Global Distressed Alpha Fund 1 Ltd Partnership v PT Bakrie Investindo

This is the judgment of the Court on the trial of what counsel for the Claimant described as “a straightforward action on an instrument of guarantee”.

The Defendant is a company incorporated in the Republic of Indonesia. It was established in July 1991 to act as investment holding company for investments made by the Bakrie family, a prominent merchant family in Indonesia. In 1996 the Defendant wished to raise finance through debt by the issue of US$50m. 9.625% Guaranteed Notes. This was successful. The finance was raised on 17 December 1996. The Notes were issued by Bakrie Indonesia BV, a Dutch company owned by the Defendant and were governed by English law. The maturity date of the Notes was 17 December 1999. The Defendant was the guarantor of the Notes.

The sums due under the Notes were not paid on their maturity date. A legal advisor to the Defendant has said that this was because of the 1998 Asian economic crisis.

On 23 May 2001 the Defendant filed an application with the Commercial Court of the Central Jakarta District Court for a provisional moratorium of payments. That was granted on 31 May 2001 and an Administrator and Supervisory Judge were appointed. The purpose of the moratorium was to enable the Defendant to seek an agreement with its creditors. That was achieved on 20 February 2002 when a Debt Reorganisation Composition Plan was accepted by a majority of the creditors. On 6 March 2002 the Indonesian Court ratified the plan.

On 16 November 2009 the Claimant, part of a group which invests in different types of private distressed commercial and sovereign debt claims around the world, purchased certain of the Notes with denominations amounting to US$2m. from a prior holder. They were purchased because they had been guaranteed by the Defendant. On 14 December 2009 these proceedings were commenced in which the Claimant sues the Defendant upon its guarantee, notwithstanding that the Claimant accepts that as a matter of Indonesian law its claim against the Defendant has been discharged by the Composition Plan.

Mr. Staff, counsel for the Claimant, relying upon long established authority, submitted that the guarantee, being governed by English law, has not been discharged by the Indonesian Composition Plan as a matter of English law. Ms. Toube, counsel for the Defendant, submitted that that argument was based upon an “isolationist” approach to foreign insolvency proceedings which, in the light of a recent decision of the Privy Council and subsequent decisions of the House of Lords and the Court of Appeal, “no longer holds good”. She invited the court not to follow the long established authority upon which Mr. Staff relies and instead to give effect to a general principle of “modified universalism” whereby this court should recognise the Composition Plan and, in particular, its discharge of the liability of the Defendant as guarantor. In addition to this main defence (“the English effects argument”) there is a further defence to the whole claim (“the prior party argument”) and a limitation defence to the interest claim (“the interest argument”).

The guarantee is contained in a deed of guarantee dated 9 December 1996. It was expressed to be between the Defendant as guarantor and “the noteholders and couponholders from time to time” (“the Holders”) and, by clause 10, was to take effect as “a deed poll for the benefit of the Holders from time to time and for the time being.” There is no dispute that this was effective to enable holders from time to time to take the benefit of the Guarantee; see Moody v Condor Insurance Limited [2006] 1 WLR 1847, [2006] EWHC 100 (Ch) at paras.16 and 17. The recitals envisaged that a Fiscal Agency Agreement would be made on 17 December between Bakrie Indonesia BV (“the Issuer”), the Defendant as guarantor, HSBC as the fiscal agent and certain paying agents which would provide for the issue of the Guaranteed Notes. The recitals also envisaged that the Notes would, save in certain circumstances, be represented at all times by a global note. Clause 1 of the Guarantee provided that:

“the Guarantor unconditionally and irrevocably guarantees that, if for any reason the Issuer does not pay any sum payable by it under the Notes………….the Guarantor will pay that sum to the Holders in US dollars…..”

Clause 15 provided that the Guarantee shall be governed by English law.

The Fiscal Agency Agreement was entered into on 17 December 1996. Clause 4 obliged the Issuer to pay the principal and interest due under the Notes. Clause 16 provided for the agreement to be governed by and construed in accordance with English law. The Global Note was issued by the Issuer as a deed on 17 December 1996. It stated that “the Notes are issued with the benefit of a guarantee” given by the Defendant.

The terms and conditions of the Notes provided that title to them passed by delivery. They are traded electronically on Euroclear or Clearstream as interests in the Global Note. Notwithstanding the Composition Plan in Indonesia, the Global Note remained registered on Euroclear and Clearstream and so it was that the Claimant was able to purchase Notes with a nominal value of US$2m. in 2009. According to the broker responsible for arranging the purchase the Notes have been traded from the default in 1999 but are “pretty illiquid” and “have not been traded frequently, especially since the restructuring in 2001”.

This argument concerns the effect in England of the Composition Plan with the regard to the discharge of liability under the Guarantee. Mr. Staff relies upon Rule 200 in Dicey 14^th ed. which states:

“Subject to the effect of the Insolvency Regulation (Footnote: ¹), a discharge from any debt or liability under the bankruptcy law of a foreign country outside the United Kingdom is a discharge therefrom in England if, and only if, it is a discharge under the law applicable to the contract.”

The comment in Dicey at para.31-093 states that there is no doubt that discharge under a foreign bankruptcy law, like the discharge of contracts generally, is governed by the law applicable to the contract. There is indeed no doubt that the authorities state this. One such is Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399. In that case the defendant agreed to buy copper to be delivered in England by the plaintiff. The defendant refused to accept the copper and so was liable in damages to the plaintiff. The defendant, a French company, was placed in judicial liquidation in France and it was assumed that as a matter of French law, the defendant was discharged from its liability in damages. Lord Esher MR held (at p.406) that French law was irrelevant because it was “not a law of the country to which the contract belongs, or one by which the contracting parties can be taken to have agreed to be bound; it is the law of another country by which they have not agreed to be bound.” Lindley and Lopes LJJ gave judgments to the same effect.

This principle has been acknowledged by courts of the highest authority. Thus in New Zealand Loan and Mercantile Agency Company v Morrison [1898] AC 349 the Privy Council followed Gibbs; per Lord Davey at p.359. In National Bank of Greece and Athens v Metliss [1958] AC 509 the House of Lords also did so; per Viscount Simonds at p.523, where he referred to Gibbs and said that the rule in Dicey “can be accepted by this House”. The other members of the Appellate Committee made similar remarks; see Lord Morton at p.528, Lord Tucker at p.529 and Lord Keith at p.531. In United Railways of the Havana and Regla Warehouses Ltd. [1960] 1 Ch. 52 Jenkins LJ noted that Gibbs had been approved both in New Zealand Loan and Mercantile Agency Company v Morrison and in National Bank of Greece and Athens v Metliss. (United Railways went on appeal to the House of Lords [1961] AC 1007 but this principle does not appear to have been mentioned in the judgments on appeal.) In Adams v National Bank of Greece [1961] AC 255 Lord Denning referred (at p.287) to Gibbs with implicit approval. In Wight v Eckhardt Marine GmbH [2004] 1 AC 147 Lord Hoffmann, sitting in the Privy Council, applied the principle that the discharge of a contract is governed by its proper law.

Notwithstanding this judicial support for the principle relied upon by Mr. Staff there has been criticism of the principle. There is criticism in Dicey itself at para.31-097 where it is observed that it was curious that whilst a discharge of an English law obligation under a foreign bankruptcy law is strictly territorial the movables of the bankrupt situated in England will be regarded as having vested in the foreign trustee in bankruptcy. Thus the bankrupt remains liable but has been deprived of his assets. Professor Fletcher in Insolvency in Private International Law 2^nd ed. advances the same criticism (at para.2.127) and suggests (at para.2.128) that a modern reformulation of the relevant rules is required and that “the Gibbs doctrine belongs to an age of Anglocentric reasoning which should be consigned to history.” He suggested that:

“In the case of a contractual obligation which happens to be governed by English law, a further rule should be developed whereby, if one of the parties to the contract is the subject of insolvency proceedings in a jurisdiction with which he has an established connection based on residence or ties of business, it should be recognised that the possibility of such proceedings must enter into the parties’ reasonable expectations in entering their relationship, and as such may furnish a ground for the discharge to take effect under the applicable law. In seeking in this way to establish a more internationally enlightened mode of responding to the effects generated by foreign insolvency proceedings, English law would in fact be returning to the open-minded tradition of the formative period of this particular branch of our jurisprudence.”

That English law should return to its earlier traditions in the jurisprudence relating to cross-border insolvency was stated in clear terms by Lord Hoffmann in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc and others [2007] 1 AC 508. In that case a shipping business petitioned for relief in New York under Chapter 11 of the United States Bankruptcy Code. The Federal Bankruptcy Court for the Southern District of New York confirmed a plan providing for the assets to be taken over by the creditors and ordered that it be carried into effect. The ships, although registered in Liberia, were owned by companies incorporated in the Isle of Man. The plan provided for the shares in the companies to be vested in the creditors’ representatives. The Federal Bankruptcy Court sent a letter of request to the High Court of Justice of the Isle of Man asking for its assistance in giving effect to the plan. A holding company, Navigator Holdings plc, held the shares through a management company of which the shipowning companies were subsidiaries. Shares in Navigator were held by Cambridge Gas Transport Corpn. which was in turn owned by Vela Energy Holdings Ltd. The creditors’ representatives petitioned the Manx court for an order vesting the shares in them. Cambridge and Vela cross-petitioned the Manx Court asking the court not to recognise or enforce the plan. At first instance it was decided that the order should not be enforced. The Staff of Government Division, the Appeal Division of the High Court in the Isle of Man, decided that the order should be enforced. The Privy Council upheld the decision of the Staff of Government Division (but for rather different reasons). Lord Hoffmann said that the common law recognised a principle that bankruptcy proceedings should have universal application. “There should be a single bankruptcy in which all creditors are entitled and required to prove” (para.16). That principle applied to corporate insolvency and is given effect “by recognising the person who is empowered under the foreign bankruptcy law to act on behalf of the insolvent company as entitled to do so in England” (para.20). Recognition carries with it the active assistance of the court. That common law principle was sufficient to enable the Manx court to assist the creditors’ representatives by giving effect to the plan; see para.21.

Ms. Toube, basing herself on Lord Hoffmann’s statement of the principle of universality, submits that this court should recognise the Indonesian Composition Plan, and in particular the discharge of the Defendant’s liability as guarantor. That is a very bold submission given that the principle in Gibbs was not mentioned by Lord Hoffmann. But Ms. Toube submits that recognition of the discharge of the Defendant’s liability in the Indonesian Composition Plan would be consistent with the principle of universality. The English law of cross-border insolvency has been in “a state of arrested development” (per Professor Fletcher and Lord Hoffmann) and, she submits, is now free to develop in accordance with principle.

Before ruling on this submission it is necessary to mention developments since Cambridge Gas.

In Re HIH Casualty and General Insurance Ltd. [2008] 1 WLR 852 the English court received a letter of request from the Australian court asking that the English provisional liquidators of four Australian insurance companies remit assets of the companies in England to the Australian liquidators for distribution. Notwithstanding that the priorities in such a distribution were different in Australia than in England the House of Lords held that the assets should be remitted. There was agreement that such remission could be ordered pursuant to section 426(4) of the Insolvency Act 1986. There was disagreement as to whether such remission could have been ordered at common law.

Lord Hoffmann (with whom Lord Walker was in full agreement, see para.63) said that it could be ordered at common law. He referred (at para.6) to a “general principle of private international law, namely, that bankruptcy (whether personal or corporate) should be unitary and universal. There should be a unitary bankruptcy proceedings in the court of the bankrupt’s domicile which receives worldwide recognition and it should apply universally to all the bankrupt’s assets.” He said (at para.7) that this was “a principle rather than a rule …. heavily qualified by exceptions on pragmatic grounds.” He later said (at para. 30):

“The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the 18^th century. That principle requires the English courts, so far as is consistent with justice and UK public policy, co-operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under as single system of distribution.”

However, Lord Scott, whilst agreeing that it is desirable as a general proposition that there should be one universally applicable scheme of distribution of the assets of an insolvent company, did not agree with Lord Hoffmann that the court had power to remit the assets to Australia other than pursuant to the statutory power; see paras.59 and 61. Lord Neuberger’s speech was to the same effect in this regard; see para.77. Lord Phillips agreed that it was in accordance with international comity and the principle of universalism that the assets should be remitted to Australia pursuant to the statutory power but did not stray into the “controversial area” of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law; see paras.42-44.

The Court of Appeal has considered Cambridge Gas and HIH Casualty in Rubin v Eurofinance [2010] EWCA Civ 895. In that case the Court of Appeal considered whether the principle of universality enabled the court to enforce a judgment in personam which had been given in New York against the defendants in and for the purposes of bankruptcy proceedings in New York, notwithstanding that the defendants had not submitted to the jurisdiction of the New York court. The Court of Appeal held that the principle had that effect:

“The ordinary rules for enforcing, or more precisely not enforcing, foreign judgments in personam do not apply to bankruptcy proceedings” (per Ward LJ at para.61).

The Court of Appeal regarded Cambridge Gas and HIH Insurance as stating the general principle of universality which carried with it the active assistance of the court (see para.62). Ms. Toube relies upon this decision and submits that just as the principle of universality enabled the Court of Appeal to disregard the previous law dealing with the circumstances in which a foreign judgment in personam may be enforced where bankruptcy was involved so the same principle enables this court to disregard the decision in Gibbs and recognisethe Indonesian Composition Plan. (Mr. Staff, who is involved in Rubin, has told me that the Supreme Court has granted permission to appeal but that no date has yet been fixed for the hearing of the appeal.)

Ms. Toube observed that were the court to take the bold step urged by her the common law would be brought into line with the Insolvency Regulation (Council Regulation (EC) No 1346/2000), the Cross-Border Insolvency Regulations 2006 and US law (see Canada Southern Railway Company v Gebhard (1883) 109 US 527).

Ms. Toube is not alone in urging this bold step. Mr. Look Chan Ho, a solicitor at Freshfields, has made the same suggestion in his article “Applying foreign law – realising the Model Law’s potential” [2010] JIBLR 552, especially at pp.555-563. However, Professor Briggs, in a case note on Rubin in [2010] LMCLQ 523, has questioned the decision and noted that “if insolvency really is different, its boundaries will need to be surveyed and mapped” (at p. 528).

I accept that there is much to be said for developing English law in the manner suggested by Ms. Toube. Recognising the Indonesian Composition Plan, and in particular its discharge of the liabilities of the Defendant as guarantor, would assist the Indonesian court in ensuring that all the Defendant’s assets are distributed to its creditors under a single system of distribution. That would give effect to the principle of (modified) universalism which all members of the House of Lords in HIH Casualty thought was a desirable principle. It would not, therefore, be inconsistent with public policy. Would it be unjust? The Claimant would say it was because his rights under an English law contract were being determined by reference to the law of another country to which the Claimant had not agreed. But had the restructuring occurred in England rights under the guarantee could also have been compromised pursuant to section 425 of the Companies Act 1985 (now section 896 of the Companies Act 2006) and, although the applicable law of the guarantee is English, it is likely that the creditors of the Defendant would have foreseen the circumstance that the restructuring of an Indonesian company might take place in Indonesia. That would suggest that recognition would not be unjust; cf the approach of Lord Hoffmann in HIH Casualty at paras. 31-33.

Notwithstanding these arguments Gibbs remains a decision of the Court of Appeal binding on this court. It has not been suggested that it can be distinguished. True it is that the decisions in Cambridge Gas, HIH Casualty and Rubin enable an argument to be advanced that the decision may justifiably be overruled but that course is not open to me in this court. My duty, sitting at first instance, is to follow a binding decision of the Court of Appeal on the very issue before this court.

I have therefore concluded that I must hold, consistently with Gibbs, that the discharge of the Defendant’s obligation as guarantor as a matter of Indonesian law is of no effect in English law, which is the governing law of the guarantee.

There was some discussion before me as to what the position was under Rome I, the Regulation on the law applicable to contractual obligations. Article 12(1)(b) and (d) provides that the applicable law of a contract governs “performance” and the “various ways of extinguishing obligations”. Either (b) or (d) or both are likely to cover the question of discharge and so the position under Rome I appears to be consistent with the common law; see Dicey at para.32-204. If the Insolvency Regulation applied the question would arise whether discharge pursuant to the law applicable to the insolvency proceedings would be recognised pursuant to Article 4(2)(e) of the Insolvency Regulation, recital (7) to Rome I and the exclusion from Rome I in Article 1(2)(f) of questions governed by the law of companies; see Dicey para.31-114. It is unnecessary to consider this question since it is not suggested that the Insolvency Regulation applies in the present case.

The Defendant has put forward a further reason for denying liability under the guarantee. Ms. Toube submitted that if, in 2002, the holder of the Notes subsequently purchased by the Claimant in 2009 participated in the Composition Plan so that the guarantor no longer had any liability in respect of those particular Notes the Claimant cannot now claim under the guarantee in respect of those Notes because there is no longer any liability under the guarantee in respect of those Notes. She submitted that the burden of proof was on the Claimant to allege and prove that the holder of the Notes in question had not participated in the Composition Plan. No such allegation had been made and no evidence had been adduced to identify the holder in 2002 or to show that the holder had not participated in the Composition Plan. The claim should therefore fail.

The Claimant did not accept this argument. Mr. Staff submitted that it matters not what the holder of the Notes did in 2002 for the Notes are negotiable instruments and the Claimant purchased them for value without notice of what the holder in 2002 did in connection with the Composition Plan. In any event he said that the burden of proof was on the Defendant to allege and prove that the holder of the Notes in 2002 had participated in the Composition Plan and the Defendant had not made that allegation and was unable to prove that the holder of the Notes in 2002 had participated in the Composition Plan.

Whilst I can understand why the holder of the Notes in 2002, if he had participated in the Composition Plan, would be unable to claim under the guarantee thereafter I do not follow why a subsequent holder would be unable to claim. The 2002 holder would be estopped from claiming but that argument would not apply to the later purchaser. All that can be said against the subsequent holder is that by Indonesian law the liability under the guarantee in respect of the Notes in question had been discharged. But that argument cannot surmount the obstacle of the decision in Gibbs, at any rate in this court. Mr. Staff also said that the guaranteed Notes were negotiable instruments and so the purchaser was not affected by the actions of a former holder. Ms. Toube said that argument did not work because the purchaser of the Notes as negotiable instruments only obtained title to sue on the Notes and did not enable him to assert a claim on a guarantee which had been discharged with respect to those Notes. She may be right but, for the reasons I have already given, I am unable to accept that, as a matter of English law, liability under the guarantee in respect of the Notes has been discharged.

However, whatever the answer to these problems I consider that if participation in the Composition Plan does provide the Defendant with a defence it is something which he must allege and prove. He has not done so and so cannot rely upon this defence. The Claimant is not required to allege and prove that there are no defences to his claim.

Condition 10 of the Notes provides that

“Claims against the ….Guarantor in respect of ….interest shall become void unless made within a period of ….five years, in the case of interest from the appropriate Relevant Date as defined in Condition 8”

Condition 8 defines the Relevant Date, so far as material as

“the date on which the payment in question first becomes due”

The Claimant seeks interest, in essence, for a period of 5 years before the issue of the claim form on 14 December 2009. The Defendant says that any claim for interest is now void pursuant to condition 10 of the Notes.

It is first necessary to note the provisions in the Note for the payment of interest. Condition 5 provides as follows:

“INTEREST

(a)

Interest Payment Dates

Each Note bears interest from 17 December 1996 at the rate of 9.625% per annum payable semi-annually in arrear on 17 June and 17 December in each year until maturity (each an Interest Payment Date). The first such payment will be made on 17 June 1997……

(b)

Interest Accrual

Each Note will cease to bear interest from the due date for redemption unless upon due presentation payment of principal is improperly withheld or refused, in which case it will continue to bear interest at the rate specified (after as well as before judgment) until …(a) the day in which all sums due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder ……”

The scheme for the accrual and payment of interest is, therefore, that each note bears interest at the specified rate from 17 December 1996, payable in arrears semi-annually, until the principal is repaid. The first semi-annual payment of interest in arrears was due on 17 June 1997.

Condition 8 uses the phrase “payment in question” which indicates that when seeking to identify the “relevant date” from which the 5 year period in condition 10 runs it is necessary to have in mind the interest payment which is being claimed. Thus if the Claimant were to claim the first interest payment due on 17 June 1997 the claim form would have to have been issued before 17 June 2002. It is no doubt for that reason that the Claimant has abandoned its originally pleaded claim to interest which became due more than 5 years before the issue of the claim form on 14 December 2009.

The interest now claimed is that which fell due on 17 December 2004 and thereafter semi-annually. Such payments fell due less than 5 years before the claim form was issued on 14 December 2009.

Ms. Toube submits that the relevant date was 17 December 1999 and that since the claim form was not issued within 5 years of that date any claims to interest are now void.

I am unable to accept that argument. It seeks to identify a relevant date for all interest payments rather then the payment “in question.” The first interest payment fell due on 17 June 1997. Had that not been paid, any claim for payment of it would be void unless a claim form were issued by 17 June 2002. However, if the interest payable on 17 December 1999 is not paid, any claim for payment of it would be void unless a claim form were issued by 17 December 2004. Similarly, if the interest payable on 17 June 2000 were not paid, any claim for payment of it would be void unless a claim were issued by 17 June 2005. The relevant date thus depends upon the date when the interest payment in question first became due.

The earliest payment of interest now claimed by the Claimant is that which first fell due for payment on 17 December 2004, that is less than 5 years before the claim form was issued. The further payments of interest which are claimed all fell due semi-annually after 17 December 2004. It seems to me that on the true construction of the Notes those claims to interest are not void because they were made within 5 years of the relevant date for each interest payment claimed.

Ms. Toube submits that this construction renders the time bar in clause 10 useless and flouts business common sense. I am not persuaded of that. The construction ensures that once 5 years has elapsed from the relevant date for the payment of interest in question any later claim for such interest payment is void. The Claimant is thus unable to claim interest payments which first fell due for payment more than 5 years before the issue of the claim form. The time bar is not useless and does not flout business common sense.

It therefore follows that the Claimant’s amended claim to interest is not void. Mr. Staff has provided a detailed calculation of the Claimant’s interest claim on that basis. I will ask the parties to agree the appropriate calculation.

There will be judgment for the Claimant in respect of the principal sum of US$2m. and such interest payments as fell due for payment from 17 December 2004.