Law Debenture Trust Corporation Plc v Acciona SA & Ors

Under a contractual event-of-default provision requiring certification that an event is materially prejudicial to the interests of the Bondholders, the trustee must identify a present breach, assess its consequences and determine whether those consequences materially prejudice the bondholders’ interests. The interests protected include contractual payment and redemption rights and ancillary protective rights, such as security and a right to appoint a director with veto powers. A breach does not automatically establish material prejudice, and a material breach does not necessarily do so. However, the total exclusion of bondholders from a negotiated management-board representation and veto right may itself be self-evidently materially prejudicial, without further investigation of resulting transactions.

The claimant trustee sought directions under a Part 8 claim form concerning the construction of Condition 12 of a trust deed governing euro bonds issued by Elektrim Finance BV and guaranteed by Elektrim SA. The defendants were bondholders and beneficiaries holding more than 30 per cent of the bonds.

Condition 10(d) gave qualifying bondholders the right to nominate a member of Elektrim’s management board. Material and financial decisions required the consensus of the entire board, giving the nominated director an effective veto. The nominated director was suspended in breach of Condition 10(d), and the breach continued after notice requiring remedy.

The central issue was whether that suspension was an event under Condition 12(ii) which was materially prejudicial to the interests of the bondholders, so that the trustee could certify the event without investigating the transactions undertaken during the suspension.

1. Construction of the proviso. The trustee had to be satisfied that there was a present breach, identify its consequences and determine whether the bondholders’ interests were materially prejudiced. The certificate was not a merely administrative act and could be issued only on information justifying that conclusion.
2. The relevant interests were not confined to the economic receipt of interest and repayment of capital. They included contractual rights under the bonds and ancillary rights protecting those entitlements, including security rights and the right to appoint a bondholder-nominated director.
3. A breach of Condition 10(d) was not automatically materially prejudicial. The trustee had to assess each breach and its consequences. Depending on the circumstances, a breach concerning nomination of a replacement director might not cause material prejudice if effective board representation continued.
4. The suspension of the nominated director was different. It amounted to a total repudiation of a fundamental protection. It excluded the bondholders from management participation and deprived them of their right to consider and veto transactions. That deprivation was presently and materially prejudicial, regardless of whether particular transactions ultimately benefited the bondholders economically.
5. The court therefore determined that the suspension was a breach of Condition 12(ii) materially prejudicial to the bondholders’ interests. The trustee could certify that fact without further investigation. An order was made in those terms.

First-instance decision on a Part 8 claim for directions. No earlier appellate decision is stated in the judgment.