The Lendy Action Group (LAG) has won its waterfall case against Lendy administrators RSM, with the judge ruling for model 2 (M2) investors to be given priority in distribution payments.
During a court hearing in July, the LAG argued against the ‘distribution waterfall’ structure, which sees former Lendy investors split into two groups: model 1 (M1) and model 2 (M2), which impacts how they receive funds recovered from the collapsed peer-to-peer lender.
M1 investors are defined as creditors, meaning their eventual payouts will be pooled with other creditors, including the Lendy directors, while M2 are defined as investors, which means that they may be able to recover funds directly from the loans that they helped to fund.
LAG argued in favour of funds being distributed first to M2 lenders, saying Lendy had a duty of care towards them but instead acted in its own best interests and the M2 investors should have been protected by the platform under fiduciary responsibility.
The judge ruled that Lendy has no legal or beneficial interest in any default interest and no part of the deferred interest belongs to Lendy, as it is the property of the M2 investors.
LAG said the court ruled that the ‘waterfall’ – whereby anything payable to Lendy itself from loan proceeds should take priority to amounts payable to M2 lenders – is unenforceable. LAG said this was because it was not brought to the attention of M2 lenders and in any event amounted to a breach of duty by Lendy.
LAG spokesperson Lisa Taylor, who previously said she was optimistic about winning, said she was pleased with the result. She said that RSM will need to follow the judge’s order to go back and review all monies held by Lendy (which is more than £10m) to ensure they were received by M2 investors first before Lendy.
She said investors will get more out of each recovery and as there is no money left in the Lendy estate, the administrators will need to negotiate with LAG or go to the courts for payment.
Read more: P2P administration fees hit £5m
“It was a spectacular outcome, the judge found that we succeeded in all of our arguments, there was no situation where the arguments we put forward were in fact rejected,” said Taylor.
“The judge was very direct in his statements that Lendy did not act properly, which was good.
“Obviously I’m satisfied we’ve won and pleased we won. I just feel disappointed the Financial Conduct Authority did such a poor job of overseeing Lendy to leave investors in a position where have to litigate something that we knew to be correct and was so clearly right.”
Lendy fell into administration in 2019, with more than £160m outstanding on its loanbook and at least £90m of those funds in default. The administration process has been arduous due to the complexity of Lendy’s legal structure and governance issues, with costs hitting the £3m mark earlier this year.