FundingSecure’s investors have won a legal battle which could help determine how much money they can recoup during the administration process.
According to legal documents released today (31 March), the case hinged on the order in which FundingSecure would pay itself a five per cent redemption fee on defaulted loans.
The platform had argued that the fee should be paid on the entire value of the loan, before payment to investors. However, a representative group of investors were able to provide proof that FundingSecure had indicated – both in its terms and conditions and in investor correspondence – that investor capital would be prioritised.
His Honour Judge Pearce ruled that investor capital should be the first to be repaid, followed by investor interest, and then FundingSecure’s five per cent redemption fee.
This means that investors have a better chance of recouping more money from the defunct platform’s loans.
“I conclude that both the natural meaning of the words used in the context in which they appear and the commercial common sense of the situation favour the opposing respondents’ interpretation that what the parties meant by the words used in the contract is that the five per cent fee should be payable from the proceeds of realisation of an asset only after deduction of the sums due to the investors,” said Judge Pearce.
The judge also ruled that “on their true construction, the loan agreements operate so that payment of the five per cent fee arises where a borrower has defaulted and the security asset has been sold; that it is payable after repayment of the investors; and that the fee is to be calculated as five per cent of the original amount of the relevant loan.”
Prior to this ruling there had been some ambiguity over whether the five per cent fee should be taken from the realised value of the asset underlying the loan, or the original amount of the loan itself.
Court proceedings began in October 2020. The opposing respondents – led by a representative group of investors – claimed that FundingSecure had inconsistently applied the five per cent rule to its historic loans.
Once the platform began to prioritise payment of the five per cent fee ahead of investor payments, the opposing respondents said that the company had moved “from being an agent acting in the best interests of the principal, to taking monies for the benefit of the company’s own investors.”
“This motive is quite frankly outrageous,” the opposing respondents added.
In his ruling, Judge Pearce acknowledged that FundingSecure’s applicants “are keen to defend themselves against the criticism that they have behaved inappropriately.”
The judge added that until 28 July 2020, FundingSecure “followed the practice that they understood the company had followed previously of taking the five per cent fee calculated as a percentage of the amount realised from the assets.”
“However since then, and in order to protect their position, they have taken five per cent of the higher of the amount realised or the original loan,” the judge said. “They accept that the correct calculation can only be one or other of these amounts not the higher of the two.”
FundingSecure went into administration in October 2019 after being overcome by litigation surrounding inappropriate allocation of investor money and a separate claim regarding fraud on a portfolio of art loans.