Deutsche Bank AG & Ors v Unitech Global Ltd & Ors

I gratefully adopt the summary of this case given by Longmore LJ at [2013] EWCA Civ 1372, paragraphs 12-21.

Between 22 and 30 July 2013 I heard arguments on several interlocutory applications in this matter. On 20 September 2013 I gave judgment ([2013] EWHC 2793 (Comm)). The resulting orders were made on 1 October 2013. On 8 November 2013 the Court of Appeal allowed an appeal ([2013] EWCA Civ 1372) from an earlier interlocutory order of Cooke J ([2013] EWHC 471 (Comm)). The further interlocutory application now before me has been necessitated by the decision of the Court of Appeal. Whereas Cooke J. had held that the remedy of rescission was not available to the defendants the Court of Appeal held that it was. In my earlier judgment I had relied upon the decision of Cooke J. as creating an issue estoppel as to the non-availability of rescission and in consequence had (a) refused to grant the defendants permission to amend their pleading to raise a claim to rescission and (b) granted the claimants summary judgment. It is now apparent, in the light of the decision of the Court of Appeal, that there was no such issue estoppel. On the contrary the issue estoppel is now to the contrary effect, namely, that the remedy of rescission is available to the defendants. In those changed circumstances the parties have returned to this court in order for this court to decide what to do in the light of those changed circumstances.

In counsel’s skeleton arguments there was considerable debate as to whether the appropriate course was for this court to give permission to appeal against such of my orders as were based on the issue estoppel arising out of Cooke J.’s judgment or to set aside those rulings in the light of the Court of Appeal’s judgment. Reference was made to the several authorities bearing on this matter including Tibbles v SIG plc [2012] EWCA Civ 518. However, I formed the provisional view that whilst the court’s power to set aside its earlier rulings, rather than leave such matters to the Court of Appeal, will only be exercised in limited circumstances as discussed in the authorities the unusual circumstances of the present case justified the exercise of that power. It was common ground that any appeal from my rulings based upon Cooke J.’s judgment would be bound to succeed in the light of the Court of Appeal’s decision allowing an appeal from that judgment. In those circumstances it would be an unnecessary waste of time and expense for the parties to proceed down the appeal route. It would be much simpler and less costly for me to set aside those rulings which it is now common ground cannot stand. Indeed paragraph 11 of the Court of Appeal’s order expressly contemplated that my orders as to costs would have to be re-considered by me in the light of the Court of Appeal’s order allowing the appeal from Cooke J. When I indicated to counsel for the defendants that that was my provisional view, counsel said that he did not propose to press on me the argument that the appeal route was the appropriate route. I will therefore set aside those rulings which, it is common ground, cannot stand in the light of the Court of Appeal’s judgment.

The real issue which now divides the parties, apart from the question of costs, is whether it is appropriate for the court to require the defendants, or at any rate the borrowers, to pay a sum of money into court or to make an interim payment to the claimants, the bank. Mr. Handyside QC, on behalf of the claimants, submitted that it was and Mr. Brisby QC, on behalf of the defendants, submitted that it was not.

In essence, the basis of Mr. Handyside’s submission is that even if the borrowers succeed in establishing a misrepresentation by the bank and, in consequence, a defence of rescission the court will only order rescission on terms that the borrower repays the unpaid principal and interest (at a minimal rate, not the contractual rate). That sum has been calculated as US$120,877,193.76. (There was no challenge to that calculation.) Thus the best that the borrowers can do is to achieve a result whereby they must pay some US$120m. to the bank. (There may be successful cross claims for damages but they cannot operate as a defence; see paragraphs 72-78 of my September 2013 judgment.) In those circumstances the borrowers ought to pay that sum now (either into court or by way of an interim payment to the bank). The power which the court can exercise to achieve that end is to be found in CPR Part 24, CPR Part 3 or CPR Part 25.

In essence, the basis of Mr. Brisby’s submission is that, although he accepts that the borrower will be obliged to repay the outstanding loan and (non-contractual) interest even if the defence of rescission were established, there is no proper basis under any rule of the CPR upon which the court can order such a payment. Indeed, it would be wrong to do so in circumstances where there is evidence that the borrowers are (presently) unable to make the requested payment with the result that the effect of the order would be to “stifle” the borrowers’ rescission defence. Further, the Court of Appeal had permitted the borrowers to rely upon a rescission defence without requiring any payment into court.

In 2013 the bank applied for summary judgment upon its claim, relying upon the issue estoppel created by Cooke J.’s decision. I acceded to that claim and gave summary judgment for US$177,287,980.83; see paragraphs 3-7 of my order dated 1 October 2013. That order, or the relevant parts thereof, must now be set aside. Mr. Handyside’s primary submission is that, for the reasons which I have summarised, the court, in response to his summary judgment application, should now make a conditional order as contemplated by PD 24 paragraph 5, namely, an order that US$120m be paid into court and that if it is not so paid the borrowers’ defence shall be struck out.

The circumstance in which PD 24 provides for a conditional order is where it is improbable that the defence will succeed; see paragraph 4. I therefore asked Mr. Handyside whether, in the light of the Court of Appeal’s judgment, he could still say that the borrower had no real prospect of successfully defending the bank’s claim for US$177m. under the loan agreement or that, if it were possible that the defence might succeed, it was improbable that it would. He accepted that in the light of the judgment of the Court of Appeal he could not advance such a case in relation to the bank’s claim for US$177m., but he said that the borrowers had no defence to having to pay US$120m. of that sum because the borrowers’ remedy of rescission would be conditional upon such sum being paid. Thus the borrowers had no real prospect of avoiding the need to pay at least US$120m. For that reason Mr. Handyside submitted that a conditional order should be made.

My approach to the application based on CPR Part 24 is as follows. The bank’s application for summary judgment was, in September 2013, based upon the submission that the borrowers had no real prospect of successfully defending the bank’s claim for the sums due under the loan agreement, some US$177m. That submission can no longer be advanced, as Mr. Handyside accepts. It is for that reason that the order for summary judgment in that sum must be set aside. Mr. Handyside seeks to say, for the reasons I have already summarised, that the borrowers have no real prospect of resisting the bank’s claim for part of that sum, namely some US$120m. If that were so then Mr. Handyside could seek summary judgment in that sum but he has not done so. The reason he has not done so, it seems to me, must be that the bank does not advance a claim for US$120m. as “counter-restitution”, that is, the requirement that a defendant who seeks rescission must give back that which he has received under the rescinded loan agreement. Rather, the bank’s claim was and remains a claim for the sums due under the loan agreement. The question which arises on an application under Part 24 is whether the borrowers have a real prospect of successfully defending that claim on the basis of rescission of the loan agreement. The bank denies the misrepresentations which found the defence of rescission and says that in any event rescission is not available because there has been a novation. But in the light of the judgment of the Court of Appeal the borrowers must be regarded as having a real prospect of establishing their defence and, moreover, one which cannot be said to be “improbable”. The application for summary judgment should therefore be dismissed and it would not be appropriate to order a conditional payment.

I appreciate that this result can be said to be unsatisfactory because the truth is that, even if the borrower makes good its case for rescission, it cannot avoid being required by the court to pay US$120m. as the price of obtaining an order for rescission of the loan agreement. The force of this point is illustrated by the comment of Sir Bernard Rix during argument on the appeal from Cooke J that “no doubt if there was an argument that it was due back in restitution, rather than under the loan, a very hefty payment into court would have to be made if there was going to be leave to defend.” However, having heard argument on the point, I do not consider that CPR 24 provides for a conditional order being made in the circumstances of this case. This point was not before the Court of Appeal and was not argued before it.

In the alternative Mr. Handyside relied upon the case management powers of the court, when revoking an order pursuant to CPR 3.1(7), to impose a condition that a sum of money be paid into court pursuant to CPR 3.1(3). He submitted that such a condition would be appropriate for the same reasons as he gave when dealing with CPR Part 24.

My approach to the application based on CPR Part 3.1(3) must be guided by the decision of the Court of Appeal in Huscroft v P&O Ferries [2011] 1 WLR 939. It is clear from paragraph 14 of the judgment of Moore-Bick LJ that where another part of the CPR deals with a particular type of application CPR 3.1(3) should not be regarded as a means of circumventing the requirements of that other part. Thus, when asked to make an order for security for costs pursuant to CPR 3.1(3), the court should have in mind the requirements of CPR Part 25.

The order which is to be set aside in the present case is the order for summary judgment in the sum of US$177m. pursuant to CPR Part 24. That order is to be set aside because the foundation for it has been removed by the Court of Appeal. For the reasons already given there is no proper basis upon which an order for payment in of US$120m. can be made pursuant to CPR Part 24. In those circumstances it appears to me to be wrong in principle, having regard to the guidance given in Huscroft v P&O Ferries, to set aside the summary judgment on terms that US$120m. is paid into court. Such an order could not have been made under CPR Part 24.

As with the application under CPR Part 24 I appreciate that this result can be said to be unsatisfactory because the truth is that, even if the borrower makes good its case for rescission, it cannot avoid being required by the court to pay US$120m. as the price of obtaining an order for rescission of the loan agreement. However, I do not consider that I can use the power to impose a condition of payment in pursuant to CPR 3.1(3) when setting aside an order without giving due consideration to the question whether such a condition is appropriate having regard to the application which gave rise to the order in the first place. Although the power is a case management power and is expressed in quite general terms, Huscroft v P&O Ferries indicates that the court should identify the purpose in imposing a condition of payment in and satisfy itself that the condition is a proportionate and effective means of achieving that objective. The purpose of making such an order in the present case would be to reflect the inevitable outcome of the case in the event that the borrower established its defence of rescission. But CPR Part 24 is the order which enables the court to reflect the inevitable (or probable) outcome of a case and that order, for the reasons already given, does not avail the bank in the present context. If CPR Part 24 does not assist then I do not consider that the case management powers in CPR Part 3 can come to the aid of the bank. That would involve circumventing the requirements of CPR Part 24. Moore-Bick LJ made clear in paragraph 18 of his judgment that CPR 3.1(3) does not give a general power to impose conditions whenever it happens to be making an order.

The final way in which Mr. Handyside put his case was that the court could and should order an interim payment of US$120m. to the bank pursuant to CPR 25.7(1)(c). That rule empowers the court to order an interim payment where “it is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial amount of money (other than costs) against the defendant from whom he is seeking an order for an interim payment”. Mr. Handyside submits that the necessary condition is satisfied because there is no doubt that if the bank’s claim against the borrower went to trial the borrower would have to pay a minimum of US$120m. to the bank.

Section 32 of the Senior Courts Act 1981 contains a definition of an interim payment. “Interim payment, in relation to a party to any proceedings, means a payment on account of any damages, debt or other sum (excluding costs) which that party may be held liable to pay to or for the benefit of another party to the proceedings if a final judgment or order of the court in the proceedings is given or made in favour of that other party.” The same, or essentially the same, definition is found in CPR 25.1(k). Mr. Handyside said that this definition was wide enough to cover an order for counter-restitution because although such sum may not be damages or a debt it was some “other sum”. That is true but the question remains whether it can properly be said, for the purposes of CPR 25.7, that the bank “would obtain judgment for a substantial amount of money (other than costs) against” the borrowers. In one, somewhat loose sense, that could be said. The bank has commenced proceedings seeking payment of a large sum and, it is to be assumed, proceeds to trial. At that trial the court gives judgment in which it grants rescission on terms that US$120m. be paid to the bank. Thus the bank would have obtained judgment for a substantial sum of money. However, I do not consider that it can properly be said that, if the bank’s claim to sums due under the loan agreement is dismissed because the defence of rescission succeeds on terms that the borrower pays US$120m. to the bank, the bank has “obtained judgment” for US$120m. When one speaks of a claimant obtaining judgment, at any rate in the context of the CPR, that ordinarily means that the judgment gives effect to the cause of action alleged by the claimant. The bank’s cause of action is for sums due under the loan agreement which it assesses in the sum of US$177m. It does not advance a cause of action based upon the requirement that a defendant who establishes a defence of rescission must give counter-restitution. Rather, the bank denies that the defence of rescission is available to the borrowers. A judgment that the bank’s claim fails and that the defence succeeds on terms that US$120m. be paid to the bank would not ordinarily be regarded as the bank obtaining judgment for that sum. I have therefore concluded that I cannot order an interim payment pursuant to Part 25.7.

As with Mr. Handyside’s other arguments I recognise that this result can be said to be unsatisfactory because the borrower cannot achieve a better result than having to pay the bank a minimum of US$120m. But I cannot give Part 25.7 (any more than I can give Part 24 or Part 3) an interpretation which it cannot properly bear simply to give effect to that reality.

For those reasons the bank’s application for a payment into court, alternatively, an interim payment must be dismissed.

It is unnecessary for me to deal with Mr. Brisby’s further arguments but in case this matter goes further I will express my views on those further arguments shortly.

Mr. Brisby submitted that it would be unjust to require a payment into court, or an interim payment, because such a condition had not been required by the Court of Appeal when allowing the misrepresentations alleged by the borrowers to be pleaded. It is true that the Court of Appeal did not impose any such condition but the Court of Appeal was not dealing with an application under CPR Part 24, Part 3 or Part 25. Those applications have, however, been made to this court. I would not therefore have accepted that a condition of payment in, or an interim payment, would be unjust for the reason suggested by Mr. Brisby.

Mr. Brisby also submitted that any order for payment in or an interim payment would be wrong in principle because “where a contract is voidable in equity there is no need for the party wishing to rescind to tender or to return benefits received, for the court is able to ensure counter-restitution by orders for conditional relief”; see The Law of Rescission by O’Sullivan, Elliott and Zakrzewski at paragraph 11.44. The proposition is based upon the decision of the Court of Appeal in Jervis v Berridge (1873) 8 Ch App 351. But the decision in that case concerned the question whether as a matter of pleading a party claiming rescission had to plead an offer to make payment of such sums as the court would, at trial, think it right to impose as the price of equitable relief. The case was not concerned with the question of what terms might be imposed pursuant to an application under CPR Part 24, Part 3 or Part 25. I would not therefore have refused to make the order sought because of this submission.

Finally, Mr. Brisby submitted that it would be wrong to make the order sought by the bank in circumstances where there is evidence that the borrowers are (presently) unable to make the requested payment with the result that the effect of the order would be to “stifle” the borrower’s rescission defence. This submission is based upon a short statement served just before the hearing (notwithstanding that the borrowers had known since January 2014 that payment into court would be sought) and a further short statement served immediately after the hearing to explain what the first statement meant.

Mr. Malhotra, an additional general manager of the legal and compliance team of the guarantor, has stated that the borrowers no longer have the US$150m. loaned by the bank because it has been invested in “equity shares of associated companies which in turn hold investments in project-holding entities in India.” He further states that “those projects have not yet been fully developed and so the holding companies have not yet received any, or any significant, returns. The relevant companies are not listed and the shares in them are not freely tradeable.” The shares are “illiquid and difficult to market”. The projects “are not yet capable of generating immediate returns. They are expected to start to generate returns in about 2 years.” Although it was expected that repayment of the loan would be possible by selling the shares in those companies the relevant projects have been delayed and so the borrower “has not yet received the necessary return on its investments from which the facility under the Credit Agreement would be repaid.” The borrower has assets in the form of receivables, primarily loans to the investment vehicles, but those companies cannot repay the loans made to them “until the projects have been developed”. Finally, the borrower cannot obtain credit facilities, first, because it is barred by clause 19.7 of the Credit Agreement and, second, because “minority shareholdings in uncompleted development projects which are still some way from reaching substantial completion are not an attractive proposition.” However, if rescission is obtained at trial (which he understands to be at least two years away) it may be possible to sell the investments or raise significant finance secured upon them “because the relevant projects are likely to have been further developed”.

This evidence is of a wholly general nature. No particulars are given of the investments or of the underlying projects or of the revenues so far generated by the investments or projects. No accounts have been disclosed in support of the generalised statements. Given that a large sum, some US$120m., will have to be paid to the bank even if the rescission defence succeeds one would expect that a responsible borrower would already have taken steps to realise assets or, at least, investigated the extent to which that is presently possible. Yet no particulars of such steps or enquires have been given.

When it is said that the need to make a payment in would stifle a defence the defendant has a heavy evidential burden. In Yorke Motors v Edwards [1982] 1 WLR 444 it was accepted by Lord Diplock at p.449 D that the defendant must put sufficient and proper evidence before the court to show that the suggested condition is impossible for him to fulfil. I do not consider that the evidence relied upon by the borrower, which is of a general nature and wholly unparticularised, is sufficient to discharge the evidential burden upon it.

It follows that if I had concluded that there was power to order payment in, or an interim payment, I would not have been persuaded that sufficient evidence had been adduced to show that such an order would stifle the defence.

The first matter to (re)consider is the bank’s costs of the amendment application, said to be £94,542. In my October 2013 order I awarded the bank 75% of the costs of the amendment application. This reflected the fact that certain submissions made by Mr. Hapgood which had been adopted by Mr. Handyside did not succeed. The rescission element of the amendment application must now be allowed. In those circumstances Mr. Brisby suggests that the costs recoverable by the bank should suffer a modest reduction to 70%. I accept that submission notwithstanding, as submitted by Mr. Handyside, that the borrowers could have accepted that there was an issue estoppel.

The second matter to (re)consider is the bank’s costs of the summary judgment application, said to be £168,429. In my October 2013 order I awarded the bank these costs. Mr. Brisby submitted that in circumstances where the bank’s claim for summary judgment in the sum of US$177m. has now failed the borrower should be awarded half of its costs to reflect that loss and the bank’s success on the summary judgment obtained by the bank on certain issues. Mr. Handyside submitted that there should be no more than a modest reduction in the costs recoverable by the bank because the argument on issue estoppel (on which the judgment for US$177m. rested) did not significantly increase the costs.

The position now is that the bank has succeeded in obtaining summary judgment on certain issues but has failed to obtain the prize of a summary judgment for US$177m. I do not consider that that enables the borrowers to claim, as did Mr. Brisby on their behalf, that “we were the winners”. Rather, it seems to me, the bank succeeded on its claim for summary judgment on certain issues but the costs order should reflect the fact that the bank lost on its claim for summary judgment for US$177m.

A broad analysis of the time spent and costs incurred in arguing the various matters suggests that the bank should obtain the greater part of its costs. However, it is probably inappropriate to assess the costs purely by reference to the time spent and costs incurred in arguing the various issues. The time spent and costs incurred in arguing the issue estoppel point, upon which the claim for US$177m rested, were no doubt modest compared with the costs of arguing the other issues. But the fact that the bank was seeking summary judgment in the large sum of US$177m. probably caused the overall level of costs incurred by the parties to increase. I consider that justice will be done by awarding the bank 60% of its costs of its summary judgment application.

There is no dispute that the bank remains entitled to its costs of the borrowers’ application to stay the application for summary judgment. They are claimed in the sum of £21,868.

I also awarded the bank the costs of the action and made an order for an interim payment of £750,000. There is no dispute that the order in respect of the costs of the action should be set aside. There is also no dispute that an order for an interim payment should be made in respect of my revised orders that the bank should recover 70% of the costs of the amendment application, 60% of the costs of the summary judgment application and 100% of the stay application. The court must therefore determine the level of the interim payment.

My previous order was 30% of the amount claimed as the costs of the action and Mr. Brisby submits that I should award the same proportion of the costs now awarded to the bank. However, the costs of the whole action were very large and therefore it was very difficult for the court to judge whether they were appropriate or excessive whilst the costs of the amendment, summary judgment and stay applications are not of the same order. In those circumstances Mr. Handyside submits that there should be an interim payment of 60% of the costs claimed.

The costs claimed are about £66,000 in respect of the amendment application (70% of the total sum claimed), about £101,000 in relation to the summary judgment application (60% of the total sum claimed) and about £21,868 in respect of the stay application, making a total of about £189,000. If I award £95,000 as an interim payment I am confident that on a detailed assessment the bank will recover no less than that. That therefore is the sum which I shall award as an interim payment. That sum should be set off against the costs awarded by the Court of Appeal.

So far as the costs in the Swap Action are concerned, the costs recoverable by the bank in respect of the amendment application should also be reduced to 70% of the sum claimed. So far as the costs of the summary judgment application are concerned I ordered in October 2013 that these be in the case. I am not persuaded that the guarantor’s success on the rescission “tips the balance” such that the guarantor should recover half of its costs. The costs should remain in the case. Finally, the payment on account should be reduced to £60,000 to reflect the reduced amount recoverable on the amendment application. That sum should be set off against the costs awarded by the Court of Appeal.

I shall ask the parties to agree the terms of an order to give effect to my conclusions.