Concord Trust (Original Appellants and Cross-respondents) v. Law Debenture Trust Corporation plc (Original Respondents and Cross-appellants)

A bond trustee’s contractual obligation to accelerate bonds may arise once the relevant event of default has been established between the trustee and bondholders and the requisite request has been made. The issuer’s continuing challenge does not suspend that obligation. The issuer may instead seek an interim injunction.

A trustee entitled to satisfactory indemnification may require protection against litigation costs and other risks which are more than fanciful. It cannot demand indemnification for damages claims which are not reasonably arguable. An invalid acceleration notice has no contractual effect and, without an applicable express or implied term, does not create contractual liability. A notice given in good faith pursuant to the trustee’s obligations does not, merely because it proves invalid, constitute negligence or unlawful means for the economic torts.

Elektrim Finance BV issued internationally traded bonds guaranteed by Elektrim SA under a trust deed with Law Debenture Trust Corporation plc as trustee. Concord Trust held about 10 per cent of the bonds. After Elektrim SA suspended a director nominated by the bondholders, the Chancery Division declared, as between the trustee and bondholders, that the suspension was a materially prejudicial event of default.

Bondholders holding the required proportion requested acceleration. The trustee refused without an indemnity covering possible liability to Elektrim for losses caused by an invalid notice. The Vice-Chancellor dismissed Concord’s application to compel acceleration. The Court of Appeal, [2004] EWCA Civ 1001, rejected the asserted damages risk but required the existence of the event of default to be determined against Elektrim before acceleration.

The issues were whether Elektrim’s challenge postponed the trustee’s mandatory obligation and whether the trustee could insist upon indemnification against possible damages liability.

1. Appeal allowed and cross-appeal dismissed unanimously. Lord Scott of Foscote delivered the leading opinion. Lord Steyn, Lord Hoffmann, Lord Hutton and Lord Walker of Gestingthorpe agreed.

2. Per Lord Scott, Condition 12 distinguished the trustee’s discretionary power from its mandatory obligation. Once a materially prejudicial event of default had been established between the trustee and bondholders, and the required proportion of bondholders requested acceleration, the trustee was obliged to give the notice, subject to satisfactory indemnification. The issuer’s refusal to accept the event of default did not prevent that obligation from arising.

3. Per Lord Scott, the dispute between the trustee and bondholders concerning the trustee’s duty was distinct from any dispute between the trustee and Elektrim concerning the notice’s validity. Elektrim could seek an interim injunction and establish the usual balance-of-convenience grounds. Its untested challenge could not suspend the trustee’s duty. This construction was reinforced by the indemnity provision, whose evident purpose included protecting the trustee against challenges by the issuer or guarantor.

4. Per Lord Scott, the trustee could require indemnification against the costs of defending a challenge and could proceed on the footing that the challenge might succeed. It could not reasonably require indemnification against damages unless such liability was more than fanciful.

5. Per Lord Scott, no damages claim was reasonably arguable. The trust deed contained no express promise against an unjustified declaration of default or an invalid acceleration notice. An implied promise was unnecessary for business efficacy because an invalid notice would have no contractual effect. A negligence claim was hopeless where the trustee acted pursuant to the declaration and its resulting obligation. Conspiracy also required an intention to injure and unlawful means, neither of which was arguable. A notice given in the bona fide belief that it was valid was likewise incapable, without more, of constituting unlawful interference with business.

6. Per Lord Scott, no evidence established a material difference between English law and any potentially applicable foreign law. The House therefore presumed no relevant difference. The Court of Appeal’s directions were set aside. The trustee was declared forthwith obliged to accelerate the bonds upon receiving a satisfactory costs indemnity; any remaining issue concerning that indemnity was to be determined at first instance.

1. House of Lords: Allowed Concord’s appeal, dismissed the trustee’s cross-appeal, set aside the material directions of the Court of Appeal and declared that the trustee was obliged to give the acceleration notice upon receiving a satisfactory costs indemnity.

2. Court of Appeal: In [2004] EWCA Civ 1001, rejected the trustee’s assessment of potential damages liability but withheld the requested declaration. It directed the trustee to commence proceedings involving Elektrim to determine whether an event of default had occurred and suspended the acceleration obligation meanwhile.

3. High Court, Chancery Division: The Vice-Chancellor dismissed Concord’s application, holding that the trustee’s refusal to accept the offered indemnity was not unreasonable.

4. High Court, Chancery Division: In earlier proceedings, Peter Smith J declared, as between the trustee and bondholders, that the director’s suspension was a materially prejudicial event of default. Elektrim was not a party and was not bound by that declaration.