Lendy Directions Hearing Day 2

Oral and Written Submissions made on Day 2 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 1 here: “Lendy Directions Hearing Day 1“
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

Click to access day-2.pdf

Issue 5

Issue 5: On a proper construction of clause 6.3 of the Model 2 Loans, is the borrower required to pay the default interest to (i) the relevant Model 2 Investors and/or Model 2 Transferees, (ii) to Lendy (as principal) or (iii) in any other manner?

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 Administrators Position
(From their Skeleton Argument)

119. The Applicants note that this provision does not expressly identify whether it was Lendy or the Model 2 Investors who would be entitled to receive any default interest paid by the Borrower.

120. Ms Taylor contends that because the clause is silent as to the recipient, all default interest should be paid to the Model 2 Investors and Model 2 Transferees.

121. The Applicants’ position is that there are two options for the distribution of default interest. The first option is that all default interest was properly payable to Lendy. The second option is that default interest should be divided equally between Lendy and the Model 2 Investors.

122. The basis for treating all default interest as payable to Lendy is as follows:

122.1. There is no suggestion in the Model 2 Terms that any default interest would be payable to the Model 2 Investors.

122.2. Instead, there was a separate regime for the payment of “bonus interest”. This is explained in [Joint Administrators Damian] Webb 2 at paragraph 118 as follows:

“After the loan repayment date, in place of the monthly interest payments to investors, Lendy offered to pay investors a bonus of up to 3% of the investor’s investment, on any loan which was paid in full by the borrower. In order to qualify for bonus interest, Lendy had to receive payment from the borrower in full, including the entire loan sum, interest and fees which were due. In reality, this very rarely happened although there were a couple of loans which paid bonus interest. This potential bonus payment of up to 3% followed the loan part, so if the loan part was sold on the secondary market, the bonus attached to it and would be payable to the purchasing investor who was holding the loan part upon the repayment date (see page 314). The intention was to try to compensate investors holding loan parts past expiry, with the additional bonus payment, upon repayment in full by the borrower”.

122.3. On this basis, it is open to the Court to conclude that all of the default interest was payable to Lendy and that (in contrast) all of the bonus interest was payable to the Model 2 Investors (in circumstances where the loan was paid in full).

123. In the alternative, it is submitted that default interest should be divided equally between Lendy and the Model 2 Investors for the following reasons:

123.1. Clause 6.3 states that default interest is payable at 3% above the “aggregate Interest Rate”.

123.2. In this context, the “aggregate Interest Rate” is the aggregate of the “Interest Rate Payable to Lenders” and the “Interest Rate Payable to Saving Stream” (as identified in the Term Sheet). Thus, if the total non-default interest rate is 6% (with 2% payable to Lendy and 4% payable to the Model 2 Investors), then default interest is payable at a rate of a further 3% (generating a total interest rate of 9% following a default).

123.3. Given that default interest is payable at 3% above the “aggregate” of the normal interest rates payable to the Model 2 Investors and Lendy, it is submitted that the most natural and fair construction of Clause 6.3 is that the additional default interest should be split between Lendy and the Model 2 Investors on a pro rata basis (by reference to the normal interest rates payable to each party as set out in the Term Sheet).

124. Accordingly:

124.1. Any default interest paid by the Borrower under Clause 6.3 should be split between Lendy and the Model 2 Investors in the same proportions that non-default interest is split between Lendy and the Model 2 Investors under the Term Sheet for the relevant Model 2 Loan.

124.2. For example, if the total non-default interest rate is 6% (with 2% payable to Lendy and 4% payable to the Model 2 Investors), and if default interest is payable at a rate of a further 3% (generating a total interest rate of 9%), then the total amount of interest payable to Lendy and the Model 2 Investors (respectively) is 3% and 6%.

125. This arrangement makes good commercial sense. It is common ground that Lendy charged the Borrowers interest for its own account (in addition to the interest payable to the Model 2 Investors by the Borrowers). That being so, it makes commercial sense for default interest to be split in the same proportions. This does not provide a windfall to Lendy – it reflects the way in which interest was already divided up between Lendy and the Model 2 Investors.

126. In contrast, it would be odd if the Model 2 Investors were able to keep the entirety of the default interest, given that the default interest is fixed at 3% above an “aggregate” interest rate which is defined to include the interest rate payable to Lendy.

127. Ms Taylor argues that, “if and to the extent there is any ambiguity, clause 6.3 should be construed consistently with [the No Profit Duty], and specifically, not so as to create any entitlement in favour of the fiduciary, Lendy, to which its principals did not consent”. However, for the reasons explained above, the Applicants submit that Lendy did not in fact owe the No Profit Duty. That being so, the No Profit Duty is not relevant to the construction of Clause 6.3

The Respondents Position
(From their Skeleton Argument)

(C) Issue 5: default interest in respect of the Model 2 Loans.

(C)(i) Overview of this issue.

11. Issue 5 concerns the default interest (“DI”) charged by Lendy, where loans were not repaid in time, and more particularly, who is entitled to it, as between the Model 2 Lenders and Lendy itself. Ms. Taylor says Lendy recovered DI as agent for the Model 2 Lenders, and holds it to their account; the Administrators maintain Lendy recovered DI either wholly, or partly, for its own account. This reduces to the question whether Model 2 Lenders had legal title to the chose in action represented by the claims against borrowers for DI, i.e. whether they could have sued borrowers to recover DI in their names. If so, then irrespective of whether Lendy could also have sued to recover DI as their agent (and in fact did so), Model 2 Lenders will have had title both to the debt, and a claim to the proceeds of it in Lendy’s hands: see Bowstead & Reynolds on Agency (22nd ed), art. 52.

(C)(ii) Applicable legal principles.

13. The general principles relevant to this issue are set out in Bowstead arts. and so far as presently material, they may be summarised as follows:

13.1 The starting point is that “where a person contracts as agent for a principal, the contract is the contract of the principal and not that of the agent; and, prima facie, at common law the only person who may sue is the principal and the only person who can be sued is the principal”.

13.2 The general rule may be displaced, however. The facts of a given case may entail the conclusion that the agent and principal are both entitled to sue or be sued, or even that the agent alone is so entitled: it all “depends on the intention of the parties, to be deduced from the nature and terms of the particular contract and the surrounding circumstances … As in all matters of formation of contract, the test is objective”.

13.3 If an agent signs an agreement “indicating that he or she signs as agent, or for or on behalf of the principal, the agent is deemed not to have contracted personally, unless it is plain from other portions of the document that, notwithstanding such qualified signature, the agent intended to be bound”. If it is, the conclusion will be that the agent has contracted “as agent in some respects and as principal … in others”.

14. Before applying those principles to the facts, two preliminary points may be made. The first is that the question of whether Lendy was exclusively liable to borrowers under the terms of its Model 2 loan agreements was considered and decided by Zacaroli J. in Lederer v. Allsop LLP [2018] EWHC 1425 (Ch):

14.1 In that case, the claimant company was a borrower, who alleged there to have been a repudiatory breach of the obligation to lend. It did not know the names of the relevant lenders, and sought an order for disclosure of their identities, so it could join them as defendants to the claim.

14.2 Lendy itself appeared on the application, and resisted that application on the basis that “Lendy is the only person who is liable to be sued under the contract”. It argued that both the loan agreement with the claimant, and connected documents, dictated that result.

14.3 The judge found that “there are a number of features of the loan agreement and connected documents which clearly identify the lenders and not the agent as the real contracting party”. Specifically so far as the loan agreement was concerned, he said that it was “on the face of it entirely consistent with the position that the agent acts only as agent, and that the principal is the real party in interest”.

14.4 He consequently concluded that “the real contracting party is the lender, not the agent. Far from there being an express provision removing liability of the principal, the contract clearly indicates that the lenders and not the agent have the obligations, and are liable, under the agreement”.

15. There are the following points to make about Lederer and its relevance:

15.1 Zacaroli J.’s conclusion on the issue of whether lenders could be liable for breach of Model 2 loan agreements was consistent with clear provision in Lendy’s lender terms, as follows:

15.1.1 Clause 7.8 of the Original Model 2 Terms said this: “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”.

15.1.2 Clause 7.8 of the Amended Model 2 Terms said this: “A Loan Contract and any related security is a bilateral agreement between the lender and the Borrower. Lendy and/or Saving Stream Security Holding has no liability for payment or repayment of any amounts due in relation to the Loan Contract or any security document”.

15.2 The decision in Lederer does not answer the specific question which this court now has to resolve, which is whether Model 2 Lenders were not only liable to be sued by borrowers under the loan agreement, but entitled to sue them in their own names (rather than Lendy’s) in respect of DI. It is, however, an important starting point, because while “an agent may undertake liability without being entitled to sue … he cannot easily be entitled to sue if he is not liable, for there would usually be no consideration to support the liability of the other party” (Chitty §31- 084 (text to note 605).

16. The second preliminary point arises out of the underlining in the quotation from Amended Model 2 Terms clause 7.8 in paragraph 15.1.2 above. Why did Lendy amend its lender terms in March 2018 specifically to stipulate that a loan contract was “a bilateral agreement between the lender and the Borrower”? The answer lies in the regulatory framework:

16.1 Lendy obtained an interim authorisation from the Financial Conduct Authority (the “FCA”) in February 2014, and in March 12 2016, applied for full authorisation to conduct the regulated activity of “operating an electronic system in relation to lending” (see [E1/31/112], and more generally, Webb 2 §48 [B/1/12]).

16.2 As the court is likely to be aware, the classes of permitted regulated activity are specified by delegated legislation made pursuant to s.22(1) of the Financial Services and Markets Act 2000 (“FSMA”), being S.I. 2001/544 (the Regulated Activities Order, or “RAO”), and what counts as “operating an electronic system in relation to lending” is prescribed by RAO art. 36H (in force with effect from 1 April 2014).

16.3 That provision contains a number of threshold conditions, of which the most relevant for present purposes are paras. (1), (4) and (4A) of art. 36H:

16.3.1 Para. (1) provides that the activity of operating an electronic lending platform is only a “specified kind of activity” for FSMA s.22(1) purposes if conducted pursuant to “an article 36H agreement”.

16.3.2 Para. (4) provides (so far as material) that an article 36H agreement is one that provides that the operator (here, Lendy) “does not provide credit, assume the rights (by assignment or operation of law) of a person who provided credit, or receive credit under the agreement” (para. (4A)).

16.3.3 The term “credit” is defined as follows, in art. 60L: “‘credit’ includes a cash loan or any other form of financial accommodation”.

16.4 The FCA granted Lendy full authorisation on 10 July 2018 (Webb 2 §61 [B/1/14]), i.e. over 2 years after its application. In the lengthy intervening period, there were extended discussions between Lendy and the FCA, some (but by no means all) of which have found their way into the bundle for this hearing.

16.5 Of particular relevance for this purpose is the letter from the FCA to Lendy dated 1 June 2017 which the court will find at [E1/79/264], in which the FCA discussed (among other things) whether Lendy’s then arrangements were art. 36H compliant: see generally section (2), starting at the bottom of the first page of the letter (“2. Lendy Ltd.’s compliance with the A36H perimeter”), and running down to [E1/79/267].

16.6 The Authority’s concern (put broadly) was that whereas the RAO art. 36H regulated activity was one of facilitating transactions between individual lenders and borrowers (see art. 36H(1)): –

16.6.1 Lendy’s borrower and lender terms created “a single multilateral loan from the lenders to the borrower, rather than multiple bilateral loans from each lender to the borrower” [E1/79/266]. And:

16.6.2 Lendy’s practice was that if insufficient lenders came forward to fund a loan, it sometimes made up the difference itself, thereby acting as a principal rather than simply a facilitation agent, in contravention of RAO art. 36H para. (4A).

16.7 This intervention appears to have driven the amendment, some 10 months later, of clause 7.8 of the Original Model 2 Terms 8, to refer to each lender/borrower agreement as “bilateral” (see paragraph 15.1 above). But the FCA’s intervention is of more general relevance, because it underlines the point that the issue as to the respective rights of Lendy and the Model 2 Lenders falls to be assessed against the regulatory framework. The terms of RAO art. 36H are a key part of the background against which the intention of the parties falls to be considered, on the usual objective basis (see paragraph 13.2 above).

(C)(iii) Relevant facts.

17. Before turning to the analysis, some factual points are in order. Focussing first on the non-default interest charged to Model 2 borrowers:

17.1 So far as material, relations between Lendy and Model 2 borrowers were the subject of two separate agreements:

17.1.1 Lendy’s Model 2 Terms and Conditions for Borrowers [C/7/112]. These regulated the terms on which borrowers were admitted by Lendy to its platform (i.e. the RAO art. 36H “electronic system”).

17.1.2 Lendy’s standard form Model 2 loan agreement ([C/8/123] for individuals, and [C/9/137] for corporates). These governed the terms of the loans which were subsequently made between lenders and borrowers through that platform.

17.2 In respect of the Terms and Conditions, Lendy and SSSHL contracted as principals: see the signature block at [C/7/112]. So far as the loan agreements were concerned, however, Lendy signed expressly as agent for the Model 2 lenders (“signed by … a director acting on behalf of Lendy Limited as agent of the Lenders” [C/8/136]).

17.3 Non-default interest was payable under the Model 2 loan agreements at the “Interest Rate”, pursuant to clause 6.1 [C/8/127]. The “Interest Rate” was defined by clause 1.1 by reference to the Term Sheet [C/8/125], which expressly provided for two Interest Rates, one “payable to Lenders”, and the other “payable to Saving Stream” [C/6/109].

17.4 Model 2 lenders were told about this dual interest charge if they looked at the page on Lendy’s website entitled “How it Works”, which (for at least some of the material time stated as follows: “Since it’s [sic] launch by Lendy Ltd in 2013, Saving Stream has made its profit from the difference in interest rates charged to borrowers and paid to investors. All Saving Stream investors receive a fixed monthly interest amount of 1% whereas Lendy Ltd charges interest at 1.5% per month on average” (see Powell 1 §56 [B/4/104], and [E1/33/138]).

17.5 It is common ground, however (see Webb 5 §18 [B/5/133]), that borrowers never in fact had to make any payments in respect of clause 6.1 (non-default) interest, whether to Lendy or lenders. This resulted from the following provisions of the Model 2 Terms and Conditions for Borrowers (see paragraph 17.1.1 above):

17.5.1 Clause 4.1 provided that if a borrower accepted a loan, Lendy “will charge you the interest rate set out in the Loan Contract on the date of drawdown of the loan (acting as agent on behalf of the lenders)”.

17.5.2 Building on those underlined words, clause 4.2 stated that Lendy “will deduct the interest set out in clause 4.1 and Arrangement Fee [sic] from the amount borrowed before it is transferred to you so you will receive the amount borrowed less the interest and Arrangement Fee … ” [C/7/116].

18. Now turning to the DI paid by borrowers:

18.1 DI was payable under clause 6.3 of the Model 2 loan agreements, which provided as follows: “if the Borrower fails to make 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 … at 3% per month above the aggregate Interest Rate” [C/8/127].

18.2 But whereas the term sheet conferred an express entitlement on Lendy in respect of non-default interest, it conferred no such entitlement in respect of DI. It made no separate mention of it, and nor was it referred to either in the Model 2 Terms and Conditions for Borrowers, which was the basis for Lendy’s separate contract, as principal, with the borrowers.

18.3 The rate of DI to which clause 6.3 gave rise (assuming non-default interest of 18% per annum) was 54% per annum (i.e. 18% + 36%). The court can get an idea of how fast that caused the amount owing by the borrower to escalate substantially from the worked example given at Webb 2 §222(i) [B/1/53], which takes the case of a £2m for a 3 month agreed term:

18.3.1 The total non-default interest payable to lenders at the end of that 3 month term, calculated at 1% per month, was £60,000 ((2,000,000/100) x 3 = 60,000).

18.3.2 But after the due date, DI accrued at the rate of £3,068 per day (i.e. ((20,000) x 54)/352), with the consequence that Lendy was itself owed more than the £60,000 owed investors within 21 days of the date of default.

18.4 On the Administrators’ primary case, however, not a penny of that DI is, or ever was, payable to Model 2 lenders: see §26 of their position paper at [A/7/78]. This is an ambitious submission, not least, because it appears to suggest that after the repayment date, lenders had no contractual entitlement to any further interest at all. Even Lendy itself did not take that position, before administration:

18.4.1 As Webb 2 §118 accepts, Lendy did, in fact, tell lenders that they were entitled to what it termed a “bonus accrual” in respect of loans that went overdue, “once the loan has been repaid and if we are successful in recovering sufficient property proceeds” [E3/187/938].

18.4.2 That entitlement was also embodied in the First Recovery Policy, which Lendy emailed out to lenders on 13 April 2018 (Powell 1 §77 [B/4/117]): “once a loan passes its due date default interest will begin to accrue … a portion of this default interest will accrue in the investors [sic] favour as bonus accrual. Bonus accrual is calculated on a daily basis at half the usual interest rate” [E2/111/489].

18.4.3 Webb 2 §198 [B/1/43] originally claimed that Model 2 lenders were “never paid any element of default interest”, but on the assumption (as must be the case) that this “bonus accrual” was paid to lenders out of DI payments received by Lendy, Webb 5 §41(b) now accepts this was incorrect: see further [E3/200/984] for details of the actual payments.

18.5 A careful reading of the First Recovery Policy will have flagged to an astute lender that Lendy was charging DI at a higher rate than it was passing it on: see the underlined words in paragraph 18.4.2 above. But copies of the loan agreements were not uploaded to the Lendy website (see Webb 2 §123-§124 [B/1/25]; Melton 1 §44 [B/3/82]; Powell 1 §59.6 [B/4/109], §70.2(c) [B/1/113], §81 [B/1/121], and §97.1(e) [B/1/127]), and nor were lenders otherwise informed what DI Lendy was charging to borrowers. They consequently had no means of knowing how much Lendy was keeping for its own account, or accruing against the security held on trust by SSSHL.

19. In correspondence in March 2018, the FCA made the obvious point that if lenders did not know what charges were payable to Lendy by borrowers in a default situation, they were unable to judge the impact of those charges on their (i.e. the lenders’) ability to recover their capital [E2/109/475]). As discussed in more detail in paragraph 51 below, Lendy batted that concern away at the time with bland assurances that lenders would always rank ahead of Lendy’s own claims (claiming this to be “a key foundation stone of the business” [E2/109/476]), but subsequently reneged on those assurances, without telling either the FCA, or lenders. How much damage to Model 2 lenders flows from that depends to a large extent on whether the Administrators are right in submitting that Lendy is entitled to keep DI for its own account.

(C)(iv) Ms. Taylor’s analysis of Issue 5. 20. It is not disputed that as between the lenders and Lendy, Lendy was duly authorised to collect DI from borrowers. This was, in fact, a precondition to Lendy validly conducting the RAO art. 36H authorised activity: see art. 36H, para. (1) and para. (2C)(b). But it does not follow that Lendy was exclusively so entitled, as against the borrowers, and whether that is so or not turns on the terms of the loan agreements, as construed on ordinary principles. Ms. Taylor suggests that they unequivocally entail the conclusion that lenders could also sue, for the following eight reasons:

20.1 First, Lendy expressly signed the loan agreements in its capacity as agent for the lenders. The starting point in this case (as it was in Lederer) is consequently that the right to enforce, as between the parties to those agreements, rested with the lenders, and not with Lendy: see paragraph 13.1 above.

20.2 Second, there is nothing in the loan agreements that warrants the conclusion that Lendy could sue for DI to the exclusion of the lenders. Clause 6.3 is silent about who DI has to be paid to. Even clause 7, governing repayment of principal and pre-default interest, does not stipulate whether payments should go to Lendy or the lenders.

20.3 Third, in their position paper, the Administrators rely heavily on the fact that the term sheet stipulated for part of the “Interest Rate” (i.e. non-default interest pursuant to clause 6.1) to be payable to lenders, and part to Lendy itself. This proves nothing. Lendy never had to sue borrowers for non-default interest because it deducted it up front from the lenders’ own advances: see paragraph 17.5 above. The provisions as to non-default interest consequently have no bearing on whether lenders could sue for DI as principals, in their own name.

20.4 Fourth, the Administrators have asserted in evidence that the function of DI was to defray Lendy’s higher costs of realising overdue loans: see e.g. Webb 2 §200 [B/1/43]. As it happens, there is no contemporaneous evidence corroborating that claim, but more fundamentally, the function DI may have played from Lendy’s internal perspective is nothing to the point:

20.4.1 What matters is the intention of the parties to the loan agreement, objectively assessed, and so far as that is concerned, the key point is that the monies payable pursuant to clause 6.3 were expressed to be “interest”, and not some other sort of charge. 20.4.2 Interest is parasitic (Teesside Power Holdings Ltd. v. Electrabel International

BV [2012] EWHC 33 (Comm), at §76). Its very nature is to serve as a  reward for the risk run by the lender in respect of his loan of the principal. It would be surprising to arrive at the result that something expressed to be payable by way of interest should be payable exclusively to someone other than the lender, and a fortiori default interest: cf Credit Suisse v. Titan Europe [2016] EWCA Civ 1293, at §49 (“it is difficult to think of any commercial transaction when parties would intend to reward a person … by reference to the default of a third person” (Arden L.J.)).

20.5 Fifth, and relatedly, if Lendy had in fact wanted to stipulate for DI (or an equivalently calculated administration charge) to be payable to it, but not to the lenders, it could have done so by the simple expedient of providing for it in the separate agreement it concluded as principal with the borrowers (see paragraph 17.1.1 above), and had it done so, there would have been good consideration for the borrowers’ undertaking to pay Lendy such sums. Instead, it quite specifically opted to embed the right to DI in the loan agreements, to which it was expressed to be a party as agent for the lenders only, and under which it incurred no liabilities to the borrowers: see the discussion of Lederer, in paragraph 15 above.

20.6 Sixth, and again relatedly, the Administrators’ suggestion that Lendy should be regarded as having all along been charging interest for its own account sits uncomfortably with the regulatory scheme referred to in paragraph 16 above. The essence of the RAO art. 36H regulated activity is that the electronic platform operator is an intermediary, facilitating transactions between multiple individual lenders and borrowers: see art 36H para. (1). This obviously does not preclude it (the facilitator) from charging for its services: but interest is qualitatively different. It is the consideration payable and due between the substantive parties to the transaction of loan, not a reward for its facilitation.

20.7 Seventh, if the Administrators’ suggestion were right, it would create a situation in which the interests of Lendy and the Model 2 lenders were potentially at loggerheads. Lenders’ interest was in seeing their interest paid, and their capital repaid in full on the due date. But if Lendy was entitled to charge default interest for its own account at the substantial rate discussed above, there was a clear likelihood of conflict, as the Administrators’ own example at paragraph 18.3 above vividly illustrates. Applying commercial common sense, it cannot have been the parties’ shared intention to create a structure in which the interests of lenders and their agent (Lendy) pulled in opposite directions.

20.8 Eighth, the conclusion that lenders had direct claims against borrowers in respect of DI is corroborated by the terms of the standard form personal guarantees that sat alongside the Model 2 loans [C/11/191], which document is part of the matrix against which the loan agreements fall to be construed:

20.8.1 Section 5 made provision for the recovery of interest, and clause 5.3 said this: “the Lenders shall not be entitled to recover any amount in respect of interest under both this guarantee and any arrangements entered into between the Borrower and the Lenders, including but not limited to those in the Loan Agreement … ” [C/11/197].

20.8.2 The term “Lenders” in the guarantee was defined to mean the Model 2 lenders, as opposed to Lendy itself, which was defined as the “Agent”: see the definitions on [C/11/193], and the interest being referred to in clause 5.3 was (and was only) DI (see clause 5.1). 20.8.3 Clause 5.3 is, consequently, consistent with lenders having claims for DI against borrowers, and inconsistent with Lendy having such claims in its own right.

21. The Administrators’ principal answer to all this (as Ms. Taylor presently understands it) is that clause 9 of both the Original and Amended Model 2 Terms (see respectively [C/14/272] and [C/15/292]) gave Lendy a beneficial entitlement to some part of the interest charged, and clause 13.4 of the Amended Model 2 Terms [C/14/297] further provided for borrowers to “pay default fees to Lendy (for its own account)”: see Webb 2 §188(d)(ii) [B/1/39] and §199 [B/1/43]. As to that:

21.1 The relevance of these provision is addressed in section (E)(i) (starting at paragraph 36) below. As a matter of construction, they do not provide any basis for saying that, as between Lendy and the lenders, it was agreed that Lendy was entitled to charge DI for its own account.

21.2 But even if they did, that would have no bearing on whether lenders were entitled to sue for DI. That different question is referable to the terms of the loan agreements, construed against the background of fact reasonably available to the parties, when they executed them: but the borrowers were not party to the Amended Model 2 Terms, and they are not part of that background.

Issue 8

Issue 8: Has Lendy breached any of its fiduciary duties regarding its charging fees and/or interest for its own account in connection with the Model 2 Loans? If so:
(a) what is the appropriate form of relief for Model 2 Investors and/or the Model 2 Transferees;
(b) is Lendy entitled to an equitable allowance to cover its costs as agent; and
(c) if the answer to the question in issue 8(b) is ‘yes’, how should that allowance be calculated in principle?

The Administrators Position
(From their Skeleton Argument)

Issue 8

61. Issue 8 is the central issue raised in relation to Model 2. It relates to pre-administration interest and fees, it being agreed that no issue arises at this hearing in relation to the post-administration Service Charge.

62. Ms Taylor contends that Lendy acted in breach of fiduciary duty (and in particular a duty not to profit from its position – the No Profit Duty) by charging interest and fees for its own account in connection with the Model 2 Loans and by failing to disclose them (in breach of the Disclosure Duty). On this basis, Ms Taylor therefore contends that the Model 2 Investors and Model 2 Transferees have a proprietary claim to any fees or interest recovered by Lendy for its own account: see Issue 9 below. If Ms Taylor is correct, a significant proportion of assets will be removed from Lendy’s general estate (which would otherwise be available to pay dividends to unsecured creditors, including Model 1 Investors).

63. For the reasons set out below, it is submitted that Lendy did not owe such fiduciary duties, or that if it did, it did not act in breach of them. More particularly:

63.1. Lendy did not have the fiduciary duties relied upon by Ms Taylor in her position paper. In particular, Lendy did not owe the No Profit duty to the Model 2 Investors.

63.2. Even if (contrary to the Applicants’ primary case), Lendy did owe the relevant fiduciary duties to the Model 2 Investors, the Model 2 Investors gave their informed consent to the profit made by Lendy.

63.3. Even if (contrary to the Applicants’ secondary case), the Model 2 Investors did not give their informed consent to the profit made by Lendy, then Lendy is as a matter of principle entitled to an equitable allowance in respect of the services that it provided to Model 2 Investors and Transferees. The value of that equitable allowance should (if relevant) be determined by the Court at a further hearing.

(A) Fiduciary Duties: Legal principles

64. Ms Taylor contends that “Lendy was an agent and a fiduciary, and as such, subject to the No Profit Duty”. The “No Profit Duty” allegedly owed by Lendy to the Model 2 Investors is defined by Ms Taylor as “a duty not to profit from its position”.

65. It is true that (as set out above) Lendy was an agent on behalf of the Model 2 Investors for certain purposes, including the entry into the Model 2 Loan. However, the nature and extent of the fiduciary duties owed by Lendy to the Model 2 Investors depends on a detailed analysis of the role that Lendy agreed to perform for the Model 2 Investors. The No Profit Duty cannot be inferred solely from the fact that Lendy was an agent for certain purposes.

66. In Boardman v Phipps [1967] 2 AC 46 at 127, Lord Upjohn summarised the legal principles as follows:

“1. The facts and circumstances must be carefully examined to see whether in fact a purported agent and even a confidential agent is in a fiduciary relationship to his principal. It does not necessarily follow that he is in such a position (see In Re Coomber).

2. Once it is established that there is such a relationship, that relationship must be examined to see what duties are thereby imposed upon the agent, to see what is the scope and ambit of the duties charged upon him.

3. Having defined the scope of those duties one must see whether he has committed some breach thereof and by placing himself within the scope and ambit of those duties in a position where his duty and interest may possibly conflict. It is only at this stage that any question of accountability arises.

4. Finally, having established accountability it only goes so far as to render the agent accountable for profits made within the scope and ambit of his duty.”

67. To similar effect, Lord Upjohn stated earlier in the same judgment at 123:

“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”

68. The fact-sensitive nature of fiduciary duties has often been noted by the Court. In New Zealand Netherlands Society “oranje” Inc v Kuys [1973] 1 WLR 1126 at 1129-1130, Lord Wilberforce said:

“The obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest, is one of strictness. The strength, and indeed the severity, of the rule has recently been emphasised by the House of Lords: Phipps v. Boardman [1967] 2 A.C. 46. It retains its vigour in all jurisdictions where the principles of equity are applied. Naturally it has different applications in different contexts. It applies, in principle, whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship.

… A person in his position may be in a fiduciary position quoad a part of his activities and not quoad other parts: each transaction, or group of transactions, must be looked at.”

69. In UBS AG v Kommunale Wasserwerke Leipsig GmbH [2017] 2 CLC 584 at [92], Lord Briggs said:

“Mr Lord took us to Halton International Inc v Guernroy Ltd [2005] EWHC 1968 (Ch) per Patten J at [138]-[9], and to Tigris International NV v China Southern Airlines Co Ltd [2014] EWCA Civ 1649, per Clarke LJ at [155], in support of his submission that the existence of a fiduciary duty was by no means an essential characteristic of agency. We agree. There are no doubt many forms of non-fiduciary agency, just as there are forms of fiduciary agency in which the agent has no authority to affect the principal’s relations with third parties.”

70. In Kelly v Cooper [1993] AC 205 at 213-214, Lord Browne-Wilkinson said:

“In the view of the Board the resolution of this case depends upon two fundamental propositions: first, agency is a contract made between principal and agent; second, like every other contract, the rights and duties of the principal and agent are dependent upon the terms of the contract between them, whether express or implied. It is not possible to say that all agents owe the same duties to their principals: it is always necessary to have regard to the express or implied terms of the contract.

… Similar considerations apply to the fiduciary duties of agents. The existence and scope of these duties depends upon the terms on which they are acting.”

71. After citing Lord Wilberforce’s judgment in New Zealand Netherlands Society (quoted above), Lord Browne-Wilkinson cited the judgment of Mason J (in the High Court of Australia) in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97:

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

72. On this basis, Lord Browne-Wilkinson concluded that estate agents did not owe many of the usual fiduciary duties, including a duty not to earn a commission from a rival vendor. He stated at 215:

“Thus, in the present case, the scope of the fiduciary duties owed by the defendants to the plaintiff (and in particular the alleged duty not to put themselves in a position where their duty and their interest conflicted) are to be defined by the terms of the contract of agency.

Applying those considerations to the present case, their Lordships are of the view that since the plaintiff was well aware that the defendants would be acting also for other vendors of comparable properties and in so doing would receive confidential information from those other vendors, the agency contract between the plaintiff and the defendants cannot have included either (a) a term requiring the defendants to disclose such confidential information to the plaintiff or (b) a term precluding the defendants acting for rival vendors or (c) a term precluding the defendants from seeking to earn commission on the sale of the property of a rival vendor.”

73. More recently, in Eze v Conway [2019] EWCA Civ 88 at [38]-[40], Asplin LJ said:

“Whether the law of bribery is engaged is dependent upon the nature and extent of the fiduciary duties owed by the recipient of the benefit or promise of a benefit, if any, the nature of the transaction in question and the relevant circumstances. The enquiry is inevitably extremely fact sensitive. This was acknowledged by Lord Upjohn in Boardman v Phipps …

It is not helpful, therefore, to consider what might be considered to be the paradigm of any particular type of agent, whether an “introducing agent” or otherwise. It all depends on the nature of the individual’s duties and which of those duties is engaged in the precise circumstances under consideration. Although the relationship of principal and agent is a fiduciary one, not every person described as an “agent” is the subject of fiduciary duties and a person described as an agent may owe fiduciary duties in relation to some of his activities and not others. See New Zealand Netherlands Society “Oranje” Inc v Kuys & Anr [1973] 1 WLR 1126 (PC) per Lord Wilberforce at 1129H –1130 F.

For example, on some occasions, an agent may merely carry out specific instructions and as a result, in the particular circumstances, may not owe fiduciary duties: see Bowstead and Reynolds on Agency 21st ed at 6-037…”

74. The relevant passage cited by Asplin LJ from Bowstead & Reynolds on Agency (now in its 22nd edition) states as follows, at paragraph 6-037:

“… the extent of an agent’s equitable duties (a phrase that embraces more than the strictly fiduciary duties to avoid conflicts of interest and not to profit) and also common law duties may vary from situation to situation … a person otherwise at arm’s length with a claimant with whom the person is proposing to contract may have a limited authority to act for the claimant, for example in filling out the blanks in the document recording the contract. In so doing the person may be required both to adhere to the mandate given and to exercise it in good faith. In many situations the duty may be, by virtue of the circumstances, limited; or restricted or even excluded by contract. “The precise scope of [the obligation] must be moulded according to the nature of the relationship.” [Citing Lord Wilberforce in New Zealands Netherlands Society] …”

75. Continuing her judgment, at [42] Asplin LJ cited the judgment of Asquith LJ in Reading v The King [1949] 2 KB 233 at 236:

“In most of these cases [viz. cases in which the servant or agent has realised a secret profit, commission or bribe in the course of his employment] it has been assumed that the plaintiff, in order to succeed, must prove that a ‘fiduciary relation’ existed between himself and the defendant and that the defendant acted in breach of this relation. But the term ‘fiduciary relation’ in this connexion is used in a very loose, or at all events a very comprehensive, sense. A consideration of the authorities suggests that for the present purpose a ‘fiduciary relation’ exists (a) whenever the plaintiff entrusts to the defendant property … and relies on the defendant to deal with such property for the benefit of the plaintiff or for purposes authorized by him, and not otherwise … and (b) whenever the plaintiff entrusts to the defendant a job to be performed, for instance, the negotiation of a contract on his behalf or for his benefit, and relies on the defendant to procure for the plaintiff the best terms available …”

76. Asplin LJ noted that Asquith LJ’s judgment had been approved by the House of Lords in the same case. (For example, Lord Porter stated at 516 that “the words ‘fiduciary relationship’ in this setting are used in a wide and loose sense”.) Finally, Asplin LJ said at [43]:

“The real question, therefore, is whether the person receiving the benefit or the promise of a benefit was acting in a capacity which involved the repose of trust and confidence in relation to the specific duties performed rather than on some general basis and whether the payment to him in that capacity was such that a real position of potential conflict between his interest and his duty arose … The requirement that the recipient of the payment or the promise of payment must be someone with a role in the decision-making process in relation to the transaction or someone who is in a position to influence or affect the decision taken by the principal…seems to me to be no more than a means of satisfying the central criterion that the recipient owes fiduciary duties to the principal in relation to the transaction in question and a means of determining the extent of his obligations and fiduciary duties.”

(On this basis, Asplin LJ concluded that the No Profit Duty did not apply to an agent whose role was to facilitate a transaction.)

77. To take another example, in Paton v Rosesilver Group Corp [2017] EWCA Civ 158 at [32]-[33], Henderson LJ concluded that a solicitor did not owe fiduciary duties in relation to a sale of a property. This meant that the solicitor did not act in breach of fiduciary duty by acting for both the buyers and sellers. Part of the reason for reaching this conclusion was that the solicitors (Brook Martin) merely performed “routine conveyancing” for the appellant (Mr Paton), such that “any retainer of Brook Martin by Mr Paton in relation to the transaction was of a very limited nature, and gave rise to no real conflict of interest”: see [31] and [33].

(B) Primary case – Lendy did not owe the fiduciary duties relied upon by Ms Taylor

78. In the present case, the scope of Lendy’s agency on behalf of the Model 2 Investors was limited. Clause 11 of the Original Model 2 Terms (entitled “the role of Saving Stream [namely Lendy]”) states as follows:

“We and Saving Stream Security Holding perform an administrative role in matching borrowers and lenders and in facilitating payments, collection of sums due and onward distribution of funds.”

79. Likewise, Clause 2 of the Original Model 2 Terms includes the following provisions:

“2.3 Saving Stream’s principal role is to perform introductory functions on behalf of borrowers and lenders in order to bring together prospective borrowers and lenders, to provide a stream-lined process for entering into loans and to facilitate the payment and collection of sums due under or in connection with those loans (together with Saving Stream Security Holding) and to enter into Loan Contracts on behalf of lenders (including Saving Stream Security Holding taking certain actions on behalf of lenders upon a borrower’s default or if the borrower becomes, or is likely to become, insolvent as set out in these terms and conditions).

2.4 Save as set out in clause 9 of these terms and conditions in connection with any amendments that Saving Stream may make to the Loan Contract in your best interests when acting as agent on your behalf, Saving Stream will not perform any management functions on a lender’s behalf; the lender retains complete control and discretion over whether or not to make a loan to a borrower and over all other aspects of its participation in the Saving Stream Website and loans made through it. Nothing Saving Stream does and nothing on the platform is intended to operate or be construed as advice or recommendation by Saving Stream to enter into a particular loan.

2.5 A lender must form its own opinion regarding the creditworthiness of a borrower and undertake its own research, analysis and assessment of each borrower for each loan and, where appropriate, seek its own independent financial and legal advice.

2.6 While Saving Stream believes that the security documents might provide additional comfort as to the likelihood of repayment, Saving Stream accepts no responsibility for the likelihood of a borrower meeting its financial obligations to lenders through the Saving Stream platform in circumstances where such recourse to the assets of the borrower is available.

…

2.11 There are no fees payable to set up a Saving Stream lender account.

…

2.13 Lending money on the platform involves risk to your capital. If you suffer a loss, either by the borrower not repaying the loan or otherwise, you are not entitled to compensation from the Financial Services Compensation Scheme (“FSCS”).”

80. The same provisions can be found in the Amended Model 2 Terms which also contained a specific waterfall on enforcement (Clause 13) which made it clear that any “unpaid fees, costs and expenses of the Agent under the Finance Documents” were payable as first in the waterfall.

81. The Loan Agreements with the Borrower also reflected this limited role in the Borrower Terms and Conditions. Clause 4 (which addressed the fees charged to the Borrower by Lendy) provided at Clause 4.3 “The above fees cover our role in providing services in relation to the introduction between you and the lenders” and further provided for Lendy

82. Importantly, Lendy did not have any duty to “procure for the [Model 2 Investors] the best terms available” in respect of interest (to adopt the language of Asquith LJ in Reading v The King). Lendy did not negotiate the interest rate with the Borrowers on behalf of the Model 2 Investors; the interest rate was already fixed by the time that the Model 2 Investors were able to invest. The Website stipulated an interest rate for each of the Model 2 Loans, and the Model 2 Investors were responsible for deciding whether they wished to invest.

83. Lendy did not hold the security under Model 2: instead, the security was held by SSSHL. Lendy was, however, one of the “Beneficiaries” under the Model 2 Debenture and the Model 2 Guarantee (alongside the Model 2 Investors), reflecting the fact that Lendy was owed money in its own right. Lendy was also given authority to enforce the Model 2 Guarantee on behalf of the Model 2 Investors (see Clause 466).

84. As stated in Clause 2.4 and Clauses 9.6 to 9.9 of the Original Model 2 Terms and the Amended Model 2 Terms, there were only two relevant respects in which Lendy undertook a duty to act in the best interests of the Model 2 Investors. This duty arose where (i) Lendy decided to amend the Model 2 Loan after it had already been signed or (ii) Lendy negotiated or settled any dispute relating to the Model 2 Loan. (The ability to amend a loan agreement was also reflected in the terms of the Model 2 Loan, Clause 5.469.) Save in that limited respect, the terms quoted above make it clear that Lendy did not undertake any duties of a fiduciary nature to the Model 2 Investors.

85. It is therefore correct that Lendy was an agent of the Model 2 Investors, but that agency was only for limited purposes. Lendy’s main role was to sign the Loan Agreement on behalf of the Model 2 Investors. This was essentially an administrative function. Indeed, the word “administrative” is repeatedly used to describe Lendy’s role in the provisions quoted above.

86. It is also notable that Clause 24.870 of the Original Model 2 Terms provides as follows:

“Nothing in these terms and conditions is intended to, or shall be deemed to, establish any partnership or joint venture between the parties, nor constitute either party the agent of the other party for any purpose.”

(The same provision appears in the Amended Model 2 Terms71.)

87. This is not a well drafted clause. Lendy was an agent of the Model 2 Investors, albeit for the limited purposes identified above. However, having regard to the other provisions of the Original Model 2 Terms and the Amended Model 2 Terms, the purpose of this clause is tolerably clear. The purpose of the clause was to clarify that Lendy was not an agent of the Model 2 Investors for any purposes other than those specifically identified in the Model 2 Terms. As a result, Lendy had not undertaken any wide-ranging fiduciary duties to the Model 2 Investors.

88. Accordingly, it is submitted that Ms Taylor is wrong to contend that Lendy owed the Model 2 Investors a duty not to profit out of its position. Such a duty is inconsistent with the true nature of the relationship between Lendy and the Model 2 Investors and the limited role that Lendy agreed to perform on their behalf.

89. The analysis would have been different if Lendy had undertaken a more extensive role. To take two examples:

89.1. It has been held that a consumer credit broker acting on behalf of a borrower has a duty not to receive a secret commission from the lender: see Hurstanger Ltd v Wilson [2007] 1 WLR 2351. This duty makes sense, since the broker’s role is to arrange credit from his client on the best available terms. If the broker is secretly being paid by the lender, then this would place the broker in a position of conflict. As Tuckey LJ said at [33], “The [clients] were entitled to expect him to get them the best possible deal, but the broker’s interest in obtaining a further commission for himself from the lender gave him an incentive to look for the lender who would give him the biggest commission”.

89.2. Similarly, if Lendy had agreed to negotiate the best available interest rate on behalf of the Model 2 Investors, then Lendy would have had a duty not to earn a profit by charging interest or fees for its own account (without the informed consent of the Model 2 Investors).

90. However, the role of Lendy in the present case is far removed from these two examples. Lendy agreed an interest rate with the Borrowers (with certain fees and interest payable to Lendy for its own account as principal), Lendy posted the loan on the Website and invited Lenders to participate in the loan if they wished to do so. Lendy did not purport to be responsible for obtaining the best available interest rate for the Model 2 Investors. There was no element of negotiation on behalf of the Model 2 Investors at all; they were only able to review each Model 2 Loan on the Website and “take it or leave it”. In those circumstances, the rationale for the No Profit Duty does not arise.

91. If this is correct, it is not necessary to consider whether the Model 2 Investors gave informed consent to Lendy’s profits. The question of informed consent only arises if Lendy in fact owed the No Profit Duty. However, in deciding whether Lendy owed the No Profit Duty, it is relevant to consider what the Model 2 Investors knew about Lendy’s business model: see, by way of analogy, Kelly v Cooper [1993] AC 205, at 215 per Lord Browne-Wilkinson (quoted in paragraph 70 above) in which the Court determined that the relevant plaintiff was “well aware” of the relevant facts, and therefore there was no relevant duty, whether contractual or fiduciary.

92. In particular, it is necessary to consider whether a duty not to make a profit is an appropriate duty to impose on Lendy in all the circumstances of the case. As to this:

92.1. The concept of a No Profit Duty does not sit easily with the reality of Lendy’s business model, which was designed to make a profit for Lendy. Lendy was a business, not a charity.

92.2. The Model 2 Investors knew that Lendy did not charge them any fees for using the Website (see Clause 2.11 of the Original Model 2 Terms72 and the Amended Model 2 Terms). As a result, there was only one way that Lendy could make a profit, namely by charging interest or fees to the Borrowers.

92.3. Both of Ms Taylor’s witnesses make it clear that they were in fact aware that Lendy operated in this way. Mr Powell’s evidence is that:

“… at the time I understood that Lendy would be making its profit in respect of Model 2 Loans by charging:

72.1 fees to borrowers, although I was unclear as to the precise nature of any fee that Lendy was charging, and the specific amount of any fee; and

72.2 borrowers interest above that which it was providing to Model 2 Investors and Model 2 Transferees and taking the delta, however I was unsure about the precise amount Lendy was taking, and also whether that amount constituted a ‘fee’ or something else.”

92.4. Similarly, Mr Melton’s evidence is that:

“I did not know what fees or charges I was paying to Lendy, and had no idea as to the amount of each of them, or their total. Rather, based on my experience with RateSetter and possibly statements made on the Website (to which, see paragraph 43.1), I assumed that Lendy would charge the borrowers a fee or commission for arranging the loans (Arrangement Fee), or charge interest to borrowers at a higher rate than it paid to the lenders and then keep the difference, or both.”

92.5. The fact that Lendy charged interest and fees to the Borrowers for its own account was also expressly stated in the FAQ section on the Website under the heading “How do [Lendy] make money?”:

“Since its launch by Lendy Ltd in 2013, [Lendy] has made its profit from the difference in interest rates charged to borrowers and paid to investors. All [Lendy] investors receive fixed monthly interest amount of 1%, whereas Lendy Ltd charges interest at 1.5% per month on average.

We feel this is a fair margin as the administration costs that are associated with sourcing new projects for investment, and ensuring all property is secured with a legal charge, are substantial.”

92.6. This FAQ appeared on the Website when the Original Model 2 Terms were in force. When the Amended Model 2 Terms were introduced, the above FAQ was deleted. However, the Amended Model 2 Terms were updated to refer expressly to the fact that interest was payable to Lendy (see Clause 9.2: “Borrowers are liable to repay the loans to lenders and pay any interest on such loans to you and Lendy”) and expressly noted that Lendy charged fees to the Borrowers (see Clause 9.11: “Details of the fees which Lendy charges borrowers are set out in the relevant Loan Contract, and these are, typically, an arrangement fee, an exit fee, and a loan monitoring fee”).

92.7. The FCA was also aware that Lendy charged interest for its own account and did not express any concerns in this regard.

93. Against that backdrop, there is no justification for imposing the No Profit Duty on Lendy. Such a duty is inconsistent with the fundamental principles of Lendy’s business (and also what the Model 2 Investors in fact knew about Lendy’s business). Lendy is not the sort of agent that should be treated as having a duty not to make a profit.

94. So far as the Model 2 Transferees are concerned, the foregoing analysis is a fortiori. There is no basis for imposing any relevant fiduciary duties on Lendy in relation to the Model 2 Transferees.

(C) Secondary Case – Informed consent

95. If (contrary to the Applicants’ primary case) Lendy did owe the No Profit Duty to the Model 2 Investors, it is submitted that (contrary to the case put forward by Ms Taylor) the Model 2 Investors gave informed consent to the profits earned by Lendy.

96. It is accepted that Lendy did not give “chapter and verse” to the Model 2 Investors on the quantum of interest and fees that it charged for its own account on each Model 2 Loan. However, such detailed information is not necessary where the principal is aware that the agent is making a profit. Where the principal is aware that the agent is making a profit, and the principal can discover the quantum of the profit but does not trouble to make inquiries, then the principal will be treated as having given informed consent.

97. In FHR European Ventures LLP v Cedar Capital Partners LLP [2011] EWHC 2308 (Ch), Simon J summarised the principles of informed consent.

97.1. He set out the relevant authorities that establish that the agent “It is not enough for an agent to tell the principal that he is going to have an interest in the purchase, or to have a part in the purchase. He must tell [the principal] all the material facts. He must make a full disclosure” (at [77]) and that the burden of proof falls on the agent (at [78]).

97.2. However, at [81], Simon J noted that “Since the sufficiency of disclosure is dependent on the facts of particular cases, previous decisions will be of limited assistance”. Nevertheless it is worth noting that, Simon J identified one proposition that is important to the present case (at [81]):

“Where the principal knows the agent will receive a commission and could have discovered what the commission was, but did not take the trouble to enquire, a misapprehension as to the amount of the commission will not mean that there has been no informed consent, see for example Great Western Insurance Co of New York v. Cunliffe (1874) LR 9 Ch App 525 at 539 and Baring v. Stanton (1876) 3 Ch D 502 at 505.”

98. Simon J also stated at [82]:

“… where the agent can show a customary usage or that the amount of the commission is standard and ascertainable on enquiry, the failure of the principal to make enquiries as to the amount of the commission is fatal to a contention that there has been insufficient disclosure. They do not assist where there is no customary usage of which the principal is deemed to have notice, or where the amount of the commission is not easily ascertainable from an available source which the principal has failed to take the trouble to discover.”

99. Thus, in Great Western Insurance Co of New York v Cunliffe (1874) LR 9 Ch App 525 at 539-540, Mellish LJ said:

“… it is quite obvious that [the principal] must have known, and they do not deny that they did know, that Messrs. Pickersgill were to be remunerated by receiving a certain allowance or discount from the underwriters with whom they made the bargains. It was easy to ascertain by inquiry what was the usual and ordinary charge which agents who effect reinsurances are entitled to make. If a person employs another, who he knows carries on a large business, to do certain work for him as his agent with other persons, and does not choose to ask him what his charge will be, and in fact knows that he is to be remunerated not by him but by the other persons—which is very common in mercantile business—and does not choose to take the trouble of inquiring what the amount is, he must allow the ordinary amount which agents are in the habit of charging.”

100. These propositions are cited as good law by the leading textbooks, including Snell’s Equity (34th edition) at paragraph 7-015:

“Where the principal knows that the agent will receive a commission and could have discovered the level of commission by making inquiries, failure to do so (and consequent misapprehension as to the amount of commission) does not negate informed consent. This, however, does not apply where the commission is not a customary usage and is not readily ascertainable from an available source which the principal has failed to take the trouble to discover.”

101. In light of the facts set out in paragraph 92 above, there can be no dispute that the Model 2 Investors were in fact aware that Lendy was making a profit by charging interest and/or fees to the Borrowers. The Model 2 Investors must also have been aware that this was the only way for Lendy to make a profit (since Lendy did not charge Investors for using the Website, and Lendy was not a charity). Finally, to the extent relevant, the evidence of Mr Melton shows that other P2P platforms adopt a similar charging structure: see, for example, Mr Melton’s reference to his “experience with RateSetter”, which he states charged interest and fees to borrowers in a similar way.

102. Accordingly, the critical question is whether the Model 2 Investors could have ascertained the amount of Lendy’s interest and fees by making enquiries. If the answer to that question is “yes”, but the Model 2 Investors did not take the trouble to make such enquiries, then the Model 2 Investors should be treated as having given informed consent.

103. In particular, Mr Powell or Mr Melton were aware that Lendy charged interest and fees to the Borrowers, but did not take any steps to make enquiries as to the amount of interest and fees that Lendy retained for its own account.

104. Moreover, Mr Powell and Mr Melton (and indeed any other Model 2 Investor) could have ascertained the amount of interest and fees that Lendy was charging. They could have asked Lendy to produce a copy of the Loan Agreement for the relevant Model 2 Loan together with the Term Sheet. As to this:

104.1. The Original Model 2 Terms made it clear that it was the Loan Contract that governed the relationship with the borrower: “Each agreement between each lender and borrower comprises our standard loan conditions and term sheet (together the ‘Loan Contract’)…The Loan Contract is a separate agreement between you and the borrower and is governed by separate terms and conditions. If there is a conflict between these terms and conditions and the Loan Contract, the Loan Contract will prevail.”

104.2. The Original Model 2 Terms expressly stated that “the Loan Contract governs the terms of repayment and payment of interest by the borrower” (see Clause 9.185) and that “interest and charges will be calculated on a daily basis up to the date the loan is repaid … The Loan Contract governs the payment of these amounts” (see Clause 9.386).

104.3. Clause 7.4 of the Original Model 2 Terms provides that “each time you purchase or sell a loan part, you will be shown the Loan Contract which will detail the legal terms of the loan”. Contrary to what is suggested by Clause 7.4, the Loan Agreement was not in fact shown to the Model 2 Investors before they invested in a Model 2 Loan87. However, Lendy was happy to provide a copy of the Loan Agreement to Model 2 Investors on request. This is shown by the evidence of Mr Powell, who explains that he asked for a copy of the Loan Agreement on a particular Model 2 Loan in late September 2018 and was provided with an unredacted copy of the Loan Agreement shortly thereafter.

104.4. Similar provisions can be found in the Amended Model 2 Terms: see Clause 9.1 (“The Loan Contract governs the terms of repayment of principal and payment of interest by the borrower”); Clause 9.2 (“Borrowers are liable to repay the loans to lenders and pay any interest on such loans to you and Lendy”); Clause 9.3 (“The Loan Contract governs the payment of these amounts and the interest rates applied to the loans due to you and Lendy”); and Clause 9.11 (“Details of the fees which Lendy charges borrowers are set out in the relevant Loan Contract, and these are, typically, an arrangement fee, an exit fee, and a loan monitoring fee”).

104.5. In order to understand the precise quantum of interest and fees that Lendy was charging, it would also have been necessary to review the Term Sheet for the relevant Model 2 Loan (in relation to interest) and the Borrower Conditions (in relation to the exit fee and arrangement fee). However: (i) the Term Sheet is expressly identified in the definition of “Interest Rate” in the Loan Agreement; (ii) Clause 4 of the Loan Agreement expressly identifies the existence of fees; and (iii) there is no evidence that Lendy would have been unwilling to supply a copy of the Term Sheet or the Borrower Conditions in addition to the Loan Agreement.

105. Thus, the present case falls within the principle stated by Simon J in FHR v Cedar at [81]. In the words of Simon J, “where the principal knows the agent will receive a commission and could have discovered what the commission was, but did not take the trouble to enquire, a misapprehension as to the amount of the commission will not mean that there has been no informed consent”.

106. The above remarks apply to the Model 2 Transferees mutatis mutandis. Moreover, it was not necessary for the Model 2 Transferees to give any separate informed consent. Provided that the original Model 2 Investors gave informed consent, the Model 2 Transferees (as assignees) stand in the shoes of the original Model 2 Investors (as assignors) and are bound by the latter’s informed consent. This follows from the principle that an assignee cannot be in a better position than the assignor: see Re Brown & Gregory Ltd [1904] 1 Ch 627 at 632.

(D) Tertiary case: Equitable allowance

107. In the alternative, it is submitted that Lendy is entitled to an equitable allowance in respect of the services that it provided to Model 2 Investors and Transferees.

108. It has long been established that the Court has the power to award an equitable allowance to a fiduciary who acts in breach of the No Profit Duty. In O’Sullivan v Management Agency and Music Ltd [1985] QB 428 at 467-468, Fox LJ referred to the various judgments in Boardman v Phipps (at first instance, in the Court of Appeal and in the House of Lords) and stated:

“These latter observations (and those of Lord Denning M.R. and the judgment of Wilberforce J. at first instance) accept the existence of a power in the court to make an allowance to the fiduciary. And I think it is clearly necessary that such a power should exist. Substantial injustice may result without it. A hard and fast rule that the beneficiary can demand the whole profit without an allowance for the work without which it could not have been created is unduly severe. Nor do I think that the principle is only applicable in cases where the personal conduct of the fiduciary cannot be criticised. I think that the justice of the individual case must be considered on the facts of that case. Accordingly, where there has been dishonesty or surreptitious dealing or other improper conduct then, as indicated by Lord Denning M.R., it might be appropriate to refuse relief; but that will depend upon the circumstances …

Once it is accepted that the court can make an appropriate allowance to a fiduciary for his skill and labour I do not see why, in principle, it should not be able to give him some part of the profit of the venture if it was thought that justice as between the parties demanded that. To give the fiduciary any allowance for his skill and labour involves some reduction of the profits otherwise payable to the beneficiary. And the business reality may be that the profits could never have been earned at all, as between fully independent persons, except on a profit sharing basis.”

(Fox LJ went on to explain that the quantum of an equitable allowance would depend on the conduct of the fiduciaries and all the circumstances of the case.)  These principles were approved by the Court of Appeal in Imageview Management Ltd v Jack [2009] 2 All ER 666 at [56]-[59] per Jacob LJ. When Jacob LJ said that the discretion to award an equitable allowance should be exercised sparingly, he was essentially referring to the Court’s broad discretion in fixing the quantum of the allowance (as is clear from the quotation from Snell that he approved at [56]).

109. In the present case, and assuming that the Court is required to consider this question at all (contrary to the arguments set out above), Lendy should be awarded an equitable allowance for its services in relation to the Model 2 Loans. Otherwise, Lendy would (in effect) have provided a P2P platform to the Model 2 Investors free of charge. This result would be unfair to the Model 1 Investors (as it would deplete the assets available in Lendy’s general estate). In the words of Wilberforce J at first instance in Phipps v Boardman [1964] 1 WLR 993 at 1018, “it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it”. The law of fiduciary duties (and in particular the remedy of ordering an account) “should not be allowed to become a vehicle for the unjust enrichment of the [principal]”: see Imageview Management Ltd v Jack [2009] 2 All ER 666 at [58] per Jacob LJ.

110. It would be particularly unjust for Lendy not to receive an equitable allowance in circumstances where both Mr Powell and Mr Melton were aware that Lendy was likely to be earning a profit by charging interest and/or fees for its own account.

111. Lendy’s conduct towards the Model 2 Investors was not dishonest, surreptitious, or improper in relation to the fees and interest that Lendy charged. As noted in paragraph 92.5 above, the FAQs displayed on the Website expressly referred to the fact that Lendy charged interest for its own account. Although the relevant FAQ was deleted when the Amended Model 2 Terms came into force, the Amended Model 2 Terms made it clear that Lendy charged interest for its own account (see Clause 9.2: “Borrowers are liable to repay the loans to lenders and pay any interest on such loans to you and Lendy” (emphasis added)) and that Lendy also charged fees for its own account (see Clause 9.11: “Details of the fees which Lendy charges borrowers are set out in the relevant Loan Contract, and these are, typically, an arrangement fee, an exit fee, and a loan monitoring fee”).

112. If the Court is satisfied that Lendy should be awarded an equitable allowance for its services in relation to the Model 2 Loans, then it will be necessary for that allowance to be quantified.

113. The authorities provide little guidance on the principles for quantifying an equitable allowance. The quantum of the allowance is within the discretion of the Court.

113.1. In some cases, the Court has awarded an allowance equal to the estimated amount that the principal would have agreed to pay the fiduciary in consideration for performing the relevant services: see Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch) at [95] per Vos J. Another (related) approach is to identify the sum that is “just and equitable” having regard to “the usual kind of figure that is expected in this market” (ibid).

113.2. The Court can also award “some part of the profit of the venture” (see O’Sullivan v Management Agency). There is no fixed methodology for quantifying an equitable allowance; the Court will exercise its discretion in light of all the circumstances.

114. It is submitted that the quantum of any equitable allowance should be determined at a further hearing in due course. If it is necessary to deal with this matter, the parties should be given permission to file evidence dealing with the points set out in the previous paragraph and any other matters that may be relevant to the quantum of the allowance.

(E) No breach of COBS 6.1.9(1)(R)

115. Finally, a miscellaneous point is raised in Ms Taylor’s position paper at paragraph 20. She contends that Lendy breached a provision in the Conduct of Business Sourcebook promulgated by the FCA (“COBS”), namely rule 6.1.9(1)(R):

“A firm must provide a client with information on costs and associated charges including, if applicable:

(1) the total price to be paid by the client in connection with the designated investment or the designated investment business, including all related fees, commissions, charges and expenses, and all taxes payable via the firm or, if an exact price cannot be indicated, the basis for the calculation of the total price so that the client can verify it. The commissions charged by the firm must be itemised separately in every case …” [emphasis added]

116. However, COBS 6.1.9(1)(R) has no application in the present case. As to this:

116.1. There was no “price to be paid by the client in connection with the designated investment”. No fees were payable by the Model 2 Investors, who were the relevant “clients”. Interest and fees were payable to Lendy by the Borrowers and not by the Investors. The payment of such fees is not within COBS 6.1.9(1)(R).

116.2. In Ms Taylor’s position paper, it is suggested that the interest and fees payable by the Borrowers should be treated “in effect” as a “price to be paid by the [Model 2 Investors]” on the basis that the Model 2 Investors would be required to compete with Lendy in the event of a shortfall on a security enforcement. However, the mere fact of competition between Lendy and the Model 2 Investors in the event of a shortfall does not show that any price was payable by the Model 2 Investors to Lendy.

117. In any event, a breach of COBS 6.1.9(1)(R) would not give rise to a proprietary remedy (unlike a claim for breach of the No Profit Duty). At best, the Model 2 Investors/Model 2 Transferees would be entitled to lodge a proof of debt for damages for breach of statutory duty under section 138D of the Financial Services and Markets Act 2000.