The Court of Appeal’s recent judgment in Deutsche Bank AG v Unitech Ltd  EWCA Civ 119 will be welcomed by lenders seeking to recover against loan agreements which used LIBOR as a reference rate in the calculation of interest. Such lenders are frequently met with a defence and counterclaim in which the borrower resists or seeks to delay any repayment on grounds of alleged LIBOR manipulation. The instant judgment makes it clear that if a borrower seeks to rescind a loan agreement and any associated interest rate swaps on these grounds, it must be prepared to make an interim payment or payment into Court (in advance of trial) for the total amount borrowed under the loan. The Court also rejected a number of other defences based on LIBOR manipulation.
Lenders can often meet resistance when pursuing recovery action against borrowers because of allegations about their alleged involvement and knowledge of LIBOR manipulation. However, the reality is that such claims only have the potential to reduce liability under the loan, not escape it entirely. The clear message from the Court is that borrowers pursuing such allegations should, at an early stage of the proceedings, be prepared to pay the same sum they would be ordered to pay if their rescission defence succeeds.
This appeal arose from two actions in the Commercial Court brought by Deutsche Bank and other creditors (the “Lenders”) to recover in the region of $177m from Unitech Global Ltd (“UGL”) and Unitech Ltd (“Unitech”) under a credit facility agreement (the “Facility Agreement”) and its associated swap agreement (the “Swap”). Unitech was the parent of UGL (together, the “Defendants”) and had guaranteed UGL’s obligations under both the Facility Agreement and the Swap. The Facility Agreement was the subject of the first action and the Swap was the subject of the second.
Both agreements used LIBOR as a reference rate for calculating interest. In November 2013, the Defendants were granted leave by the Court of Appeal in both actions to amend their Defence to plead misrepresentation concerning the accuracy of LIBOR and Deutsche Bank’s alleged role in undermining the integrity of LIBOR. The Defendants argued that this entitled them to rescind both the Facility Agreement and the Swap.
The procedural history to the instant appeal is complex, but in summary the Court of Appeal was asked to determine the following:
- An appeal by the Defendants against the judgment of Mr Justice Teare dated 20 September 2013, refusing to grant permission to the Defendants to raise five additional grounds of defence; and
- An appeal by the Lenders against the judgment of Mr Justice Teare dated 3 October 2014, refusing to order the Defendants to make an interim payment or payment into Court of the outstanding benefit received under the Facility Agreement.
2. Court of Appeal decision
Additional grounds of defence
The Court of Appeal upheld the Commercial Court’s decision to refuse permission to amend the Defence to include each of the five new grounds of defence, which were as follows:
- that the bank failed to disclose to Unitech as guarantor unusual features of the Facility Agreement with UGL and the guarantee was therefore discharged;
- that the bank’s breaches of the agreements (e.g. by manipulating LIBOR) discharged Unitech from liability under the guarantee;
- that the agreements constituted exchange contracts and were thus unenforceable under Article VIII section 2 of the IMF Agreement (formerly the Bretton Woods Agreement 1944);
- that the contracts were illegal because they required the Defendants to perform their contracts in a place where it would be illegal to do so; and
- that the Facility Agreement and guarantee were void as a result of the bank’s breach of the anti-competition provisions of the Treaty on the Functioning of the European Union and section 2 of the Competition Act 1998.
The Court confirmed the approach to such applications: if an amendment is properly arguable, it should normally be allowed unless there is prejudice to the other party which cannot be compensated by an order for costs. Applying this approach, the Court held that defences (c) to (e) did not constitute arguable defences and so permission to amend was refused.
Defences (a) and (b) sought to discharge Unitech’s liability as guarantorbecause of Deutsche Bank’s alleged role in the manipulation of LIBOR. The Court refused permission because Unitech was a primary obligor under the Facility Agreement (as well as a guarantor), which contained a provision that Unitech would indemnify the Lenders for any amount not recoverable under the guarantee “for any reason”. The Court was satisfied that this wording was broad enough to cover any non-disclosure or breach of contract which might prevent recovery under the guarantee.
Interim payment / conditional payment into Court
The Court of Appeal reversed the Commercial Court’s decision and ordered that the rescission defence be conditional upon the Defendants paying $120m into Court. It was common ground between the parties that if the Defendants succeeded with their misrepresentation defence, they would only be entitled to rescind the agreements on condition that they made restitution of the outstanding principal loan sum of about $120m. If the Lenders were successful then the Defendants would be liable for about $177m, meaning that any outcome at trial would result in the Defendants having to pay at least $120m to the Lenders.
The Court’s power to order an interim payment or conditional payment into Court was considered separately, as follows:
- The rule-making power in respect of interim payments was set out at section 32 of the Senior Courts Act 1981 and the rule itself appeared at CPR 25.1(1)(k) (security for costs).
- The power to order payment of any “other sum” within these provisions was capable of covering a payment by way of restitution as a condition for rescinding an agreement. Further, the phrase “which the court may hold the defendant liable to pay” was sufficiently wide to cover the situation where a defendant’s purported rescission will only be recognised if the defendant makes a restitutionary payment to the claimant. Such interpretation was “powerfully reinforced” when read in the light of the overriding objective.
- CPR 25.6 set out the procedure to be followed when applying for an interim payment. The Court of Appeal did not accept the Defendants’ submission that the conditions to be satisfied should be read narrowly and held that those conditions were satisfied in the instant case.
Conditional payment into Court
- CPR 24 (summary judgment) did not include an express provision for making leave to defend a claim conditional upon the defendant making a payment into Court. Unlike CPR 25 in relation to security for costs, CPR 24 contained no special rules dealing with such a case.
- However, there was a general power of case management under CPR 3.1(3), which could be exercised to make a conditional order requiring a payment into Court.
The Court of Appeal held that the first instance judge was wrong to hold that the Court had no power to order an interim payment under CPR 25, and that – in relation to the conditional payment into Court – he exercised his discretion under CPR 3.1(3) on an incorrect basis.
The Lenders’ preference was for an order making UGL’s Defence conditional on payment of $120m into Court, instead of an interim payment. This was the order made by the Court of Appeal.
The Court of Appeal made two further noteworthy observations:
- The Defendants could not rely upon the rule that – where a contract is voidable in equity – there is no need for the party wishing to rescind the contract to tender or to return benefits received in advance of trial on the question of their entitlement to rescind. This was because it had been established in the present case that UCL would be required to pay the Lender a minimum of $120m. The bespoke measures adopted by the Court to order an interim payment or payment into Court in this specific context, in furtherance of the overriding objective, were not undermined by this general rule.
- The evidence from the Defendants that the order to pay $120m would stifle their Defence and Counterclaim was too general and insufficient to satisfy the heavy burden required.
This was a robust decision by the Court of Appeal, clearly driven by its desire to ensure that the litigation is conducted in a way that is fair and at proportionate cost. It was key to the exercise of the Court’s discretion that, even if the Defendants are fully successful at trial, they would only ever be able to reduce their liability to the sum of $120m. If the Defendants are unable to raise the minimum payment of $120m, then it is clearly in the interests of justice to find out at this juncture, rather than after conducting a full trial and all the effort and expense that this would entail.