David Rolph and Jeremy Willmont v AY Bank Ltd
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PUMFREY |
| Judgment Date | 14 December 2001 |
| Judgment citation (vLex) | [2001] EWHC J1214-4 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Claim No. 4201 of 1999 |
| Date | 14 December 2001 |
[2001] EWHC J1214-4
IN THE HIGH COURT OF JUSTICE
Chancery Division)
Royal Courts of Justice
Strand
London WC2A 2LL
Mr Justice Pumfrey
Claim No. 4201 of 1999
Sub-action No. 1
MR Mark Phillips & Tom Smith appeared on behalf of the Claimants
Friday, 14 th December 2001
This is an application by the joint administrators of AY Bank Limited, to whom I shall refer as "The Bank", for directions in respect of a transaction into which they wish to enter with the National Bank of the Republic of Macedonia. It is supported by a witness statement of Mr Jeremy Mark Willmont, who is one of the joint administrators. The ultimate purpose of the transaction is to enable the bank to release certain deposits held by it in the name of the National Bank of the Republic of Macedonia.
The Bank was established in 1980 and provided banking services with the principal aims of promoting and financing aid with Yugoslavia and the former Yugoslav republics, and providing advice to those States on corporate and financial restructuring, privatisation and debt and equity finance. The political problems within some of the former Yugoslav republics has meant that trade, and consequently the business opportunities for The Bank, have declined or altogether ceased.
The need for an administration order arose primarily as a result of the economic sanctions imposed by the United Nations, the European Union and the United States, in respect of the Federal Government of Yugoslavia, the Republic of Serbia and various institutions and entities owned or controlled, or deemed to be controlled, by those bodies. As a result, certain of The Bank's assets were frozen and as a consequence it was no longer in a position to pay its debts as and when they fell due. The Bank went into administration on 25 th June 1999, and the purposes of the administration were all of the purposes set out in sub-section 8(3) of the Insolvency Act 1986.
The Bank remains an authorised institution within the meaning of the Banking Act 1987. It is subject to the supervision and regulation of the Financial Services Authority. The affect of the administration order was to permit The Bank to continue its operations and to retain its licence, subject to certain restrictions upon its activities; in particular, The Bank is presently prohibited from taking further deposits or advancing further funds.
The present application arises because the sanctions regime has now become much less stringent, and the administrators consider that it is possible to seek to rehabilitate The Bank as a continuing trading entity. In order to start operating again The Bank must be solvent, and it must have a loan book, which is performing as an ordinary loan book would. The administrators wish, therefore, to take steps to restart The Bank's loan business.
The application before me relates to an important part of The Bank's loan portfolio. These loans are loans made to various debtors in Macedonia. They fall essentially into two classes. The first class, and by far the largest, are loans that are secured by collateral in the form of deposits made by the National Bank of the Republic of Macedonia. The papers refer to these as "the Macedonian linked loans". They amount in total to some £14m and the linked deposits amount, as I understand it, to some £11m. There are also some unsecured debts, again, with Macedonian borrowers, and these amount to some £2.65m. Since the loans are secured by deposits made by the National Bank of the Republic of Macedonia, which are not held in any segregated or trust account, the National Bank of the Republic of Macedonia is an unsecured creditor of The Bank to the extent of £11m.
The purpose of the transaction in respect of which I am asked to give directions is to realise the loan book, so far as the Macedonian loans are concerned. The problem arises because the borrowers wish to be satisfied that if they repay their loans they will not be pursued by the National Bank of the Republic of Macedonia in respect of any shortfall in its recovery of its linked deposits. Mr Willmont describes it in this way, in paragraph 8 of his witness statement:
"The Macedonian linked loans and the Macedonian unsecured debts continue to be outstanding, and the link deposits continue to be held by The Bank. As The Bank is in administration the Macedonian debtors have thus far failed to repay the Macedonian linked loans due to the uncertainty of the recovery of the linked deposits by the National Bank of the Republic of Macedonia.
Some Macedonian debtors have not discharged their obligations, fearing that the repayment of the Macedonian linked loans will not result in the discharge of their liabilities to the National Bank of the Republic of Macedonia, in the absence of the repayment of its deposits by The Bank."
"The administrators", Mr Willmont continues, "concluded that due to the potential exposure and delay in seeking to recover such debts from Macedonian debtors, the uncertainty of making any recovery and the possibility of complex cross claims, The Bank should attempt to break the deadlock by considering an alternative strategy by considering an alternative strategy to seeking the repayment of the underlying Macedonian linked loans and Macedonian unsecured debts".
The way in which the logjam is sought to be broken is described in paragraph 9 of Mr Willmont's witness statement. The centrepiece is an agreement with the National Bank of the Republic of Macedonia, which is called "The deposit release agreement", or DRA. The manner in which the agreement is intended to operate is accurately and helpfully summarised in a document that was provided for the benefit of the creditors, and the account which I shall give follows that document:
"The agreement is made between the joint administrators of the National Bank of the Republic of Macedonia. AY Bank Limited, 'The Bank', provided both secured and unsecured loans, totalling an equivalent of £25,707,861 to various Macedonian debtors. The National Bank of the Republic of Macedonia secured the repayment of secured loans by the provision of deposits, totalling an equivalent of £11,445,585 to The Bank.
The National Bank of the Republic of Macedonia did not provide deposits in respect of the unsecured loans. For the purposes of the agreement the loans and deposits have been calculated as at 30 th June 2001.
The National Bank of the Republic of Macedonia has agreed to use its reasonable endeavours to procure the repayment of both secured and certain unsecured debts payable to The Bank, totalling an equivalent of £16,845,505, as at 30 th June 2001, by reaching agreements with the relevant Macedonian debtors in relation to the discharge of their residual liability to the National Bank of the Republic of Macedonia.
The amount of the secured debt totals £14,186,251, as at 30 th June 2001, and the amount of the unsecured debt totals £2,659,254, as at the same date. The unsecured debts are owed by one entity, which, rather curiously, has been referred to throughout these proceedings as 'redacted one'. This is because it is the first entity to have its name crossed out in the redacted version of the agreement.
The National Bank of the Republic of Macedonia considers that they are only in a position to encourage repayment of secured and unsecured loans to other banks and financial institutions. Accordingly, loans to individuals and/or trading entities are expressly excluded from the agreement. In addition, the National Bank of the Republic of Macedonia are not in a position to encourage repayment of lending to one of The Bank's creditors on the grounds of its insolvency.
Payments in respect of both secured and unsecured debts will be paid into accounts in The Bank's name at a UK clearing bank. Following repayment of all outstanding secured and unsecured debts with (inaudible) deduction or counterclaim, The Bank will pay the deposits and interest to the National Bank of the Republic of Macedonia, subject to certain clauses in the agreement, which serve to protect The Bank and the general body of creditors.
The unsecured debt, payable by redacted one, will be excluded from the list of debts that are required to be paid prior to the release of the deposits. In the event, the redacted ones form(?) insolvency. The interest payable on the deposits would(?) be limited to that earned by The Bank on the secured debts actually repaid to it until payment of the deposits to the National Bank of the Republic of Macedonia, subject to the maximum that would have accrued on the deposits in any event."
As the document observes, it is clearly unusual for any creditor to be paid early in this way by a company in administration. "However", it continues, "the repayment of the deposits to the National Bank of the Republic of Macedonia is conditional not only on the actual repayment of the secured and unsecured loans by The Bank, but also the presentation of a duly extended dividend equalisation agreement":
"The dividend equalisation agreement places an obligation on the National Bank of the Republic of Macedonia to repay such amount as a result of the early repayment of the deposits that exceeds the sum that would have been available to them as a dividend in the event that The Bank should go into liquidation.
The National Bank's obligation under the dividend equalisation agreements comes into force in the event that The Bank is placed into liquidation or enters into an arrangement to pay funds to its creditors, following which the National Bank is obliged to return the funds required to equalise the dividend.
The National Bank's liability under the dividend equalisation...
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