Ministry of Finance of the Russian Federation Wins $3 Billion English Court Victory

March 29, 2017

Cleary Gottlieb won a major victory in the English High Court on March 29, 2017, for the Ministry of Finance of the Russian Federation.

The High Court granted an application for summary judgment in a case against Ukraine for repayment of a $3 billion eurobond issued by Ukraine and held by the Ministry of Finance of the Russian Federation.

The application was submitted by the Law Debenture Corporation plc, as Trustee, on the instruction of the Ministry of Finance.

The eurobond was issued in December 2013 as part of a financial support package provided by the Russian Federation to Ukraine. Following the change of Ukraine’s government, Ukraine continued to pay interest on the eurobond, but it failed to pay the $3 billion principal or the final interest payment at maturity in December 2015.

Ukraine had offered in September 2015 to include the eurobond in its private sector debt restructuring, but failed to recognize the status of the Russian Federation as an official sovereign creditor, which should have entitled it to preferential terms based on international practice. The IMF subsequently confirmed that the eurobond was an official claim, and the Russian Federation proposed several restructuring options, but Ukraine refused to consider any restructuring on terms more favorable than those provided to its private sector creditors.

After Ukraine failed to pay the eurobond, the Russian Federation instructed the Trustee to initiate legal proceedings in the English High Court (the eurobond is governed by English law and provides for English court jurisdiction; it was also listed on the Irish Stock Exchange).

Ukraine asserted four separate defenses, the most significant of which were that it purportedly lacked the capacity to issue the eurobond, and that the eurobond was voidable because Ukraine supposedly issued it under duress resulting from illegitimate pressure allegedly applied by the Russian Federation in the months prior to the issuance of the Eurobond.

The Court rejected all of Ukraine’s defenses and granted the Trustee’s summary judgment application. In particular, it ruled that sovereign states have unlimited capacity to enter into English law borrowing contracts, that Ukraine’s defense related to questions of authority rather than capacity, and that Ukraine’s Minister of Finance had usual or apparent authority to issue the eurobond. With respect to duress, the Court ruled that Ukraine’s defense related to questions of relations between sovereign states that are non-justiciable as a matter of English law. The Court also rejected Ukraine’s attempts to imply terms into the eurobond transaction documents which, along with Ukraine’s other defenses, would have had significant ramifications for the eurobond market had they been accepted.

Ukraine has announced that it intends to appeal the ruling.