HNW Lending Loses Major Court Case

Update on 20/11/2024: HNW Lending has informed me that it will appeal the court decision outlined below. Specifically, Ben Shaw says:

“Despite the dramatic headline, the judge did find in HNW's favour on nearly every issue in contention. For example, the judge stated that despite the loan being a regulated mortgage he would have otherwise allowed HNW to repossess and sell the property and use the proceeds to repay lenders. Furthermore, the judge was not persuaded by the Defendant's attempts to argue that the sales of the existing properties to date (which have resulted in the repayment of almost all the capital lent by retail investors), were at an undervalue. On the point of who should have the right to bring the claim, HNW has instructed a King's Counsel to prepare an appeal and we are confident we will win on appeal.”

HNW Lending took a borrower to court for over £3 million in lent amounts and interest. That loan represents around 5% of outstanding loan amounts.

Taking borrowers to court is not new for HNW Lending, as a bridging lender to borrowers who are often rich in properties but low on cash.

However, in a judgment open to the public, the judge threw out the claim to repossess and sell the property security attached to the loan, or to otherwise enforce it.

In this loan, while the amount being claimed in court amounts to £3 million, the maximum losses to individual lenders through HNW Lending's online lending platform appear to be capped at £100,000, which is far less than one month's interest earned by lenders across all loans.

Even so, the case is still of huge interest to lenders and borrowers, because of the reason that the judge gave for dismissing the claim and other matters he brought up in his ruling.

The reason the judge gave is that an anonymous lender – merely designated with the number “1” by HNW Lending – was not party to the claim and that HNW Lending itself had no legal claim against the borrower.

The judge also found that HNW Lending (or its director Ben Shaw or HNW Lending's agents) knew that the purpose of the loan was for the borrower to live in the property. That made it a regulated mortgage, but HNW Lending, as an unregulated entity, is not authorised to provide such loans. Nevertheless, in this case, HNW Lending would have been allowed to enforce payment – were it not for the fact that the judge ruled it had no claim against the borrower.

I am going to go over the claim in a little more detail before outlining the wider consequences for lenders and borrowers.

Why was the claim dismissed?

I've tried to summarise what happened accurately above, but now let me turn as much as possible to the judge's own words, to reduce the chance of error.

The judge said in his ruling that:

“The defendant [borrower] also notes that the claimant [HNW Lending] has failed to give disclosure of the documents which govern the true relationship between the claimant and [so-called lender] 1 and has refused to identify who 1 is.”

Later, he said:

“I have come to the conclusion that whatever the position of 1 may have been, the claimant has no cause of action under the loan agreement and cannot enforce it.”

In other words, as HNW Lending was not itself lending to the borrower, and since HNW Lending was representing itself and not lender 1, the judge rejected HNW Lending's claim, and so he won't allow HNW Lending to repossess and sell the borrower's properties to recover the outstanding debt.

He added:

“I am of the view that the charge [under which the property security is held], for similar reasons as I have given in respect of the loan agreement, cannot be enforced by the claimant because the covenant to pay was not given to the claimant and the charge was not granted to the claimant.”

He continued by repeating that “in my judgment, the claimant has no right to enforce it.” And: “I would, therefore, on the basis of my conclusions in respect of [this issue] alone, dismiss the claim.”

A regulated mortgage from an unauthorised lender

With the substance already decided, the judge went on to consider other matters.

The next key issue was that, if the borrower was intending to live in the property, the loan would be a regulated mortgage. And HNW Lending is not authorised to offer such loans.

The judge said of his findings that “both sides knew that the defendant intended to live at the property as soon as he could after acquisition of it, and that the purpose of the loan principally, therefore, was not to enable the defendant to carry on a business but so that he could buy the property to live in.

“It seems to me that Mr Shaw knew this from the beginning, although he tried to guard against it.”

The judge went on to say that if he generously interprets the evidence in HNW Lending's favour he still has “no doubt” that HNW Lending and its agents had reasonable cause to suspect that the borrower was predominantly buying the property to live in it, “which is the test” that applies in law.

To that end, he said that:

“My conclusion, therefore, is that the loan agreement was not an exempt agreement and was accordingly regulated by FSMA”, with neither HNW Lending nor the anonymous lender “authorised by the FCA to enter into regulated mortgage agreements”.

Nevertheless, the judge said that, in this case, he would have still allowed HNW Lending to enforce the loan – were it not for the fact that he had already found that HNW Lending had no claim against the borrower.

The reasons he gave for this included that the borrower “wanted to take up this loan”, that it has “provided him with a roof over his head since 2021”, that he was “independently advised by solicitors and an accountant” and that “it does not seem to me that he was taken advantage of”.

Reliability of HNW Lending's director

The judge quoted Ben Shaw, director of HNW Lending, as saying:

“I only make one file note per loan…I vehemently deny that the file note has been backdated. This is one loan out of 50 in a year – why would I want to lie? I do not create file notes for every conversation. I probably had 20 or so – 30 conversations per day. I had lots of conversations with you. I tend to do one file note per application.”

The judge then expressed his opinion of Ben Shaw's reliability as a witness:

“Mr Shaw was certainly irritated by the cross-examination and was not, if I may say so, cooperative in the way in which he gave evidence. I had doubts about his reliability as a witness and, in particular, I doubt that he only made one file note per transaction and that given the very significant number of conversations that he had with the defendant in this case and the changing details and parameters of the loan, I doubt that he made no more file notes or records.”

What happens to individual lenders in this loan through HNW Lending's online platform?

The dismissed claim was for over £3 million on an initial loan of around £2.5 million.

However, Ben Shaw told me in March that individual lenders using HNW Lending's online platform had already been bought back in advance, leaving them with a maximum combined potential loss of £100,000.

Since HNW Lending has failed to enforce the loan due to having an anonymous lender 1 that it refuses to expose in court or have party to the claim, I would expect HNW Lending to make good the difference to individual lenders out of its own pocket.

How many other loans are affected?

HNW lending has taken a good number of borrowers to court in the past 10 years and individual lenders have always received their money back up to this point.

That said, I know of other court cases between borrowers and HNW Lending that appear at least anecdotally to have many overlapping themes with this case.

The total in outstanding loans in the cases I know most about is at least £10 million to £12 million, or roughly 20% of total lent amounts on loans not fully repaid.

Ominously (for lenders if not borrowers), I have been told anecdotally that at least one of these claims specifies a certain lender “1”.

Data from HNW Lending (last from July 2024) shows that individual lenders through its online platform are still fully on the hook for all of these loans, minus a first-loss position taken by HNW Lending or its directors that totals over half a million.

This begs the question what or who the number “1” represents…and the question of why HNW Lending failed to structure one or more loans or claims in such a way that it could easily enforce payment of the large debts.

It seems likely that individual lenders in any loans that are structured in a way that involves an anonymous lender 1 could be most at risk of losses.

I am aware superficially that HNW Lending has at least two different types of loans, and the variation in those structures may or may not include whether lender 1 is involved. Possibly, lender 1 loans is a sub-variation of one of those two loan structures or it is a third structure by itself.

Furthermore, with HNW Lending having been found by the judge to knowingly enter into a regulated agreement, even though unauthorised, it remains to be seen if the financial regulator will get involved and what steps it might take. I am not even remotely what you would call a specialist in regulatory matters, but perhaps in an extreme case it could involve forcing HNW Lending to go into wind-down mode, especially if it finds more similar examples from HNW Lending's current loans.

What this means for P2P lending more generally

Peer-to-peer lending as a form of lending is completely legal and debts are enforceable. Providers are allowed to represent lenders through online lending platforms in court; each individual lender doesn't have to represent themselves. So this ruling in no way nullifies that.

Yet individual lenders need to have confidence in the legal standards of the providers they choose to lend through, especially when they are handling large property loans. Enforcing a property debt on an unregulated property loan should not usually be a question of if, but when the claim will be successful.

Platforms like Loanpad* (Loanpad Review) and Somo* (Somo Review) have in-house lawyers in addition to its external ones, which can add reassurance when lending. Others, like Proplend* (Proplend Review), deal with commercial property, which doesn't so easily fall foul of consumer protection laws.

The moral hazard

At 4thWay, we use the term “moral hazard”, taken from insurance, to mean signs that might perhaps show aspects of the character of the people behind the lending providers and what that might mean in terms of the risks.

I told readers earlier this year that I have learned to trust these signs more as time has gone on, as they have most often ultimately been backed up by the course of events.

The judge's comments on Ben Shaw's reliability, the fact that HNW Lending is hiding the lender even at the cost of losing the claim, and that the judge believed that Shaw knew that he was entering into a regulated contract when HNW Lending is not authorised to do so – these are all factors that every insurance actuary would take into account.

Another oddity

The judge pointed out that someone called Rachel Ranby-Gorwood works for HNW Lending but also shares the same unusual surname as the family running the insolvency company (the receivers) that were acting on the sale of one of the borrower's properties.

He posited the question whether she was a relation and said that she “clearly had a number of dealings with everybody involved in this transaction” and she “could have shed light on what was going on”.

Advice to borrowers

4thWay is for lenders, but I'm sure that borrowers have learned from this update, too. Many lenders go on to become borrowers, for example when developing their own properties.

My additional advice to you, through the research I have conducted into different court cases involving HNW Lending, is not to carelessly and needlessly be even one day late on any repayments, if you can possibly pay on time.

Next

I've written this up as quickly as I could after giving the court time to get back to me on whether there were reporting restrictions. I'll now be seeking Ben Shaw's comments and will pass any on to you.

Further reading

Did you know 4thWay's first principle of investing: ‘If you have any doubt at all about lending through a specific P2P lending account, the answer's “No”.' Read all 10 P2P Investing Principles.