Merchant International Company Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy The Bank of New York Mellon (Third Party)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Blair |
| Judgment Date | 26 February 2014 |
| Neutral Citation | [2014] EWHC 391 (Comm) |
| Docket Number | Case No: 2012 Folio 1580 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 26 February 2014 |
and
[2014] EWHC 391 (Comm)
Mr Justice Blair
Case No: 2012 Folio 1580
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Michael Lazarus (instructed by Hogan Lovells International LLP) for the Claimant
David Head (instructed by Lawrence Graham LLP) for the Defendant
Hearing dates: 7 February 2014
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.
The question in this case is whether interim third party debt orders obtained by the claimant, a judgment creditor, should be made final. A "third party debt order" is what used to be called a garnishee order. It is a form of enforcement by which a third party which is indebted to the judgment debtor is required to pay the judgment creditor instead. The context is unusual, because although the third party is a bank, it was acting in the role of paying agent under the terms of a debt issue in the form of notes guaranteed by a state, in this case Ukraine. The judgment debtor is the Ukrainian national energy company. The orders are said to have disrupted the payment arrangements in respect of interest due to the noteholders.
The issues for decision are first whether there was a "debt due or accruing due" to the defendant, the judgment debtor, from the third party, and second whether the claimant complied with its obligations of full and frank disclosure in obtaining the interim orders and/or whether the orders should be made final as a matter of discretion. The third party, Bank of New York Mellon ("BNYM"), complied with its obligations under the orders, but otherwise (as it was entitled to) has remained neutral and taken no part in these proceedings.
The facts
The facts are as follows. Merchant International Company Ltd ("MIC") is a Delaware company, and Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy ("Naftogaz") is a Ukrainian entity. How MIC came to be a judgment creditor of Naftogaz under an English judgment is explained in the Court of Appeal judgment at [2012] EWCA Civ 196. In short, MIC is the assignee of a creditor of Naftogaz. It obtained judgment in the courts of Ukraine, and sued on the judgment in England. MIC obtained judgment in default of defence. Proceedings were renewed by Naftogaz in the courts in Ukraine, which ruled in its favour. Naftogaz then sought to set aside the English default judgment, but its application was unsuccessful at first instance and in the Court of Appeal. Though Naftogaz has sought to challenge that ruling in the European Court of Human Rights, such challenge cannot affect any of the questions that I have to decide (see e.g. [2012] EWHC 3753 (Comm)).
Having obtained the judgment, MIC has taken various steps to enforce it, including those at issue in the present case. The background is as follows. Naftogaz is the issuer of US$1,595,017,000 9.5% Guaranteed Notes due 30 September 2014 issued on 5 November 2009. The note issue carries the guarantee of Ukraine, and in this respect is sovereign debt. For the avoidance of doubt, it is entirely unconnected with the transaction which gave rise to the judgment debt. The contractual documents consist of a Trust Deed, Guarantee, Agency Agreement, and Notes, and are dated 5 November 2009. English law is the governing law.
BNYM London is the Principal Paying Agent (and Transfer Agent and Trustee). Interest is payable to the noteholders semi-annually in arrears on 30 March and 30 September each year. The mechanics of payment by Naftogaz as issuer to BNYM, and by BNYM to the noteholders, is governed by the Agency Agreement. The payments are denominated in US dollars, and the evidence filed in these proceedings shows that funds are paid by Naftogaz via the State Export-Import Bank of Ukraine into an account maintained by BNYM at the Federal Reserve in New York for the purposes of clearing. Since it is BNYM London that performs the role of Principal Paying Agent, the funds are credited to a Naftogaz account in London via a series of internal ledger entries. It is not in dispute that the funds do not remain in that account, but are dispersed by BNYM to the noteholders in the usual way.
This level of detail was not, of course, known to MIC (or for that matter Naftogaz) prior to these proceedings, but MIC was aware from the public documents available in connection with the note issue that a semi-annual interest payment was due to the noteholders on 30 September 2013 in the sum of US$75,763,307.50. MIC took the position that BNYM was the agent of Naftogaz, and that funds received by BNYM did not become the property of the noteholders until paid over to them. Accordingly, MIC took steps to intercept the funds to satisfy its judgment debt, which it states then amounted to US$21.76 million including interest.
The steps that it took were as follows. In England, it applied for a third party debt order by application dated 19 September 2013, the third party being BNYM. I will describe what was stated on the application later. The order was granted by Master Kay QC on 20 September 2013 with a return date of 5 November 2013. It was served on BNYM on Friday 27 September 2013, though after banking hours.
At or about the same time, MIC put in place saisie-arrêt conservatoire procedures directed at BNYM in Brussels and in Luxembourg. The evidence is that these are not (in the first instance) judicial procedures, but the effect is broadly the same as an interim third party debt order. The orders were dated 27 September 2013. A second order was obtained in Brussels and served on BNYM on 2 October 2013. As I understand it, MIC took these steps in Brussels and Luxembourg as well as London because it was not sure which BNYM entity would actually receive the funds.
At this point, Naftogaz was of course unaware of these measures. It gave instructions for the payment of the interest due, that is, the US$75m, on 30 September 2013. Payment was duly received by BNYM on 30 September 2013, value 1 October 2013. This was after deemed service of the interim third party debt order on 30 September 2013 on BNYM's London branch, and it is on this limited basis that MIC now accepts that the order was ineffective, a point I consider further below.
Whilst the funds received were about US$75m, the judgment debt was only about US$21m. BNYM did not make any payments to noteholders at this time. There is a dispute between the parties as to why this was so. MIC said in oral submissions that it was the Belgian order that caused BNYM to freeze the money. Under Belgian procedure, it seems that the attachment is to the extent of the value of the fund, in this case US$75m, rather than value of the debt. There is some support for MIC's submission in the form of a letter from Naftogaz's solicitors, though its subsequent witness evidence points to the effect of the orders in all three jurisdictions.
In fact, the evidence is that it took BNYM a little time to work out whether the account was located in Brussels or in London. This may be less surprising than it seems, when one bears in mind that BNYM's role was to transmit funds between Naftogaz and the noteholders, and these were essentially internal account entries. However, it is not now in dispute that the account is in London. Equally, it is clear that the account was never intended to act as the repository of funds.
In its written submissions, MIC said that it "accepts that if it had not served the (ineffective) first TPDO (and the Belgian order) on BNYM on 27 September 2013, then the First Coupon Payment would have been paid out to note holders before 7 October 2013". ("Coupon" in this context means interest.) No direct evidence is available from BNYM, but I think that this was a reasonable concession, and in any case infer that the London order played an important part in preventing the payment being made. In its oral submissions, Naftogaz says that it created confusion and difficulty, and I agree that this is also a reasonable inference.
In any case, though only part of the Naftogaz payment was frozen by the London order, a partial payment by BNYM to the noteholders would not have satisfied the terms of the note issue. Under these terms, failure to pay within ten days of the due date was an event of default, potentially resulting in the entire principal sum of US$1.6 billion becoming due. This would have been a serious matter, and there was now a few days pause when it is to be inferred that BNYM (and doubtless Naftogaz) were seeking to establish their legal position in the various jurisdictions before the deadline expired on 10 October 2013.
On 7 October 2013, BNYM gave details of the position in London as required by CPR 72.6(2). The same day, the solicitors for Naftogaz proposed to the solicitors for MIC an agreement by which a further amount equivalent to the unpaid judgment debt would be paid into the London account to be held pending the return date of the interim third party debt order. However, no agreement was forthcoming from MIC in time.
On 8 October 2013, MIC made an oral without notice application to Cooke J for a second interim third party debt order. The written note accompanying the application says that the reason for making the application was that, "on the authority of Heppenstall v Jackson [1939] 1 KB 585, the existing TPDO is not effective to restrain BNYM from paying out the monies it received since the TPDO was served". Another interim order was made in favour of MIC with a return date of 5 November...
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