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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> The Argo Fund Ltd. v Essar Steel Ltd. [2004] EWHC 128 (Comm) (26 January 2004) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2004/128.html Cite as: [2004] EWHC 128 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		26th January 2004

Mr Justice David Steel :

1. Essar Steel Ltd ("Essar") is an Indian company, which manufactures briquetted iron, hot rolled steel coil and other steel products. In March 1997, Essar entered into a US$40m loan agreement with a syndicate of banks. The loan was by way of refinance of debt and was for a term of two years.
2. The syndicate banks and their relevant shares were as follows:

1.	Bayerische Landesbank Girozentrale, Singapore branch	10m
2.	The Sanwa Bank Limited, Singapore branch	7.5m
3.	ANZ Grindlays Export Finance Limited	5m
4.	Mashreqbank psc	5m
5.	The Sakura Bank Limited, Hong Kong branch	5m
6.	Indian Bank, Singapore branch	2m
7.	KDLC Leasing Singapore Pte.Ltd.	2m
8.	The Siam Commercial Bank Public Company Ltd 2m
9.	TAIB Bank E.C.	1.5m

3. At the time of the loan, steel coil prices were about $400 per ton. Within 18 months the prices had fallen dramatically to about US$200 per ton. The outcome was that Essar was unable to repay the banks under the agreement and became in default on 20^th March 1999.
4. Clause 27 of the Agreement provided a mechanism whereby each participant could transfer its rights, benefits and obligations under the agreement by executing and delivering Transfer Certificates to the nominated agent under the agreement, namely the Singapore branch of Bayerische Landesbank Girozentrale.
5. Prolonged negotiations took place between Essar and the syndicate banks with a view to achieving a global settlement in the form of a further debt restructuring. These negotiations failed to achieve unanimity amongst the banks.
6. In due course, between November 2002 and May 2003, some of the banks sought to make use of Clause 27 of the agreement to transfer their interests to the claimant ("Argo") either directly or (in one case) to a third party who in turn purported to transfer to Argo. The legitimacy of these transfers is the primary issue between the parties.
7. The participation of Argo acquired by this means amounted to a principal sum of $29.5m made up as follows:-

Transfer Date	Transferor	Tranferee	Amount US$
4 November 02	ANZEF Ltd. (formerly ANZ Grindlays Export Finance Limited)	Garban Securities Limited	5m
4 November 02	Garban Securities Limited	Argo	5m
26 February 03	Argo	Ankus Limited	5m
25 April 03	Siam Commercial Bank	Argo	2m
30 April 03	Bayerische Landesbank	Argo	10m
19 May 03	Mashreqbank psc	Argo	5m
3 June 03	Citigroup Financial Products Inc (This participation was that formerly held by the Sanwa Bank)	Argo	7.5m
10 June 03	Ankus Limited	Argo	5m

8. The claim is advanced in the principal sum, together with interest in the amount of $9,645,718.77, making a total claim of nearly $40m. The claim form was issued on 26^th June 2003. It was served on the agent for service identified in clause 32.5 of the agreement (the Law Debenture Trust) shortly thereafter.
9. On 17^th July 2003 Essar acknowledged service of the proceedings. The acknowledgment stated the intention to defend the claim but gave no indication of an intention to contest jurisdiction. The time prescribed for service of an application to contest jurisdiction expired in mid-August. In the meantime, Argo had issued an application for summary judgment pursuant to CPR Part 24.
10. On 5^th September 2003 Essar issued proceedings in Singapore against the original lenders under the agreement, seeking a declaration that the agreement was illegal or impossible to perform or that the transfer to Argo was void or of no effect. Four days later, on 9^th September 2003, Essar issued its application in these proceedings seeking to set aside service or obtain a stay of the proceedings.
11. The two applications have an underlying common theme. Essar's position is that Argo is not a qualifying transferee for the mechanism of transfer under clause 27. Thus it is contended that the claimants cannot establish the jurisdiction of the court by service of process pursuant to clause 32.5 on the Law Debenture Trust in London so as to invoke the agreed non-exclusive jurisdiction of the English courts prescribed by clause 32.2.
12. Clause 27 of the Agreement reads as follows:

27. BENEFIT OF AGREEMENT

27.1. This Agreement shall be binding upon, and inure to the benefit of each party hereto and their respective successors, Transferees and assigns. The Borrower shall not be entitled to assign, transfer or otherwise deal in any way with all or any of its rights, benefits and obligations under this Agreement. Any Bank may, subject to the execution and completion of such documents as the Agent may specify and with notice to the Borrower, assign all or any of its rights and benefits hereunder or, subject to the payment to the Agent of a transfer fee of $250, transfer in accordance with Clause 27.2 all or any of its rights, benefits and obligations hereunder.

27.2 If any Bank wishes to transfer all or any of its rights, benefits and/or obligations hereunder, then such transfer may be effected by the delivery to the Agent of a duly completed and duly executed Transfer Certificate in which event, on the later of the effective date of transfer (the "Transfer Date") specified in such Transfer Certificate and the third business day after the date of delivery of such Transfer Certificate to the Agent:

(i) To the extent that in such Transfer Certificate the Bank party thereto seeks to transfer its rights and obligations hereunder, the Borrower and such Bank shall be released from further obligations towards one another hereunder and their respective rights against one another shall be cancelled (such rights and obligations being referred to in this clause 27.2 as "discharged rights and obligations");

(ii) The Borrower and the Transferee party thereto shall assume obligations towards one another and/or acquire rights against one another which differ from the discharged rights and obligations only insofar as the borrower and the Transferee have assumed and/or acquired the same in place of the borrower and such Bank; and

(iii) The Agent, the Arrangers, the Co-Arrangers, the Transferee and the other Banks shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had the Transferee been an original party hereto as a Bank with the rights and/or obligations acquired or assumed by it as a result of such transfer.

13. The agreement itself furnishes a definition of Transfer Certificate and Transferee in clause 1:-

"Transfer Certificate" means a certificate in the form set out in schedule 2, signed by a Bank and a Transferee whereby:

1) such Bank seeks to transfer to such Transferee all or a part of such Bank's rights and obligations (as more particularly described therein) in accordance with the provisions hereof; and

2) such Transferee agrees to assume and perform the obligations it would assume as a result of the delivery of such certificate to the Agent as is contemplated by this Agreement;

and

"Transferee" means a bank or other financial institution to which a Bank seeks to transfer all or a part of such Bank's rights and obligations hereunder in accordance with the provisions of this Agreement."

14. The focus of the submissions was on the phrase "bank or other financial institution". It was submitted on behalf of Essar that the phrase was intended to encompass banks and other institutions akin to banks, a substantial proportion of whose business involved the making of loans, of which the present facility would have been a typical example.
15. The primary submission made on behalf of Argo was that there was no limitation on the class of person to whom a participation could be transferred and that the phrase "bank or other financial institution" was simply a convenient way of describing a likely group of candidates.
16. The agreement is expressly governed by English law. But I am bound to say that I rather doubt whether this proposition is arguable under any governing law. In short it involves substituting the word "means" with the word "includes". In my judgment the relevant part of the interpretation clause simply provides that only a bank or other financial institution can be a transferee. (The narrow scope of the transfer thus permitted is in stark contrast to the open-ended liberty to make an assignment to any person albeit subject to the execution of such documents as may be specified and subject to notice to Essar).
17. The alternative submission made on behalf of Argo was that "other financial institution" was not restricted to institutions of like kind to a bank but referred to any corporation involved in buying and selling investments in financial markets. I also reject this submission, preferring the construction advanced by Essar.
18. Firstly, in its context within the agreement as a whole, a transferee is expressly identified as a bank or an institution of a similar kind:-

i) The fourth party to the Agreement is defined as "the Financial Institutions listed in Schedule One (in their capacity as such, the "Banks" and individually a "Bank")".

ii) Further, clause 3.1 of the agreement requires each of the "Banks" to participate through its "Lending Office": indeed specification of a lending office is required in the case of a transfer as well.

iii) Clause 27 requires any transfer to be accompanied by execution of a Transfer Certificate. The prescribed form of the Transfer Certificate is in Schedule 2 and is drafted in terms of a transaction as between 'Transferring Bank' and a 'Transferee Bank'.

19. Secondly, the Transfer Certificate, which can be effected at any time, expressly contemplates that a transfer may be effected prior to draw down. Accordingly, any transfer to a financial institution which simply trades in investments but does not provide loans would obstruct performance of the agreement. Thus, from the perspective of the borrower, there is obvious commercial sense in limiting the range of transferees to banks or institutions of a like kind. Equally, from the prospective of the banks and the other lending institutions who were the original parties to the agreement, such a limitation makes commercial sense, given the need for co-operation between the lenders (e.g. in regard to the responsibilities of the 'Majority Banks' (as defined) and the role of the Agent in giving notice of draw down and in receiving or distributing payments).
20. Thirdly, there is no obvious commercial purpose to enlarging the range of potential transferees beyond banks and such like but nonetheless restricting the class to financial institutions as suggested by Argo. Indeed, it is not easy to identify a workable definition of a qualifying 'financial institution'. (In this regard I derive no assistance from Argo's reliance on the Banking Co-ordination (Second Council Directive) Regulations 1992).
21. Lastly, the approach urged on the court by Essar is supported by the eijusdem generis rule. It is proper to assume that the parties intended that the general words 'or other financial institution' were not included to extend the defined genus (banks) to institutions of an entirely different kind. (Again, I derive no assistance in this regard from Argo's reliance on the income tax case R v Special Commissioners ex parte Shaftesbury Homes 1923 1 KB 393.)
22. It follows that, given this conclusion, it remains necessary to seek to categorise Argo by reference to banks and institutions of like kind. The material before the court relevant to this topic is limited. In his first statement dated 1^st December 2003, Mr Rialas, the managing director of Argo Naftis Management (Overseas) Ltd., the managers of Argo, simply stated (in response to the assertion made by Essar that 'Argo was not a financial institution within the context of the facility agreement') that 'Argo Fund Ltd is a financial institution governed by the rules of the Financial Services Act and listed on the Irish stock exchange.'
23. This was at best unhelpful and at worst misleading. Essar exhibited various extracts from Argo's website to the statement of its chief financial officer. The following are the primary features to emerge:-

a) Argo is registered in the Cayman Islands as a mutual fund and is an Irish listed offshore fund.

b) Argo was an "unrecognised collective investment scheme" for the purposes of the UK Financial Services and Markets Act 2000: the fund, and the distribution of its prospectus in relation to it in the United Kingdom, is "restricted by law".

c) Argo Naftis, a company incorporated in Cyprus and regulated by the Cyprus International Financial Service Authority is the investment manager for Argo. The principal feature of Argo's investment objective and policy is 'to achieve above average return on risk adjusted basis by actively trading and investing in securities and other commercial instruments."

d) Argo in pursuit of this policy, principally invested in emerging markets fixed income credit products and in distressed special situations: "We seek diversification ranging from investment grade sovereigns in emerging markets to defaultive corporate debt: we take proactive positions in corporate restructuring."

24. Quite apart from demonstrating that Argo was not an institution governed by the Financial Services Act in any meaningful way, this material is wholly inconsistent with Argo being categorised as a bank or institution of like kind.
25. During the course of the hearing, Argo sought leave to put in evidence a further statement from Mr Rialas. This asserted that, as part of the business of Argo, it made loans from time to time, either 'bilaterally' or by way of participation in syndicated loans. Three examples were briefly outlined. I allowed the statement to be put in evidence de bene esse although I saw no good reason why any material relating to the nature of Argo's business had not been prepared and served much earlier.
26. It is striking that, despite the content of this new statement, there is no reference whatsoever throughout the website (including the prospectus) to the role of Argo (or its investment manager) in the making of loans, let alone as a significant part of its investment objective or policy. In my judgment, Argo has failed to establish the basis of its application under CPR Part 24 that the defendant has no real prospect of successfully defending the claim. To the contrary, put at its lowest, the defendants have very much the better of the argument that Argo was not a qualifying transferee.
27. I have not forgotten that one of the participations in the sum of $5m was transferred initially to Garban Securities and only then to Argo (later the same participation was transferred from Argo to Ankus Ltd., and even later from Ankus Ltd back to Argo). The purpose of these transfers is unexplained. Equally, there is almost nothing in the papers relating to the role or activities of Garban or Ankus (save that in the prospectus Ankus is described as a 'trading subsidiary' of Argo and which was incorporated in Cyprus in 2002). In this respect, the prospectus goes on:-

"The Fund makes investments in certain jurisdictions through its subsidiary in order to avail of certain tax efficiencies. The subsidiary will not carry on other activities. The subsidiary is permitted by the Central Bank of Cyprus to undertake investments only with funds provided by the Fund."

28. If this is right, it follows that Ankus is no more a legitimate transferee than Argo. I also infer that Garban Securities Ltd is a captive subsidiary of like kind.
29. My conclusion that the claimants have failed to establish that they have a good arguable case that they are legitimate transferees is not just fatal to their summary judgment application. It also follows that the claimants cannot pray in aid the provision of CPR Part 6.15 whereby a claim form is deemed to be served on a defendant if served by a method specified in a contract. Put another way, this court has no jurisdiction to entertain the claim since it is not sufficiently established that the defendants have thereby submitted to the jurisdiction.
30. The position however is not quite that straightforward. Essar acknowledged service of the proceedings on 17^th July. No challenge to the court's jurisdiction was made within 28 days. Accordingly, by virtue of CPR Part 11(5) Essar is to be treated as having accepted that the court has jurisdiction to try the claims unless it be appropriate to grant an extension of time under CPR Part 3.1(2)(a) (which in turn calls for a reference to the criteria set out in CPR Part 3.9).
31. The explanation for the delay put forward is very brief and is as follows:-

1. The need to give instructions to the initial firm of solicitors in London instructed by Essar and the subsequent change of solicitors.

2. The need to obtain legal advice in Singapore.

3. The need for liaison between the legal representatives in London and in Singapore.

32. In considering this delay, it is to be noted that Essar had already objected to the validity of the transfers in a letter to the agent Bayerische Landesbank in June 2003. Indeed, in a letter to the Reserve Bank of India in mid-August, Essar drew attention to their position that the 'transferees' were not banks or financial institutions as a matter of English law.
33. In my judgment, having regard to all the circumstances, it would not be appropriate to extend time:-

a) The application for an extension of time was not made promptly but only when three weeks had gone by after the expiry of the time for challenging jurisdiction and even then only after the issuance of their own proceedings in Singapore.

b) Whilst it is possible that the failure was not intentional, nonetheless the explanation tendered is unsatisfactory and unconvincing.

c) If an extension of time is refused, Essar will be held to a jurisdiction, which by definition is in a position to apply English law and which was the chosen non-exclusive jurisdiction for any legitimate transferee.

d) In contrast, if an extension is allowed, both additional delay and cost will be incurred. Argo are not parties to the Singapore proceedings and are not (on Essar's case) contractually entitled to pray it in aid.

34. This last point elides with a further point. It is contended that the court should stay the proceedings pending the outcome of the Singapore proceedings. I also reject this submission:

a) Argo is not a party to the Singapore proceedings which are primarily tactical in nature and which were issued nearly two months after the present action.

b) Essar does not recognise Argo as a party entitled to the benefits of the agreement and its jurisdiction terms.

c) The issue as to the legitimacy of Argo as the transferee can be determined as a preliminary point in these proceedings without any need for witnesses or documents available in or near Singapore.

35. It was suggested by Essar that I should grant summary judgment in their favour on 'the legitimacy' issue. This would not be appropriate. Whatever provisional view has been formed on the material presently available, it would be right to accord the parties the full opportunity to produce factual matrix evidence, together with material relating to the status and activities of Argo and its subsidiaries.
36. I refer to the 'legitimacy point' as being an appropriate preliminary point since Essar wish to raise a further defence to the effect that the agreement, if valid, is nonetheless impossible to perform because it is not permitted to make payments to a claimant and/or that it is an implied term of the agreement that any transferee must be 'a person capable of receiving payment of foreign currency by an Indian corporate entity'. I am not disposed to shut Essar out from taking the point. But these contentions clearly face formidable impediments in the form of the express terms requiring all payments to be made to Bayerische Landesbank, as agent, for which purpose the approval of the Reserve Bank had been obtained.