Cry for Argentina: Permission to Appeal 1.3B Euro Suit on One Condition

On 22 February, the London Court of Appeal ruled in Palladian Partners LP & Ors v. The Republic of Argentina & Anor [2024] EWCA Civ 139 that the Republic of Argentina (the Republic) must pay a 310-million-euro deposit in order for a full appeal to be heard over a securities-related litigation. 

In January, the Republic sought permission to appeal to the Court of Appeal over a 1.33-billion-euro lawsuit brought against it by four hedge funds – HBK Master Fund, Hirsh Group, Virtual Emerald International, and Palladian Partners (the Respondents) – that held around 48% of GDP-linked securities the Republic issued between 2005 and 2010. The Republic lost the case in the High Court but was granted permission to appeal by Lord Justice Stephen Phillips subject to the condition that the Republic pay approximately 20% of the judgment sum to a trustee to be held in escrow pending determination of the appeal. The Republic had sought reconsideration of the imposition of the condition.

Test for the imposition of a condition

In his ruling, Lord Justice Phillips cited rule CPR 52.6(2)(b), which provides that an order giving permission to appeal may be made subject to conditions. Whilst that rule does not identify the test to be applied, CPR 52.18(1)(c) does provide that the appeal court may impose or vary conditions upon which an appeal may be brought if there is “compelling reason” to do so. In Hammond Suddard Solicitors v. Agrichem International Holdings Ltd. [2001] EWCA Civ 2065, Sunico A/S & Others v. The Commissioners for HMRC [2014] EWCA Civ 1108 and other subsequent judgments, the Court of Appeal proceeded on the basis that the compelling reason requirement also applies to the imposition of a condition under CPR 52.6(2)(b).

Specifically, Lord Justice Phillips considered and applied the principles in Sunico on the defensibility of the imposition of a payment obligation as a condition to appeal. In that case, the Judge stressed that the existence of a compelling reason was only a necessary rather than a sufficient factor. The imposition of a condition remained at the Court's discretion.

The background facts

In 2001, the Republic defaulted on $80 billion of debt, at the time the largest sovereign debt default in history. As part of a re-structuring in January 2005 and again in 2010, creditors were offered GDP-linked securities in exchange for their existing nonperforming bonds at a rate of between 25% to 30% of the face-value of the securities they held. Approximately 91% of the aggregate value of nonperforming securities participated in the exchange.

Holdout creditors who did not accept the offer of an exchange took proceedings in the Southern District of New York (SDNY) to enforce the underlying debt. A settlement was eventually reached in 2016 but in January of this year the Republic faced the enforcement of a $16.1 billion judgment in different SDNY proceedings brought by investors. As to the state of its finances, the Republic argued that any payment condition would prove difficult to raise due to its worst economic crisis in decades and pose a significant burden on the Argentine population.

Was there a compelling reason to impose a condition?

Lord Justice Phillips did not accept the Republic’s argument that a compelling reason must arise from conduct in the case in question and that it was impermissible to consider wider issues and previous related conduct of the Republic.

His Lordship observed that the previous default and restructuring (at a significant discount) was the context in which the securities were issued, and the fact that it had again taken the holders of the securities many years to obtain judgment in relation to reference year 2013 (and declarations in relation to subsequent years) demonstrated that the pattern of default and delay had not been broken. Moreover, His Lordship noted that the Republic had not paid any of the judgment of the SDNY Court, nor complied with the conditions on a stay of execution pending appeal.

Lord Justice Phillips was particularly influenced by the fact that whilst the Republic was maintaining that it would pay the judgment if it lost its appeal(s), it had not identified how or when that payment would be made.

Lord Justice Phillips concluded that there was a very high risk that the Republic would find the funds to appeal both to the Court of Appeal and, if permitted, to the Supreme Court, would not pay the judgment if unsuccessful but would require the Respondents to engage in another lengthy and difficult enforcement process.

Therefore, His Lordship was satisfied that there was a compelling reason to impose the payment condition sought by the Respondents.

Discretion

Whilst Lord Justice Phillips understood and was sympathetic to the impact any additional financial burden would have on a distressed economy, he was unpersuaded by the evidence and argument as to irremediable harm on the population. The Republic had not identified what expenditure it would actually divert to paying the condition sum. Instead, the Republic had simply identified certain items of expenditure by way of comparison, being a tiny fraction of the overall national budget, but without stating that those items would be cut to fund the condition sum. Moreover, no reference had been made to other large items of expenditure, the reduction of which might have had less impact (or less immediate impact) on the population.

Finally, His Lordship did not accept that he was in any way constrained by the unconditional stay of execution granted by the Judge. The Judge had refused permission to appeal and was not considering the very different question of whether a condition should be imposed if permission was granted.

In all the circumstances, Lord Justice Phillips did not consider that he should decline to impose a condition, for which there was a compelling reason, as an exercise of his discretion. He reached that conclusion without taking account of the view he formed in granting permission as to the relative lack of merit of the appeal. Whilst that might have been relevant to the exercise of his discretion had he been more impressed by the Republic’s contentions in that regard, in the event it was neither necessary nor appropriate for him to express any view on the merits of the appeal.