Case No: 6903 of 2015
Neutral Citation Number: [2015] EWHC 3299 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Royal Courts of Justice
Rolls Building, 
Fetter Lane, London, EC4A 1NL

Date: 13 November 2015 

Before :

MR JUSTICE DAVID RICHARDS
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IN THE MATTER OF PUBLIC JOINT-STOCK COMPANY COMMERCIAL BANK “PRIVATBANK”

AND IN THE MATTER OF THE COMPANIES ACT 2006

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Tom Smith QC and Charlotte Cooke (instructed by Latham & Watkins) for the Applicant

Hearing date:   13 November 2015

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Judgment
Mr Justice David Richards: 
1.	Public Joint-Stock Company Commercial Bank “Privatbank” (the Bank) applies for the sanction of the Court to a scheme of arrangement under section 899 of the Companies Act 2006 with creditors in respect of two series of subordinated loan notes, having an aggregate nominal value of US $220 million.
2.	The Bank is incorporated under the laws of Ukraine and has since 1992 operated under a full banking licence issued by the National Bank of Ukraine (the NBU).   It is the largest bank in Ukraine by assets, loans and deposits, with a market share of approximately 34% of all retail deposits.   As at 30 June 2015, it had 30 branches and 2,881 outlets in Ukraine, a branch in Cyprus, a subsidiary in Latvia and representative offices, which do not carry out any banking operations or activities and perform purely administrative functions, in the United Kingdom and China.    
3.	The survival of the Bank has in recent times depended on liquidity support loans from the NBU.    Its financial condition has been adversely affected by the political crisis and deterioration in economic conditions in Ukraine.    Historically, it has relied significantly on retail deposits to fund its operations but domestic currency deposits decreased by 13.7% between December 2013 and June 2015 and foreign currency deposits decreased by 48.9% over the same period.    The ability of domestic borrowers to service debts denominated in foreign currencies, which represent approximately 36% of the Bank’s loan portfolio, has been badly affected by the very significant depreciation of the Ukrainian currency against the US dollar and the Euro.    
4.	The NBU earlier this year required the Bank to take the steps necessary to extend the maturity of one of the series of subordinated loan notes to which the proposed scheme of arrangement relates, the 2016 Notes.  The Bank attempted to do this in June 2015 with the consent of the Noteholders but was unable to obtain the requisite majority of 75% at a meeting convened to consider the proposal.    Creditors holding approximately 85.38% of the debt in respect of the notes were represented at the meeting but the majority in favour of the proposal was approximately 69.08%.     
5.	In September 2015, the NBU required that further capital be injected into the Bank by 1 October 2015 to ensure compliance with regulatory capital requirements.   To meet this requirement, on 6 October 2015, the Bank raised US $70 million from a shareholder by the issue of subordinated notes maturing in 2021 (the 2021 Notes).   The 2021 Notes are on materially the same terms as the 2016 Notes save as to maturity.   It was agreed that any restructuring of the 2016 Notes would apply equally to the 2021 Notes, so that any new instruments issued in place of the 2016 Notes would be issued on the same basis in place of the 2021 Notes. 
6.	The evidence before the court establishes that, if the scheme is not sanctioned before the end of November 2015, it is likely that the Bank will be put into temporary administration in the Ukraine. This is likely to result in the acceleration of the 2016 Notes and the 2021 Notes, as well as another series of subordinated notes (the 2015 Notes), whose maturity has been extended to January 2016 and, if this scheme is sanctioned, will be further extended to January 2018.   Once a bank enters into temporary administration, it cannot be restored to its prior position.    A temporary administration terminates only either on the sale of the bank or its assets and liabilities or its nationalisation, or on its liquidation.   In the event of the liquidation of the Bank, the claims of creditors in respect of the 2016 Notes and the 2021 Notes would rank pari passu but on a heavily subordinated basis and it is unlikely that the Bank would have sufficient assets to repay any part of them.   This is not surprising, given that the subordinated loans are intended to form part of the Bank’s regulatory capital. 
7.	Under the terms of the scheme, the 2016 Notes and the 2021 Notes will be discharged, released and cancelled and, in consideration, the Noteholders will receive new Notes to be issued by a special purpose vehicle incorporated in England (the New Notes) in an aggregate principal amount equal to the principal amount of the existing Notes.   The New Notes will be on materially the same terms as the existing Notes, except that the maturity date for all the New Notes will be 9 February 2021 and the interest coupon will be increased to 11% per annum.  The subordinated loan made to the Bank out of the proceeds of the issue of 2016 Notes will be transferred to the special purpose vehicle, which already holds the subordinated loan made out of the proceeds of the 2021 Notes.   The security granted in connection with the existing Notes will be released and new equivalent security will be granted in favour of the trustee of the New Notes for the benefit of the Noteholders.  
8.	The proposed restructuring of the loan notes will materially assist the financial position of the Bank and it is anticipated that the replacement notes, with a maturity date in 2021, will be repaid in full. 
9.	The structure of the existing Notes is not straightforward.   The 2016 Notes were issued by ICBC Standard Bank Plc pursuant to a trust deed dated 9 February 2006 and the proceeds of the 2016 Notes were used to make a subordinated loan by ICBC Standard Bank Plc to the Bank pursuant to a subordinated loan agreement dated 3 February 2006.  Recoveries under the 2016 Notes are limited in recourse to payments made by the Bank under the subordinated loan.   The 2016 Notes are secured by a charge in favour of a trustee for the holders of the 2016 Notes of all the rights under the subordinated loan made to the Bank.    The 2016 Notes are presently held in global note form, with the rights of the Noteholders recorded through the Euro Clear and Clearstream systems.    A similar structure applies to the 2021 Notes.    
10.	On the face of it, therefore, the holders of the 2016 Notes and the 2021 Notes are not creditors of the Bank.   However, the holders of the Notes have a right of direct recourse against the Bank under the terms of the security arrangements, in the event that the security trustee, having become bound to proceed against the Bank, fails to do so within a reasonable time.   
11.	No doubt in order to resolve any difficulty as to the status of the Noteholders as creditors of the Bank, the Bank entered into a deed poll dated 21 October 2015 whereby it agreed that, if it were to fail to make any payment pursuant to the subordinated loans, it would be liable directly to the Noteholders as if it were the original principal obligor under the Notes and/or the Noteholders were the original counterparty under the subordinated loans. 
12.	By an order made on 23 October 2015, Asplin J directed that a single meeting of the holders of the 2016 Notes and the 2021 Notes should be convened and held for the purpose of considering the scheme.    The meeting was duly convened and held in accordance with the terms of that order and, at the meeting, the scheme was approved by a majority of 98.26% in number of the scheme creditors voting at the meeting, holding 98.95% in value of the notes.    The total number of creditors voting for or against the scheme at the meeting was 115 holding in aggregate US $207,808,000 of the notes, representing 94.46% in value.   The scheme was therefore overwhelmingly approved by a majority significantly in excess of that required by section 899 of the Companies Act (a majority in number voting representing at least 75% in value of the creditors), with a very high turn-out of creditors.
13.	At the hearing of the application to convene the meeting of creditors, Asplin J heard submissions on a number of matters which went to the jurisdiction of the court in relation to the scheme and on the composition of the class of creditors.   She was satisfied that the holders of the Notes were creditors of the Bank, having regard to the deed poll made in October 2015 which, she held, rendered them contingent creditors of the Bank without more.   Further, she was satisfied that, in any event, the provisions in the security arrangements which enabled the Noteholders in certain circumstances to proceed directly against the Bank also rendered them contingent creditors of the Bank.   Contingent creditors are, of course, creditors for the purposes of sections 895-899 of the Companies Act 2006.   
14.	Asplin J was also satisfied that the Bank is “a company liable to be bound up under the Insolvency Act 1986 for the purposes of the sections dealing with schemes of arrangement.    Although incorporated under the laws of Ukraine, the Bank is capable of being wound up as an unregistered company under section 221 of the Insolvency Act 1986.   
15.	No creditors have appeared at the present hearing to oppose the application to sanction the scheme or to make any submissions on it.   I have not therefore heard any submissions casting any doubt on these conclusions reached by Asplin J, with which in any event I agree.   
16.	Submissions were also addressed to Asplin J, as they were to me, as to whether there existed a sufficient connection with England to make it appropriate for the court to consider the proposed scheme of arrangement.   All the agreements and trust deeds connected with the 2016 Notes and the 2021 Notes and the related subordinated loans are, by their express terms, governed by English law.  All the agreements and trust deeds contain either clauses giving jurisdiction to the English courts or clauses submitting disputes to arbitration with a London seat.     
17.	As regards the connection with England, the critical point in my judgment is that the arrangements relating to the 2016 Notes and the 2021 Notes are governed by English law.  Subject to public policy exceptions, variations to the rights of parties to contracts made in accordance with the law of the country governing the contract will, under the conflicts of laws principles applied by most countries, be recognised as valid in those countries.  The expert evidence of Ukrainian law establishes that this is the case as regards Ukraine. 
18.	As Lawrence Collins J observed in In Re Drax Holdings Ltd [2004] 1 WLR 1049 at [30]:
“An important aspect of the international effectiveness of a scheme involving the alteration of contractual rights may be that it should be made … by the courts of the country whose law governs the contractual obligations.    Otherwise dissenting creditors may disregard the scheme and enforce their claims against assets (including security for the debt) in countries outside the country of incorporation.” 
The reference to countries outside the country of incorporation appears because, in that case, there was a scheme being simultaneously proposed in the company’s country of incorporation.    
19.	In my judgment this is a sufficient connection with England to justify the court considering and, if thought fit, sanctioning the proposed scheme of arrangement.   In addition, it may be noted that the Bank has a representative office and assets in England so that, in the event of insolvency, it is a real possibility that the Bank could be wound up in England, albeit in practice as an ancillary liquidation to an insolvency process in Ukraine.    
20.	It is also clear that, if sanctioned, the scheme will have a substantial effect.   The rights of the Noteholders will be varied in accordance with the governing law and, as mentioned above, the expert evidence on Ukrainian law establishes that the Ukrainian courts would recognise and give effect to such variation.    
21.	Asplin J also addressed the issue whether the requirements of the EU Judgments Regulation 1215/2012 are satisfied.  She held that, if Chapter II of the Judgments Regulation applies to applications to sanction a scheme of arrangement, this court has jurisdiction by virtue of Article 8 of the Regulation.  The evidence establishes that Notes representing 12% by value of the two classes of Notes are held by persons domiciled in the United Kingdom.   In all the circumstances, including the fact that the claims are all subject to English law, Asplin J concluded that it was expedient that the English courts should assume jurisdiction under Article 8.   Again, I have heard no contrary argument and I in any event agree with the conclusion. 
22.	Likewise, I have heard no contrary argument as regards the composition of the class for the purposes of the meeting convened to consider the scheme.   Although the rights attached to the two series of Notes are significantly different in terms of their maturity dates, the realistic alternative to the scheme is an insolvency procedure. In those circumstances, the Noteholders would rank pari passu in respect of their claims, all of which would be accelerated. The rights to which the Noteholders will become entitled under the scheme do not differentiate between the two series of Notes. Looking therefore at the rights of the creditors both before and after the scheme takes effect, they are in substance the same and, in any event, sufficiently similar that they can properly constitute a single class.
23.	A conclusion that creditors can properly constitute a single class does not mean that differences between them are not relevant to the exercise of the court’s discretion whether to sanction the scheme. In this case, the 2021 notes were issued after the unsuccessful attempt to obtain consent to a restructuring of the 2016 Notes and only very shortly before the issue of the claim form seeking an order to convene the meeting of creditors. This chronology raised in my mind the possibility that the terms attached to the 2021 notes were structured in such a way as to enable them to constitute a single class with the 2016 Noteholders and to increase the prospects of reaching the statutory majorities in favour of the scheme at a single meeting. While the 2016 Noteholders will see under the scheme a significant extension to the maturity of their notes, the same is obviously not true of the 2021 Noteholder. Moreover, there being only one holder of the 2021 Notes, the restructuring of those Notes could be achieved simply with the agreement of that Noteholder and without the need for a scheme. These would have been relevant matters to consider if there had been significant opposition to the scheme and, in particular, if the majority in favour of the scheme at the meeting had been achieved only by reason of the votes of the holders of the 2021 Notes. This is not, however, the case. I have earlier given the result of the meeting, from which it will be seen that there was an overwhelming majority in favour of the scheme, even if the votes of the 2021 Noteholder are ignored. 
24.	It is also relevant to ask why those Holders of 2016 Notes who opposed the restructuring proposed in June 2015 do not oppose the scheme and, indeed, voted in favour of it.    There are two principal Noteholders in this category.   The first, holding 3.3% of the 2016 Notes, explained that it opposed the restructuring in June 2015 because no shareholder had injected any further capital into the Bank.   The subscription by a shareholder of the 2021 Notes has satisfied this Noteholder.   The other, holding over 20% of the 2016 Notes, refused to make any contact with the Bank.  It is not known why it has changed its position but there has been no side deal or other inducement given to it.   
25.	Another factor going to the exercise of the discretion of the court to sanction the scheme is the existence of agreements between the Bank and some  Noteholders whereby they bound themselves to vote in favour of the scheme in consideration of a fee equal to 2% of the outstanding principal of the Notes held by them.  All Noteholders had the opportunity of entering into such an agreement and the opportunity was available until 6 November 2011, only five days before the date of the meeting.    In the rather different circumstances prevailing in In re Primacom Holding GmbH [2011] EWHC 3746 (Ch) and [2012] EWHC 164 (Ch);  [2013] BCC 201, Hildyard J at [57] was not persuaded that the availability of such an agreement to all relevant creditors entitled the court to disregard the agreements in considering the fairness of the scheme.   In the present case, the circumstances are such that, in my judgment, the existence of these agreements does not render the scheme unfair to the small number of creditors who voted against the scheme or who abstained.   In reaching this conclusion, I take particularly into account that the agreement was available to all creditors until a very late stage and there was no material change in circumstances making the scheme less favourable between the dates on which agreements were made and the date of the meeting.   
26.	One test for considering the relevance of this type of agreement is whether the fee is sufficiently small as to be very unlikely to have a material effect on the decision of a creditor to support the scheme.    While Mr Smith QC, appearing for the Bank, pointed to the fact that the fee was only 2% of the principal amount outstanding on the Notes held by a Noteholder entering into such agreement, he readily accepted that materiality might more appropriately be judged by reference to the price at which Notes had been acquired by a Noteholder.    If, for example, Notes were acquired at a price of 25 cents per US $1 nominal of Notes, a fee of 2% of the nominal value might well be considered material.    However, I need not explore this further in the circumstances of the present case, given the factors to which I have already referred.    
27.	In all the circumstances, I am satisfied that this is an appropriate scheme to sanction.   I am grateful to Mr Smith and Ms Cooke for their clear submissions both in their skeleton argument and in answer to the various points which I raised during the course of the hearing.