provable claims against Lendy.
28.2. the answer to Issue 2 is “yes”. The proceeds of security of a Model 1 Loan form part of Lendy’s general estate.
29. Although the answers to Issues 1 and 2 are agreed, the Court is nevertheless asked to give directions on these points. This is because the answers to Issues 1 and 2 will inform the answers to Issue 3: see below.
30. For the reasons set out below, the Court is asked to declare that:
30.1. the Model 1 Investors only have unsecured provable claims against Lendy; and
30.2. the proceeds of security of a Model 1 Loan form part of Lendy’s general estate.
31. The Applicants have carefully considered whether it would be possible for them to argue that the Model 1 Investors have any other claims, including proprietary claims, against any assets realised by Lendy in connection with the Model 1 Loans. The Applicants have not been able to identify any argument of this type which has a real prospect of success.
32. The Model 1 Terms do not create a trust in favour of the Model 1 Investors and do not create any security interest in favour of the Model 1 Investors. In particular:
32.1. As noted in paragraph 6.1 above, the term “Model 1 Loan” refers to a loan made by Lendy (as Lender) to the Borrower under a Model 1 Loan Agreement. This is conceptually distinct from the loans made by the Model 1 Investors to Lendy under the Model 1 Terms.
32.2. The sample Model 1 Loan in Trial Bundle C is secured by the Model 1 Debenture, which was granted in favour of Lendy (as Lender) by the Borrower. The Model 1 Investors are not parties to the Model 1 Debenture and do not have any rights under the Model 1 Debenture. In particular, the proceeds of security received by the Lender (or, which is not relevant to the Applications, a Receiver or a Delegate) must be applied in accordance with the “waterfall” set out in Clause 20.1 of the Debenture. No reference is made in this clause to the sums owing by Lendy to the Model 1 Investors.
33. It is conceptually possible that Lendy could have created a charge over its security interest under the Model 1 Debenture to secure the sums that Lendy owed to the Model 1 Investors. (In technical terms, such a charge would more properly be regarded as having constituted a “sub-mortgage”.) However:
33.1. The Model 1 Terms do not purport to create any charge or sub-mortgage in favour of the Model 1 Investors.
33.2. In any event, any charge or sub-mortgage purportedly created by Lendy in favour of the Model 1 Investors would be void for non-registration under section 859H of the Companies Act 2006.
33.3. A charge or sub-mortgage would also have been void under section 53(1)(a) of the Law of Property Act 1925, given that the key secured assets consist of real property and the Model 1 Terms were not signed by Lendy or any agent thereof15.
34. It is also conceptually possible that Lendy could have declared a trust over its own mortgage of the Borrower’s property in favour of the Model 1 Investors. However:
34.1. The Model 1 Terms do not purport to create a trust over Lendy’s own mortgage of the Borrower’s property in favour of the Model 1 Investors.
34.2. In any event, any purported trust would have been unenforceable under section 53(1)(b) of the Law of Property Act 1925, given that the key secured assets consist of real property and the Model 1 Terms were not signed by Lendy.
34.3. Moreover, any purported “trust” would properly be characterised as a charge or sub-mortgage (since any such so-called “trust” could only be designed to secure the payment of sums owing by Lendy to the Model 1 Investors and would necessarily preserve the Borrower’s equity of redemption). For the reasons given above, a charge or sub-mortgage would be void for non-registration under section 859H of the Companies Act 2006.
35. It should be noted that Clause 5.2 of the Model 1 Terms identifies a procedure for selling the secured assets at auction. Following a sale at auction, the net proceeds “shall be used to settle amounts due” (Clause 5.2.4) to Lendy and the Model 1 Investors in the following order:
“1. principal amount of loan which was funded by, and is repayable to the
Investors (allocated in proportion to the loan amounts funded);
2. fees due to Lendy in accordance with Lendy Ltd’s Terms and Conditions;
3. interest due to the Investors (allocated in proportion to the loan amounts funded); and
4. the balance (if any) will be returned to the Borrower to their Nominated Account.”
36. The Applicants have considered whether it is possible to construct an appropriate argument based on Clause 5.2 that the Model 1 Investors have a proprietary interest in the secured assets. They have concluded that no such argument can properly be constructed. This is for the following reasons:
36.1. No assets were in fact sold at auction under Clause 5.2 of the Model 1 Terms. As a result, Clause 5.2 is not relevant.
36.2. In any event, Clause 5.2 does not purport to give the Model 1 Investors a proprietary interest in the secured assets. It imposes a personal obligation on Lendy to make payments in a particular sequence.
36.3. Even if (contrary to the above) Clause 5.2 could be construed as giving the Model 1 Investors a proprietary interest in the proceeds of sale of the secured assets, this proprietary interest would properly fall to be characterised as a charge or sub-mortgage (since it could only be designed to secure the payment of sums owing by Lendy to the Model 1 Investors, and it expressly preserves the Borrower’s equity of redemption). For the reasons set out above, such a charge or sub-mortgage would be void for non-registration under section 859H of the Companies Act 2006 and void for non-compliance with the formalities under section 53(1)(a) of the Law of Property Act 1925: see paragraphs 33 to 34 above.
37. Accordingly, the Applicants have not been able to identify any proper basis for arguing that the Model 1 Investors have a proprietary interest in any assets realised by Lendy in connection with the Model 1 Loans.
The Respondents Position
(From their Skeleton Argument)
It is understood that the Respondents didn’t make written submissions as these issues were not disputed.
Issues 3:
Issue 3: As regards its contractual liability to Model 1 Investors pursuant to the Model 1 Terms, is Lendy liable to each Model 1 Investor only to the extent that Lendy is repaid by a borrower under, or makes recoveries in respect of, the relevant Model 1 Loan which that Model 1 Investor has funded?
The Applicants Position
(From their Skeleton Argument)
38. Ms Taylor argues that the answer to Issue 3 is “yes” (subject to the exceptions in Clauses 5.2.5 and 5.3). She contends that Model 1 structure involves a “limited recourse” arrangement (whereby Lendy’s liability is contractually limited to the amount that it recovers on the relevant Model 1 Loan).
39. The position of the Applicants is that the answer to Issue 3 is “no”. More particularly:
39.1. The Model 1 Investors are entitled to lodge a proof of debt in Lendy’s administration for the entire amount that they advanced to Lendy.
39.2. The quantum of the proof is not “capped” by reference to the amount recovered by Lendy in respect of the relevant Model 1 Loan.
39.3. This result follows from the fact that even if Ms Taylor is right that the Model 1 structure involves a limited recourse arrangement outside of insolvency, it does not follow that the proofs of debt lodged by the Model 1 Investors in an insolvency process (Lendy’s administration) are capped in the same way. In the context of insolvency proceedings, a creditor under a limited recourse loan is entitled to prove for the full amount advanced.
40. The interaction between limited recourse arrangements and insolvency was dealt with by David Richards J (as he then was) in Re ARM Asset Backed Securities SA [2014] BCC 252:
40.1. A winding-up petition was presented against the issuer of a series of bonds.
40.2. The bonds included a limited recourse provision which capped the issuer’s liability at the amount recovered from certain sources.
40.3. Despite the limited recourse structure, David Richards J concluded that the company was insolvent. Of particular relevance to Issue 3, the Judge also stated that the bondholders would be entitled to lodge proofs of debt for the entire face value of their bonds. At [28]-[33], he explained:
“… although it is clear that there are insufficient funds to service in full the bonds issued by the company, and it is likely that there will be insufficient funds to repay the bonds in full, the terms of the bonds provide for only a limited recourse by bond holders. That is to say that they are entitled to recover sums due to them only to the extent that the company has available to it funds derived from the policies purchased in the United States and possibly other funds raised from the issue of bonds.
The bonds also provide, consistently with that, that the bond holders cannot take steps to attach assets of the company and cannot themselves apply for a winding-up order of the company or other insolvency related orders.
There raises the question as to whether a company is insolvent. Although it has insufficient funds to meet all its liabilities at their face value, its ultimate liability will be restricted to the funds available to it.
As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds.
It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds.
I therefore conclude that the company can properly be said to be unable to pay its debts, both on a cash-flow basis and on a balance-sheet basis.” (emphasis added)
41. The reasoning of David Richards J is correct. If unsecured creditors within a limited recourse lending structure were (as Ms Taylor seeks to contend) unable to prove for the full
amount of their debt, the result would be unfair because the claim of those creditors would be discounted twice over. This can be illustrated by the present case:
41.1. The Model 1 Investors have unsecured claims against Lendy. They do not have any proprietary interest in the security held by Lendy for a Model 1 Loan. It follows that the proceeds realised by Lendy from security held in connection with a Model 1 Loan form part of Lendy’s general estate, such that the Model 1 Investors will share with all Lendy’s other unsecured creditors in a pari passu distribution of those proceeds: see Issues 1 and 2 above.
41.2. In those circumstances, it would be wrong if the Model 1 Investors were only entitled to lodge a proof of debt for a limited amount (i.e. limited to the sum recovered by Lendy in respect of the Model 1 Loan). The Model 1 Investors would then face a “double detriment” in that they would be forced to compete with other unsecured creditors for the recoveries in respect of the relevant Model 1 Loan, and the quantum of their provable claims would also be limited to the value of those recoveries. They would therefore be placed in a worse position than all other unsecured creditors and would be discounted twice in relation to the same debt.
41.3. This is no doubt why David Richards J concluded that, even if a creditor is subject to a limited recourse clause outside insolvency, the creditor is nevertheless entitled to lodge a proof of debt for the entire face value of the claim in the debtor’s insolvency proceedings.
42. The fallacy that underlies Ms Taylor’s argument is therefore the assumption that a limited recourse structure operates in the same way both outside of insolvency and within insolvency. It may be that, outside the context of insolvency, the Model 1 Investors would not be able to sue Lendy for a shortfall on a Model 1 Loan following the enforcement of security: see below. However, the position is different in insolvency proceedings because they involve a rateable distribution of the debtor’s assets (i.e. the creditor is already limited in its recovery by virtue of the limited extent of the pot). The distribution regime would produce unfair results if the claims of some creditors were capped by reference to the value of the assets realised. All creditors must be allowed to compete on an equal footing, and this means that they must be able to lodge claims for the full amount of the debt. More particularly:
42.1. A rateable distribution requires a numerator and a denominator.
42.2. The numerator represents the total value of the estate; the denominator represents the total claims against the estate. In other words, the total value of the estate is divided by the total value of the claims.
42.3. When calculating the denominator, claims should not be capped by reference to the value of assets which count towards the numerator.
42.4. This would be contrary to the purpose of a limited recourse structure. A limited recourse structure is designed to ensure that, outside of an insolvency, the creditor will recover what the debtor recovers from a particular source. In an insolvency, by contrast, the creditor cannot recover what the debtor recovers from a particular source, since the debtor’s assets are distributed rateably to other competing creditors. In that context, the rationale for imposing a cap on the proof disappears. By capping the proof, the relevant creditor would end up with a rateable distribution that is far less valuable than the assets to which the creditor would have had recourse outside of insolvency proceedings.
43. It is unnecessary for the Court to determine whether, outside of an insolvency, the Model 1 Investors would have been able to sue Lendy for the shortfall on a Model 1 Loan following the enforcement of security, or whether there was some form of contractual limited recourse structure. Whatever the answer to that question, it does not affect the quantum of the proofs that can be lodged by the Model 1 Investors in Lendy’s administration.
44. It is noted, however, that Lendy itself represented to the Investors that they would have been able to sue Lendy for the shortfall on a Model 1 Loan following the enforcement of security. This was included in the explanation of the reasons for the change from the Model 1 structure to the Model 2 structure [E/179/885], which stated that under Model 1 “Lendy Ltd was responsible for covering all repayments and shortfalls as it was both the borrower and the lender” and that under Model 2 “Lendy Ltd no longer have any direct responsibility for covering any shortfalls”. This suggests that no limited recourse structure was in fact intended, even outside the context of insolvency.
45. Ms Taylor advances a number of points in her position paper. Taking them in turn:
45.1. Ms Taylor contends that “the whole point of the Lendy platform was to enable Model 1 Investors to match their funds to specific loans (see generally Webb 2 §110-§126), and it was to those loans, and the relevant security, and not Lendy, that they looked for repayment”. However, Ms Taylor accepts that the Model 1 Investors did not have any proprietary interest in the security held by Lendy. As a result, even if the Model 1 Investors viewed the security held by Lendy as the most likely source from which they would be repaid, they did not in fact have exclusive recourse to that security in the event of Lendy’s insolvency (in which the proceeds of the security would be available to Lendy’s unsecured creditors as a whole). This undermines such a rationale for capping the value of any Model 1 proofs in Lendy’s administration.
45.2. Ms Taylor relies on Clause 4.6 of the Model 1 Terms, which provides for an Investor’s loan to Lendy to “remain in place until the borrower repays the loan”. However, these words cannot bear the weight that Ms Taylor seeks to place on them. Clause 4.6 does not address what would happen where the security produces a shortfall on the Model 1 Loan. Moreover, Clause 4.6 needs to be viewed in context. Its true purpose is to inform Investors that the funds invested will be locked up for the duration of the loan. This can be seen by looking at Clauses 4.5 and 4.6 in context:
“5. By funding a loan, you are agreeing to enter into a Loan Agreement with Lendy. Once you have Invested in a loan, the funds cannot be removed for the duration of that loan.
6. The loan will remain in place until the borrower repays the loan, upon which time the funds plus interest earned will be made available to you for withdrawal or reinvestment.”
In any event, even if Clause 4.6 creates a limited recourse structure, it does not impose any cap on Model 1 claims in Lendy’s administration (for the reasons explained above).
45.3. Ms Taylor rightly points to certain provisions which support some form of limited recourse structure. These provisions include Clause 5.2.5 (“In the event that the asset turns out to be stolen or fake, Lendy will reimburse all invested funds to investors”23) and Clause 5.3 (“If the Asset is not sold at auction, Lendy will settle the Borrower’s loan, at the reserve price”). However, these provisions address the limited recourse nature of the structure, they do not provide any support for the proposition that Model 1 proofs must be capped in Lendy’s administration.
Ms Taylor relies on the fact that Lendy created a fund to provide compensation (at Lendy’s sole discretion) for Model 1 Investors who suffered losses on their loans (the “Lendy Provision Fund”). However, the Lendy Provision Fund was essentially intended to provide a commercial source from which funds could be released, at the discretion of Lendy, and from which any shortfall could be repaid (without granting a formal security interest to Investors) and is neutral between a limited recourse structure and a full recourse structure. Further:
45.3.1. The Lendy Provision Fund was only created in January 2015. That being so, as Ms Taylor acknowledges, the existence of the Lendy Provision Fund is not relevant to construing the Model 1 Terms in relation to persons who had already invested prior to January 2015.
45.3.2. In addition (and more importantly), the Lendy Provision Fund does not provide any support for the proposition that Model 1 proofs must be capped in Lendy’s administration. As explained above, the latter issue is a separate issue from the question whether Lendy benefited from a contractual limited recourse structure outside of insolvency proceedings.
46. The Court is therefore requested to direct as follows:
“As regards its contractual liability to Model 1 Investors pursuant to the Model 1 Terms, Lendy is not liable to each Model 1 Investor only to the extent that Lendy is repaid by a borrower under, or makes recoveries in respect of, the relevant Model 1 Loan which that Model 1 Investor has funded.”
The Respondents Position
(From their Skeleton Argument)
6. Issue 3 is the first of two short issues concerned with the rights of Model 1 Lenders:
6.1 Under Model 1, investors lent monies to Lendy to on-lend, as principal, to the underlying borrowers. No-one suggests Model 1 lenders have any proprietary claims against the Lendy estate, and when they originally issued this application, the Administrators did not seek any separate directions as to their (the Model 1 Lenders’) position.
6.2 At the second CMC on 23 October 2020, however, an issue arose as to whether Lendy was only obliged to repay Model 1 loans if and to the extent it (Lendy) was itself repaid by the underlying borrowers, and the court concluded that point was at least arguable. In subsequent correspondence, Ms. Taylor agreed to carry the argument in support of that position in default of anyone else being willing to do so, and her agreement on that point was embodied in §5 of the order at the 21 December 2020 CMC.
7. The starting point for this topic is the uncontroversial proposition that “although a borrower is in the ordinary way personally liable to repay a loan, whatever security he may give for it, it is perfectly possible to have a contract of loan in which the borrower is under no personal liability” (Chitty on Contracts (33rd ed.) vol. 1 §39-263). As Professor Goode notes in Consumer Credit Law and Practice (loose-leaf) §11.73: “whilst an obligation to repay is an essential characteristic of a loan, the manner in which the obligation is to be discharged may be restricted. In particular, it is not necessary that the borrower should incur a personal obligation to repay out of his own monies. It suffices that payment is to be made from a designated fund or from the proceeds of a specified asset. So an undertaking by B to repay an advance with such money (if any) as has come into his hands from T makes B a borrower despite the fact that his repayment liability is limited to the sums received from T”.
8. Whether a loan agreement gives rise to a non-recourse repayment obligation of this type is referable to its terms, construed in accordance with the familiar principles summarised in Arnold v. Britton [2015] A.C. 1619 (H.L.), and Wood v. Capita Insurance Services Limited [2017] A.C. 1173 (S.C.). The relevant agreement here is the Model 1 Terms, and Ms. Taylor submits that it unequivocally bears out the construction suggested at the October 2020 CMC. Putting the point at its simplest:
8.1 Model 1 Terms clause 4.5 stated that “by funding a loan, you are agreeing to enter into a Loan Agreement with Lendy”. But clause 4.6 provided that “the loan will remain in place until the borrower repays the loan, upon which time the funds plus interest earned will be made available to you for withdrawal or reinvestment”.
8.2 Those underlined words controlled whether Lendy was obliged to action a request for a “withdrawal or reinvestment” at all, and if so, when, and to what extent. Thus, if a given borrower only ever repaid 20% of the principal in respect of his loan, Lendy was under no obligation to participating Model 1 Lenders in respect of the 80% balance. To the extent the borrower failed to repay it, there was nothing left of his original investment for the relevant Model 1 Lender either to “withdraw” or “reinvest”, within the meaning of clause 4.6.
9. That analysis is powerfully corroborated by the provisions of the Model 1 Terms more generally, furthermore:
9.1 The whole tenor of the Model 1 Terms (and indeed, Lendy’s promotional literature more generally) was that investors were investing in pre-existing loans already written by Lendy. See:
9.1.1 The recital at the top of the first page (“opportunities are made available … for investors to invest in loans made to borrowers”).
9.1.2 Clause 1.2 on the same page (“Lendy permits investment … into existing asset backed secure loans already in place”).
9.2 Reflecting that fact, the Lendy platform contained key information about each open loan which was relevant to investors’ decisions whether or not to invest in it: “the Loan Amount, the Security Value of the Asset, the Loan To Value Ratio (LTV) … a redacted valuation report where available, and a short description of the Borrower’s requirements” (clause 4.3).
9.3 All of this would have been (at best) superfluous and (at worst) misleading if Lendy had itself been liable to repay the full amount subscribed by the relevant Model 1 investors upon borrower default. The whole point of providing such information was to enable investors to assess for themselves the credit risk they were running, by investing in any given peer-to-peer loan.
9.4 For precisely that reason, while Lendy guaranteed “the enforceability of all its existing Loan Agreements” (see clause 4.4), it expressly disclaimed responsibility for the price the security given for them might fetch if auctioned following default (see clause 5.3 at the top of), and provided for Lendy to be separately liable in only the following two limited cases:
9.4.1 “In the event that the asset [i.e. the asset subject to Lendy’s security: see clause 17.2] turns out to be stolen or fake, Lendy will reimburse all invested funds to Investors” (clause 5.4.5).
9.4.2 “If the Asset is not sold at auction, Lendy will settle the Borrower’s loan at the reserve price, and legal title to the Asset will pass to Lendy … ” (see the immediately following clause numbered (3)).
9.5 Those provisions are flatly inconsistent with reading the Model 1 Terms as having created some more general obligation on the part of Lendy to permit investors to withdraw or reinvest monies the underlying borrower failed to repay, and the court will note that they were buttressed by restrictive limitations on Lendy’s liability in section 12 of the Model 1 Terms which are similarly inconsistent: see e.g. clause 12.3 (“Our liability to you on any basis whatsoever shall not exceed the total amount of revenue earned by Lendy in respect of transactions entered into by you through Lendy … ”).
Issue 4
Issue 4: If the answer to the question in issue 3 is ‘yes’, should the Model 1 Investors’ contractual claims be valued in an amount equal to the gross proceeds received by Lendy for the relevant Model 1 Loan or the net proceeds of that Model 1 Loan (taking into account the costs of realisation)?
The Applicants Position
(From their Skeleton Argument)
47. If the Administrators are right on Issue 3 (and the answer to that issue is “no”), this issue does not arise.
48. If the Administrators are not right on Issue 3 (and the answer to that issue is “yes”), the following points are noted:
48.1. Outside of insolvency proceedings, Lendy was entitled to deduct a 5% administration fee from the proceeds of an asset sold at auction: see Clause 5.2.4 of the Model 1 Terms. No assets have been sold at auction pursuant to Clause 5.2, Ms Taylor correctly asserts that Lendy was not entitled to make any other deductions from the proceeds of the security.
48.2. Within insolvency proceedings, the Applicants would not be entitled to deduct any costs from the proofs of debt lodged by Model 1 Investors. Under the statutory scheme in administration, creditors’ proofs fall to be admitted for the full value of the relevant claim, and the costs of the administration are paid out of the estate in priority to all such provable claims (and not deducted from them separately).
48.3. As a result, it follows that if any direction is required on this issue, it should be that the Model 1 Investors’ contractual claims should be valued in an amount equal to the gross proceeds received by Lendy for the relevant Model 1 Loan.
The Model 2 Structure
- Key Features Of The Model 2 Structure
49. The remaining issues in the Applications relate to the Model 2 Investors. Before turning to consider these issues, it is necessary to explain the key features of the Model 2 structure.
50. Model 2 was used by Lendy for loans originated in October 2015 onwards. Model 2 was introduced to replace Model 1.
51. The contractual documentation for each Model 2 Loan is slightly different, but each set of documentation shares a number of common features. It has been agreed between the parties that the issues in these proceedings will be determined by reference to the contractual documentation in Trial Bundle C. The Model 2 documents in Trial Bundle C comprise:
51.1. a loan agreement (the “Model 2 Loan”) and an accompanying term sheet specifying the commercial terms of the loan (the “Term Sheet”);
51.2. the terms and conditions between Lendy and the Borrower (the “Borrower Conditions”);
51.3. a suite of security documents granted by the Borrower in favour of SSSHL as security trustee, including a debenture (the “Model 2 Debenture”) and two forms of legal charge;
51.4. a personal guarantee granted by a shareholder of the Borrower or some other person connected with the Borrower such as a director or affiliate (the “Model 2 Guarantee”); and
51.5. the terms and conditions between Lendy and the Model 2 Investors (the “Model 2 Terms”). There were many different versions of the Model 2 Terms, but the differences between them are minor. For the purposes of these proceedings, the parties have agreed to focus on the Model 2 Terms that were in force from 1 February 2016 until 4 March 2018 (the “Original Model 2 Terms”) and the Model 2 Terms that were in force from 4 March 2018 onwards (the “Amended Model 2 Terms”).
52. For present purposes, the key documents are the Model 2 Terms (both Original and Amended), the Model 2 Loan and the Model 2 Debenture.
- Lendy’s Role As Agent
53. The major difference between Model 1 and Model 2 is that Lendy acted as agent on behalf of the Model 2 Investors (rather than as principal). Model 2 Investors made loans to the relevant Borrower directly and Lendy signed the loan documents as agent of the Investors. The security was held by SSSHL as trustee for, inter alios, the Model 2 Investors: see Issue 10 below.
54. Lendy’s agency is illustrated by a number of contractual provisions:
54.1. The Model 2 Loan is expressed to be made between the Borrower and Lendy “as agent for the Lenders”. Lendy is referred to as “the Agent” throughout the Loan Agreement.
54.2. Recital (C) of the Model 2 Loan states: “The Agent is entering into this agreement as the agent of the Lenders”.
54.3. Clause 1.2 of the Borrower Conditions provides that “Saving Stream is authorised by the lenders to enter into the Loan Contract as agent for the lenders”.
54.4. More generally, the provisions of the Model 2 Loan are intended on their face to be binding on the Model 2 Investors. The Model 2 Investors did not execute the Model 2 Loan themselves, but rather it was intended that the Model 2 Investors would be parties to the Model 2 Loan by virtue of Lendy’s execution of it on their behalf.
55. Importantly, Lendy was given express contractual authority by the Model 2 Investors to enter into the Loan Agreement on their behalf. This is clear from the Model 2 Terms, which include the following provisions (which are materially the same in the Original and Amended Model 2 Terms):
55.1. Clause 8.1 states: “when you lend money on the platform you … appoint Saving Stream to act as agent on your behalf in relation to the loan and instruct Saving Stream to sign the Loan Contract as agent on your behalf”.
55.2. Clause 7.8 states that “a Loan Contract is between the lender and the borrower. Saving Stream and/or Saving Stream Security Holding has no liability in relation to the Loan Contract”.
56. The “Lenders” under the Model 2 Loan are not Lendy, but are the Model 2 Investors. They are not identified by name, but are instead referred to by description (“the persons who have agreed with the Agent from time to time to provide all or part of the Loan to the Borrower and whose names and addresses are maintained by the Agent”). However, this does not prevent the Model 2 Investors from being parties to the Model 2 Loan. There is no legal requirement for a principal to be identified by name (or indeed at all). See Bowstead & Reynolds on Agency 22nd edition) at Article 71:
“A disclosed principal, whether identified or unidentified, may sue or be sued on any contract made on his behalf by his agent acting within the scope of his actual authority or whose acts are validly ratified.”
57. Accordingly, the Model 2 Investors and Model 2 Transferees (who stand in the shoes of the Model 2 Investors) are bound by the terms of the Model 2 Loan as parties thereto. This conclusion reflects the express terms of the Model 2 Loan, which creates a contractual relationship between the Model 2 Investors and the Borrowers. For example, the obligation to lend under Clause 2 of the Model 2 Loan is described as an obligation of the Model 2 Investors (and not of Lendy):
“The Lenders agrees [sic] to lend to the Borrower the aggregate amount of the Loan on the terms of the Loan Agreement and in the proportions that they have agreed with the Agent.”
- Lendy’s role as principal
58. Lendy’s role in relation to the Model 2 Loans was not merely an agent of the Model 2 Investors. Some provisions of the Model 2 Loan treat Lendy as a principal acting on its own behalf. For example:
58.1. The representations and warranties in Clause 9 are given “to the Lenders and the Agent”, as are the undertakings in Clause 10. This suggests that the Borrower owes obligations both to the Model 2 Investors and also to Lendy in its own right.
58.2. Clause 11 states that “the obligations of the Borrower to the Lenders and the Agent under this agreement shall be secured by the Security Documents”. Again, the language of this clause suggests that the Borrower owes obligations to the Model 2 Investors and to Lendy in its own right.
58.3. As to the payment of interest:
58.3.1. Clause 6 of the Model 2 Loan requires the Borrower to pay interest at the Interest Rate, which is defined by reference to the Term Sheet.
58.3.2. The Term Sheet distinguishes between the “Interest Rate payable to Lenders” and the “Interest Rate payable to Saving Stream”. This shows that the Borrower has a bifurcated obligation to pay interest. Part of the interest is payable to the Model 2 Investors, whereas the other part is payable to Lendy for its own account.
58.3.3. So far as default interest is concerned, Clause 6.3 of the Model 2 Loan provides as follows:
“In addition to the interest payable under clause 6.1, if the Borrower fails to make any payment due under this agreement on the due date for payment, interest on the unpaid amount shall accrue daily, from the date of non-payment to the date of actual payment (both before and after judgment), at 3% per month above the aggregate Interest Rate.”
(The above provision does not identify who is entitled to receive default interest. This is the subject of Issue 5 below.)
58.3.4. Fees were also payable to Lendy under Clause 4.2 of the Borrower Conditions:
“If you accept a loan(s), for each loan Saving Stream will charge you:
4.2.1 an arrangement fee of an amount notified to you in writing by Saving Stream, on the date of drawdown of the loan as set out in the Contract Details (“Arrangement Fee”);
4.2.2 an exit fee of an amount notified to you in writing by Saving Stream, on the date of repayment of the loan as set out in the Contract Details (“Exit Fee”).”
59. Accordingly, there is a contractual relationship between the relevant Borrower and Lendy as principal (in addition to the contractual relationship between the Borrower and the Model 2 Investors in relation to which Lendy acted as agent). There is no difficulty as a matter of law for Lendy having acted as agent (in some respects) and as principal (in other respects). It is a matter of construction to determine whether a particular clause imposes an obligation or confers a benefit on the agent, the principal, or both of them. See Bowstead at Article 99:
“The question whether the agent is to be deemed to have contracted personally, in the case of a contract in writing other than a deed, bill of exchange, promissory note or cheque, depends upon the intention of the parties, as appearing from the terms of the written agreement as a whole, the construction of which is a matter of law. The party concerned may act as agent in some respects and as principal (including as trustee) in others.” (emphasis added)
60. The concept of an agent acting in a dual capacity is common in finance contracts. By way of example, in British Energy Power and Trading Ltd v Credit Suisse [2008] EWCA Civ 53, the Court of Appeal recognised that a single bank (Barclays) could act both as agent and as principal in a syndicated loan transaction. The documentation included a Share Option Agreement, which referred to Barclays “as agent and trustee for the Finance Parties”: per Sir Anthony Clarke MR at [34]-[36].
The Respondents Position
(From their Skeleton Argument)
10. Issue 4 only arises if the answer to Issue 3 is as submitted above. Issue 4 was not a point Ms. Taylor was directed to argue by the 31 December 2020 order, but since it was addressed in her position paper (see §9 at [A/10/137], she suggests the correct analysis to be as follows:
10.1 Model 1 Terms clause 7.1 provided that “Lendy pays all fees on behalf of its investors. Lendy does not make any charges or fees [sic] to its investors”. Subject as follows, the default position is, consequently, that Lendy was not entitled to make deductions from its receipts from Model 1 borrowers to cover its own costs of realisation.
10.2 The general provision at clause 7.1 has to yield, however, to the more specific provision of clause 5.2.4, governing sale at auction. That provision stipulates for “an additional fee of 5% of loan value”, deductible from the “net proceeds”, i.e. what remains “after deduction of selling expenses such as commissions” (see the first sentence).
10.3 There is then a question as to how that 5% fee ranks in order of priority, in light of clause 5.2.4, and the waterfall prescribed at paragraphs (1)-(4) immediately following that clause. There are two possibilities:
10.3.1 The 5% is deducted before repayments in respect of the “principal amount of the loan” (i.e. before paragraph (1) of the waterfall). This is what the first sentence of clause 5.2.4 says, in terms, but entails the consequence that paragraph (2) of the waterfall appears to be redundant, as there seem to be no other “fees due to Lendy” in the Model 1 Terms.
10.3.2 The 5% is paid out at paragraph (2) of the waterfall, i.e. as “fees due to Lendy”, if (and only if) there is enough first to meet the “principal amount of the loan”. This saves paragraph (2) from redundancy, but cuts across the clear terms of the first sentence of clause 5.2.4.
10.4 As between those options, Ms. Taylor suggests the first sits more comfortably with the language. On this basis, paragraph (2) of the waterfall is simply referring to such other fees in addition to the 5% as there may be: and this reading is consistent with the opening words of clause 5.2.4. The reference there to “an additional administration fee of 5%” indicates that the drafter had in mind that other fees might in fact be due, and it was those fees that were intended to rank for payment at paragraph (2).
Mouse in the Court 
5 thoughts on “Lendy Directions Hearing Day 1”