Sberbank of Russia v The OJSC International Bank of Azerbaijan

There is listed before me today a case management conference in an action between Sberbank of Russia, the claimant, and the OJSC International Bank of Azerbaijan (IBA), who are the defendant. The claim is, in essence, a simple debt claim.

IBA’s position before me today is that I should not hear the case management conference, and should adjourn it generally, with no further steps being taken in the action until after an appeal before the Court of Appeal (and potentially the Supreme Court) in relation to an order of Hildyard J (reported at [2018] Bus LR 1270) concerning what has been defined as the “Moratorium Continuation Application” which was issued in the Insolvency and Companies List and heard by Hildyard J in December 2017. Notwithstanding that, in a subsequent judgment in April 2018, Hildyard J held that Sberbank should be permitted to bring a claim against IBA to enforce its debts (reported at [2018] BPIR 837), which is the claim brought in this action, and which is listed before me today for a case management conference. For its part Sberbank submits that I can, and should, give case management directions to trial.

In order to understand the issues that arise it is necessary to set out the relevant events that have occurred at some length to put in context the issues that arise in the appeal to the Court of Appeal, and the issues that arise in this action, which are of relevance to the application that is before me.

The claimant Sberbank, and the defendant IBA, entered into a facility agreement on 15th July 2016 under which Sberbank lent IBA US$20 million. IBA is an Azeri bank. It fell into financial difficulties in 2007. In April 2017, it embarked on a voluntary restructuring procedure in Azerbaijan, with a view to restructuring certain of its debts ("the Restructuring Proceeding"). This was a rescue procedure which I am instructed is broadly similar to an administration process.

Between May and July 2017, IBA announced a restructuring plan. This was approved by a majority of creditors in July 2017 and sanctioned by the Azeri court in August 2017. It became effective as a matter of Azeri law on 1 September 2017. I will refer to it as "the Plan".

In broad outline, the Plan involved the following. The Plan relates to certain foreign debts owed by IBA, referred to in the Plan as "Designated Financial Indebtedness", amongst those is the Sberbank loan. The effect of the Plan as a matter of Azeri law was to cancel existing indebtedness in return for which the creditors received a package of new debt instruments (on less favourable terms) called "Entitlements".

In May 2017, IBA's foreign representative applied for an order before the English court to recognise the Azeri Restructuring Proceeding as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (CBIR). Barling J granted that application on 6th June 2017. As an automatic consequence of the recognition of the order, Barling J also imposed a temporary moratorium that prevented creditors from commencing claims against IBA before the English courts. The purpose of the temporary moratorium was to give IBA a breathing-space pending its restructuring plan taking effect. The temporary moratorium was therefore to last no longer than the duration of the Azeri Restructuring Proceeding (which at that time was due to terminate on 30th January 2018). Once that temporary moratorium expired, creditors would then be free to pursue any claims they had in the English courts.

In November 2017, IBA's foreign representative applied for an order under CBIR Article 21 for a permanent moratorium, so that the moratorium on creditor claims would continue indefinitely. This has been referred to as the Moratorium Continuation Application.

It will be seen, therefore, that the purpose of IBA's application was to permanently deprive Sberbank from enforcing its claim by making its claim subject to an indefinite moratorium continuing beyond the termination of the Azeri Restructuring Proceeding.

That application came before Hildyard J in December 2017, and Sberbank, along with another creditor, Franklin Templeton, resisted that application. Hildyard J refused IBA's application in a judgment on 18th January 2018, which, as I have already noted, is reported at [2018] Bus LR 1270.

By way of brief summary:

Hildyard J granted IBA permission to appeal, and indeed that appeal is due to be heard by the Court of Appeal next week.

A supplemental hearing took place in April 2018 to determine consequential matters. At that hearing, the judge had to consider the position in circumstances where IBA's application for a permanent moratorium had failed, and whether or not to lift, therefore, the temporary moratorium ordered by Barling J and allow Sberbank to issue a claim. One issue which the judge had to consider was whether or not he should do so in the context of IBA's forthcoming appeal to the Court of Appeal. The judge was alive to avoiding any prejudice to IBA's position pending the determination of that appeal, i.e., in other words, not to render nugatory that appeal.

With those considerations in mind, as recorded by Hildyard J in his order of 12 April, and as explained in his supplemental judgment which is before me, he essentially proceeded as follows:

It is important, in my view, to bear in mind that Hildyard J was very familiar with the issues that had arisen before him and which would be determined by the Court of Appeal. At that hearing he essentially case-managed matters such that he considered it appropriate that Sberbank could, in the meantime, proceed with an action in relation to the recovery of the debt, and prosecute that claim as far as, but not to, the obtaining of a final judgment.

It is said on behalf of Sberbank that nothing has changed since that order. In this regard, paragraph 3 of the order of Hildyard J provided:

It is not suggested that there has been any material change of circumstances since the date of that order. Of course, a party can apply at any stage for further case management directions in an action, in the present case the action which came to be commenced. In any event, the matter is before me today on the case management conference, at which it is for me to consider what case management decisions are appropriate.

Accordingly, if I were to disagree with the views of Hildyard J, there would be no bar to me making whatever case management order I considered appropriate at the present time. I do, of course, bear in mind the fact that Hildyard J was very familiar with the issues arising at the time and nevertheless made the order that he did. However, I have considered the matter today afresh and in the light of the submissions that I have heard.

Sberbank issued its claim on 16 April 2018. IBA served its defence on 14 May 2018, and Sberbank served a reply on 4 June 2018. Pleadings then having closed, the matter comes before me today for the case management conference.

As I have already foreshadowed, IBA is appealing the decision, that is the first decision of Hildyard J, by which he dismissed the Moratorium Continuation Application. I interject at this point that there was no appeal from the case management judgment and order of Hildyard J of 12 April 2018. So that aspect forms no part of the forthcoming Court of Appeal hearing.

In terms of the Court of Appeal hearing itself, there are only two issues before the Court of Appeal: (i) whether the court has jurisdiction to grant a permanent stay under CBIR Article 21; and (ii), if so, whether the court should exercise such jurisdiction, especially bearing in mind the Gibbs rule.

In this regard, Mr. Hobson, who appears for the claimant, draws my attention to the skeleton argument which is lodged on behalf of the appellant on that appeal. In this regard it is stated, amongst other matters, as follows:-

At paragraph 8:

At paragraph 25:

At paragraph 27:

IBA accepts that the current issues before the Court of Appeal are limited, as I have identified, to whether the court has jurisdiction to grant a permanent stay under CBIR Article 21, and if so, whether the court should exercise such jurisdiction, bearing in mind the Gibbs rule.

So, certainly in terms of the hearing before the Court of Appeal, the Gibbs rule itself is not a matter for consideration or determination. IBA has reserved the right to seek to attempt to introduce a consideration of that rule if the matter goes against them and proceeds beyond that stage (to the Supreme Court). Of course, it would be a matter for the Court of Appeal and the Supreme Court as to whether it permitted any expansion of the issues that arose in the appeal.

Mr. Perkins, for IBA, in a detailed and well-argued skeleton argument, which he has elaborated upon orally before me today, urges me not to proceed with the CMC and that this action should not be progressed beyond today until after not only determination in the Court of Appeal of the issues I have just identified, but if matters proceed further, until after the determination in the Supreme Court.

He makes the obvious point that if the issue in relation to CBIR Article 21 finds favour with the Court of Appeal, or the Supreme Court, the result would be that effectively the court would have no jurisdiction to hear this claim. There would be a permanent moratorium and this action would never proceed.

However, he recognises, as he must, that the position would be rather different if that was not what was determined by the Court of Appeal or the Supreme Court. In order to understand how matters might develop from here, it is necessary to identify the issues that arise in the action that is before me.

As I have identified, the claim is a simple debt claim and IBA raises one defence to that claim, which is that the debt has been discharged as a matter of English law. That is the defence advanced at paragraphs [15]-[18] of the defence. It is said, first, as a matter of Azeri law, the effect of the Plan is to discharge the debt: see the defence at paragraphs 15-16; and, secondly, as a matter of English common law, the terms of the Plan are to be recognised and given effect in England. Therefore, as a matter of English common law, the debt has been discharged.

The tension between that plea and the stance adopted on appeal will be readily apparent, but, as is clear from the defence, at paragraph 17, the defendant effectively reserves the right to argue in the Supreme Court (if it were given permission to do so) that Gibbs is not good law.

Mr. Perkins also says, as developed at some length in his skeleton argument, that the common law of England is the common law of England, such that if it turns out that the matter is considered in due course by the Supreme Court and it is found that the rule in Gibbs does not represent English common law, then the common law now is as the Supreme Court would find it to be.

Sberbank's riposte to the defence is two-fold: first of all, it relies upon the Gibbs rule, therefore that, as a matter of English common law, the terms of the Plan should not be recognised and given effect in English law; and secondly, it is asserted that there is an independent reason why the court should not recognise and give effect to the Plan, which is because the Plan is (it is said) arbitrary and discriminatory, as regards Sberbank. That is what has been characterised before me as the “Defects in the Plan Point”.

This second riposte is developed, and pleaded out, at paragraphs 6 to 15 of the reply. Essentially, it is said that the claim under the facility agreement has been mis-classified, and that it should have been classified as Trade Finance, but was incorrectly classified as Senior Liability; secondly, that the relevant criteria, the Trade Finance criteria, were and are arbitrary, inappropriate and unfair; and thirdly, that the application of those criteria was applied in a manner which was arbitrary, unfair and discriminated against Sberbank.

It is said by Sberbank, and this is paragraph 17 of the reply (which compendiously deals both with the Gibbs point and the Defects in the Plan Point):

"… the Defendant … is not and would not be entitled to any form of relief from the English court giving substantive effect to the Plan insofar as it relates to the Facility, whether by way of the relief sought under the Moratorium Continuation Application or otherwise.

As to this:

(i)

Such relief is not and would not be available in principle, in the light of the matters pleaded above.

(ii)

In any case, the Court should not and would not grant any such relief, given the matters pleaded above."

The “matters pleaded above” include (say Sberbank) the matters pleaded at paragraph 6 and following of the reply. Whilst there is some criticism from Mr. Perkins as to how clearly there has been a plea of what has been characterised as this second basis under common law, I am satisfied that there is sufficient there pleaded to raise not only the Gibbs rule point but also the alternative point at common law. It is said, indeed this seems to be common ground, that this is an area of law which is undeveloped at the moment, not least because of the existence of the Gibbs rule.

There has been no application to strike out these paragraphs of the reply, and therefore, for present purposes, I proceed on the basis that there is a reasonably arguable claim for the reasons identified at paragraph 6 and following of the reply, that at common law there are reasons as a matter of English public policy (although those words are not expressly used in the reply), that the effect of the Plan should not be recognised.

The battleground then is as to whether or not this action should proceed and proceed as far as a judgment hearing, or whether, as IBA urges upon me, this action should proceed no further pending determination of the issues before the Court of Appeal and any appeal therefrom (and any widening of the issues on appeal therefrom, to the Supreme Court).

I bear well in mind the overriding objective in CPR 1.1, and 1.2, including dealing with cases justly and at proportionate cost, including, so far as practical, (d), "ensuring that it is dealt with expeditiously and fairly".

The first important point is that the Court of Appeal hearing is concerned, and is concerned only with the narrow issue in relation to CBIR Article 21. At the moment, it is not even concerned with the Gibbs issue, which may or may not, if matters proceed any further, be incorporated in any proceedings that take place in the Supreme Court.

I have before me for case management today an action which has progressed to close of pleadings. If I were to accede to the suggestion of the respondent and not progress the matter today, then, as must be accepted by Mr. Perkins, there would be an inevitable loss of time. Whether that loss of time would be a year, 18 months or two years, a significant amount of time would be lost. It would cause delay in the furtherance of the action.

Essentially at the end of such appellate proceedings as take place, at whatever appellate level, the issues which arise in this case, certainly in relation to the alternative basis at common law which is advanced, would not have been addressed and, therefore, there would then be a standing start and the action would take as long as it takes to get to trial.

That is, in my view, an important consideration in the context of the overriding objective and from a case management point of view, because at least in the abstract a claimant is entitled to have his action determined within a reasonable period of time, in particular debt claims. Whilst there is no evidence before me of any specific prejudice in this case, the mere passage of time in relation to a debt claim is something that could cause prejudice for a claimant, not least because no one knows how a bank will trade in the future, what will happen in the future or, indeed, what happens in the world in the future. Therefore, there is a potential prejudice that results from delay if I were effectively to stay these proceedings so that they do not continue beyond this point, which is the effect of what IBA seeks before me today.

The real battleground between the parties was to consider how things might play out as a result of matters in the appellate courts, including the Supreme Court. It is accepted (rightly, in my view) by Mr. Perkins, on behalf of IBA, that it is inherently unlikely that even if the matters under appeal reached the Supreme Court, and the Supreme Court allowed any widening of the issues, the Supreme Court would rule on the particular facts of this case in relation to any common law public policy defence. At the very highest (and this, of course, assumes that the Supreme Court was willing to consider the Gibbs point), it is possible that the Supreme Court might offer some general guidance in relation to what exceptions there might be to any recognition and enforcement of foreign plans. However, it seems to me that even if the point was live before the Supreme Court, assuming of course that matters reached the Supreme Court, and even assuming that the Supreme Court was willing to give some general guidance, it is inherently unlikely that such guidance would be otherwise than at a high level, and no doubt the Supreme Court would be careful and reluctant not to trespass upon the facts of any particular case; nor, indeed, to give such detailed guidance as would straightjacket judges in the future, given the myriad of circumstances that could arise and which might not necessarily be foreseeable or foreseen in advance.

I consider, therefore, that if one was within a scenario whereby Gibbs was overturned, but there were some circumstances in which the Gibbs rule did still arise (which Mr. Perkins accepted was a possibility which could well happen, for example, if the principle in Gibbs was found to be limited to certain circumstances, as opposed to not forming part of English law at all), then the reality is that this would not determine the point in many cases, including in relation to the alternative common law principle that Sberbank submits exists and would wish to rely upon.

Against that background, there is inevitably going to be delay, it seems to me, if matters proceed in the way that is suggested by IBA. Of course, if Gibbs was not overturned, then I accept that, in that scenario, there would be no necessity for Sberbank to rely on the alternative ground. If the judgment of Hildyard J was not overturned (but the Gibbs point was not determined in the appellate proceedings), IBA says that it would submit to summary judgment in Sberbank’s favour (based on Gibbs) – whilst reserving the right to seek a leapfrog appeal to the Supreme Court. However, in such a scenario it would be a matter for Sberbank whether it wished to proceed to summary judgment or not. It might wish to proceed to trial – for example not only on the Gibbs point but on its alternative case at common law. It is not true to say therefore (as IBA submitted) that there will necessarily never be a trial of the present action.

Ultimately, this is a matter of case management for me and is a case management decision on which there are, no doubt, different views that could be formed. However, there is no doubt in my mind that the appropriate course is that this action should proceed for the time being and that I should hold the case management conference today and give directions towards trial.

In that regard, I have already heard some debate on this, because part of Mr. Perkins's opposition to the CMC proceeding is to say that, in reality, the issues that would arise for determination would not actually involve a great deal of factual evidence, although he says (and recognises, rightly), that there would have to be some Azeri law evidence. However, against that, Mr. Hobson says that, in fact, there will need not only to be Azeri law evidence, or potentially Azeri law evidence, but also factual evidence, because one of the allegations Sberbank have made in the reply is that there was, effectively, discriminatory conduct between different debtors, because another debtor, Cargill, was put into a different category. The result of that is there may be need for disclosure and, indeed, potentially factual witness evidence from IBA in that regard.

I consider, therefore, that there is likely to be a significant amount of work that needs to be done between now and any trial, and I was not impressed with the suggestion that there is no reason why matters should be progressed now on the basis that, from a standing start, the action could progress to a trial fairly quickly. I consider that there are two problems with that submission. Firstly, it does not answer the question of the delay which inevitably would take place if the action is not progressed today, and the potential prejudice, at a conceptual level, that could arise from that delay; and secondly, the action will take as long as it takes, and it seems to me that there are strong case management grounds in furtherance of the overriding objective to progress the action today.

Of course, that does not mean that this matter will necessarily proceed to trial. Events may evolve hereafter, as a result of something said or determined in the Court of Appeal or, indeed, in the Supreme Court, which may determine the matter, in one direction at least. Equally, once the Court of Appeal has ruled and depending on what happens thereafter (in terms of whether the matter does or does not proceed to the Supreme Court), a court hereafter may be better placed than I am today to decide whether the action should continue to trial at that time.

That circumstances may change, is, indeed, one of the matters contemplated at paragraph 3 of the order of Hildyard J, in terms of a material change of circumstances. That, indeed, was effectively Mr. Perkins's fallback position, which was to reserve the right hereafter to come back to this court at a stage when matters are clearer, in order to invite the court not to proceed further at that time. The flip side of that is, of course, that it would be equally open to Mr. Hobson hereafter to seek a variation or a lifting of the undertaking that was given to Hildyard J, in the light of the events hereafter. However, and for the reasons I have given, I consider that in the exercise of my case management powers, the overriding objective is best furthered by continuing this action, and for me to give case management directions today, which I will now proceed to hear counsel on.

Therefore, and for the reasons I have given, I dismiss IBA’s application that I should adjourn the CMC and should, effectively, stay the proceedings pending any appellate proceedings on the other issues that arise, and accordingly this action will proceed with case management directions to trial being given today.

The final matter that arises for determination on this CMC is the question of the costs of the CMC. The normal order on the CMC is costs in the case as contemplated by the Commercial Court Guide. That is because a CMC is an opportunity to air all case management issues. It is true that on a CMC, on occasions, there are contested matters between the parties which have to be aired. That is one of the purposes of the CMC and, generally, on a CMC, if one party is or is not successful on a particular case management issue, that is not normally regarded as a relevant event to depart from the normal order on a CMC of costs in the case, at least unless it can be categorised as a discrete issue with its own time listing.

This is a case where a very substantial part of the time of the CMC has been to the question of whether or not this CMC should proceed or whether or not the matter should be stayed, but that was closely connected with case management and what this action and any associated trial actually involves, what the issues are in this case, and how the matter should progress to trial in terms of disclosure, witness evidence and expert evidence. These issues were quite closely bound up with the question of whether or not the action should proceed at this stage.

Although there was a substantial difference between the parties, which no doubt occupied the parties, both in preparation and at the hearing, it was essentially in relation to a particular type of case management issue which concerned how this matter should be case managed. Therefore, I do not consider that this is a case where there is a discrete event which is easily carved out from the costs of the CMC.

The whole purpose of a CMC is to consider the issues that arise and how the action is to be case-managed. This particular CMC threw up particular facts which are perhaps out of the norm, but which were in all the more need for active case management by this court, which is what a case management conference is ultimately all about. Therefore, I do not consider this would be an appropriate case to depart from the normal order on a case management conference and, therefore, I order that costs be in the case.