Concord Trust v Law Debenture Trust Corporation Plc
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD SCOTT OF FOSCOTE,LORD HUTTON,LORD WALKER OF GESTINGTHORPE |
| Judgment Date | 28 April 2005 |
| Neutral Citation | [2005] UKHL 27 |
| Court | House of Lords |
| Date | 28 April 2005 |
[2005] UKHL 27
The Appellate Committee comprised:
Lord Steyn
Lord Hoffmann
Lord Hutton
Lord Scott of Foscote
Lord Walker of Gestingthorpe
HOUSE OF LORDS
I have had the advantage of reading the opinion of my noble and learned friend Lord Scott of Foscote. I agree with it. For the reasons given by Lord Scott I would make the order which he proposes.
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Scott of Foscote. For the reasons he gives, with which I agree, I would make the order which he proposes.
My Lords,
I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Scott of Foscote. I agree with it and for the reasons which he gives I would make the order which he proposes.
The Issues
My Lords,
This appeal requires two issues to be decided. The first is a short point of construction of Condition 12 of the terms ("the Bond Terms") applicable to a Eurobond issue of _510 million 2 per cent bonds ('the Bonds') which fall due for payment in December 2005. The Bonds were issued in 1999 by Elektrim Finance BV ("Elektrim Finance") and guaranteed by Elektrim Finance's parent company, Elektrim SA. When it is not necessary to distinguish between the two companies I will, for convenience, refer to them together as "Elektrim". In November 2002 the Bonds were restructured, the principal sum outstanding being increased to the _510 million. The Bond Terms, as amended, were set out in the 2nd Schedule to a Trust Deed dated 15 November 2002. The parties to this Trust Deed were Elektrim and the Law Debenture Trust Corporation plc ("the Trustee"). The Bonds are marketable securities, traded internationally. There is no contractual privity between Elektrim on the one hand and the bondholders on the other hand. The covenants by Elektrim for payment of the principal sum and interest due on the Bonds were covenants entered into with the Trustee (see clauses 2, 7 and 8 of the Trust Deed). Concord Trust holds some 10 per cent in value of the Bonds.
Condition 12 of the Bond Terms provides that:
"The Bond Trustee at its discretion may, and if so requested in writing by the holders of at least thirty per cent in principal amount outstanding of the Bonds or if so directed by an Extraordinary Resolution of the Bondholders shall (subject in each case to being indemnified to its satisfaction), give notice to the Issuer and the Guarantor that the Bonds are, and they shall immediately become, due and repayable at their relevant redemption value, together with the accrued Interest Amount as provided in the Bond Trust Deed, upon the occurrence of any of the following events ("Events of Default") …".
Fourteen potential "Events of Default" were described. The second of them included a failure by Elektrim "to perform or observe" any of its obligations under the Bonds or the Trust Deed (see para.(ii) of Condition 12). However a proviso to Condition 12 has the result that a paragraph (ii) failure does not qualify as an Event of Default unless the Trustee has certified that the failure "is materially prejudicial to the interests of the Bondholders."
The first issue is whether, on the true construction of Condition 12 and in the events which have happened (which I will later describe), the Trustee is obliged (subject to its indemnity rights) to give a Condition 12 notice of acceleration to Elektrim. On this issue Concord is the appellant and the Trustee is the respondent. The Trustee's contention is that it cannot come under an obligation to give a notice of acceleration if Elektrim challenge the existence of the Event of Default proposed to be relied on.
The second issue bears upon the first. The Trustee and Concord agree that the Trustee can insist on being "indemnified to its satisfaction" against the costs of meeting a challenge by Elektrim to the existence of the Event of Default in reliance on which the proposed notice of acceleration would be given, or indeed, a challenge by Elektrim to the validity of the notice of acceleration on any other ground. But the Trustee contends that it is entitled also to be indemnified to its satisfaction against its possible liability in damages to Elektrim if it should transpire that the notice of acceleration was invalid and that the service of the notice on Elektrim has caused Elektrim to suffer commercial or financial loss. Concord, however, contends that a cause of action in damages for loss caused to Elektrim by the giving of an invalid notice of acceleration is a mirage. Absent fraud or bad faith, which no one has suggested, the feared cause of action could not, in law, arise. So the second issue is whether the Trustee is entitled to insist on an indemnity to cover its possible exposure to an action by Elektrim for damages.
Both issues have been presented as issues of some public importance. Your Lordships were told that the Bond Terms and the Trust Deed were in a form fairly standard for bond issues. The extent of the obligation resting on a bond trustee where an event of default is thought by the trustee and the bondholders to have occurred but the existence of which is disputed by the issuer may arise, and perhaps has already arisen, in relation to other bond issues. Similar issues might arise in relation to syndicate bank loans. Certainty as to the extent of the rights and obligations of the various participants in these important commercial transactions is highly desirable. I would respectfully agree.
The facts
Neither of the two issues, at least in the present case, is a complex one. The relevant facts have been fully set out both in the judgment at first instance of the Vice-Chancellor, Sir Andrew Morritt, and in the judgment of Jonathan Parker LJ in the Court of Appeal and it is unnecessary for me to do more than refer to the essentials.
The importance to the bondholders of the financial substance and stability of Elektrim SA, the guarantor under the Trust Deed of Elektrim Finance's obligations, is obvious. So it is not a matter of surprise that Condition 10(d) of the Bond Terms entitled the Trustee in certain circumstances to require the supervisory board of Elektrim SA to appoint to its management board a person nominated by the holders of not less than 25 per cent in value of the Bonds. Condition 10(d) has elaborate provision as to the status of this nominated director and as to what steps Elektrim SA can take if it considers his performance on the board to be unsatisfactory. It is unnecessary to refer to any details other than an express provision that:
"Material decisions of [Elektrim SA] and all financial decisions relating to amounts exceeding _25,000 may only be taken with the consensus of the entire Management Board."
Pursuant to Condition 10(d) a Mr Piotr Rymaszewski was nominated by the bondholders and appointed to Elektrim SA's management board. But in June 2003 Elektrim SA suspended Mr Rymaszewski and invited the bondholders to nominate someone else for appointment. The bondholders took the view that Elektrim SA had had no right to suspend Mr Rymaszewski, and that his suspension constituted a breach of the obligations of Elektrim SA under Condition 10(d). The Trustee presumably agreed with this view for it gave notice to Elektrim SA on 24 July 2003 requiring Elektrim SA to remedy the breach. Elektrim SA did not do so and Mr Rymaszewski has remained suspended. Subsequent to Mr Rymaszewski's suspension Elektrim SA entered into transactions that, under Condition 10(d), required the consensus of the whole of the management board. But the suspended Mr Rymaszewski was unable to, and did not, participate in the decisions approving these transactions.
It is evident that the Trustee was not sure whether the continued suspension of Mr Rymaszewski from Elektrim's board of management constituted an Event of Default "materially prejudicial" to the interests of the bondholders for Condition 12 purposes. A committee of bondholders, including Concord and representing some 40 per cent in value of the bondholders, contended that it was and that the Trustee should certify an Event of Default. So the Trustee commenced proceedings in the Chancery Division asking for directions and a declaration as to whether it was entitled to certify that the suspension of Mr Rymaszewski was an Event of Default that was materially prejudicial. Three bondholders, one of them Concord, were joined as representative defendants.
The Trustee's action was heard by Peter Smith J. He gave judgment on 16 February 2004 and held that the suspension of Mr Rymaszewski was a breach of Condition 10(d) materially prejudicial to the interests of the bondholders and that the Trustee could so certify without the need for any further factual investigation. Peter Smith J made a declaration to that effect. It is important to be clear as to the effect of Peter Smith J's declaration. The declaration settled, as between the Trustee and the bondholders, the question whether the suspension of Mr Rymaszewski was a breach of Condition 10(d), the question whether that breach was an Event of Default within paragraph (ii) of Condition 12 and the question whether that Event of Default was "materially prejudicial to the interests of the bondholders." Peter Smith J's declaration gave an affirmative answer to each of these questions. But on none of these questions did Peter Smith J's declaration bind Elektrim. Elektrim had not been party to the proceedings.
On 17 February 2004 the Trustee notified Elektrim that Mr Rymaszewski's suspension constituted a...
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