Madison Pacific Trust v Shakoor Capital: A More Nuanced Approach To Illegality?

• Published date: 03 August 2020
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Quadrant Chambers
• Author: Ms Emily Saunderson

In Madison Pacific Trust Limited v (1) Shakoor Capital Company and (2) Joint-Stock Company Commercial Bank Privatbank [2020] EWHC 610 (Ch), the court considered whether the trustee of securitised loan notes could pay only certain of the beneficiaries of the notes having regard to the pari passu distribution provisions in the relevant trust deed in circumstances where the underlying loans were tainted by illegality. Emily Saunderson considers the implications for findings of illegality in connection with loans and securitised notes.

The issue that arose in Madison Pacific Trust Limited v Shakoor Capital Company, was whether the trustee of loan notes (Notes), the proceeds of which had been loaned to the second defendant bank (Privatbank) by the note issuer, could legitimately distribute sums recovered from Privatbank to some but not all of the noteholders on the basis that the actions of some of the noteholders (those to whom it was proposed repayments would not be made) had resulted in the loans being tainted by illegality which also infected the Notes.

The Notes were issued by a UK orphan special purpose vehicle further to two trust deeds (Trust Deeds), which were in materially similar terms. The claimant (Madison) was the trustee. The first series of Notes was issued in 2010 in the sum of US$200m, and the Notes were due for repayment in January 2018. The second series of Notes was issued in 2013 in the sum of US$175m; the Notes were due for repayment in February 2018.

The funds raised by the Notes were loaned by the issuer to Privatbank further to two loan agreements: one for US$200m in September 2010, and one for US$175m in February 2013 (Loan Agreements). The issuer charged and assigned by way of security its interest pursuant to the Loan Agreements to Madison.

Payment under the Notes was dependent on the extent to which the Loans were repaid. The noteholders would only be repaid in full if Privatbank repaid the Loans.

The Loan Agreements provided that disputes arising out of or in connection with them were subject to arbitration in London in accordance with London Court of International Arbitration rules.

The Arbitration

The Loans were not repaid, and Madison, enforcing its security, sought arbitration awards against Privatbank for repayment. In taking this action, Madison acted further to instructions and indemnification by specific holders of interests in the Notes (Instructing Group).

One of the bases upon which Privatbank defended the arbitral...