FINANCIAL LIST
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Before :
MR JUSTICE BLAIR
Between :
The Law Debenture Trust Corporation P.L.C. | Claimant |
- and - | |
Ukraine, represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine | Defendant |
Mark Howard QC and Oliver Jones (instructed by Norton Rose Fulbright LLP) for the Claimant
Bankim Thanki QC and Simon Atrill (instructed by Quinn Emanuel Urquhart & Sullivan, UK LLP) for the Defendant
Hearing date: 26 May 2017
Approved Judgment on consequential matters
Mr Justice Blair:
Judgment in this matter was handed down on 29 March 2017 (see [2017] EWHC 655 (Comm), [2017] All ER (D) 07 (Apr)). Judgment on the Notes was given in favour of the Trustee, the outstanding principal amount of which is in the sum of US$3 billion.
There are a number of consequential matters that arise following judgment, as set out below. The hearing in respect of these matters took place on 26 May 2017. At the court’s request, on 16 June 2017 the parties produced further written submissions on the subject of costs. The issues, and the court’s decision on the issues, are as follows.
Whether any condition should be imposed upon the stay of the judgment
The court has given Ukraine permission to appeal to the Court of Appeal against the judgment, and the parties have said that the appeal is provisionally listed for 22 January 2018. CPR 52.16 provides that an appeal shall not operate as a stay of any order or decision of the court unless the court orders otherwise. However, the Trustee realistically accepts that in this case a stay of the obligation to pay the judgment debt will be granted pending appeal. The first question for decision is whether Ukraine is entitled to an unconditional stay. It is not in dispute that the court has the power to impose a condition on the stay. The condition that the Trustee seeks as a condition of the stay (and of the appeal itself, which raises a discrete issue which is dealt with below), is that Ukraine should make a payment to the Trustee or into court of US$325 million to be held pending the appeal.
The sum of US$325 million has been calculated by determining how much interest would have been paid or accrued up to 26 May 2017 on new notes that the Russian Federation would have received in exchange for the Notes (i.e. the Notes the subject of these proceedings) had Russia participated in a restructuring. The restructuring is part of IMF support provided to Ukraine in 2015 by way of an Extended Fund Facility. On any basis, the Trustee argues, it is reasonable to require Ukraine to give security in this sum as a condition for granting a stay. Ukraine was prepared to incur a liability in this amount to Russia in the restructuring, and it should be required to pay this money into court because:
If Ukraine loses the appeal, it is clear (the Trustee submits) that Ukraine will not voluntarily satisfy the judgment debt, and will vigorously resist enforcement.
It will be very difficult for the Trustee to enforce the judgment against Ukraine in Ukraine, or elsewhere.
Ukraine plainly has the resources to allow it to prosecute the appeal, make its application for a stay, and so on.
There is no reason to think that Ukraine cannot pay US$325m, or that a requirement that it pay this amount will stifle the appeal.
Ukraine resists the imposition of the condition because:
There is no valid comparison or connection to be made (Ukraine submits) between the Notes and the new notes Russia would have received had it participated in the restructuring, because if it had done so it would have taken the new notes with a haircut of 20%.
As to payment generally, Ukraine says that there “are obvious difficulties in Ukraine providing a categorical reassurance of Ukraine’s future actions in unknown and unpredictable circumstances”. It also says that it would be problematic to make the payment from reserves.
Payment of the US$325m would risk breaching the “Most Favoured Creditor Clause” in the new notes and entitle Ukraine’s creditors to call a default accelerating the liabilities under the new notes, would infringe Ukrainian law including court injunctions, and would risk breaching the negative pledge in its financing arrangements with the World Bank.
Imposing the condition would in effect improve the Trustee’s position on enforcement, which is not the purpose of imposing a condition on a stay. Further, it may prejudice its position as to state immunity on enforcement, which is different from the jurisdictional waiver of immunity which it gave as a term of the transaction.
It is inappropriate, as a matter of international comity, to require a sovereign state to provide security from state funds in this way.
The court’s conclusion on this question is as follows:
Rightly, the Trustee did not strenuously oppose the giving of permission to appeal to Ukraine: this is clearly a case in which the threshold conditions for giving permission to appeal are satisfied.
As to the applicable legal principles, it is correct to say that the authorities as to the imposition of a condition on permission to appeal are also relevant to the imposition of a condition on granting a stay. They are set out in the White Book at CPR 52.18.4, and more generally are explained in Hammond Suddard Solicitors v Agrichem International Holdings Ltd [2001] EWCA Civ 2065 (reviewed recently in Merchant International Company Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy [2016] EWCA Civ 710). Among the factors to be balanced are the possibility of a condition stifling the appeal, as against (for example) failure to comply with previous orders of the court, or good reason to believe that the judgment will be unsatisfied if the appeal is unsuccessful.
Again rightly, the Trustee has not sought to require payment into court of the outstanding principal amount of the Notes in the sum of US$3 billion as a condition of the stay. Though it is possible to see such a condition being imposed in the (exceptional) case in which permission to appeal against judgment on debt instruments of this kind is given, in the realities of this case, such a condition would have rendered permission to appeal nugatory.
That said, and whilst respecting Ukraine’s evidence to the contrary, the risks of the negative consequences emphasised by Ukraine do not seem very likely. Whilst it is possible that compliance with a condition of payment of US$325m might breach the Most Favoured Creditor Clause in the new notes, and/or the Ukrainian court injunctions, and/or the World Bank negative pledge, the attendant consequences seem manageable in practice. The action brought by the Trustee on the Notes is very public already, and it seems improbable that international institutions (or creditors) would invoke these provisions on the basis of Ukraine’s compliance with a court order of this kind in the course of the action. As for the injunctions, even accepting Ukraine’s point that it has no direct control over these proceedings, it is not unreasonable to suppose that the Ukrainian court would seek to avoid an outcome that placed its Government in breach.
However, the premise of the Trustee’s US$325m figure does not seem compelling either. It is not disputed that had Russia participated in the restructuring, this sum would have accrued, and would either have been paid, or be due—but Russia did not participate (on the grounds that it is an official not a private creditor, and that it considered the terms to be inadequate). There is no real link for the purposes of setting a condition between the obligations in dispute in these proceedings, and the restructuring terms.
Taking the factors mentioned above, this is not a case in which Ukraine is in breach of court orders. On the other side of the balance, it seems improbable that ordering a payment into court of US$325m would stifle an appeal. As to the important question of compliance with the judgment should the appeal fail, whilst Ukraine has not given the explicit assurance sought by the Trustee, it has at least gone some way to put before the court evidence to the effect that giving such an assurance is not politically feasible in current circumstances. Ukraine has not said that it will not respect the court’s judgment should the appeal fail.
This is not an altogether straightforward decision, because this is a judgment on transferable notes. It is entirely appropriate to think in terms of conditions. However, for the court, the decisive factor is that the imposition of the condition sought might, or possibly even might likely, lead to satellite proceedings between the parties, raising in effect the very questions to be decided on appeal, in circumstances in which the appeal will come on soon, and against a background which for reasons that are well known is particularly difficult. This would not be a desirable state of affairs (c.f. Micula v Romania [2017] EWHC 1430 (Comm) at paragraph 23(ii) for a situation on very different facts).
In balancing the factors, it is also of some relevance that as a state, Ukraine’s assets will remain amenable to enforcement to the extent that they are now. In that sense, the Trustee is not prejudiced by the delay in enforcement should the appeal fail and the judgment remain unpaid, as might be the case with a company. For these reasons, in its discretion, the court will not impose the condition on the stay.
The appropriate rate of interest on the amounts owed by Ukraine to the Trustee, both pre and post judgment
There are a number of questions that arise on the construction of the Trust Deed that will determine the interest rate issues. Depending on the answers, the parties have agreed the numbers in an agreed interest table.
The key contractual provision is clause 2.2.2 of the Trust Deed which deals with interest on overdue amounts. It is within the clause that deals with the covenant to repay (see paragraph 37(iv) of the main judgment). Clause 2.2.2 provides in material part that:
“in any case where payment of all or part of the principal amount due on any day is not made to the Trustee or the Principal Paying Agent on or before the due date, interest shall continue to accrue on such principal amount (both before and after any judgment or other order of a court of competent jurisdiction) at the rate specified in the Conditions (or, if higher, the rate of interest on judgment debts for the time being provided by English law) ….”
Interest on the principal
It is not in dispute that the “rate specified in the Conditions” is 5%, as per Condition 4 of the Notes. Subject to the points made by Ukraine, the “rate of interest on judgment debts for the time being provided by English law” is 8% pursuant to s. 17 of the Judgments Act 1838. On this basis, the Trustee submits that under clause 2.2.2 of the Trust Deed, a rate of 8% is applicable to the principal, as the higher of the two rates, and that this applies both pre- and post- judgment.
Ukraine submits that pre-judgment interest continues to accrue at the contractual rate of 5%, not 8%. This is on the basis that the judgment is in US dollars and clause 2.2.2 is referring to a judgment in US dollars. The rate of interest on non-sterling judgments is at the court’s discretion: section 44A of the Administration of Justice Act 1970. Accordingly, there is no “rate of interest on judgment debts” that is higher than 5%. That reflects, Ukraine says, a sensible commercial outcome, namely that interest continues to accrue at 5%.
As to post-judgment interest, Ukraine submits that the court should exercise its discretion so as to reflect the starting point that, as with pre-judgment interest, it should be used to compensate the claimant for having been kept out of its money. In Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499 at [136], the court rejected the submission that there is any policy of imposing an “arbitrary” rate of 8% to incentivise payment, and held that the compensatory principle will provide “sufficient (we might even say compelling) grounds for departing from the prescribed rate applicable to sterling judgments”. The appropriate compensatory rate is US$ LIBOR (3 month) plus 2%, and in any event, it should be no higher than the contractual rate of 5%.
The court’s conclusion is as follows. This is a question of the interpretation of clause 2.2.2 of the Trust Deed, and the applicable principles have not been in dispute (see e.g. Arnold v Britton [2015] AC 1619, [2015] UKSC 36). The agreement provides that in the case of late payment, interest continues to accrue on the principal both before and after judgment “at the rate specified in the Conditions (or, if higher, the rate of interest on judgment debts for the time being provided by English law)”. There is only one rate of interest on judgment debts for the time being provided by English law and it is presently 8% (and has been at 8% since 1993). This is higher than the non-default rate of 5%.
It is true that had the court been giving judgment in the absence of this clause, the judgment rate would have been in the court’s discretion since this is a US dollar sum. But parties are free to agree to apply the judgment rate to a non-sterling sum, and by the express words of the clause have done so here. They are also free, as they have here, to agree that the rate applies both before and after judgment. The Novoship case was not one in which the court was applying a contractual term of this kind, and the passages from the case which Ukraine cites do not assist. The fact that on non-payment the interest rate rises from 5% to 8% is not in itself a commercially surprising result. The court should not depart, therefore, from the agreed provision. The Trustee’s submissions are upheld in this respect.
Interest on the coupon
US$75m in coupon interest under the Notes due on 21 December 2015 was not paid. The Trustee accepts that clause 2.2.2 of the Trust Deed does not expressly apply to interest. However, the Trustee submits that the court should apply the same approach when awarding interest on the coupon interest due under the Notes pursuant to s. 35A Senior Courts Act 1981, as this is plainly the rate at which the parties considered the Trustee and the Noteholder should be compensated for being kept out of their money. It seeks interest at 8%, alternatively 5%, alternatively a rate of 3% above six-month US$ LIBOR.
Ukraine submits that the Trustee and Russia have not adduced any evidence of their respective costs of borrowing, or even explained whose borrowing costs would be applicable. The best evidence that the court has on this topic, it says, is that the Trustee considered the appropriate interest rate on monies owed to it to be a bank’s base rate plus 2% (clause 14.6). Alternatively, the court can reach a similar result by applying an approach, common in the Commercial Court, of applying interest based on US$ LIBOR plus a small margin (no more than 2% in this case).
The court’s conclusion is as follows. The starting point is that coupon interest falls outside clause 2.2.2, so that the court is awarding interest pursuant to its statutory powers. It is well established that the broad object of the exercise under s. 35A Senior Courts Act 1981 is to compensate the claimant for being kept out of its money (see e.g. the summary in Dreamvar (UK) Limited v Mishcon de Reya [2016] EWHC 3316 (Ch)). In the present case, the relevant party for these purposes is plainly the Noteholder, not the claimant Trustee. (As it happens in this case, there is only one Noteholder, i.e. Russia.) No assistance is gained, therefore, from the contractual provisions applicable to interest on late payment of monies due to the Trustee which are cited by Ukraine.
Contrary to the Trustee’s submissions, however, a contractual term as to interest on the late payment of principal may shed little or no light on the application of the compensatory principle to late payments which are not covered by the term. The Trustee accepts that late payment of interest is not covered by clause 2.2.2 of the Trust Deed. There is no reason to apply the clause indirectly.
The choice for the court is therefore US$ LIBOR (6 month) plus 3% (the Trustee) or US$ LIBOR (3 month) plus 2% (Ukraine), the former yielding a substantially greater number than the latter. The court has no information on Russia’s borrowing costs (see for a similar situation VIS Trading Co Ltd v Nazarov [2013] EWHC 491 (QB) at [13]), and though either rate is on its face credible, it seems right to take the lower figure, particularly since the sum in question (i.e. US$75m) is small in the context of a state like Russia, and one would expect this to be reflected in lower notional borrowing costs.
Costs
A number of issues arise as to costs, though these were narrowed somewhat in the supplemental notes which were submitted by the parties at the court’s request on 16 June 2017.
Subject to the points made below, there is no doubt that having obtained judgment, and in the normal way, the Trustee is entitled to its costs of the proceedings. There are however two distinct routes by which to implement that result, one based on the Trustee’s indemnity, and the other pursuant to the court’s rules of procedure, though in practice it may not make that much difference to the ultimate outcome.
As to the first, the Trustee has the benefit of the usual contractual indemnity from Ukraine as Issuer on the terms set out in clause 14.5 of the Trust Deed (the contractual indemnity being without prejudice to the right of indemnity by law given to trustees, see clause 15.9). By clause 14.5, Ukraine as Issuer agrees to pay “all Liabilities properly incurred by the Trustee” in connection with, among other matters, enforcement. The term “Liability” is defined in clause 1.1 as “… including legal fees and expenses properly incurred on a full indemnity basis”. The words “properly incurred” frequently appear in this context, and mean “not improperly incurred” (see Re Beddoe [1893] 1 Ch 547), the burden of proof being on the party challenging the expenses (in this case Ukraine).
The Trustee’s case is that “properly incurred” means costs incurred by the Trustee in good faith, within the Trustee’s powers, and not through any failure of due diligence in breach of trust. As Ukraine points out, Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 184, 186-187 and 194-195 shows that a trustee cannot recover costs that have not been reasonably incurred or are unreasonable in amount. The court’s view is that in the context of a financial transaction of this kind, this means commercial reasonableness (UBS AG, London Branch v Glas Trust Corp Ltd [2017] EWHC 1788 (Comm) at [48]), and that effect must be given to the parties’ agreement that costs properly incurred are to be paid on a full indemnity basis. A trustee could not safely take on this kind of responsibility if when acting properly it risked ending up out of pocket.
The Gomba Holdings case concerned a mortgagee’s contractual right to add its legal costs of enforcement to the security so as in effect to increase the secured debt. Though the fact situation in the present case is different, the explanation given by Scott LJ of the relationship between the contractual right to recover costs and the court’s procedural powers to award costs is important (see in particular at p. 194-5).
The Trustee has issued demands to Ukraine in respect of its legal costs totalling £2,399,133.68. Its primary case is that the court should give summary judgment in respect of such costs under clause 14.5 of the Trust Deed. Ukraine’s case is that the court should make any costs order under CPR Part 44, in other words by way of its power to award costs, such costs to be assessed by the costs judge.
It is clear in a case like the present that the court may order summary judgment of the trustee’s costs without an assessment by the costs judge: see The Law Debenture Trust Corporation p.l.c v Elektrim Finance B.V. [2005] EWHC 1999 at [71]. In that case, Hart J relied on the “detailed narrative” with which the defendant had been supplied, and the fact that no “plausible reason” or “clear case” had been advanced as to unreasonableness in relation to any particular item.
In the present case, Ukraine’s contention is that by contrast with Elektrim, the detail provided is sparse, and legitimate issues and concerns have been identified based on that sparse information, so that a detailed assessment is required to obtain proper details. Moreover, it is contended that there is “ample prima facie evidence” that those costs are likely to be reduced substantially. (Also, it is said that compliance with such an order as to costs would not involve a breach of Ukrainian law unlike the contractual route.)
The Trustee says that it is unarguable that any of the costs it claims do not fall within the ambit of costs “properly incurred”. As to the scope of the costs, the court would agree with this (see e.g. the discussion in paragraph 30(ii) below). However, the position is more difficult as regards the amount of the costs. In their submissions, the parties did not address to any great extent the details of the costs incurred. On balance, and even allowing for the full contractual indemnity, it seems inappropriate in this case (unlike in Elektrim) to summarily order the payment of millions of pounds of costs, the quantum of which is in dispute, without any assessment at all. As was said in Gomba Holdings at p.188 E-F, there must be some means of quantification, and assessment perhaps by the costs judge seems the most practical means of doing so (unless agreement is reached which is what normally happens). For the same reasons, the Trustee’s suggestion that the court should summarily determine the costs under CPR r.44.5 cannot be accepted.
This is also consistent with the approach adopted in Renewable Power & Light Ltd v McCarthy Tetrault [2014] EWHC 3848 (Ch), where Morgan J said at [40]:
“The next question is: how procedurally is the amount of the indemnity in relation to costs to be quantified? Should I enter judgment for an indemnity to be assessed and then direct an account or an inquiry, perhaps before a costs judge? It seems to me that the most convenient course is simply to make a declaration of Grant Thornton’s entitlement to an indemnity and then to make an order for costs which reflects that entitlement, and then to direct a detailed assessment of the relevant costs on the indemnity basis. It seems to me that procedural course is supported by the approach in Gomba Holdings.”
The parties agree that this process will be stayed pending Ukraine’s appeal.
The following further conclusions apply taking account of various points raised by the parties:
Costs will be awarded to the Trustee on the indemnity basis. The assessment will proceed on the basis that where (as in this case) there is a contractual right to the costs, the assessment should be exercised so as to reflect that contractual right: Gomba Holdings p.191A-B, p.194B.
The court does not accept Ukraine’s submission that there should be a percentage reduction in respect of costs referable to the issues of (a) the content of Ukrainian law and the underlying factual evidence supporting Ukraine's case on capacity, and (b) ratification and affirmation. That is because the costs of considering the issues as to (a) were “properly incurred” by the Trustee, although in the event Ukraine’s case was not challenged in this regard. Similarly, the costs in respect of ratification and affirmation were “properly incurred”, although the court rejected the Trustee’s summary judgment application in that respect. The result would have been the same had the court been exercising its discretion under ordinary costs principles in the absence of clause 14.5 of the Trust Deed. The discount advocated by Ukraine does not correspond with the time these took up in the argument in the case, and the fact that a party loses a particular argument is not in itself a reason for applying a percentage reduction. For the same reasons, Ukraine is not entitled to its costs of these issues.
The court does accept Ukraine’s submission that the Trustee should not have the costs of pursuing (a) the claims for the Russian Federation’s own costs incurred qua Noteholder or (b) the Trustee’s management time claim (both of which have been stayed by agreement pending Ukraine’s appeal). These are both very contentious issues raising points of principle. The Trustee also accepts this, saying however that they were minor issues in the overall context of the claim. It says that its costs of the Consequentials Hearing were £517,414.03, and considers that no more than 8% of these costs should be carved out in relation to these two issues, taken together. However, these were not so minor issues in the court’s opinion, and the figure for deduction should be 15%. The parties can agree the calculation.
It is common ground that the Trustee is not entitled to demand costs that have not yet been incurred.
In accordance with the principles that apply where the court orders costs to be assessed, the Trustee is entitled to an interim payment in respect of its costs. The parties both accept that this should be 50% of the Trustee’s stated costs, to be paid within eight weeks. The court has been told that the Ministry of Finance of Ukraine will take all reasonable steps to arrange and obtain in good time the various governmental decisions and approvals that will be required in order to make the interim payment.
The parties have now agreed interest payable on the Trustee’s legal costs at 2.25%. The calculations are set out in the agreed interest table.
Security for costs of the appeal
The Trustee applies for security for its costs of the appeal. As regards the costs of the proceedings in this court, as has been explained above, Ukraine must pay the Trustee its costs to be assessed, with an interim payment of half such costs, to be paid within eight weeks. To repeat, the court has been told that the Ministry of Finance of Ukraine will take all reasonable steps to arrange and obtain in good time the various governmental decisions and approvals that will be required in order to make the interim payment. If this payment is duly made, and without expressing a view on the various contentions that the parties have advanced, there is no cogent case for ordering security for the costs of the appeal, since Ukraine will be in compliance with its costs obligations. If this payment is not made, the application for security can be renewed.
Whether there can or should be any conditions imposed on Ukraine’s appeal
The Trustee invites the court to order that Ukraine’s compliance with any monetary orders made against it including payment of US$325m to the Trustee or into court be made a condition of its continuing with its appeal.
As to monetary orders in relation to costs, see above.
As to the proposed condition of the permission to appeal of the payment of US$325m, the same considerations apply as to the payment of that sum as a condition of the stay (see above). For the same reasons, the court will not impose this as a condition of the appeal. (Had it been relevant, Ukraine’s contention that the court has no jurisdiction to impose conditions would not have been accepted. At the handing down of the judgment subject to editorial corrections on 29 March 2017, permission to appeal was given, and dealt with to that extent, but the question of whether there should be any conditions imposed was not dealt with. Nor were the parties in a position to deal with that question, only just having seen the judgment.)
The order
The parties are asked to draw up an order that gives effect to the above rulings. The court thanks them for their assistance.