Merchant International Company Ltd v Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy & Anor [2014] EWHC 391 (Comm)

Case No 2012 Folio 1580[2014] EWHC 391 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 26/02/2014
Before
MR JUSTICE BLAIR
Between
MERCHANT INTERNATIONAL COMPANY LTDClaimantNATSIONALNA AKTSIONERNA KOMPANIIA NAFTOGAZ UKRAINYDefendantTHE BANK OF NEW YORK MELLONThird Party
Michael Lazarus (instructed by Hogan Lovells International LLP) for ClaimantDavid Head (instructed by Lawrence Graham LLP) for DefendantHearing Hearing dates: 7 February 2014
JudgmentMr Justice Blair :
[1]The question in this case is whether interim third party debt orders obtained by the claimant, a judgment creditor, should be made final. A “third party debt order” is what used to be called a garnishee order. It is a form of enforcement by which a third party which is indebted to the judgment debtor is required to pay the judgment creditor instead. The context is unusual, because although the third party is a bank, it was acting in the role of paying agent under the terms of a debt issue in the form of notes guaranteed by a state, in this case Ukraine. The judgment debtor is the Ukrainian national energy company. The orders are said to have disrupted the payment arrangements in respect of interest due to the noteholders.[2]The issues for decision are first whether there was a “debt due or accruing due” to the defendant, the judgment debtor, from the third party, and second whether the claimant complied with its obligations of full and frank disclosure in obtaining the interim orders and/or whether the orders should be made final as a matter of discretion. The third party, Bank of New York Mellon (“BNYM”), complied with its obligations under the orders, but otherwise (as it was entitled to) has remained neutral and taken no part in these proceedings.

The facts

[3]The facts are as follows. Merchant International Company Ltd (“MIC”) is a Delaware company, and Natsionalna Aktsionerna Kompaniia Naftogaz Ukrainy (“Naftogaz”) is a Ukrainian entity. How MIC came to be a judgment creditor of Naftogaz under an English judgment is explained in the Court of Appeal judgment at [2012] EWCA Civ 196. In short, MIC is the assignee of a creditor of Naftogaz. It obtained judgment in the courts of Ukraine, and sued on the judgment in England. MIC obtained judgment in default of defence. Proceedings were renewed by Naftogaz in the courts in Ukraine, which ruled in its favour. Naftogaz then sought to set aside the English default judgment, but its application was unsuccessful at first instance and in the Court of Appeal. Though Naftogaz has sought to challenge that ruling in the European Court of Human Rights, such challenge cannot affect any of the questions that I have to decide (see e.g. [2012] EWHC 3753 (Comm)).[4]Having obtained the judgment, MIC has taken various steps to enforce it, including those at issue in the present case. The background is as follows. Naftogaz is the issuer of US$1,595,017,000 9.5% Guaranteed Notes due 30 September 2014 issued on 5 November 2009. The note issue carries the guarantee of Ukraine, and in this respect is sovereign debt. For the avoidance of doubt, it is entirely unconnected with the transaction which gave rise to the judgment debt. The contractual documents consist of a Trust Deed, Guarantee, Agency Agreement, and Notes, and are dated 5 November 2009. English law is the governing law.[5]BNYM London is the Principal Paying Agent (and Transfer Agent and Trustee). Interest is payable to the noteholders semi-annually in arrears on 30 March and 30 September each year. The mechanics of payment by Naftogaz as issuer to BNYM, and by BNYM to the noteholders, is governed by the Agency Agreement. The payments are denominated in US dollars, and the evidence filed in these proceedings shows that funds are paid by Naftogaz via the State Export-Import Bank of Ukraine into an account maintained by BNYM at the Federal Reserve in New York for the purposes of clearing. Since it is BNYM London that performs the role of Principal Paying Agent, the funds are credited to a Naftogaz account in London via a series of internal ledger entries. It is not in dispute that the funds do not remain in that account, but are dispersed by BNYM to the noteholders in the usual way.[6]This level of detail was not, of course, known to MIC (or for that matter Naftogaz) prior to these proceedings, but MIC was aware from the public documents available in connection with the note issue that a semi-annual interest payment was due to the noteholders on 30 September 2013 in the sum of US$75,763,307.50. MIC took the position that BNYM was the agent of Naftogaz, and that funds received by BNYM did not become the property of the noteholders until paid over to them. Accordingly, MIC took steps to intercept the funds to satisfy its judgment debt, which it states then amounted to US$21.76 million including interest.[7]The steps that it took were as follows. In England, it applied for a third party debt order by application dated 19 September 2013, the third party being BNYM. I will describe what was stated on the application later. The order was granted by Master Kay QC on 20 September 2013 with a return date of 5 November 2013. It was served on BNYM on Friday 27 September 2013, though after banking hours.[8]At or about the same time, MIC put in place saisie-arrêt conservatoire procedures directed at BNYM in Brussels and in Luxembourg. The evidence is that these are not (in the first instance) judicial procedures, but the effect is broadly the same as an interim third party debt order. The orders were dated 27 September 2013. A second order was obtained in Brussels and served on BNYM on 2 October 2013. As I understand it, MIC took these steps in Brussels and Luxembourg as well as London because it was not sure which BNYM entity would actually receive the funds.[9]At this point, Naftogaz was of course unaware of these measures. It gave instructions for the payment of the interest due, that is, the US$75m, on 30 September 2013. Payment was duly received by BNYM on 30 September 2013, value 1 October 2013. This was after deemed service of the interim third party debt order on 30 September 2013 on BNYM’s London branch, and it is on this limited basis that MIC now accepts that the order was ineffective, a point I consider further below.[10]Whilst the funds received were about US$75m, the judgment debt was only about US$21m. BNYM did not make any payments to noteholders at this time. There is a dispute between the parties as to why this was so. MIC said in oral submissions that it was the Belgian order that caused BNYM to freeze the money. Under Belgian procedure, it seems that the attachment is to the extent of the value of the fund, in this case US$75m, rather than value of the debt. There is some support for MIC’s submission in the form of a letter from Naftogaz’s solicitors, though its subsequent witness evidence points to the effect of the orders in all three jurisdictions.[11]In fact, the evidence is that it took BNYM a little time to work out whether the account was located in Brussels or in London. This may be less surprising than it seems, when one bears in mind that BNYM’s role was to transmit funds between Naftogaz and the noteholders, and these were essentially internal account entries. However, it is not now in dispute that the account is in London. Equally, it is clear that the account was never intended to act as the repository of funds.[12]In its written submissions, MIC said that it “accepts that if it had not served the (ineffective) first TPDO (and the Belgian order) on BNYM on 27 September 2013, then the First Coupon Payment would have been paid out to note holders before 7 October 2013”. (“Coupon” in this context means interest.) No direct evidence is available from BNYM, but I think that this was a reasonable concession, and in any case infer that the London order played an important part in preventing the payment being made. In its oral submissions, Naftogaz says that it created confusion and difficulty, and I agree that this is also a reasonable inference.[13]In any case, though only part of the Naftogaz payment was frozen by the London order, a partial payment by BNYM to the noteholders would not have satisfied the terms of the note issue. Under these terms, failure to pay within ten days of the due date was an event of default, potentially resulting in the entire principal sum of US$1.6 billion becoming due. This would have been a serious matter, and there was now a few days pause when it is to be inferred that BNYM (and doubtless Naftogaz) were seeking to establish their legal position in the various jurisdictions before the deadline expired on 10 October 2013.[14]On 7 October 2013, BNYM gave details of the position in London as required by CPR 72.6(2). The same day, the solicitors for Naftogaz proposed to the solicitors for MIC an agreement by which a further amount equivalent to the unpaid judgment debt would be paid into the London account to be held pending the return date of the interim third party debt order. However, no agreement was forthcoming from MIC in time.[15]On 8 October 2013, MIC made an oral without notice application to Cooke J for a second interim third party debt order. The written note accompanying the application says that the reason for making the application was that, “on the authority of Heppenstall v Jackson [1939] 1 KB 585, the existing TPDO is not effective to restrain BNYM from paying out the monies it received since the TPDO was served”. Another interim order was made in favour of MIC with a return date of 5 November 2013 as in the case of the first order. (The details required by CPR 72.6(2) in respect of this order were given by BNYM on 10 October 2013.)[16]Also on 8 October 2013, Naftogaz and BNYM entered into a short written agreement which has been called the “Supplemental Agreement”. Lawyers were involved in its drafting, and its purpose is made clear by the first clause. In order to facilitate payment of interest to the noteholders, and solely to avoid any potential event of default under the notes, Naftogaz was to pay a further US$75.76m. The fact that this was necessary no doubt reflected the fact that it had been unable to reach agreement in time with MIC which would have allowed it to pay a further sum equivalent to the amount asserted to be due under the judgment only. In the event, the noteholders were paid out of these further funds, and a default was avoided. By now, Naftogaz had made payments amounting to about US$150m.[17]On 16 October 2013, MIC applied for another third party debt order. The basis for the application was that even if there had not originally been any attachable debt due from BNYM to Naftogaz, the money was nevertheless held by BNYM, and since the purpose for which it was originally paid had been exhausted, “there must now be a simple debt repayable on demand”. An interim order was made by Master Kay QC on the papers on 22 October 2013, being the third order made by the court on MIC’s application.[18]By now, the noteholders had been paid, but there was still US$75m in London against a judgment debt calculated at US$21.9m. On 22 October 2013, Naftogaz requested BNYM to transfer the balance of about US$50m back to it. The reason that as much as US$25m was to be left in the account was that this was the amount of a freezing order that MIC had obtained in 2010. A few days later, BNYM complied with this request.[19]This hearing is the return date of all three interim third party debt orders, the issue for decision being whether final orders should be made or the interim orders discharged. MIC contends that final orders should be made in respect of the second and third interim orders (it does not contend that a final order should be made in respect of the first interim order). Naftogaz contends that the remaining two orders should be discharged. To complete the picture, I should note that the orders obtained by MIC in Belgium and Luxembourg have lapsed, since there were no funds held by BNYM in either jurisdiction that could be attached. The first issue: was there a debt due or accruing due to the defendant from the third party? The power to make third party debt orders and their scope[20]The rules governing third party debt orders are contained in CPR 72. The scheme of the rule is as follows. The application will initially be dealt with by a judge without a hearing. If granted, an interim third party debt order fixes a hearing to consider whether to make a final order, and directs that until that hearing, the third party must not make any payment which reduces the amount he owes the judgment debtor to less than the amount specified in the order (CPR 72.4). Service of the interim order is made first on the third party, then on the judgment debtor (CPR 72.5). A bank served with an order must carry out a search to identify all accounts held with it by the judgment debtor, and disclose certain specified information to the court and the judgment creditor (CPR 72.6). If the judgment debtor or third party objects to the court making a final order he must file and serve written evidence stating the grounds (CPR 72.9). This will then be determined at the hearing, as happened in this case.[21]For present purposes, the most important provision is CPR 72.2(1). This provides that the court may make a final third party debt order requiring the third party to pay to the judgment creditor “(a) the amount of any debt due or accruing due to the judgment debtor from the third party; or (b) so much of that debt as is sufficient to satisfy the judgment debt and the judgment creditor's costs of the application”. It is (a) which is presently in issue, and particularly the words “debt due or accruing due”.[22]There is an important difference between the parties as to the effect of this provision. MIC submits that there is good reason to construe CPR 72 liberally to include cases where the judgment creditor can adduce credible evidence that the third party will shortly become the debtor of the judgment debtor. This was slightly refined in oral argument, the submission being that the court has jurisdiction to make a third party debt order in relation to a debt that does not exist at the date of the application but which will exist at the date of service of the order. It justifies this on the basis that in modern commerce funds move very quickly, especially when the judgment debtor is doing its best to avoid execution. To support its submission, MIC relies on Alawiye v. Mahmood [2007] 1 WLR 79.[23]This submission is linked to another argument put forward by MIC. It accepts that the first interim order which it obtained and which was made on 20 September 2013 was ineffective. The reason it gives is that when the order was served, which was on 27 September 2013 (or if served after close of business deemed to be on the morning of 30 September 2013), the funds from Naftogaz to pay the interest on the notes had not yet arrived at BNYM. MIC put this in argument as a timing issue, the implication being that had the funds arrived at the time of service of the order, it would have been a valid order which would have attached the funds.[24]Naftogaz on the other hand submits that this is wrong as a matter of law. It submits that CPR 72.2(1) and the authorities make it clear that there must be a “debt due or accruing due” at the time of the application. This connotes an existing obligation to pay a liquidated sum, either immediately or in future but in consequence of an existing obligation. It follows (Naftogaz submits) that in the absence of an existing obligation on the part of the third party to pay a liquidated sum to the judgment debtor, there is no jurisdiction to make a third party debt order. Accordingly, the judgment creditor must know or believe at the time that the application is made that the third party owes money to the judgment debtor. A third party debt order attaches no debts which do not exist at the moment when the order is made and served.[25]On that disputed issue, my conclusions are as follows. The equivalent words in the Common Law Procedure Act 1854 and in the Rules of the Supreme Court of 1875 referred to the amount of debts “owing or accruing” from the garnishee (that is, the third party) to the judgment debtor (see the texts as set out in Webb v Stenton (1883) 11 QBD 518). At some point, the language of Order 49(1) of the RSC was changed to refer to “any debt due or accruing due”, which are the same words used in CPR 72.2. It was not suggested that there is any difference in substance which flows from these different wordings, and it follows that the pre-CPR authorities on the meaning of the words remain binding.[26]The leading authority is Webb v Stenton, ibid, the judgments of the Court of Appeal showing that the court intended to settle what appear to have been differences in practice in applying the test. As it was put by Lindley LJ at p. 527, “…a debt legal or equitable can be attached whether it be a debt owing or accruing; but it must be a debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in presenti, solvendum in futuro. An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation”. At p. 528, Fry LJ states that to satisfy the terms of the rules, “there must be an actual present debt”. It was held that “… there was no debt ‘owing or accruing’ at the time when the order was applied for which could be attached [under the rules]” (see the headnote at p. 518).[27]Subsequent authority is to the same effect. In O’Driscoll v Manchester Insurance Committee [1915] 3 KB 499, Bankes LJ said at 516-7, “It is well established that “debts owing or accruing” include debts debita in praesenti solvenda in futuro. The matter is well put in the Annual Practice, 1915, p. 808: ‘But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and the case where both the debt and its payment rest in the future. In the former case there is an attachable debt, in the latter case there is not’.” See to similar effect, Heppenstall v Jackson, ibid, at p. 592.[28]The principle, therefore, was that a garnishee order could only be made in respect of an existing debt, though it could be made even if the debt was payable in the future. As the notes in the White Book at 72.2.1 make clear, the Civil Procedure Rules did not change the position as regards third party debt orders. Rule 72.3(2) provides that the application notice must be in the form and contain the information required by Practice Direction 72, which at paragraph 1.2(7) requires that the application notice contains confirmation that: “…to the best of the judgment creditor’s knowledge or belief the third party…owes money to or holds money to the credit of the judgment debtor” (italics supplied).[29]In support of its contentions to the contrary, MIC relies on Alawiye v Mahmood, ibid. It submits that the decision shows that the practice of the court is to interpret CPR 72 liberally so as to assist judgment creditors to enforce their judgments. In the light of that decision, MIC says, it could have made the application for a third party debt order based purely on the fact that Naftogaz had made the previous semi-annual interest payment under the notes via BNYM in March 2013.[30]In the Alawiye case the judgment creditor applied for a third party debt order to be made against National Westminster Bank. The evidence that the judgment debtor had an account at the bank was in the form of a cheque which had been drawn some time previously. Lindsay J held that this was sufficient evidence that the judgment debtor had an account at the bank which had been in credit so as to justify the making of an interim order. He pointed to the speed at which bank accounts can be closed, and credits transferred or reduced. He said at p.82, “… to insist, where the third party is a banker, upon cogent evidence of the judgment debtor’s account being in credit as at the very day of the application for the interim order or any later day would … prevent a good number of applications by requiring a level of proof to which remarkably few judgment creditors could aspire”.[31]Naftogaz says, and I agree, that Alawiye was a case about the sufficiency of evidence necessary to support the statement which the judgment creditor has to make that the third party “owes money to or holds money to the credit of the judgment debtor”. It does not decide that an application for a third party debt order may be made where the judgment creditor has no such belief. It does not, in my view, disturb the principle that a third party debt order can only be made where there is an existing debt.[32]This highlights a more general point. MIC submits that under modern conditions, the court has to be flexible when it comes to proof sufficient to make an interim third party debt order. I accept that submission. But the objection to its application in this case is more fundamental. If it was to obtain a third party debt order against BNYM, it had to show that BNYM was indebted to Naftogaz. However, though BNYM is a bank just as National Westminster Bank in the Alawiye case was a bank, it was playing an entirely different role. National Westminster Bank held a current account for the judgment debtor. BNYM acted as Paying Agent in respect of the judgment debtor’s notes issue. 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. In that regard, I shall now consider the terms of the relationship between them, and what was asserted by MIC in its first application for an order.

The first order—the terms of the relationship between BNYM and Naftogaz

[33]MIC’s first application for a third party debt order dated 19 September 2013 was on the prescribed form, stating that the third party (BNYM) “… owed money to (or holds money to the credit of) the Judgment Debtor”, i.e. Naftogaz. MIC goes on to say that it “knows or believes” that this information is correct, because BNYM was the Principal Paying Agent in relation to the guaranteed notes due 2014. By reference to the prospectus, a public document which was annexed, it stated that it understood that Naftogaz would put BNYM in funds to make the semi-annual interest payment shortly before payment was due on 30 September 2013. It went on to state that since one of the conditions of the notes was that BNYM acted solely as agent of Naftogaz and did not assume any obligations towards the noteholders, “This means that the Third Party is the agent of the Judgment Debtor and accordingly the funds received by the Third Party from the Judgment Debtor do not become the property of the noteholders until they are paid over to them”. MIC now accepts that it was unable to state, as it did on the application, that BNYM “owes money to (or holds money to the credit of)” Naftogaz. On no possible view did BNYM owe anything to Naftogaz as at that date, or for that matter when the order was made the following day.[34]The statement based on the prospectus founded (in my view) a reasonable belief that funds received by BNYM from Naftogaz would not become the property of the noteholders until paid over to them. However, it does not follow that BNYM would ever become indebted to Naftogaz. In its skeleton argument, MIC states that, “It therefore appeared that the funds that Naftogaz would shortly pay BNYM for payment to the noteholders would be held by BNYM as banker to Naftogaz until payment.” This however was not stated in the application. Further, to say that the paying agent is indebted to the issuer of securities runs contrary to the commercial sense of this everyday transaction by which the issuer puts the paying agent in funds to meet payments due to the holders of the securities.[35]In its evidence challenging the interim orders, Naftogaz produced the Agency Agreement dated 5 November 2009 between itself and BNYM acting in various capacities, but so far as presently relevant acting as Principal Paying Agent through its London branch.[36]Clause 6 of the Agency Agreement deals with “Payment to the Principal Paying Agent”. This deals with the obligation of Naftogaz as issuer to make funds available to BNYM in respect of payments due under the notes.[37]Clause 6.3 provides that BNYM is entitled to deal with such amounts “in the same manner as other amounts paid to it as a banker by its customers”, though it cannot exercise any right of set off in respect of such funds. Although this was relied on in its evidence by MIC as showing that the relationship between BNYM and Naftogaz was “prima facie one of banker and customer”, Mr Michael Lazarus, counsel for MIC, rightly accepted in argument that this and certain other similar provisions in the agreement were there to prevent the money becoming impressed with a special purpose trust to pay the noteholders in BNYM’s hands.[38]The position is explained in a letter written by BNYM to solicitors for Naftogaz dated 24 October 2013. This states that there is no written account documentation in place between BNYM London and Naftogaz in respect of the Naftogaz account except for the Agency Agreement. Although MIC describes this as a slightly “odd” letter, the object was clearly to provide Naftogaz with information about the account in the context of the ongoing court proceedings, and I accept the submission made on its behalf that there is no reason to doubt its accuracy.[39]Clause 7 of the Agency Agreement deals with the obligations of BNYM to make payment to the noteholders. However, the central provision as between BNYM and Naftogaz as to the status of funds paid is clause 6.4. This provides that:
“The Principal Paying Agent shall apply each amount paid to it under this Clause 6 in accordance with Clause 7 and shall not be obliged to repay any such amount unless the claim for the relevant payment becomes void under Condition 9, in which event it shall refund at the written request of the Issuer or (as the case may be) the Guarantor such portion of such amount as relates to such payment by paying the same by credit transfer in U.S. dollars to such account with such bank in Kyiv as the Issuer or (as the case may be) the Guarantor has by notice to the Principal Paying Agent specified for the purpose.”
[40]Condition 9 referred to in this clause is one of the conditions of the notes. It provides that claims by noteholders for payment of principal and interest in respect of the notes shall become void unless made within ten years in the case of principal and five years in the case of interest. In that event, clause 6.4 provides that the issuer (i.e. Naftogaz) may request BNYM to pay the money back.[41]Save for this contingency, therefore, clause 6.4 expressly provides that BNYM “shall not be obliged to repay any … amount” paid to it by Naftogaz. The reason is obvious, namely that 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. I agree with Naftogaz that the terms of clause 6.4 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. MIC now accepts that the first interim third party debt order it obtained was ineffective. However, this was not, as it argued, because there were no funds held by BNYM London when the order was served. I agree with Naftogaz that the application was fundamentally flawed because there was no debt owing by BNYM to Naftogaz which the order could attach. In such circumstances, there was no jurisdiction to make the order.

The second order

[42]The second interim third party debt order was obtained by MIC on 8 October 2013 as described above. By now, by letter of 7 October 2013 BNYM had given the details required by CPR 72.6(2) under the first order. The letter gives the account number held at BNYM London, states that the account is in credit, and that the balance is sufficient to cover the amount specified in the order. (The same details were given by BNYM on 10 October 2013 in compliance with the second interim third party debt order.)[43]MIC’s case in this respect is as follows. It says that this is the standard response of a bank that has been served with a third party debt order in relation to a customer’s account where the ordinary banker/customer relationship exists. On this basis, it contends that the court would have made the second interim order final on the return date. Naftogaz, it submits, bears the onus of proving that BNYM’s response was incorrect. MIC submits that reliance on clause 6.4 of the Agency Agreement is insufficient because Naftogaz has failed to adduce sufficient evidence to displace the prima facie conclusion that arises from BNYM’s responses. BNYM, it says, appears to have concluded that clause 6.4 did not have the effect of excluding the normal banker/customer relationship, and the court “should infer that the missing evidence would be unfavourable to Naftogaz”.[44]On its part, Naftogaz submits that BNYM has confirmed that the only terms governing the relationship between them are contained in the Agency Agreement, and there is no basis to doubt the accuracy of this. Naftogaz had no knowledge as to the manner in which the account in London was created or designated internally by the bank. The account was simply an internal BNYM account in place to make payment to the noteholders, and was not a bank account in the conventional sense. Even if such a conclusion could be derived from BNYM’s letters given pursuant to CPR 72.6(2), which Naftogaz denies, this can make no difference to whether or not a debt existed between them. In this respect, it submits that clause 6.4 of the Agency Agreement to the effect that BNYM “shall not be obliged to repay any … amount” paid to it by Naftogaz for payment to the noteholders, is conclusive.[45]I deal first with MIC’s submission that the onus of proof lies on Naftogaz, whilst noting Naftogaz’s response that this is a “red herring”. As developed in oral argument, the submission was that whilst the legal burden may be on MIC as applicant for the third party debt order, the evidential burden lies on Naftogaz to explain the facts.[46]Under the Rules of the Supreme Court, the procedure was very similar to that under the CPR. The judgment creditor applied for a garnishee order nisi, usually without notice to the judgment debtor. The determination whether to make a garnishee order absolute was made on the return date. In Roberts Petroleum Ltd v Bernard Kenny Ltd [1982] 1 WLR 301 at 307, Lord Brandon set out the principles that apply. The case concerned a charging order, but it was made clear that there was no material difference between a charging order and a garnishee order in this respect. His analysis has to be read in the light of the fact that the decision was reversed in the House of Lords ([1983] 2 AC 192), but doubt was not cast on his statement that, “The burden of showing cause why a charging order should not be made absolute is on the judgment debtor”.[47]However the point was doubted in National Guild of Removers & Storers Ltd v Jones [2012] 1 WLR 2501 (another charging order case). Pitchford LJ makes clear at [15] that at the stage of the written application, the burden is on the judgment creditor. As regards the second stage, when a decision is taken whether or not to grant a final order, he points out at [13] – [14] that the requirement to “show cause” placed on the judgment debtor by the RSC, is not replicated in the CPR. However, the court did not need to decide the issue.[48]I see the force of MIC’s submission that whilst the legal burden may be on the judgment creditor, the evidential burden as regards the nature of the debt which is the subject of the attachment proceedings should be on the judgment debtor. That is because he, rather than the judgment creditor, will have access to information as to the contractual position between himself and the third party. However, nothing turned on the burden of proof in the National Guild of Removers case (see [11]), and the position, in my view, is the same in the present case.[49]Evidence given by Naftogaz’s solicitor explains the position as regards the account as understood by Naftogaz. She says that it has no knowledge as to the manner in which the account was created or designated internally by BNYM London, or the nature of BNYM’s internal ledger entries. MIC objects that this is inadmissible or of no evidential weight because the source of this information is not given, but that does not appear to me to be a particularly substantial objection since it is consistent with other evidence. As Naftogaz points out, it cannot compel BNYM to provide evidence. Further, I agree that there is no reason to doubt the contents of BNYM’s letter of 24 October 2013 to Naftogaz’s solicitors, which states explicitly that there is no written account documentation in place between BNYM London and Naftogaz in respect of the account save for the Agency Agreement. This is consistent with clause 15.5 of the Agency Agreement by which its terms are exhaustive of the parties’ rights and obligations, and with the purpose of the account as a point of transit of the funds between Naftogaz and the noteholders.[50]I consider that MIC’s reliance on BNYM’s letters of 7 and 10 October 2013 sent as required by CPR 72.6(2) in response to the interim third party debt orders is misplaced. The letters state that “the balance of the Account is sufficient to cover the amount specified in the Order”. Plainly however this resulted from the fact that the order or orders obtained by MIC had stopped BNYM paying the funds to the noteholders. Nothing (in my view) suggests that BNYM was acknowledging in its responses that it had a banker/customer relationship with Naftogaz. So far as the burden lies on Naftogaz to explain the nature of its relationship with BNYM, I am satisfied that it has discharged it.[51]In this regard, MIC emphasises words used in both letters to the effect that “BNYM London branch confirms that it asserts no rights to monies in the Account …”. On the other hand, the sentence goes on to say “… and has no rights of set-off or otherwise”. The excluded right of set-off is an indicia of a banker/customer relationship entitling, as it does, a bank in credit on one account to set off a debit on another account. That aside, the evidence, in my view, makes it plain that the contractual relationship between BNYM and Naftogaz was (so far as relevant) limited to BNYM’s undertaking on Naftogaz’s behalf to receive, and pay on to the noteholders, the payments which were due to them. This is not a case where Naftogaz has failed to provide evidence to explain the position. The evidence is that the relationship did not give rise to a debt owing from BNYM to Naftogaz, and it follows that the second interim third party debt order should be discharged.

The third order

(i) The parties’ submissions

[52]As explained above, MIC’s third and final application for a third party debt order was made by written application dated 16 October 2013. An interim order was made on 22 October 2013. As regards this order, MIC’s argument proceeds on the assumption that (as I have held) BNYM was not a debtor of Naftogaz in respect of the funds at the time of the second order it obtained on 8 October 2013. This part of MIC’s argument takes into account the terms of the Supplemental Agreement entered into between Naftogaz and BNYM on 8 October 2013.[53]MIC submits that the noteholders having been paid out of the second US$75m paid by Naftogaz to BNYM, the first US$75m “would then have been a debt due from BNYM to Naftogaz either in restitution or under a contract implied from the party’s conduct in making and accepting the … payment. It would have been unthinkable for BNYM to retain that money for its own benefit, and in the absence of a restitutionary right or an express agreement to the contrary, an agreement to repay it would necessarily have been implied” (The Aramis [1989] 1 Lloyd’s Rep 213 at 224).[54]MIC accepts, of course, that the purpose of the Supplemental Agreement was to make it clear that the funds remained subject to the Agency Agreement including clause 6.4. However, it submits that this was an impossibility, because the parties must have intended Naftogaz to be able to recover the money from BNYM. It submits that Naftogaz’s rights against BNYM amount to a debt on one of two alternative bases.[55]The first basis is that after Naftogaz made the further transfer of US$75m to BNYM which was used to pay the noteholders, Naftogaz simply demanded repayment of the first US$75m it had paid on 30 September 2013 (less US$25m which was withheld by BNYM because of the freezing injunction obtained by MIC on 6 May 2010). Repayment was made by BNYM pursuant to a letter dated 28 October 2013 which made no reference to the Supplemental Agreement.[56]The second basis relied on by MIC refers to the wording of the Supplemental Agreement, by which the first US$75m was to continue to be held “until any order of a competent court or further written agreement in terms acceptable to BNYM”. As a matter of construction, MIC submits, BNYM cannot have been intended to be entitled to impose unreasonable or capricious terms, because that would be tantamount to giving BNYM a discretion to retain the money.[57]On its part, Naftogaz submits that the meaning and effect of the Supplemental Agreement was clearly to maintain the status quo in relation to the first US$75m pending the court’s determination as to the status of the monies. There is, it is submitted, no reason why the Supplemental Agreement should not be effective to maintain Naftogaz’s rights in respect of the money, because it was only to avoid default that it had been obliged to pay the noteholders out of the second payment of US$75m. The fact that Naftogaz made the request to repay the balance of the first US$75m and that BNYM was prepared to comply does not mean that Naftogaz had a right to demand repayment, because clause 6.4 of the Agency Agreement continued to apply. Accordingly, Naftogaz submits, there was and is no debt due or accruing from BNYM to Naftogaz, and accordingly there is no jurisdiction to make a final third party debt order under the interim order. (ii). Discussion and conclusion as to third order[58]In essence, the parties’ submissions are straightforward. Naftogaz submits that the Supplemental Agreement should be given effect to. Its purpose was to allow the noteholders to be paid out of the second payment, without altering the status of the first payment. MIC accepts that this was what was intended, but submits that it was an impossibility. The money was of necessity held by BNYM under an obligation to repay it to Naftogaz, and that obligation was capable of being, and was, attached by the order.[59]I begin by noting that the Supplemental Agreement was clearly entered into under conditions of exigency. By 8 October 2013, the noteholders had still not been paid the interest due, and the ten day grace period expired on 10 October 2013. Unable to reach an agreement with MIC which would have only frozen an amount equivalent to the judgment debt, I am satisfied that Naftogaz had no choice but to make another payment in full to meet its obligations to the noteholders. I am further satisfied that Mr David Head, counsel for Naftogaz, was right to say that default on a debt issue for some US$1.6 billion would have been a major disaster.[60]However, the second payment left at large the question of the status of the first US$75m which BNYM continued to hold. There is no question, indeed this is accepted by MIC, that the purpose of the Supplemental Agreement was to ensure that the money remained subject to the Agency Agreement. For present purposes, the crucial term of that agreement (as noted above) is clause 6.4, by which BNYM is not obliged to repay to Naftogaz amounts paid for payment to the noteholders. The exception is where the noteholder’s claim for payment becomes time barred, which would happen after 5 years in the case of an interest payment. In that event only, BNYM is to refund the money to Naftogaz. For the reasons set out above, this provision was by its terms effective to prevent any debt arising owed by BNYM to Naftogaz.[61]The Supplemental Agreement states that it is made to enable the noteholders to be paid, and avoid an event of default under the notes. Clause 2 deals with the first US$75m paid by Naftogaz (described as the First Coupon Payment) as follows:
“Until the earlier of the return date of 5 November 2013 for the Interim Third Party Debt Orders made by the English High Court on 20 September 2013 and 8 October 2013 (the “Interim TPDOs”) or any further order(s) of a competent court in any jurisdiction the Issuer and BNYM agree that the First Coupon Payment will continue to be held in Account Number 8881018400. Notwithstanding the Second Coupon Payment and/or subsequent payment to the noteholders as contemplated below, until any order of a competent court or further written agreement in terms acceptable to BNYM, the First Coupon Payment will continue to be held by BNYM on the same basis as originally paid, being subject to the terms of the Agency Agreement dated 5 November 2009 (the “Agency Agreement”), except insofar as they conflict with the following further terms, which shall amend and supplement the Agency Agreement in relation to the First Coupon Payment only:”
[62]Thus, the first US$75m was to “… continue to be held by BNYM on the same basis as originally paid, being subject to the terms of the Agency Agreement dated 5 November 2009”. Under the Agency Agreement, there was no debt arising between BNYM and Naftogaz. The real question is whether MIC is right to submit that though this was what the parties wished to achieve, what they were trying to do was impossible. However, I do not consider that it was any more impossible than was originally agreed. Money passing through the account would not result in a debt owed to Naftogaz, but money had only got stuck in the account because MIC had obtained an interim third party debt order to which it was not entitled.[63]I agree with Naftogaz that the terms of the Supplemental Agreement were sufficient to negate a debt coming into existence. I do not think that the provision that the funds were to continue to be held by BNYM on the same basis as originally paid, until an order of a court or “further written agreement in terms acceptable to BNYM” alters that conclusion. There never was any such further written agreement, and the wording only emphasises that no debt was created. Though the balance of the money was repaid in due course, I do not consider that this was pursuant to an obligation that was capable of being attached by a third party debt order. This avoids a conclusion that would mean that MIC had in effect itself created a debt by virtue of the action it had taken. Whilst it was suggested on its behalf in argument that it had “got lucky”, it does not follow that there was an attachable debt. In those circumstances, the interim order obtained on MIC’s third application should also be discharged. The second issue: full and frank disclosure and/or discretion The parties’ submissions

The second issue: full and frank disclosure and/or discretion

[64]Naftogaz argues that MIC failed to comply with its obligations of full and frank disclosure in respect of all of its applications for the interim third party debt orders, and/or the court should not in any event grant final orders as a matter of discretion. Since I have decided to discharge the orders, these issues do not arise. However, the matter was argued, and I should set out my conclusions.[65]The premise is that (contrary to the above) there was a debt owed by BNYM to Naftogaz which was capable of being attached by a third party debt order. The issue is whether the court should make a final order in respect of the second or third interim orders (MIC is no longer relying on the first order). The arguments advanced by the parties were as follows.[66]Naftogaz argues that the position was not properly explained to the court on any of the three applications that MIC made. These were ex parte applications, and applying general principle, MIC was obliged to make full and frank disclosure. Had the facts been put properly to the court, and in particular the weakness in the proposition that BNYM was Naftogaz’s debtor, the interim orders would not have been made. Alternatively, they should now be discharged. The same outcome, Naftogaz submits, should result from the court exercising its discretion in deciding whether or not to make the interim orders final.[67]For its part, MIC argues that the matter was fairly placed before the court on each of the three applications that it made. In particular, it was explained that the relevant funds were in respect of interest payments due under an issue of loan notes. The developments since the first order were explained properly when applying for the second and third orders, and since MIC is the holder of an unimpeachable judgment which Naftogaz is deliberately refusing to pay, there is no basis upon which the court can or should properly refuse to make the second and/or third interim orders final.

The applicable principles

[68]I begin by setting out the principles by which these issues must be determined. No authority was cited to me on the duty of disclosure in the specific context of a without notice application for a third party debt order. Naftogaz submits that the same principles apply as apply in the case of applications for freezing orders, which has been the subject of much case law. Whilst accepting that there is a duty of disclosure, MIC submitted that the duty was a lesser one, and relied (if necessary) on the cases which show that a freezing order which has been discharged on non-disclosure grounds may, in some circumstances, be re-imposed where the interests of justice require it.[69]In my view, some force is given to Naftogaz’s submission by the fact that the effect of an interim third party debt order is to freeze the debt in question (for example, money in the judgment debtor’s bank account) up to the amount of the judgment debt. In that respect, it is not unlike a freezing order, though it is directed at the third party not the judgment debtor. There, however, the similarity ends. Whereas a freezing order is exceptional relief, even where the claimant has obtained judgment, the third party debt order procedure is a long established and routine way to attach debts owed to the judgment debtor by a third party. I can see no reason to import the case-law applying to disclosure in the case of freezing orders, and no authority has been cited to me that requires it.[70]On the other hand, the importance of accurate evidence on a without notice application is undoubted, as is the duty of disclosure on such an application (see for example Ghafoor v Cliff [2006] 1 WLR 3020 at [46], David Richards J, in the context of without notice applications for the grant of administration). As Hobhouse J put it in a well known passage in The “Jay Bola” [1992] 2 Lloyd’s Rep 62 at 67, there is a duty of disclosure on all ex parte applications, but the extent of the duty and the gravity of any lack of frankness will depend in any given case on the character of the application. Applying that approach, where the consequences of an interim third party debt order are potentially serious, and the grounds for making an order debateable, the duty of full and frank disclosure will be commensurately higher.[71]Independent of any issue of non-disclosure, the question whether an interim order should be made final is one for the discretion of the court. This is established in many cases, including Roberts Petroleum Ltd v Kenny, cited above. It was held at [1982] 1WLR 301 at 307 that in exercising its discretion, the court must take into account all the relevant circumstances whether they arose before or after the interim order, and should exercise its discretion equitably having regard to the interests of all parties involved. The principles are well summarised in the White Book at CPR 73.4.5. Where no complicating factor exists, such as the effect of an order on other creditors, or the possibility that an order may require the third party to pay twice, there is usually no reason not to make the interim order final, and indeed normally there is no dispute.

Discussion and conclusion

[72]As Naftogaz says, the fact that MIC no longer relies on the first interim third party debt order that it obtained does not mean that it is not important in the overall picture. MIC’s application dated 19 September 2013 was on the applicable court form, with a number of documents annexed including the publicly available prospectus relating to the issue of the notes guaranteed by Ukraine. The form follows the requirements for an application notice specified in Practice Direction 72. It is verified by a statement of truth on behalf of MIC.[73]The prescribed contents of the form reflect the principle that a third party debt order can only be made in respect of an existing debt (see above for the case law). In section 3, it is stated that the “The Third Party is within England and Wales and owes money to (or holds money to the credit of) the Judgment Debtor”. The third party is BNYM and the Judgment Debtor is Naftogaz. MIC now accepts that this statement was wrong, and (as Naftogaz points out) it was wrong even on MIC’s own case. On no view did BNYM owe money to Naftogaz at this time.[74]MIC relies on what is said later in the form. In section 5, it is said that MIC “knows or believes” that the information in section 3 is correct because BNYM is the Principal Paying Agent in respect of the notes issue, and MIC understands that Naftogaz is to put BNYM in funds to make the semi-annual interest payment on 30 September 2013. A condition of the notes is cited to the effect that BNYM did not assume any obligations towards the noteholders. MIC concluded that, “This means that the Third Party is the agent of the Judgment Debtor and accordingly the funds received by the Third Party from the Judgment Debtor do not become the property of the noteholders until they are paid over to them”.[75]Naftogaz says that while accurate as far as it went, this did not begin to answer the question whether BNYM owed a debt to Naftogaz. In my view, that is right. MIC says that it is obvious that as judgment creditor it would not have a full understanding of the contractual relationship between judgment debtor and third party. Again, that is right, but in a very unusual application of the present kind, it was in my view incumbent on MIC, if it was to make this without notice application, to explain that since BNYM’s capacity was that of paying agent, it might not be indebted to Naftogaz at all. MIC suggests that since Master Kay QC made the order, he must have concluded that the application was not a speculative one. However, the Master was dealing with the application as placed before him. It should not have been placed before him including the statement that BNYM owed money to Naftogaz when this (as is accepted) was wrong.[76]Naftogaz also submits that the matter was not put sufficiently clearly to Cooke J on 8 October 2013, and in particular that it was not made clear that even at that point MIC did not know whether any debt existed or not. However, fuller information was placed before the judge than previously, and I do not think that there are grounds for criticism in this respect. Equally, MIC cannot derive any support from the fact that an order was made by the judge, since it is clear from the transcript that the matter had only just been placed before him as a matter of urgency, and he was doing no more than holding the position pending the return date.[77]The third application was (as explained above) made on the papers on 16 October 2013. Again, the applicable court form was used. On this occasion, a considerable amount of information was given reflecting what had happened over the three or four weeks since the first application. It was explained that an application for a further order was being made because it appeared that Naftogaz intended to contend that the order made by Cooke J was not effective. It was said that Naftogaz had declined to explain the basis of that contention. The application went on to say that even if Naftogaz was right, and the money it paid to BNYM was not originally held in a way that resulted in an attachable debt due from BNYM to Naftogaz, “… it must now be an attachable debt since the purpose for which it was originally paid has been exhausted. As between [BNYM] and [Naftogaz] there must now be a simple debt repayable on demand”.[78]Naftogaz points out that its solicitors wrote to MIC’s solicitors at some length on 21 October 2013 (which was prior to the making of the order). Among other things, this letter articulates that the effect of clause 6.4 of the Agency Agreement (which it attached) made clear that no debt was owed by BNYM to Naftogaz. Naftogaz submits that this letter should have been drawn to the Master’s attention, since it supplied the explanation which it was stated in the application form that Naftogaz had declined to give.[79]In fact, as noted above, the third interim third party debt order was made on 22 October 2013. It was accepted, I think, on behalf of MIC that it would have been preferable for the letter of 21 October 2013 to have been communicated to the Master. However, this application did make clear that its basis was that a debt must now have arisen since the noteholders had been paid and the remaining money must (MIC submitted) be repayable on demand. Having made that clear, MIC was entitled to state that the “The Third Party … owes money to (or holds money to the credit of) the Judgment Debtor”, because that is what it believed, albeit in my view wrongly as explained above. Further, I am satisfied that the fact that the letter of 21 October 2013 was not provided to the Master would have made no difference. By now, the position was so complicated that it was virtually inevitable that he would preserve the status quo until the return date, which was what he did.[80]Drawing all these points together, my conclusion is as follows. As explained above, it was a result of the first interim third party debt order, taken with the order obtained in Belgium, that the US$75m received by BNYM from Naftogaz on 30 September 2013 for payment to the noteholders was blocked. MIC now accepts that its statement in the application to the effect that BNYM owed money to Naftogaz was wrong.[81]In my view, everything that happened subsequently flowed from this. As I have described, the US$75m interest payment to the noteholders was blocked, and Naftogaz had to make available a further US$75m to avoid a default under the note issue. I agree with Naftogaz that the first application was a speculative one, and by Practice Direction 72 paragraph 1.3, the court will not grant speculative applications. The second and third applications by MIC were only possible because funds were blocked by the first order, which should not have been blocked.[82]Accordingly, whilst I do not consider that this would have been a case for discharge for non-disclosure, if I had concluded (contrary to the above) that there was jurisdiction to make a final third party debt order in respect of MIC’s second and third applications, I would in my discretion have declined to do so. MIC has rightly emphasised the court’s policy of ensuring that its judgments are paid. It is however also important that the court’s enforcement procedures are properly used, which in my view did not happen on this occasion.[83]MIC indicated in its skeleton argument that if that was the view the court took, it would apply for a receiver to be appointed in respect of the US$25m which remains in the London account. This issue was not argued before me, and does not arise for decision on the present applications.

Conclusion

[84]For reasons set out above, the interim third party debt orders granted on 20 September 2013, 8 October 2013 and 22 October 2013 against BNYM as third party and Naftogaz as judgment debtor are discharged. I am grateful to the parties for their assistance, and will hear them as to any consequential matters.

Cited in 6 later judgments