When a restructuring agreement fails

What defences are available when a restructuring agreement fails to bring about the desired outcome for a lender?

Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC [2013] EWHC 3781 (Comm), [2013] All E (D) 79 (Dec)

The claimant (the Bank) brought a claim, against various defendants in respect of a debt for some US$432m, which it contended was due under a restructuring agreement, following an event of default. The Commercial Court held that, on the facts, the Bank was entitled to the sums claimed.

How did the issues arise in this case?

In Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC, the Bank provided banking and financial services in accordance with Islamic law. The Bank entered into a restructuring agreement (RSA) with one of the defendants after the bank discovered that it had been a victim of a long-standing major international trade receivables fraud. A lease of land held by a company owned by two of the defendants was the principal security provided to the Bank under the RSA. Three of the five defendants also granted guarantees for amounts owing under the RSA. Following an event of default under the RSA, the Bank claimed under the guarantees for amounts due and unpaid and also contended that it was entitled to trace monies applied in breach of fiduciary duty into shares in a company which was owned by one of the defendants. Flaux J gave judgment for the claimant bank in the sum of $432m.

What were the defendant’s arguments?

The defences put forward were extensive and many turned on the facts of the case. The key points were:

  1. contractual estoppel—the entire agreement clause in the RSA gave rise to a contractual estoppel and precluded the defendants from asserting estoppel by convention to give an alleged understanding between the parties contractual effect
  2. whether the Bank had breached the term implied into contracts that neither party shall prevent the other from performing the contract—the defendants asserted that the bank was behind the arrests of the defendants and the defendants were unable to fulfill their contractual obligations from prison, the court held this was not the case
  3. repudiatory breach of contract—the fact that the bank served a notice of default one day too early did not amount to a repudiatory breach of the RSA as (i)  the defendants did not act as though they considered the contract repudiated (ii)  the Bank served a notice of acceleration the following day at the point that it was entitled to do so meaning any breach was swiftly remedied and(iii) the RSA included a clause which stated that the guarantors' obligation to pay under the guarantee survived even if the underlying contract failed or was terminatedguarantor defences—no guarantor related defences were available to the defendants as they were also under a joint and several obligation to indemnify the Bank as principal debtors—in addition, the schedule to the RSA contained waiver of defences language
  4. mortgagee in possession—the Bank was not in breach of its duties as mortgagee in possession just because it did not sell the lease promptly or complete the project—a mortgagee is at all times free to consult their own interests alone and decide whether and when to exercise their power of sale

Accordingly the court upheld the bank’s claims and also allowed the tracing claim.

Why is the case important for R&I professionals?

It is unusual to see a case involving a breach of a restructuring agreement—often such matters result in an insolvency process where the borrower companies are under the control of an insolvency practitioner. Given the number of failed restructurings that have taken place over the last few years, cases like this will become more common. While this case was very fact specific, it does demonstrate that the court was keen to uphold the terms of the restructuring agreement as documented by the parties and allow the bank to pursue the guarantors of the restructuring agreement.

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