The claim concerned loan notes issued by an EU company and held by the subsidiary of a well-known Russian bank, which is subject to sanctions as a result of the war in
Due to a proposed refinancing, the company wished to redeem the notes held by the Russian subsidiary before their maturity date in
The judgment will be of interest to financial institutions following case law developments involving sanctioned entities. The court appears to have taken a sensible and pragmatic approach to dealing with the difficulties caused by sanctions and has provided guidance on the approach to take where an obligor wishes to exercise its right to redeem.
We discuss the decision in further detail below.
Background
This was an expedited Part 8 trial of a claim concerning loan notes with a face value of approximately €400m issued by Fortenova Grupa d.d. (the Company), which is part of the
Pursuant to a 2019 Subscription Agreement, governed by English law and subject to the exclusive jurisdiction of the English court, the Company had issued a total of €1.157 billion worth of senior secured floating rate notes. Shushary held approximately 37.9% of the notes. The fifth and sixth defendants, as holders of the remainder of the notes, were joined to the proceedings so that they could be bound by the court's decision. In accordance with the terms of the Subscription Agreement, the loan notes were secured against various assets of the Company and other companies in the
During 2021, the Company began exploring options for refinancing the notes. Due to the proposed refinancing, the Company wished to redeem the notes held by Shushary before their maturity date in
However, in
Accordingly, the Company applied for an order that moneys be paid into court to enable the Shushary notes to be redeemed, and for the security in Shushary's favour to be released so that the refinancing could proceed. It would then be for Shushary to apply for the moneys to be released from there, when and if sanctions are lifted. The Company also sought a declaration that it was not liable for default interest on the notes, because it has been unable to pay interest to Shushary in accordance with the Subscription Agreement while the sanctions are in place.
Decision
Payment into court
In granting an order for the payment of moneys into the Court Funds Office bank account, the court recognised that the Company must comply with the sanctions legislation in the
In considering the nature of the equity of redemption, the court referred to the authorities which emphasised that the policy of the courts of equity was always to ensure that there is nothing to prevent redemption, or rather that there are "no clogs" on the equity of redemption. The court noted that there was no dispute as to the clearly established principles in this area and held that:
"The court will fashion a remedy to ensure that a debtor is able to rid their property of encumbrances and that will include directing that security be released upon payment into court of the sums required to redeem."
As it was not lawful for the Company to make payment to the VTB accounts in accordance with the Subscription Agreement and the Payment Direction Letter in light of the various sanctions, resulting in the Company being prevented from exercising its right to redeem the Shushary notes and obtain a release of the security, the court held that an order permitting the Company to pay moneys into court, in the event of the Company exercising its right of redemption, was a "perfectly proper and sensible route" in the circumstances. Moreover, without the relief, the court noted the Company and the
The court held that the possibility of Shushary being unable to receive funds for a potentially lengthy period of time was no reason to refuse redemption. Indeed, the court held that this was precisely why the court should make the order, as otherwise the Company would be left in a state of paralysis.
It was submitted that Shushary would have preferred payment to be made to a blocked account in its name within the EU, or in rubles to a Russian account. Payment to
Accordingly, the court ordered that moneys be paid into court to enable the Shushary notes to be redeemed and for the security in Shushary's favour to be released so that the refinancing could proceed. It would then be for Shushary to apply to court for the moneys to be released to it, or to such other person as it nominated, with the application showing that such payment would be lawful and not in contravention of any applicable sanctions regime.
The court commented that the application for the payment of moneys into court was a "relatively straightforward way" of dealing with the "unfortunate situation", and notably the application was "not strenuously opposed" by Shushary. The court also considered that the Company bringing the claim on its own behalf and pursuant to CPR 19.8(1) on behalf of the companies within the
Default interest
The court also held that, in the circumstances, the Company was not liable to pay default interest under the Subscription Agreement. The relevant default interest clause stated:
"If an obligor fails to pay any amount payable by it under a finance document on its due date, interest shall accrue on the overdue amount from the due date up to the date of actual payment."
It was argued that the clause presupposes that it is lawful for the obligor to pay the debt. However, the Company cannot be said to have failed to pay sums due to Shushary, in circumstances where the Company was willing to pay those sums, but was not permitted to do so as a result of international sanctions which prohibited the Company from paying Shushary. Having been referred to a series of cases decided during wartime (notably NV Ledeboter and
In reaching its conclusion, the court agreed with a previous judgment in this case handed down on
Although the court held that it was not necessary to consider the Company's argument on the default interest being an unenforceable penalty in the circumstances, the court considered that the argument was "quite compelling" and added to the construction argument.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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