Repayment prevented by sanctions

Fortenova Grupa DD v LLC Shushary Holding (and five others) [2023] EWHC 1165 (Ch) 

In a novel application of the ancient equitable jurisdiction that protects a debtor’s right to redeem mortgaged property, after a short trial, Mr Justice Green granted Fortenova Grupa’s redemption action against LLC Shushary Holding – a subsidiary of VTB Bank PJSC, sanctioned in the UK, EU and US. The action concerned €1.157bn of senior secured floating rate notes issued by Fortenova and due to mature in September 2023; 38% of the notes were owned by Shushary.  

In its classic incarnation, redemption action is brought by a mortgagor who, though once in default, is now ready to settle the debt and is obstructed from so doing by a lender who has disappeared or prefers to keep the property than accept repayment. The courts of equity are, in the words of Lord Henley in 1761, jealous of a debtor’s right to redeem against any lender who takes security for a loan and then tries to convert it into a purchase. Historically, this protection has included recognition of the right after the contractual period for redemption has passed and even after forfeiture has commenced.

This case was not classic. It was unusual in several respects and novel in one.

Instead of a mortgage, the case involved a syndicated loan. The courts had, however, already recognised the right to redeem in comparable situations. The case was unusual in that the secured property was overseas, but there was existing authority for the power of the English courts to order redemption in respect of foreign property. The debtor in this case wished to redeem via a payment into court. This too was unusual, but the existence of such practice was mentioned in reported cases.

What was novel in this case was that, before bringing its claim, Fortenova had not attempted to make ‘proper tender’ to discharge the debt to Shushary: the sum had not been set aside, available immediately on Shushary’s demand. Fortenova had merely indicated that it wished to exercise its contractual right to make early repayment and redeem the security. In previous cases, the jurisdiction to protect the right to redeem was said to arise because a proper tender had been made and refused, or because the making of such tender had been wrongfully obstructed by the lender. In this case, what frustrated the claimants’ attempts was not the conduct of Shushary (who recognised Fortenova’s right to redeem, wanted to be repaid, and only disputed how), but international sanctions. As an EU-incorporated entity, with a debt administered by a UK paying agent, hoping to refinance with funds from a US-incorporated party, Fortenova was prevented by the operation of three different regimes from raising the money necessary to make proper tender to repay. Unpaid interest had already accrued, and no third party would agree to refinance the loan without first being assured of a viable mechanism to discharge the existing debt and release the security.

Despite this novelty, Shushary was unable to identify any principle of equity which might operate against the use of the jurisdiction in Fortenova’s case. Critically, in previous cases, distinctions between ‘proper tender’, ‘conditional tender’ and ‘mere offer’ had gone to one of two issues: whether redemption should occur; the point at which the court should grant equitable relief against interest. Fortenova was not suggesting that the security should be released, or that ordinary contractual rates of interest should cease to apply, unless and until it physically completed the payment it wished to make – that is, the payment of Shushary’s money into court. Unlike previous claimants, Fortenova was effectively asking the court to make available a mechanism which it might (if it successfully completed the planned refinancing) in future use to redeem the relevant security, thereby relieving it from the state of paralysis in which sanctions had placed it.

Shushary did not consent to the relief sought. Its adamant desire was for repayment to be made in roubles, to an account held in a jurisdiction unaffected by sanctions against Russia. Though faithfully representing this position to the court, Shushary’s representatives could not point to a provision under which the Office of Financial Sanctions Implementation might license such payment. Payment into court, on the other hand, ought to be covered by the terms of general licence INT/2023/2824812. To complete the payment, Fortenova would also need US and EU licences. As to the former, Fortenova had obtained an Office of Foreign Assets Control licence, which stipulated payment must be into the High Court or a frozen account held with a US institution (which Shushary could not obtain). As to the latter, a Croatian Ministry of Finance licence was expected to follow the court order.

Shushary also contended that default interest should apply in respect of the quarterly payments due under contract, which Fortenova had been unable to make since February 2022: the court had little difficulty rejecting this argument.

Significantly, no order was made as to costs; Fortenova made no such application. In the absence of a US-held account which Shushary might nominate to receive repayment, only a court order was capable of saving Fortenova from the potentially fatal, catch-22 in which sanctions against VTB PJSC had placed it. And nobody criticised Shushary for its resolute – but economically expressed – refusal to consent.

Clare Sibson KC is a barrister at Fountain Court Chambers. She acted for LLC Shushary Holding