In Hardy v Government of India and IIFC (UK)  EWHC 1916 (Comm), the English Commercial Court discharged an interim third-party debt order awarded to support an oil and gas company’s UNCITRAL award against India. The Court refused to grant a final order because the debt was situated in India and Indian law would not recognise an English third-party debt order. Additionally, the jurisdictional requirement under CPR Rule 72.2 that the relevant debt must be “due or accruing due” was not met.
The Claimant (“Hardy”) had recently failed to enforce the award against India in the United States of America (see here).
In 2013, Hardy obtained an arbitration award (“the Award”) against the Defendant, the Government of India (“GOI”). Hardy applied, without notice, for an interim third-party debt order (“TPDO”) pursuant to CPR Part 72 which was granted by Master Kay QC on the premise that “there is a debt due or accruing due by the third party to the judgment creditor”. The third party was India Infrastructure Finance Company (UK) Limited (“IIFC (UK)”), a company incorporated in England and Wales. IIFC (UK) is wholly owned by India Infrastructure Finance Company Ltd, which is in turn wholly owned by GOI. IIFC (UK) provides loans to Indian companies implementing infrastructure projects in India. This is partly financed by bonds which IIFC (UK) issued to the Reserve Bank of India pursuant to a Bond Subscription Agreement (“BSA”). Under the BSA, the repayment of any bonds was secured by a guarantee from the GOI. As consideration for GOI’s guarantee, IIFC (UK) agreed to pay an annual guarantee fee at a specified rate under certain Guarantee Fee Agreements (“GFAs”).
The TPDO required IIFC (UK) not to pay the debt it owed GOI under the BSA up to a limit of £70,528,107.04 unless the Court otherwise ordered. If made final, it would require IIFC (UK) to pay the debt to Hardy instead of GOI.
In April 2018, IIFC (UK) applied for an order for the discharge of the TPDO on these grounds:
the Court lacked jurisdiction to make the Interim Order and/or should not make a final order because the debt owed by IIFC (UK) is enforceable (and therefore situated) in India, and payment by IIFC (UK) pursuant to an order of the English Court will not discharge the debt as a matter of Indian law; and
the debt owed by IIFC (UK) to the GOI was not “due or accruing due” on the date the Interim Order was made or served.
Issue 1: The situs of the debt
The Court noted the general rule that it has no jurisdiction to make a TPDO in circumstances where the relevant debt to be attached is situated outside England and Wales. An exception applies where even if the situs of the debt is outside England and Wales, the law applicable in the situs of the debt would recognise an English order as discharging the liability of the third party to the judgment debtor.
Hardy argued that the situs of the debt was determined by the residence or domicile of the third party, IIFC (UK). IIFC (UK) is an English company with a registered office in England, which carries on business in England and has bank accounts in England. Therefore, the situs of the debt was England. On the other hand, IIFC (UK) argued that the situs of the debt was located in the State where the debt is properly recoverable or can be enforced. This meant the State whose courts have jurisdiction to declare and decide on the existence and quantum of the debt.
The Court noted that the difficulty in this dispute arose from the language used by the Court in the past, which referred to the place where the debtor resides or where the debt is “recoverable”, “enforceable” or “payable”, each of which may or may not have its own distinct meaning.
The Court held that the general rule of presumption is that the debt is properly recoverable or enforceable in the place of residence, or domicile, of the debtor. This general rule can be displaced if it can be shown that the debt is properly recoverable or enforceable in a jurisdiction other than the debtor’s residence or domicile. For example, where because of a “special agreement” or an “exclusive right of suit” agreed between the parties, suit must be brought against the debtor in that other jurisdiction.
On the facts, the GFAs provided that an Indian seated arbitral tribunal or alternatively the civil courts in Delhi had jurisdiction. The debt was therefore situated in India. As stated above, the Court can make a TPDO, even if the situs of the debt is outside England and Wales, if by the law applicable in the situs of the debt, an English order would be recognised as discharging the liability of the third party to the judgment debtor.
The Court found that as a matter of Indian law, there was a real or substantial risk that the Delhi Court or arbitral tribunal would view the debt as situated in India. If the debt was situated in India, the Delhi Courts would not recognise the TPDO as discharging the debt under the GFAs. The Court could not discount the real or substantial possibility that even if a final TPDO had been granted, the GOI would seek to recover or enforce the debt legally due to it under the GFAs. Therefore, even if the Court had jurisdiction to make the TPDO, the Court would have exercised its discretion against making such an order.
Issue 2: The debt “due or accruing due”
It is a jurisdictional requirement under CPR Rule 72.2 that the relevant debt must be “due or accruing due”. The question was whether there was an immediate and unconditional obligation, or a cause of action, on the part of IIFC (UK) towards the GOI in respect of the guarantee fee on 28 February 2018 (the date on the TPDO was made) or 5 March 2018 (the date on the TPDO was served on IIFC (UK)).
Clause 1 of the GFAs provided that IIFC (UK) pay an annual guarantee fee at a specified rate on the amount of the borrowing (i.e. the borrowing by IIFC (UK) from the Reserve Bank of India) and “thereafter pay in advance on the 1st day of April of each year on the principal plus accumulated normal interest outstanding”.
Hardy argued that from the date on which each GFA became effective, an existing obligation to pay the guarantee fee for the life of the contract came into existence, even though the fee was only payable annually and though the quantification of the precise amount occurred annually. IIFC (UK) argued that whether any guarantee fees fell due on 1 April 2018 depended on whether IIFC (UK) owed the Reserve Bank of India any monies under the BSA at that date, which was a contingency that was unsatisfied at the date of making or service of the TPDO.
The Court held that there was no actionable entitlement to the fee before 1 April 2018. Additionally, the entitlement to the fee depended on a contingency, namely that the principal amount of the borrowing remained outstanding and that there was outstanding accumulated interest on 1 April 2018. Therefore, the entitlement to the guarantee fee which accrued on 1 April 2018 was not a debt “due or accruing due” on 28 February 2018 or 5 March 2018 when the TPDO was made and served.
This case sheds light on the English courts’ jurisdiction to grant third-party debt orders and the law on determining the situs of debts. Previous case law referred to the situs as the place where the debtor resides or where the debt is “recoverable”, “enforceable” or “payable”, without confirming what these words meant and whether they had distinct meanings. It is now settled that a debt is situated in a State where the creditor can bring a suit for payment of that debt. This will generally be the debtor’s domicile, unless the parties have agreed that suit must be brought against the debtor in another jurisdiction. Parties seeking to enforce arbitration awards should consider the situs of the debt, before applying for a TPDO. An exclusive jurisdiction or arbitration agreement may change the situs of the debt, preventing the granting of a TPDO. Hardy’s second attempt to enforce its award against India failed due to this reason.
Read the judgment in full here.
Akshay Sewlikar would like to thank Nicole Chui for her assistance in the preparation of this article.