Lendy Directions Hearing Day 4

Oral and Written Submissions made on Day 4 in the Matter of Lendy Ltd at the High Court in Birmingham.

See 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 2 here: “Lendy Directions Hearing Day 2“
Read the submissions made on Day 3 here: “Lendy Directions Hearing Day 3”
And handed down some six weeks after the trial: Read the Judgment

The Transcript

Click to access day-4.pdf

Issue 10

Issue 10: Should the Secured Liabilities be discharged pro rata between Lendy on the one hand, and Model 2 Investors and/or Model 2 Transferees on the other hand, or in some other manner?

The Applicants Position
(From their Skeleton Argument)

149. The Applicants’ position is that the Secured Liabilities should be discharged pro rata (to the extent that there is any shortfall in the proceeds available for the discharge of the Secured Liabilities) so that any shortfall is borne rateably by the persons to whom the Secured Liabilities are owed.

150. In contrast, Ms Taylor contends that the Secured Liabilities owing to the Model 2 Investors and Transferees should be discharged in priority to the Secured Liabilities owing to Lendy. There is no proper basis for reaching this conclusion, which would operate to reduce the assets available to Lendy’s general estate to the detriment of Model 1 Investors, and would prefer the Model 2 Investors.

151. Clause 21.1 of the Model 2 Debenture provides as follows:

“All monies received by the Security Agent, a Receiver or a Delegate pursuant to this deed, after the security constituted by this deed has become enforceable, shall (subject to the claims of any person having prior rights and by way of variation of the LPA 1925) be applied in the following order of priority:

21.1.1 in or towards payment of or provision for all costs, charges and expenses incurred by or on behalf of the Beneficiaries, the Security Agent, (and any Receiver, Delegate, attorney or agent appointed by it) under or in connection with this deed, and of all remuneration due to any Receiver under or in connection with this deed;

21.1.2 in or towards payment of or provision for the Secured Liabilities in any order and manner that the Security Agent determines; and

21.1.3 in payment of the surplus (if any) to the Borrower or other person entitled to it.” (emphasis added)

152. The second limb set out above appears at first glance to give a broad discretion to SSSHL to determine the order and manner in which the Secured Liabilities are to be discharged. However, the Applicants’ case is that SSSHL can only properly exercise this discretion to apply the proceeds pro rata between the Secured Liabilities (in the event of a shortfall). This is because:

152.1. SSSHL’s discretion to determine the order and manner in which the Secured Liabilities are to be discharged must be exercised honestly and in good faith, and should not be exercised arbitrarily, capriciously, or irrationally: see Braganza v BP Shipping Ltd [2015] 1 WLR 1661 at [18]-[32]. Only a pro rata allocation could satisfy this test.

152.2. SSSHL is now under the control of the Administrators and Conflict Administrators, who are officers of the Court. Both sets of Administrators of SSSHL have a statutory duty to treat creditors fairly (by virtue of the “unfair harm” provision in paragraph 74 of Schedule B1 and the rule in Ex Parte James (1873-4) LR 9 Ch App 609). Again, only a pro rata allocation would be fair.

152.3. A pro rata allocation is also consistent with Clause 12.7 of the Model 2 Terms:

“12.7 Where Saving Stream Security Holding holds a debenture, a legal charge and/or other security in respect of a particular loan or the liabilities of a particular borrower, that debenture, legal charge and/or other security will generally operate to secure all monies due from that borrower to lenders on the Saving Stream platform from time to time. If Saving Stream Security Holding is required to enforce any security agreement, and any proceeds of recovery become available (after allowing for all of Saving Stream Security Holding and/or Saving Stream’s costs of enforcement), it is possible that the available proceeds will not be sufficient to discharge all obligations owed by the borrower at that time to lenders on the Saving Stream platform. If that is the case, then the lenders shall only be entitled to recover their proportionate share of such recoveries.” (emphasis added) (Original Model 2 Terms)

“12.7 Where Saving Stream Security Holding holds an all asset security, a legal charge and/or other security in respect of a particular loan or the liabilities of a particular borrower, that debenture, legal charge and/or other security will generally operate to secure all monies due from that borrower to each lender (and any amounts due to Lendy) on the Lendy Platform from time to time. If Saving Stream Security Holding is required to enforce any security agreement, and any proceeds of recovery become available (after allowing for all of Saving Stream Security Holding and/or Lendy’s costs of enforcement), it is possible that the available proceeds will not be sufficient to discharge all obligations owed by the borrower at that time to lenders (and any amounts due to Lendy) on the Lendy platform. If that is the case, then the lenders shall only be entitled to recover their proportionate share of such available proceeds.” (emphasis added) (Amended Model 2 Terms)

This provision does not expressly deal with the allocation of recoveries between the Model 2 Investors / Transferees and Lendy. However, the language of the clause (including in particular the reference to a “proportionate share”) is consistent with a pro rata allocation.

153. In correspondence, Ms Taylor has argued that the Conflict Administrators should exercise the discretion under Clause 21.1.2 of the Model 2 Debenture. This is said to be on the basis that the Applicants have a conflict of interest (by virtue of the fact that the Applicants are also administrators of Lendy, which is one of the beneficiaries of the security enforcement waterfall). However, this is not correct:

153.1. The purpose of Issue 10 is to obtain a determination as to the way in which the discretion under Clause 21.1.2 of the Model 2 Debenture should be exercised.

153.2. In order to provide such a determination, the Court needs to satisfy itself that the Administrators of SSSHL are before the Court (which they are) and to hear adversarial argument on the point (which it will – see below). This will enable the Court to provide a determination of Issue 10.

153.3. In those circumstances, it is irrelevant whether the discretion under Clause 21.1.2 is exercised by the Applicants or the Conflict Administrators. Whoever exercises the discretion must do so in accordance with whatever determination the Court makes in relation to Issue 10

153.4. Ms Taylor has in any event now confirmed that she will provide the Court with adversarial argument on Issue 10. Her substantive position appears to be that the Secured Liabilities owing to the Model 2 Investors and Transferees should be discharged in priority to the Secured Liabilities owing to Lendy: see below.

153.5. In those circumstances, the Court will be able to determine Issue 10 after hearing argument from each of the Applicants and Ms Taylor. It is not necessary for the Conflict Administrators to be actively involved in these proceedings, since the relevant arguments will already be advanced by the parties who are before the Court.

154. Ms Taylor will no doubt seek to rely upon the fact that the Head of Compliance at Lendy (Mr Coles) informed the FCA that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy. This was stated in an email from Mr Coles to Mr Cooper (of the FCA) dated 16 March 2018:

“All capital payments received are apportioned to ensure that investors receive full repayment before settling any interest and/or costs payable to, or paid out by, Lendy. Therefore, Lendy will always apportion the monies on the following basis:

1. Capital payable to investors

2. Interest payable to investors

3. Bonus accrual payable to investors

4. Monies owed to Lendy

The only time this process is not followed is when an LPA Receiver or Administrator is appointed whereby the costs of the receivership/ administration (which are not Lendy’s costs) will be deducted from any proceeds of sale before monies are attributed as above.

Lendy has never prioritised its costs over and above those of investors in the event of a shortfall from an asset sale. The minor update to the payment waterfall seeks to further clarify (and therefore strengthen) investor protection in the case of these or similar sale events. Furthermore, I can confirm that Lendy has absolutely no plans to change the payment waterfall to promote its costs above investors. This a key foundation stone of the business.

On this basis we have not historically detailed the costs incurred by Lendy on the platform since they are not relevant to the recovery to investors…”

155. However, this email is not an aid to the construction of the Model 2 Debenture and is in any event inconsistent with

155.1. the express terms of Clause 21.1

155.2. the Original Model 2 Terms and the Amended Model 2 Terms: see Clause 12.7 (quoted in paragraph 152.3 above), which did not provide that the Model 2 Investors would be given any priority over Lendy.

156. In addition:

156.1. There is no suggestion that the email from Mr Coles was disseminated to Model 2 Investors. This makes it impossible to see how any argument based on estoppel (or any similar doctrine) could be advanced in reliance on the email from Mr Coles.

156.2. It may be that the email from Mr Coles was an attempt by Lendy to seek to persuade the FCA that the position was other than it was. However, Mr Coles is not before the Court, and there is no need for the Court to reach any conclusion as to his state of mind. The email from Mr Coles is not relevant to the construction of Clause 21.1.2 of the Model 2 Debenture or to the exercise of SSSHL’s powers under Clause 21.1.2 of the Model 2 Debenture.

157. Ms Taylor may also seek to rely upon the fact that a series of inconsistent and confusing statements were included in the policy documents uploaded to the Website by Lendy. As to this:

157.1. The first policy document (the “First Overdue Loans Default Policy”) was effective from 1 March 2017. It did not suggest that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy.

157.2. The second policy document (the “Second Overdue Loans Default Policy”) was effective from 1 August 2017. Again, it did not suggest that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy.

157.3. The third policy document (the “Recovery and Collections Policy”) was effective from 13 April 2018. Unlike the previous two policy documents, it stated that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy.

157.4. However, shortly afterwards, the original Recovery and Collections Policy was deleted and a new policy document was uploaded in its place (the “Amended Recovery and Collections Policy”). This document removed any suggestion that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy. Instead, it stated: “Payments received… as a result of any enforcement action will be applied as set out in Lendy’s [investor] terms and conditions”.

157.5. It is not known exactly when the Amended Recovery and Collections Policy was uploaded to the Website, but it appears to have taken place at some point between the end of April and the beginning of October 2018. Mr Powell himself contacted Lendy on 30 April 2018 to point out that the original Recovery and Collections Policy was inconsistent with the Model 2 Terms, which did not contain any suggestion that the Secured Liabilities owing to the Model 2 Investors and Transferees would be discharged in priority to the Secured Liabilities owing to Lendy. It may be that Mr Powell’s emails resulted in Lendy deleting the original Recovery and Collections Policy and introducing the Amended Recovery and Collections Policy in its place.

158. Although these policy documents are undoubtedly inconsistent and confusing, they do not provide a proper basis for exercising the discretion under Clause 21.1.2 of the Model 2 Debenture. In light of the inconsistencies, the policy documents should be disregarded for the purposes of exercising the discretion under Clause 21.1.2. The right course of action is to apply a pro rata allocation in the manner set out in paragraph 149 above.

The Respondents Position
(From their Skeleton Argument)

(F) Issue 10: the application of security proceeds held on trust.

(F)(i) The issue in overview.

45. From October 2015, Lendy’s loans were on Model 2 terms (Webb 2 §35-§36 [B/1/8])), and its standard-form debenture (the “Debenture”) [C/10/150] and legal mortgages (see [C/12/205] and [C/13/235]) provided for SSSHL to be the chargee/mortgagee in respect of the security granted by borrowers. So far as material:

45.1 Clause 14.1.1 of the Debenture provided for the Security Agent (i.e. SSSHL) to hold its rights thereunder “upon trust to pay and apply the same for the benefit of the Beneficiaries” [C/10/173], which term was defined by clause 1.1 to include both the lenders and Lendy [C/10/153].

45.2 Clause 21.1 provided that all monies received by the Security Agent pursuant to the Debenture fell to be applied first, under clause 21.1.1, towards certain charges (which are not material for present purposes), and thereafter, under clause 21.1.2, “in or towards payment of or provision for the Secured Liabilities in any order and manner that the Security Trustee determines” [C/10/182].

45.3 The term “Secured Liabilities” was defined by clause 1.1 [C/10/156] to mean “all present and future monies, obligation and liabilities of the Borrower to the Beneficiaries … pursuant to any Finance Document”, which was defined in turn [C/10/154] to include the loan agreements between Lendy and borrowers.

46. Clause 21.1.2 of the Debenture consequently gave SSSHL a discretionary power qua trustee to pay Model 2 Lenders and Lendy in whatever order of priority it chose, and it is common ground between the parties that the position is no different in cases where Lendy took legal mortgages, rather than a debenture (see Webb 2 §191(f) [B/1/42]). The issue for decision is how that discretion should be exercised in respect of funds still in its hands, in circumstances where (as will be the case in respect of many loans) there is insufficient to meet the claims of both relevant Model 2 Lenders and Lendy in full. Ms. Taylor says Model 2 Lenders should be paid in priority to Lendy; the Administrators contend they should be paid pari passu.

(F)(ii) What is the court’s proper role?

47. Issue 10 was posed by the Administrators for the court’s decision in the following general terms: “should the Secured Liabilities be discharged pro rata … or in some other manner?” (see §13 in the original list at [A/1/5], and §10 in the final list at [A/2/10]). This raises a threshold question about the court’s role on this aspect of the application:

47.1 A trustee upon whom a discretionary power is conferred may invoke the assistance of a court of equity in relation to its exercise: see generally Lewin on Trusts (20th ed.) §39-085. Among other things, he may take the decision for himself, but seek the court’s blessing, in which case, the court’s function is “a limited one … once it appears that the proposed exercise is within the terms of the power, the court is concerned with limits of rationality and honesty” (Lewin at §39-095).

47.2 Alternatively, the trustee may seek to surrender his discretion to the court for it to exercise on his behalf, and this is what the Administrators in fact did here, in framing Issue 10 in the terms they did. In such a case, the court’s role is different: it “will act as a reasonable trustee could be expected to act having regard to all the material circumstances” (Lewin §39-099). It exercises an originating, rather than a supervisory jurisdiction, and takes the discretionary decision for itself.

47.3 The cases show that it is not every case in which a trustee seeks to surrender his discretion that the court will be prepared to accept that surrender: there has to be “a good reason” for doing so (Lewin §39-085(3)). But there will be such where the trustee is conflicted on the issue for decision, as is usually the case where the trustee is a company in insolvency proceedings, and the exercise of the power may benefit the insolvent estate, at the expense of other beneficiaries under the trust: see e.g. Thrells Ltd. v. Lomas [1993] 1 W.L.R. 456, at 459H (“the liquidator is confronted with an impossible conflict of duties … ”).

47.4 This is such a case. The Administrators are the administrators of both the trustee (SSSHL) and Lendy, and in that latter capacity, (1) owe duties to Lendy’s unsecured creditors, and (2) are themselves expense creditors in respect of their remuneration. Those duties and interests are plainly adverse to the interests of the Model 2 Lenders, in their capacities as objects of the power conferred by clause 21.1.2 of the Debenture. The Administrators cannot properly exercise their powers as the administrators of SSSHL to benefit either themselves, or Lendy’s insolvent estate more generally, at the expense of Model 2 Lenders.

48. In the circumstances, the court should have no hesitation in accepting the Administrators’ surrender of the discretion conferred on SSSHL by clause 21.1.2 of the Debenture. In some cases, difficulties arise, because the trustee has an intimate familiarity with the subject matter of the trust which the court can never have: there is no such difficulty here. By the time of this hearing, the court will be at least as well placed to assess the relevant considerations as the administrators of SSSHL could ever have been (cf Lewin §33-035, text to note 98), and resolving the issues as to the exercise of the discretion now is plainly the cost-effective course, given the other matters also standing in need of resolution.

(F)(iii) Can the discretion only be exercised in favour of a pari passu distribution?

49. If the court agrees thus far, it is convenient to deal next with a discrete issue arising out of the Administrators’ PP. At §51 [A/7/85], the Administrators advanced the radical suggestion that despite the fact that clause 21.1.2 of the Debenture expressly confers a discretion in the widest terms, that discretion can only be exercised in favour of a pari passu distribution, citing Braganza v. BP Shipping Ltd. [2015] 1 WLR 1661 (S.C.) in support. This is plainly not so:

49.1 Nothing in Braganza supports the proposition that where a trustee (or any other private law decision-maker, for that matter) has a discretion to distribute a fund among a class of persons, rateable distribution is the only rational basis upon which the discretion can be exercised. On the contrary, that would be an abdication of the discretion, because the possibility of an unequal outcome is inherent in the nature of the power: “the very discretion conferred is to prefer one [i.e. member of the relevant class] over another” (Lewin §29-064).

49.2 Thus, in Edge v. Pensions Ombudsman [2000] Ch. 602 (C.A.), a pension scheme trustee decided to exercise a power in a way that favoured one class of beneficiaries over another. The pensions ombudsman set that decision aside, claiming it breached a “duty to act impartially between the different beneficiaries” (at 615H), but his ruling was overturned by the High Court. Dismissing the regulator’s appeal, Chadwick L.J. said: “properly understood, the so-called duty to act impartially … is no more than the ordinary duty … [to exercise] the power for the purpose for which it is given … If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interest … over others. The preference will be the result of a proper exercise of the discretionary power” (at 627E-F).

49.3 It is settled at the highest level of authority that what is true where the trustee exercises a discretionary power for himself is equally true where the court exercises it for him. In McPhail v. Doulton [1971] A.C. 424 (H.L.), Lord Wilberforce stated that where the court steps in to distribute a discretionary fund, it is by no means constrained to distribute it pari passu among the class of beneficiaries: “equal division is surely the last thing the settlor ever intended … Equal division may be sensible and has been decreed, in cases of family trusts, for a limited class; here there is life in the maxim ‘equality is equity’, but the cases provide numerous examples where this has not been so, and a different type of execution has been ordered, appropriate to the circumstances” (at 451A-B, and see further Snell’s Equity 34th ed.), §5-012).

49.4 The Administrators PP §51(b) [A/7/85] appears to suggest that it somehow makes a difference that the trustee (i.e. SSSHL) is in administration, and that they (the Administrators) as a result have a “statutory duty to treat creditors fairly”:

49.4.1 This submission neatly illustrates the point made in paragraph 47.4 above: the Administrators cannot possibly take the decision about how the trust discretion should be exercised, because their duty to creditors (and their interest in payment of their own fees) undermines their impartiality in their separate capacity as the decision maker under clause 21.1.2 of the Debenture.

49.4.2 But it does not begin to justify the suggestion that the only way in which the court should exercise its discretion, the Administrators having surrendered it, is to direct pari passu distribution of the funds held on trust by SSSHL. That funds distributed from the trust by SSSHL to Lendy thereafter fall to be distributed pari passu by the Administrators does not entail that the trustee likewise has to distribute rateably at the antecedent stage.

49.5 The Administrators’ reliance at §51(c) of their position paper [A/7/85] on clause 12.7 in the Original/Amended Model 2 Terms (see respectively [C/14/276] and [C/15/295] is misplaced. That provision did not purport to deal with how competing claims of Model 2 Lenders and Lendy would be treated, as against each other, in the event of a shortfall. It simply provided that the claims of Model 2 Lenders would abate rateably, as among themselves, if there was insufficient to go round. If anything, it consequently supports Ms. Taylor’s distribution proposal, and not the Administrators’. (F)(iv) How should the court exercise its discretion?

50. The question then becomes how the court should exercise its discretion to distribute, in place of the trustee. In the context of a traditional family or charitable trust whose assets derive from the largesse of a settlor, weight usually attaches to the wishes of that settlor (see Lewin §29-046). In the context of a trust like the one under consideration, it is not easy to determine who is to be regarded as the settlor for that purpose (Lendy or the Model 2 Lenders?), and nor does this court need to do so. It suffices to identify “the main purpose” of the settlement (Edge v. Pensions Ombudsman at 626G), and then to weigh the decision in light of ordinary equitable principles by reference to that purpose.

51. So far as that “main purpose” is concerned, Ms. Taylor submits that it was self-evidently to reassure Lenders that they benefitted from security that would see them right, even in the event of borrower default. And it is important to appreciate that this was not mere altruism: it was fundamental to Lendy’s ability to raise capital that lenders believed themselves to enjoy such protection, in a competitive market where there were many other investment products on offer. Highlighting only some of the more important aspects of the evidence relevant to that point:

51.1 Powell 1 §75.2 states that he was “always under the impression” that Model 2 Lenders “would recover their capital and any unpaid interest before Lendy would recover any amounts due to it” [B/4/116], and Melton 1 §42.2 states that he similarly assumed “that Lendy would prioritise the return of a lender’s capital and interest” [B/3/81]. Both also state that had they known their claims would be in competition with substantial claims of Lendy’s own, in a shortfall situation, they would not have invested through the platform: Powell 1 97.3(d) [B/4/128]; Melton 1 §52.3 [B/3/84].

51.2 Their understandings of how Lendy proposed to deal with shortfall cases had a firm foundation. The point has already been made that clause 12.7 of the Original/Amended Model 2 Terms is consistent with Lendy not making claims against security proceeds in a shortfall case (see paragraph 49.5 above), and Lendy made unequivocal representations in its investor communications that lenders would be the priority, were that situation ever to arise: “You are our number one concern and protecting your interests and hard-earned capital is our top priority … Where we might be faced with a recovery shortfall, we will pursue every avenue available to us to recover Investors’ capital in full, along with interest accrued and any bonuses owed” [E2/103/415].

51.3 Importantly, Lendy also made very similar claims to the FCA in March 2018, at a point at which the Authority had provisionally indicated that it was minded to refuse Lendy’s FSMA part 4A application. Following publication of the Amended Model 2 Terms on its website on 4 March 2018, the FCA wrote to Lendy expressing concern that new clause 13.3 [C/15/296] subordinated lenders’ entitlements to principal and interest to Lendy’s own fees [E2/108/462], and querying whether this had previously been communicated to lenders.

51.4 The FCA’s communication resulted in an exchange of emails, which culminated in the following from Lendy’s Head of Compliance, Paul Coles, on 16 March 2018: “all capital payments received are apportioned to ensure that investors receive full repayment before settling any interest and/or costs to payable to, or paid out by, Lendy … Lendy has never prioritised its costs over and above those of investors in the event of a shortfall from an asset sale … Furthermore I can confirm that Lendy has absolutely no plans to change the payment waterfall to promote its costs above investors. This is a key foundation stone of our business” [E2/109/476].

52. For the purposes of the point now under discussion, it is important to trace how that issue played out subsequently:

52.1 On 27 March 2018, Lendy published its First Recovery Policy [E2/111/486], which it announced in an investor-round up email on 13 April 2018 (see Powell 1 §77 [B/4/117], and [E2/112/492]). Consistently with Mr. Coles’ 16 March 2018 email, the Policy stated that (subject to an immaterial exception) receipts from borrowers “shall be put to the amounts owing with the following priority: (1) Capital (loan) amount; (2) interest accrued; (3) [lender] bonus accrual. Lendy will only take any portion of interest or fees owing to them once all of the above has been satisfied” [E2/111/489].

52.2 That promise was inconsistent with clause 13 of the Amended Model 2 Terms, and the inconsistency was picked-up by Mr. Powell, who queried it in an email to Lendy on 30 April 2018 [E2/114/499]. This drew the following response from Lendy, a little over a week later, on 8 May 2018: “we acknowledge the mismatch between the order of payments in our T&Cs and in the Collections & Recoveries policy. The order of payments in the event of a shortfall will be as per the Collections & Recoveries policy. We will be updating the T&Cs so that they correspond with the Collections & Recoveries policy” [E2/114/500].

52.3 By 1 August 2018 (i.e. almost three months later), the promised amendment to bring the Amended Model 2 Terms into line with the First Recovery Policy had not materialised, so Mr. Powell emailed Lendy again (“just a reminder that the T&Cs still haven’t been corrected … “ [E2/114/504]). Absent any reply to that, he sent a further email on 13 September 2018 [E2/121/528], and then another one on 3 October 2018 [E2/121/530], finally getting the following holding reply: “sorry for the delay in getting back to you. I have referred your inquiry to the legal team and I will get back to you as soon as I have an update … ” [E2/121/530].

52.4 As far as the evidence goes, that was the last communication on this point. Contrary to the assurance given to Mr. Powell on 8 May 2018, the Amended Model 2 Terms were not amended to bring them into line with (1) the First Recovery Policy, and (2) the representations made by Mr. Coles to the FCA on 16 March 2018. Instead, at an unknown date (but likely to have been after 28 August 2018: see SOAF §13.5.5(b) [A/4/45]), Lendy withdrew the First Recovery Policy, and substituted it with the Second Recovery Policy [E3194/963], which deleted the reference to lenders being repaid in priority in a shortfall case, and replaced it with the following wording: “payments received … as a result of any enforcement action will be applied as set out in Lendy’s terms and conditions” [E/3/194/966].

53. There are the following points to make about that sequence of events:

53.1 Although the First Recovery Policy was announced in a round-robin email to lenders (see paragraph 52.1 above), the Second Recovery Policy was not. As far as the evidence goes, lenders were never told about this critical change to how Lendy proposed to proceed in shortfall cases: see further Powell 1 §79.6 [B/4/199].

53.2 The consequence of the Second Recovery Policy was that from the date of its publication, the statements on that critical point made to the Authority by Mr. Coles in his 16 March 2018 email (see paragraph 51.4 above) were misleading. Far from prioritising lenders’ entitlements, Lendy was thereafter prioritising its own, in flat contradiction to what it had given the regulator to understand.

53.3 But although Mr. Coles remained in post down to May 2019 (see Webb 2 §43(h) [B/1/11]), neither he, nor anyone else at Lendy appears to have seen fit to tell the FCA about this important change of heart. That omission would be striking enough, if viewed in isolation: it is still more so, given that on 10 July 2018, the FCA granted Lendy its FSMA part 4A full authorisation (Webb 2 §61 [B/1/14]).

53.4 In deciding to authorise Lendy, the FCA must have been influenced by the understanding (gained from Mr. Coles) that Lendy would prioritise lenders over its own claims, in shortfall cases. Lendy must have been well aware of that, and equally well aware that the FCA would look with disfavour on any attempt to derogate from that subsequently.

53.5 The facts set out above, however, suggest that while Lendy was anxious to tell both the regulator and lenders (i.e. Mr. Powell) that its intention was to prioritise lenders for as long as it was seeking FCA authorisation, after it got it, in July 2018, it decided to do the precise opposite, but without informing anyone of its volte face.

54. Two other aspects of Lendy’s conduct towards its lenders are also relevant in this context. First, the point has already been made more than once that Lendy did not supply copies of loan agreements to investors, despite the fact that the investors were (through their agent, Lendy) themselves party to those agreements:

54.1 Taken in conjunction with clause 13.3 of the Amended Model 2 Terms and the Second Recovery Policy, the consequence of that was that in shortfall cases, lenders were exposed to a risk of loss whose magnitude they had no means of understanding. From the date of the Second Recovery Policy, Lendy’s position was that its dues were payable from security realisations in priority to the amounts owing to lenders, but lenders had no means of knowing what those dues were.

54.2 The FCA made precisely this point in an email to Mr. Coles of 13 May 2018, forming part of the exchange referred to in paragraphs 51.3-51.4 above. It pointed out that because Lendy did “not provide any information about its ‘unpaid fees, costs and expenses”, lenders had no means of establishing for themselves “the likely cost when an asset sale leads to a shortfall … we consider this to be material information that lenders should have been provided with prior to them making a decision to invest. This is information that would help a lender formulate a view as to the likely risks of losing their investment (COBS 14.3.2R(1))” [E2/109/479].

54.3 But because of the assurances Mr. Cole gave the FCA in reply to the effect that Lendy would prioritise Investors, despite the terms of clause 13.3 (see paragraph 51.4 above), the FCA did not thereafter pursue this point, and oblige Lendy to make full disclosure to lenders of the charges the Administrators now maintain should rank pari passu under the SSSHL trust. The upshot is that the full extent of those charges has become clear to Model 2 Lenders only during the course of these proceedings: see the references to the evidence in paragraph 51.1 above (second sentence).

55. The second relevant aspect of Lendy’s conduct is as follows:

55.1 The Administrators’ evidence necessarily contains only a partial account of Lendy’s no doubt extensive correspondence and dealings with the FCA. From the selected material that has been made available, however, it is clear that the Authority raised concerns that Lendy’s promotional materials were misleading, and in breach of provisions in the FCA Handbook.

55.2 The Administrators have accepted in correspondence that this is likely to have been so (see the final paragraph on [D/6/15]), and there are two letters in the hearing bundle evidencing the regulator’s concerns:

55.2.1 On 12 August 2016, the FCA wrote to Lendy stating that its internet advertisements “may not meet our requirements to be fair, clear and not misleading, and … present a potentially misleading impression of the returns available and the nature and safety of the investments” [E1/44/160].

55.2.2 On 1 June 2017, the Authority wrote again, raising concerns over how the funding of interest payments was explained [E1/79/269], failures to flag the fact that loans being traded in the secondary market had already gone into default [E/79/271], and the claims made by Lendy about its Provision Fund [E/79/272].

55.3 Lendy’s response to that first letter was particularly noteworthy. One of the FCA’s principal concerns at this point was that Lendy’s use of the “Saving Stream” trading name was misleading: “you have presented a P2P agreement as a ‘savings’ vehicle. However, it is an investment with a very different risk profile to a savings vehicle … We consider that the use of the trading name ‘saving stream’ is misleading for the reasons set out above … Please reply to us in writing by 2 September 2016 telling us what you have done to change your trading name” [E1/44/161].

55.4 Lendy replied on the 2 September 2016 deadline, initially declining to comply with the FCA’s direction [E1/47/176], but an internal document dating from 1 December 2016 (Webb 2 §47 [B/1/12], and [E1/58/202]) shows that by that date, it was reluctantly bowing to pressure from the regulator, in part, out of a concern that if it did not, the “FCA will almost certainly then, over the next 3 months, look at every aspect of Lendy Ltd’s compliance with the regulator’s rules … ”. On 1 March 2017, it consequently ditched the objectionable Saving Stream trading name, carrying-on business between then and administration instead as “Lendy”.

55.5 Remarkably, however, when announcing this rebranding to its existing lender base, Lendy made no mention at all of the fact that it had resulted from a threat of intervention by the FCA to correct the misleading impression created by its previous trading name. Instead, it sought to explain it away with bland generalities that were, on any view, far from frank: “following feedback from users, we are integrating the Saving Stream platform under the Lendy brand. This is in order to simplify the brand and make accessing the crowdfunding platform easier for all our clients” [E1/73/237].

56. Against that background, Ms. Taylor suggests that, subject to such separate considerations as arise out of Lendy’s insolvency, the obviously fair course is for the court to exercise its discretion to direct SSSHL to distribute the monies it holds on trust to the relevant Model 2 Lenders in priority to Lendy. To do so would give effect to the “main purpose” of the trust (see paragraph 51 above): to do otherwise would cause hardship to a large class of individuals, many of whom will be retired (Powell 1 §85.4 [B/4/122]), and of limited means. It would also be thoroughly unconscionable to allow Lendy to participate in the limited fund, given the conduct referred to above, and in particular, the assurances it gave about priorities in order to raise capital, and secure FCA authorisation.

57. If the court agrees, the only question that leaves is whether Lendy’s insolvency should make a difference. Pending seeing what the Administrators may have to say about that, Ms. Taylor makes the following points:

57.1 Under Model 1, Lendy was itself the lender, and the chargee under the debentures it concluded with borrowers [C/2/16]. When the switch to Model 2 was made, Lendy could still have provided for itself to be the chargee, holding realisations on trust for lenders: but it did not. Instead, debentures/mortgages were thereafter concluded in favour of SSSHL, which had no separate business of its own.

57.2 In those circumstances, Ms. Taylor suggests that it would be an odd result if the fact of Lendy’s insolvency were a point of much weight in the context of SSSHL’s discretion under clause 21.1.2 of the Debenture. The sole purpose of SSSHL’s interposition in the structure was to serve as a bankruptcy-remote vehicle, further immunising security realisations from the consequences of Lendy’s insolvency.

57.3 Reflecting that fact, Lendy’s unsecured creditors are not beneficiaries under the trust created by the Debenture, and to the extent it is relevant for the court (as proxy for the trustee) to have regard to their separate interests at all, the equities as between them and the Model 2 Lenders are plainly unequal:

57.3.1 Lendy’s unsecured creditors must be taken to have been content to run the risk of Lendy’s insolvency. The Model 2 Lenders emphatically did not agree to that risk, however.

57.3.2 While there is no evidence of the hardship which a subordination of Lendy’s claims may occasion to its unsecured creditors (or indeed, much evidence as to who those unsecured creditors may actually be), the likelihood of hardship to Model 2 Lenders if Lendy’s claims rank pari passu is evidenced, and indeed obvious.