Out-Law News 2 min. read
15 Dec 2014, 5:25 pm
Lord Justice Davis said that the clause, which acted to set aside the money for the purposes of making interest payments to bondholders, could not be “regarded as a sham” set up to deprive the creditor, US-based Merchant International Company Ltd (MIC), from what it was entitled to. The clause had an “obvious underlying commercial purpose” that the commercial court judge was entitled to rely on in his earlier decision, Lord Justice Davis said.
“It seems to me that [MIC’s arguments] involve a violation of all ordinary principles of construction and stand on its head the evident intent of the [relevant clause], on the natural and ordinary meaning of the words used,” he said. “I consider, overall, that whichever way one looks at MIC’s arguments they founder on the actual terms of the [contract],”
“[The contract] was in truth designed to preserve the status quo: in view of the unexpected impact of the first third party debt order and/or Belgian and Luxembourg orders which MIC had obtained without notice. This is not, perhaps, a case to dwell on the underlying merits, one way or another, at this stage of the argument. But the natural and ordinary meaning of the words of the [contract] overall do accord with a perceived and understandable aim to preserve the status quo and to fulfil a clear commercial purpose in that regard,” he said.
MIC had been assigned the rights to money owed by Naftogaz, the Ukrainian national gas company. 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.
A TPDO is a relatively simple and cost-effective form of enforcement, which allows a creditor with a judgment in its favour to obtain payment directly from a third party that owes money to its debtor. TPDOs are most commonly used against 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. The bank will normally take a neutral position in such cases.
Both parties to this case agreed that sums held by a bank in a current account, as was the case here, were “generally capable” of being the subject of a TPDO, Lord Justice Davis said. Whether the general rule was applicable here was a matter of contractual interpretation, he said.
“The judge held that, properly construed, the contracts made gave rise to no debt due or accruing due from the third party, BNYM, to Naftogaz,” he said. “Accordingly there was no jurisdiction to make the third party debt orders.”
Commenting on the original commercial court decision, litigation expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com said that it was important to ensure that money held by a bank was actually owed to the debtor before attempting to use a TPDO.
“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.”