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Creditor could not use third party debt order on money set aside for interest payments, court rules

A creditor of the Ukrainian national gas company was unable to use a third party debt order (TPDO) to take control of money held in a bank account on behalf of the gas company, because that money had been set aside to make interest payments to the gas company's bondholders.

The High Court's judgment in the case shows the importance of ensuring that money held by a bank is actually owed to the debtor before using a TPDO to enforce a judgment, according to litigation expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com.

"TPDOs work well in cases where the judgment debtor has a bank account in credit, in which case the bank owes the judgment debtor the balance in the account," he said. "However, in this case the TPDO approach failed because the court held that, under the terms of the paying agency agreement, the bank was never indebted to the issuer: its only obligation was to make the interest payment to the bondholders."

"Although money set aside for making an interest payment to bondholders might be a very tempting target for enforcement, this judgment shows that you do have to be sure that the bank holding the money actually owes it to the judgment debtor," he said.

Formerly known as a 'garnishee order', a TPDO is a relatively simple and cost-effective form of enforcement which allows a creditor with a judgment to obtain payment directly from a third party which owes money to its debtor. TPDOs are most commonly used in relation to funds held in a bank or building society account on behalf of a debtor, but can be used against any money owed to the debtor. A judge will grant an interim TPDO, which will become final at a later date if there are no valid objections by the judgment creditor. The bank will normally take a neutral position in such cases.

In the case in dispute, a US company called Merchant International Company Ltd (MIC) had been assigned the rights to money owed by the Ukrainian national gas company, Naftogaz. Naftogaz issued a number of state-backed bonds, of which Bank of New York Mellon London (BNYM London) was principal paying agent, transfer agent and trustee under contractual arrangements governed by English law. Under the terms of these arrangements BNYM London made interest payments to bondholders twice a year. Arguing that this money did not become the property of the bondholders until it was paid over to them, MIC tried to use a TPDO to satisfy its debt before these payments could be made.

In his judgment, Mr Justice Blair noted that the account into which Naftogaz paid the money due to the bondholders as interest was "never intended to act as the repository of funds". This meant that there was no "debt due or accruing due" owed to Naftogaz by the bank, and so there was legally no jurisdiction to make the TPDO in favour of MIC, he said.

"BNYM acted as Paying Agent in respect of the judgment debtor's notes issue," he said. "Its role was to receive funds from Naftogaz by way of interest and transfer the money to the noteholders. Unless this relationship gave rise to a debt owed by BNYM to Naftogaz, there were no grounds for making an order at all."

"BNYM's obligation is to pay the noteholders, and any repayment obligations are limited to amounts in respect of claims for principal and interest that have become time-barred. In those circumstances only, money held by BNYM becomes repayable to Naftogaz. ... the terms of [the Agency Agreement] rule out any contention that BNYM is indebted to Naftogaz in respect of amounts paid in respect of the notes issue," he said.

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