Third Party Debt Orders: Court provides guidance on determining the situs of a debt, and when a debt becomes “due or accruing due”

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management - Third Party Debt Orders

05-09-2018

Hardy Exploration & Production (India) Inc v Government of India [2018] EWHC 1916 (Comm)

Facts of the case

– A Third Party Debt Order (“TPDO”) freezes (on an interim application) and then seizes (once the TPDO is made final) amounts held by a third party which are owed to a judgment debtor, to the benefit of a judgment creditor.

– For a TPDO to be granted: 

– the third party debtor must be present in the jurisdiction. As regards a company, it is considered present if it is incorporated in the jurisdiction or if it carries on business there;

– the “situs” of the third party’s debt (i.e. its location, for legal purposes) must also be within the jurisdiction or, if it is situated in another jurisdiction, the law applicable to the debt must regard payment pursuant to a final TPDO as discharging such debt; and

– the debt must be “due or accruing due” to the judgment debtor.

– Here, an oil and gas exploration company (“C”) obtained an arbitration award against the Government of India (“D”). C then made an application for the enforcement of that award against an English company (“TP”), which was said to owe D a debt under Guarantee Fee Agreements (the “GFAs”).

– The GFAs did not contain an express choice of law provision, but did contain Indian jurisdiction and arbitration clauses. The GFAs also provided for annual payments from TP to D.

– An interim TPDO was granted in C’s favour, which TP applied to be discharged.

– The grounds of TP’s application were that: 

– bethe situs of the debt under the GFAs was India, not England and Wales; and

– TP’s debt to D was not “due or accruing due” at the time the interim TPDO was made or served, which was before the annual date for TP’s payment under the GFAs. 

The decision

The situs of TP’s debt 

– The Court found that it did not have jurisdiction to grant the TPDO on the basis that:

– because the GFAs contained Indian jurisdiction and arbitration clauses, the debt arising under them was recoverable in India, and the presumption in favour of English jurisdiction (as a result of TP being an English company) was displaced; and

– there was a risk that the Indian courts would not recognise the TPDO as discharging TP’s debt to D.

Was TP’s debt “due or accruing due”?

– The Court held that a third party’s debt would be “due or accruing due” for the purposes of CPR 72.2 where there was an “immediate and unconditional obligation” to pay the relevant sum,  “whether payment is required instantly or in the future… For this purpose, it does not matter if the amount to be paid is not yet quantifiable, provided that there is an existing obligation in respect of the debt”.

– Here, on the wording of the GFAs, D’s causes of action against TP: 

– had not arisen until after the interim TPDO was made; and

– depended on a contingency, namely that the principal amount of borrowing and accumulated interest remained outstanding when the date for payment arose.

– For these reasons, the Court held that TP’s debt to D was not “due or accruing due” at the time the interim TPDO was made or served.

Analysis and practical advice

– The judgment provides a useful summary of the principles applicable to the determination of the situs of the debt, in particular:

– the situs of the debt must be determined according to English conflict of law rules;

– a debt is situated in the country where it is properly recoverable or enforced;

– the general presumption is that this is in the place of residency or domicile of the debtor. However, this presumption can be displaced by evidence that another jurisdiction is applicable, e.g. if  an action must be brought against the debtor in another jurisdiction because of an exclusive jurisdiction clause; and 

– the application of the law governing the debt will determine whether or not the relevant debt has been discharged. Expert evidence may be required in this regard.

– For financial institutions with branches overseas with credit balances in accounts in the name of the judgment debtor, it will be important to consider the governing law of the account under the terms and conditions as this will be important in establishing the situs of the debt.

– Debt obligations should also be carefully reviewed to ensure that the debt is properly due or accruing due.