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Lendy High Court Result Great News For P2P Lenders
I'm not new to reading long-winded court judgments, so I want to write about some interesting points for lenders that came up in this 83-page High Court judgment on Lendy this month.
My thoughts are not specifically for people who lent through Lendy, the disgraced P2P lending company that went bust under a cloud of accusations of fraud, negligence or incompetence. Rather, they're for anyone who lends through P2P lending accounts or P2P IFISAs.
Who was fighting in the Lendy court case?
In this court case, the external administrators who were appointed to deal with Lendy's bankruptcy and to wind down the P2P loan book took one side in the case.
The other side was taken by lawyers acting for a group of Lendy lenders called the Lendy Action Group, which is led by Lisa Taylor.
As I understand it (and please forgive my ignorance here but, like we've explained elsewhere, we've never followed Lendy that closely) this was intended to be a friendly case. The administrators had its lawyers argue against P2P lenders, but the administration also settles the costs for the Lendy Action Group while it argues in favour of P2P lenders.
So it wasn't so much a case of lenders versus the administrators, but rather trying to settle some points of law, so that everyone could move on with correctly winding down Lendy and its loans. Then, everyone gets their money in the correct order from now on.
Judge rules that P2P lenders get repaid first
Here's the first interesting point.
When Lendy first started in 2014, people using Lendy lent their money to Lendy itself. Lendy then lent that on to end property borrowers. Here, lenders had just one borrower, which was Lendy itself. This is not P2P lending.
After Lendy went bust, those lenders could only ever hope to get whatever it could from the remains of Lendy and what they can claw back from its directors. They will have to fight for a piece of the action with HM Revenue & Customs, and whoever else might be owed money by Lendy itself.
But then, some time in 2015, lenders lending in new loans through Lendy were on a new contract that now involved directly lending to the end property borrowers. In these loans, Lendy was just an agent in the middle and was not the borrower. As borrowers repay these loans, the money is owed directly to the individual lenders and not to Lendy. So Lendy had become a P2P lending company, because these loans were truly what we'd call P2P.
The result of the court case here was not surprising, but still satisfying. It settled the fact that outstanding lenders who were doing direct lending – P2P lending – are to get their money back first, as and when repayments come in on the loans that they were lending in. These lenders don't have to share the proceeds with other people, businesses and HMRC, which are all still owed substantial amounts of money by Lendy itself.
This result is as you'd hope and as we'd absolutely expect, but it's nice to have it confirmed in a court case.
What P2P lending companies tell lenders matters
While Lendy was still operating, it sent a few emails to individual P2P lenders and to the Financial Conduct Authority. Lendy stated that it was putting lenders first in getting their money back when loans went wrong. Yet it actually changed a legal document to say the opposite.
The judge found that this was unfair and so – for this and many other reasons – the judge said that lenders will be at the top of the pile.
Using trusts to protect property P2P loans from bankruptcy works
One of the ways that lenders can be protected from the bankruptcy of a P2P lending company is through separate trust companies, which effectively help to ensure that borrower payments go to the lenders.
The case looked at whether the fact that Lendy was bankrupt changed anything, but the judge decided that the exact point of the trust was to protect beneficiaries of the trust – the individual P2P lenders – from Lendy's bankruptcy.
Again, this isn't new news, but nice to have it confirmed in a P2P context.
A conflict of interest to watch out for
When borrowers fall behind on payments, Lendy charges them extra interest – which we call default interest.
It's possible that default interest is key to the reason why Lendy loans performed so badly. Because of how it was done, it was a massive conflict of interests with individual lenders' wishes.
Lendy was able to award itself massive default interest that boosted its own revenue on a loan by up to 600%. The judge pointed out that this is a perverse incentive.
Lenders, clearly, would rather have prompt action to recover their bad debts, rather than have Lendy drag out bad debts because it gives them a big source of income. Not only does this setup mean that Lendy might not have been concerned enough about borrower quality, but it also means that the chances of a decent recovery of bad debt fall – as they invariably do the longer you wait to recover a bad debt.
The courts can change unfair terms
Again, it's not new that the small print doesn't have to be followed closely – or at all – when businesses are treating people unfairly or outside the law. But it's good to see this in action in the court room in a P2P lending case.
The judge wrote that Lendy misappropriated default interest for its own use and that, from now on, it is to be paid directly to the lenders. (Although the bankruptcy administrators' fees might swallow up all or part of it.)
More on default interest
In the court judgment, there were a lot of details and ideas about default interest.
These ideas included when default interest should be paid to lenders, and how and when P2P lending companies might effectively take some or all of the default interest for itself.
The ideas got quite technical and so I don't think these fiddly little details are broadly interesting enough for me to elaborate on here. But they would interest anyone who's legally minded. So, if that sounds like you, I suggest you read the entire county court judgment for yourself.
Is the law on all this settled, then?
Each court case is different and there's a lot of precedent set in earlier court cases that might be called on in the future. Indeed, the judgment gave a lot of ideas about where other historical cases might potentially impact the result of another P2P lending claim in a different way to the resounding success in this Lendy case.
However, while this is just the start of P2P lending case law, it's a very good and reassuring one.
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