LONDON, 29 April 2004 – LAWFUEL – The Law News Network – In a significant development for bondholders and bank lenders, the House of Lords has found that a bond trustee can have no liability for service of a notice accelerating bonds, where the notice is invalid in the absence of an underlying Event of Default.
The action, Concord Trust v The Law Debenture Trust plc, arose when the trustee of EUR510 million bonds guaranteed by Polish company Elektrim S.A. refused to accelerate the bonds until indemnified by bondholders against substantial damages in case the notice of acceleration was invalid. The House of Lords confirmed yesterday that the only liability the trustee may face in English law is for the legal costs of establishing whether the notice of acceleration is valid.
In his leading judgment, Lord Scott of Foscote confirmed that a bond trustee has no discretion whether to accelerate the Bonds, but is obliged to do so once instructed by the requisite percentage of holders of the Bonds, and indemnified to its satisfaction. The fact that the bond issuer is challenging the existence of the Event of Default does not impact upon the mandatory obligation of a trustee to accelerate.
“I am pleased with the outcome,” said Gordon Singer of Elliott Advisors (UK) Limited, an affiliate of Concord Trust, the Elektrim bondholder which led the appeal. “The trustee’s demand for EUR1 billion of bank indemnities was obviously flawed. If this approach had been upheld, it would have been impossible to enforce the covenants in these bonds, or indeed in any English law bonds once the issuer had so much as challenged an obvious Event of Default.”
The proceedings followed repeated breaches of the bonds, including the suspension by Elektrim of a director nominated by bondholders under the terms of a November 2002 restructuring. This breach was found by Mr Justice Peter Smith in March 2004 to be “a material breach prejudicial” to the Bondholders’ interests but the trustee, although willing to certify an Event of Default, would not accelerate the bonds without substantial bank-backed indemnification.
“This is a landmark judgment for bondholders,” said James Roome of Bingham McCutchen, the international law firm which represented Concord Trust. “English law bonds are used worldwide but the mechanisms for enforcing compliance with covenants have never been tested. We are proud to have worked with Elliott and its fellow Elektrim bondholders in their efforts to clarify this important legal issue which will benefit market participants globally. Significantly, although the bonds were finally accelerated before the Lords could consider the appeal, the bondholders considered it worthwhile to continue with the appeal in order to resolve the confusion created by the first instance and Court of Appeal rulings.”
“As Lord Scott recognised in his judgment, the findings will have wide reaching consequences in the financial markets, including for syndicated bank loans, and will improve the recourse of banks and bondholders against defaulting debtors,” added Natasha Demetriou, litigation partner at Bingham McCutchen.
The Bingham McCutchen legal team representing Concord Trust was led by James Roome and Natasha Demetriou, assisted by Tamara Wilson and Sheena Buddhdev.