Interim declaration as to ownership of funds paid by Argentina to BNY Mellon

26/02/15

Knighthead Master Fund LP & Others v The Bank of New York Mellon & Others [2015] EWHC 270 (Ch)

On 19 October 1994, the Republic of Argentina and Bankers Trust Company entered into a Fiscal Agency Agreement, or “FAA”, pursuant to which the Republic issued securities to investors in sovereign debt.

By 2001, the Republic’s total debt issuance under the FAA had come to exceed US$80,000,000,000.  In December 2001, the Republic, whose economy had greatly suffered in the wake of the economic crises in various other emerging markets, defaulted on its sovereign debt.  That marked the start of litigation which has been going on for some 13 years.

Through debt restructurings in 2005 and 2010, some 93% of holders of Argentine bonds surrendered their original bonds in exchange for new bonds.  These holders are referred to as the Exchange Bondholders.  The Exchange Bondholders suffered very substantial losses on the exchange.  In effect, they accepted between 25 and 29 cents on the dollar.

However, a minority of bondholders, holding about 7% of Argentine’s FAA bonds, refused to participate in the exchange and held on to their original bonds.  These holders came to be known as “the Holdout Creditors”. 

The Holdout Creditors obtained judgments against the Republic in New York but were unable to execute those judgments.  They then sought and obtained from the New York court an injunction restraining the Republic from making any payments to the Exchange Bondholders unless the Republic also makes rateable payments to the Holdout Creditors.  This injunction was granted to give effect to a controversial construction of a pari passu provision in the FAA.  If the Republic had abided by the injunction, the Holdout Creditors would have enjoyed a favourable position because they are owed principal, many years’ contractual interest, and post judgment interest, whereas the Exchange Bondholders are only owed interest on their bonds, issued years later, with principal not being repayable for many years.

On 24 June 2014, the Republic made an interest payment of more than €225 million to Exchange Bondholders holding Euro debt securities.  The payment was made to BNY Mellon as Trustee for the Bondholders into a BNY Mellon bank account with the Central Bank of Argentina.  However, BNY Mellon refused to pay the monies over to the holders of the Euro debt securities on the ground that it was prohibited from doing so by the New York injunction.

This state of affairs generated three more pieces of litigation.  First, the Holdout Creditors successfully applied to the New York court for an order that the Republic is in contempt of court. Second, certain Holdout Creditors, known as the Turnover Creditors, have applied in New York for an order that the monies paid by the Republic to BNY Mellon, or a rateable part thereof, be paid over to them.  Third, certain holders of the Euro securities, which are subject to English law and jurisdiction, applied in London for an interim declaration that the funds paid to BNY Mellon in Argentina are held on an English law trust for them.

Mr Justice David Richards granted an interim declaration that the sum of €225 million transferred by the Republic of Argentina to the account of the trustee with Banco Central de la República Argentina and still held to the credit of that account is held for the relevant Exchange Bondholders on the trusts declared by a Trust Indenture between the Republic as Issuer and The Bank of New York as trustee dated as of 2 June 2005 and subsequently amended, such trust being governed by English law (as would be any other funds paid to it in attempted satisfaction of the Republic’s payment obligations under the Euro Debt Securities).

The judgment is here.