OJSC Uralsib v (1) C.R.R & Ors Claim No: 11C00348 (case note)

Mishcon de Reya acts for a Russian Bank, OJSC Uralsib (“Uralsib”), in English proceedings concerning rights and obligations arising in connection with US$100 million of Loan Participation Notes (Issue Series No: 2008-26) (“Notes”) issued by a Dutch company, C.R.R. BV (the “Issuer”). Uralsib holds US$8 million of the Notes. The Notes give their holders (together the "Note Holders”) a sub-participation in a US$100 million loan (the “Loan”) made by the Issuer to a Russian company, CJSC Siberian Services Company (the “Borrower”). The effect of the relevant contractual documents is that the Issuer has no ongoing commercial interest in the Loan, with the Note Holders having the full benefits and/or risks associated with lending money to the Borrowers on the terms of the Loan.

Following a breach by it of the terms of the Loan, the Borrower negotiated with the Note Holders to seek to agree an amendment to the Loan. To this end the Borrower made a series of proposals to the Note Holders, each getting progressively worse from the Note Holders’ perspective in terms of repayment date and applicable interest. None of these proposals was accepted. However, on 5 July 2010, Note Holders holding in excess of 75% in value of the Notes passed a resolution to direct the Issuer to amend the Loan to incorporate terms that were more disadvantageous to the Note Holders than any of the previously rejected proposals (the “Decision”). The terms of the Decision included: the Borrower only being required to pay around one third of the annual interest due under the Loan for the duration of the term; the term of the Loan being extended by some 6 years; and removing many of those provisions in the Loan that prevented the Borrower creating encumbrances over its assets.

In the absence of any commercial rationale (stated or otherwise) for the Decision, Uralsib considers that it can only have been taken in order to benefit the Borrower at the expense of the Note Holders. Relying on the decision of Rimer J in Redwood Master Fund v TD Europe [2002] EWHC 2703 (Ch) as support for the proposition that majority decisions by Note Holders will be invalid if they are made in bad faith, for an improper purpose or constitute a fraud on the minority, Uralsib commenced proceedings against all of the Note Holders and all of the parties to the various relevant contractual documents (including the Issuer, the Trustee and the Borrower).

After service of the claim, the 6th Defendant, Banque Privée Edmond de Rothschild S.A. (“Rothschild”) , the 7th Defendant, Bank Julius Baer & Co. Ltd (“BJB”), and the 8th Defendant, UBS AG (“UBS”) identified themselves as being mere nominee holders of Notes. BJB and UBS stated in their Defences that whilst they had voted on 5 July 2010 in favour of the Decision they had done so on the instructions of their (un-named) underlying clients. The Defence of BJB (whose underlying client held the overwhelming majority of the Notes - some 78%) stated that whilst it had no interest in the Notes, it would put forward the case of its underlying client that the Decision was valid. As the proceedings progressed, BJB and UBS maintained that as a result of Swiss and Singaporean banking secrecy laws those institutions were precluded from identifying their underlying clients.

Uralsib argued that it was not open to BJB to put forward a positive case on behalf of its underlying client when that client would neither identify itself nor give standard disclosure; this would effectively allow the underlying client “to have one foot in the legal proceedings and one foot out”. BJB should either remove those aspects of its Defence that asserted a positive case on behalf of its underlying client, or its client should identify itself, give full disclosure and participate properly in the proceedings. At a hearing before Mr Justice Mann on 6 October 2011, the Court endorsed Uralsib's analysis and ordered that BJB and its underlying client should be put to such an election. In response, BJB elected to amend its Defence by removing any parts that asserted a positive case on behalf of its underlying client (which continued to refuse to reveal itself). However, BJB continued to plead (as a matter of logic) that the Court should not draw any inference that the Decision was taken in bad faith or for an improper purpose.

At a hearing on 16 December 2011, Mr Justice David Richards observed that in circumstances where no personal wrongdoing was being alleged against BJB, he did not see why BJB should be defending the action on behalf of its underlying client at all. The Judge agreed with Uralsib that BJB should not even be permitted to defend the proceedings on behalf of its underlying client by challenging the inferences of bad faith that Uralsib says should be drawn from the facts. The Judge ordered that BJB confirm within seven days whether or not it intended to defend the proceedings. In response, BJB confirmed that it would no longer take any part in the proceedings. As such, no Note Holder challenges the claims of bad faith, improper purpose and fraud on a minority advanced by Uralsib.

At a resumed hearing on 17 January 2012, Mr Justice David Richards awarded Uralsib all of its costs against BJB and UBS from the date of their Defences to the date of the hearing, sending a clear message to all beneficial holders of Notes (or similar instruments) that the Court will not allow beneficial owners of such instruments to exercise control of them by directing nominee Banks to vote in a particular way, only then to hide behind the banking secrecy shield provided by such nominees when the beneficial owners’ decisions and motivations are challenged. If such beneficial owners want to stand by their decisions then they can only do so by proper participation in the judicial process which includes both identifying themselves and giving full disclosure. In the absence of such participation, no third parties will be allowed to defend proceedings on their behalf.

Finally, although none of the Note Holders now challenges the claims being advanced by Uralsib in the proceedings, to obtain the declaratory relief it seeks Uralsib will need to obtain a judgment binding on the Note Holders, the Issuer, the Trustee and the Borrower . For the purposes of obtaining that judgment Uralsib will be relying on the Redwood Master Fund case as support for the proposition that the Decision that is the subject of these proceedings was made in bad faith, for an improper purpose, constitutes a fraud on the minority and is of no legal effect.