Concord Trust v The Law Debenture Trust Corporation Plc

A trustee given contractual discretion to decide whether an indemnity is satisfactory is subject to limited judicial review. The court may intervene only where the trustee acts dishonestly, considers the wrong question, fails to apply its mind to the relevant question, or reaches a conclusion so perverse that no reasonable trustee could have reached it.

The burden lies on the party challenging the decision. A trustee is entitled to protect its own right of indemnity, even where that conflicts with beneficiaries’ interests. Where potential liability is uncertain, adequacy may be assessed on reasonable, non-fanciful worst-case assumptions. A wrongful acceleration may itself constitute a contractual breach capable of giving rise to substantial damages.

The claimant represented an ad hoc committee of bondholders. The defendant was trustee under a trust deed governing €510 million bonds issued by Elektrim Finance BV and guaranteed by Elektrim SA.

Following an earlier judgment concerning an event of default, more than 30 per cent of the bondholders requested acceleration. The trustee required an indemnity to its satisfaction before acting. It rejected indemnities offered by Concord and Elliott Associates LP, principally because the liability was not joint and several and the financial information did not provide sufficient comfort.

Concord sought a declaration that the trustee was obliged to accelerate the bonds, arguing that its conclusion was irrational and that the trust deed protected it against potential liability. The central issue was whether the trustee had acted unreasonably in the Wednesbury sense in finding the indemnities unsatisfactory.

1. The application was dismissed. The relevant question was not whether the trustee was justified in demanding a €1 billion letter of credit for 12 years, but whether it was Wednesbury unreasonable to conclude that the indemnities actually offered on 23 and 28 April 2004 were unsatisfactory.

2. Following Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 and the authorities summarised in Ludgate Insurance Company Ltd v Citibank NA [1998] Ll.L.R. 221, the court would interfere only in extremely limited circumstances. The burden was on Concord to establish unreasonableness. There was no requirement for the trustee to prove that its conclusion was reasonable.

3. The right to an indemnity was conferred for the trustee’s own protection and took priority over the interests of beneficiaries. The trustee was entitled to consider a reasonable worst-case scenario, provided the assumptions were not fanciful. A wrongful acceleration, if no event of default existed, would constitute a breach of the contractual relationship between the trustee and Elektrim and could expose the trustee to substantial damages.

4. The court considered that the possible consequences of acceleration, including economic impairment and loss connected with the PTC shareholding, could not be dismissed as fanciful. On the information available, a wrongful acceleration could expose the trustee to a claim by Elektrim in the region of €876 million.

5. Clauses 16.5, 17.1(G), 17.1(J) and 20.1 of the trust deed did not provide a clear and unambiguous defence. The indemnity provisions and the trustee’s contractual discretion were not overridden by the request of more than 30 per cent of bondholders. The offered indemnities were inadequate because they lacked joint and several liability and sufficient financial security. The trustee’s conclusion could not therefore be attacked as Wednesbury unreasonable.