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'Score draw' for trustee as judge rejects security for costs in Ukrainian Eurobonds case, says expert

Out-Law Analysis | 28 Jul 2017 | 12:10 pm | 4 min. read

ANALYSIS: The trustee in the long-running dispute over Ukraine's £3 billion Eurobond debt to Russia has been unable to secure an order that Ukraine pay £325 million worth of lost interest on the notes as a condition of enforcement being stayed until an appeal is decided early next year.

The judge also declined to grant the trustee security for its costs in the appeal, although if Ukraine does not pay up within the eight week time limit set by the court the trustee will be entitled to renew its application for security.

The result was effectively a 'score draw' for the trustee, albeit with the second half still to play. While it seemed "improbable" that requiring Ukraine to pay the lost interest would stifle its appeal, equally, the state has not yet breached any court orders and its assets "will remain amenable to enforcement to the extent that they are now" should it lose the appeal.

"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," Mr Justice Blair said in his latest judgment.


Back in March, Ukraine was ordered to pay more than $3bn under sovereign debt Eurobond notes issued by it in December 2013, all of which were held by the Russian Federation. While repayable at the end of 2015 the trustee, Law Debenture Trust Corporation, successfully applied for summary judgment following Ukraine's suspension of payments in May 2015.

For its part, Ukraine has raised a number of arguments against the default being treated as an 'ordinary' debt claim, including that it only entered into the transaction in the face of "massive, unlawful and illegitimate economic and political pressure" from Russia. Although Mr Justice Blair effectively found in March that Ukraine had no real prospect of successfully defending the trustee's default claim on the grounds that the English courts are unable to intervene in matters of international law between independent sovereign states, Ukraine was granted permission to appeal.

That appeal is provisionally listed for 22 January 2018. In the meantime, Mr Justice Blair was required to decide on a number of consequential matters. These included whether it should grant a stay on enforcement of Ukraine's payment obligation in favour of the Russian Federation and, if so, whether to impose any conditions on that stay.

The stay on enforcement

Under the Civil Procedure Rules (CPRs) which apply to civil litigation in England, the fact that an appeal is underway is not of itself sufficient to justify a stay of any order or decision of the court. In this case, since the appeal would be heard relatively quickly, the trustee did not dispute that a stay should be granted. However, it pressed for the court to use its powers to impose a condition on the stay.

According to previous case law, among the factors that the court should balance when deciding whether to impose a condition on a stay are:

  • the possibility of a condition stifling the appeal;
  • the appealing party's failure to comply with previous orders of the court; or
  • good reason to believe that, should the appeal be unsuccessful, the appealing party would refuse to pay.

The trustee argued that, if Ukraine lost the appeal, it was likely to "vigorously resist enforcement" due to the nature of the dispute. If that happened, it would be very difficult for the trustee to enforce the judgment against the state in the Ukrainian courts, or anywhere else for that matter. It was clear that Ukraine had the resources to pursue an appeal, and there was no reason to believe that it could not pay the lost interest or that forcing it to pay would stifle the appeal.

While acknowledging that the balancing exercise in this case was "not straightforward", Mr Justice Blair ultimately decided not to impose any conditions on the stay. For the judge, the "decisive factor" was that imposing such a condition was likely to lead to satellite proceedings between the parties; something which was particularly undesirable given the political circumstances and the fact that the appeal was so soon. It was also relevant that Ukraine was not in breach of court orders and, as a state, its assets were relatively amenable to enforcement.

The question of interest

In terms of interest on the outstanding $3bn, Ukraine was ordered to pay interest at the usual 8% rate applicable to judgments. It did not matter that the interest rate on the coupon was 5%, when the contract allowed for interest to be charged at "the rate of interest on judgment debts for the time being provided by English law" where this was higher.

Ukraine acknowledged that the parties had agreed to the 8% rate under the terms of the contract. However, it argued that as interest is intended to be compensatory, rather than punitive, the creditor should only be entitled to its out of pocket expenses - that is, a rate of interest that reflects the cost of borrowing. Arguments along these lines are often successful, but here the court backed the clause as agreed by the parties.

To the court, the fact that on non-payment the applicable interest rate rose from 5% to 8% was "not in itself a commercially surprising result". It therefore saw no reason to depart from the agreed contractual term.

However, the interest rate applying to the missed coupons was to be treated differently. The contract provision quoted above concerned late payment of the 'principal' sums, and as a matter of plain interpretation that did not include late payment of interest. The court was provided with the cost of borrowing by the trustee, but as the single noteholder was the Russian state it was that entity, rather than the trustee, that was to be compensated for being kept out of its money. In the circumstances, the court did the best it could but preferred the lower option of three-month US$ LIBOR plus 2%.

If there had been multiple noteholders, it is difficult to see how this approach could be replicated.

The question of costs

Mr Justice Blair found the question of costs easier, simply relying on his own decision two weeks ago in the UBS v GLAS Trust Corp case. As usual, the trustee was entitled to an indemnity under the contract - and "in a financial transaction of this kind, this means commercial reasonableness ... 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 judge said.

Insofar as the trustee sought to recover management time, or Russia's costs, those claims failed - again, echoing the sentiment expressed by Mr Justice Blair in the UBS decision.

Stuart McNeill and Danielle Williamson are financial services litigation experts at Pinsent Masons, the law firm behind Out-Law.com.