Madison Pacific Trust Ltd v Shakoor Capital Ltd
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Zacaroli,Mr Justice Zacaroli |
| Judgment Date | 16 March 2020 |
| Neutral Citation | [2020] EWHC 610 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: FL-2019-000008 |
| Date | 16 March 2020 |
[2020] EWHC 610 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
FINANCIAL LIST (ChD)
7 Rolls Building
Fetter Lane
London, EC4A 1NL
Mr Justice Zacaroli
Case No: FL-2019-000008
Sonia Tolaney QC and Nicholas Sloboda (instructed by Boies Schiller Flexner LLP) for the Claimant
Adrian Beltrami QC and Louise Hutton (instructed by Dechert LLP) for the First Defendant
David Wolfson QC, Simon Atrill and Nick Daly (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Second Defendant
Hearing dates: 27 and 28 February 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an application by the claimant, Madison Pacific Trust Limited (the “Trustee”) as trustee of two series of notes (the “Notes”) issued by UK SPV Credit Finance Plc (the “Issuer”), for directions.
The Issuer is an orphan special purpose vehicle, established for the purpose of (inter alia) issuing the Notes. The first series of Notes (the “2010 Notes”) was issued pursuant to a trust deed dated 24 September 2010 (the “2010 Trust Deed”). The 2010 Notes were in the aggregate amount of US$200 million and were originally due 23 September 2015, but the maturity date was extended to 23 January 2018 (and in August 2016 a 20% amortisation payment was made). The second series of Notes (the “2013 Notes”) was issued pursuant to a trust deed dated 28 February 2013 (the “2013 Trust Deed”). The 2013 Notes are in the aggregate amount of US$175 million and were due 28 February 2018.
The funds raised upon the issuance of both series of Notes were advanced by the Issuer to the second defendant, Joint Stock Company Commercial Bank PrivatBank (“PrivatBank”), pursuant to (1) a loan agreement dated 17 September 2010, relating to a loan of US$200 million (the “2010 Loan Agreement”) and (2) a loan agreement dated 25 February 2013 relating to a loan of US$175 million (the “2013 Loan Agreement”).
The Issuer has charged and assigned by way of security all of its interest under the Loan Agreements in favour of the Trustee.
The Notes are all limited recourse, payment being dependent upon the extent to which recoveries are made under the Loan Agreements. In particular, by clause 2.4 of the Trust Deed, the obligations of the Issuer are “solely to make payments of amounts in aggregate equivalent to each sum actually received by or for the account of the Issuer from [PrivatBank]”. Noteholders were therefore reliant “solely and exclusively upon [PrivatBank's] covenant to pay under the Loan Agreement and the credit and financial standing of [PrivatBank]”.
The maturity date in respect of both series of Notes has now passed, without payment of principal having been made to the Noteholders. That is a direct result of PrivatBank having failed to repay the amounts due under either of the Loan Agreements.
The Loan Agreements are in materially similar terms. They each contain a provision that “any dispute arising out of or connected with” the Loan Agreement “including a dispute as to the validity, existence or termination [of the Loan Agreement] or the consequences of its nullity … shall be resolved … by arbitration in London … in accordance with the LCIA Rules.”
On 8 November 2017, the Trustee, on its own behalf and on behalf of the Issuer, served two requests for arbitration seeking awards ordering PrivatBank to pay the amounts due under the Loan Agreements. The Trustee acted following instruction from and indemnification by certain holders of interests in the Notes (the “Instructing Group”).
PrivatBank advanced two defences: first, that as a result of the nationalisation of PrivatBank in Ukraine and the subsequent ‘bail-in’, as and when the bail-in is recognised by the Bank of England pursuant to the Banking Act 2009 the obligations of PrivatBank under the Loan Agreements will have been discharged; and, second, that the Loan Agreements are unenforceable for illegality perpetrated by two former owners of PrivatBank (the “Former Owners”).
In partial awards published in the arbitration relating to each Loan Agreement on 13 June 2019 (the “Awards”), the arbitration tribunal (the “Tribunal”) concluded that (subject to the bail-in defence, the determination of which had been postponed) PrivatBank would be required to pay only certain amounts due under the Loan Agreements, for the following reasons:
i) The Loan Agreements were indeed tainted by illegality. That illegality also infected the Notes to the extent that interests in the Notes had been acquired by the Former Owners or entities under their control.
ii) Many of those who had acquired interests in the Notes (including the Instructing Group), on the other hand, were innocent. Not only were they not parties to the illegality, they were victims of it.
iii) The public policy considerations that underlay the defence of illegality under English law required “…a court or tribunal to act to prevent recovery where to allow the claim would be in effect to endorse the fraud and assist in the achievement of the fraudulent purpose. Equally, it can readily be seen that a court or tribunal should aim to protect innocent investors from fraud who would be damaged despite being victims of the fraud if the claims brought for their benefit were to be refused.”
iv) The difficulty the Tribunal faced, in these circumstances, was that the entities actually suing to recover under the Loan Agreements were the Issuer and, as holder of a security interest, the Trustee. As between the Issuer and Trustee (on the one hand) and PrivatBank (on the other) illegality would appear to operate as a binary defence: each Loan Agreement was either enforceable as a whole, or not at all.
v) The Tribunal considered whether there were other ways of ensuring that innocent holders of interests in the Notes could recover, while preventing the Former Owners and their associated entities from recovering (including applications by the Trustee to court in relation to the proceeds of any repayment of the Loans), but decided that “stopping the funds at source is in the view of the Tribunal a much more attractive and economic solution if it can be achieved.”
Accordingly, the Tribunal fashioned its Awards as follows:
i) PrivatBank had no liability and should not be required to make any payment to the claimants (the Issuer and the Trustee) “in a sum equal to” the principal value of the Notes which as at 14 June 2019 (the “Relevant Date”) were held for the benefit of the Former Owners or entities owned or controlled by them;
ii) PrivatBank was required to pay to the Trustee “an amount equal to the aggregate principal value of the Notes” held as at the Relevant Date for the benefit of the Instructing Group;
iii) The Trustee was required (by paragraph 5.2(3) of the operative part of the Awards) to pay to each member of the Instructing Group pro rata the amount of its respective interest in the Notes; and
iv) A mechanism was put in place for those persons who held an interest in the Notes but fell within neither (i) nor (ii) above, which entailed notices being published requesting such persons to make themselves known to the Trustee and provide information and evidence within 60 days. PrivatBank was given the opportunity to object to any payment being made to such persons, on the grounds that their claims are (on the findings of the Tribunal) infected with illegality. Any dispute was to be resolved by the Tribunal, and PrivatBank was required to pay to the Trustee only where PrivatBank's objection was not upheld;
v) The Trustee was required (by paragraph 6.3(3) of the operative part of the Awards) to pay to each entity referred to in (iv) above where either PrivatBank raised no objection, or the objection was not upheld;
vi) The Tribunal stated, however, that nothing in the Awards required the claimants to make any payment under paragraph 5.2(3) or paragraph 6.3(3) until the Trustee had had an opportunity to make an application to a judge of the High Court, seeking directions “in order to confirm that it will have no further liability under the Trust Deed or otherwise as a result of making the payments envisaged by [the Awards]”. In the event that the Court declines to give such confirmation, then the operative parts of the Awards will cease to have effect and the Tribunal retains jurisdiction to deal with the matters raised by the claim and the illegality defence as it may consider appropriate.
This is the application by the Trustee which the Tribunal indicated should be made.
The holding structure of the Notes
In order properly to explain the problem which the Tribunal sought to resolve by its Awards, and the issues which arise on this application, it is necessary to set out in some detail the structure through which the Notes are held, and the relevant terms of the Trust Deeds. I will do this by reference to the 2010 Trust Deed, but there are no material differences from 2013 Trust Deed.
In relation to the 2010 Notes only one Note has been issued, a permanent global note which is deposited with a common depositary who holds it on behalf of Euroclear and Clearstream (the “Clearing Systems”). The Clearing Systems facilitate trading in the Notes by crediting interests in the global note to account holders, or “participants” in the Clearing Systems.
The participants hold such interests on behalf of persons in the market who wish to acquire beneficial interests in the global note, the ultimate account holders (“UAHs”). The UAHs may hold their interest directly with a...
To continue reading
Request your trial
-
Re Leading Holdings Group Ltd
...clearing systems. [The Claimant] holds its Notes indirectly.” [Emphasis added] 63. In Madison Pacific Trust Ltd v Shakoor Capital Ltd [2020] EWHC 610 (Ch), Zacaroli J explained that the underlying investors of such bond issuance are only beneficiaries under sub-trusts (at “14. In relation t......
-
Madison Pacific Trust v Shakoor Capital: A More Nuanced Approach To Illegality?
...Pacific Trust Limited v (1) Shakoor Capital Company and (2) Joint-Stock Company Commercial Bank Privatbank [2020] EWHC 610 (Ch), the court considered whether the trustee of securitised loan notes could pay only certain of the beneficiaries of the notes having regard to the pari passu distri......