Concord Trust v Law Debenture Trust Corporation plc

The House of Lords construed Condition 12 of the Bond Terms and the related Trust Deed and held that, once the Trustee had properly certified that an Event of Default had occurred and the requisite proportion of bondholders had made a written request (or passed an Extraordinary Resolution), the Trustee was under a mandatory obligation to give a notice of acceleration to the issuer subject to receiving a satisfactory indemnity. The Trustee was entitled to require an indemnity to cover its legal costs in defending challenges by the issuer. However, the Trustee could not reasonably insist on an indemnity against speculative losses claimed by the issuer for an invalid notice because it was not reasonably arguable that the issuer could recover such damages in contract or in tort under English law absent fraud or bad faith.

This was an appeal concerning the scope of a bond trustee's duties and the extent of the indemnity it may require before giving an acceleration notice under Condition 12 of the Bond Terms and the Trust Deed. The Bonds were Eurobonds issued by Elektrim Finance BV and guaranteed by Elektrim SA. Bondholders had nominated a director, Mr Piotr Rymaszewski, to the guarantor's management board pursuant to Condition 10(d). Elektrim SA suspended that director; bondholders and the Trustee treated the suspension as a breach of Condition 10(d) and as an Event of Default under Condition 12(ii). The Trustee sought directions and obtained a declaration from Peter Smith J (declared as between the Trustee and the bondholders) that the suspension was a materially prejudicial Event of Default. The Trustee was asked to give a Condition 12 notice of acceleration by bondholders holding the requisite proportion, but declined to do so without an indemnity "to its satisfaction" because Elektrim contended no Event of Default had occurred and warned of potential loss.

Procedural posture: Concord Trust, holding about 10% of the bonds, sought a declaration that the Trustee was obliged to give the notice. The Vice-Chancellor dismissed Concord's claim. The Court of Appeal refused the relief sought but ordered proceedings to determine the issuer's challenge; Concord appealed to the House of Lords; the Trustee cross-appealed on the indemnity point.

Issues: (i) Whether Condition 12 obliged the Trustee to give the notice of acceleration once the Trustee and the bondholders had established, between themselves, that a materially prejudicial Event of Default had occurred and the requisite bondholder request had been made; (ii) whether the Trustee was entitled to require an indemnity covering potential damages claims by the issuer resulting from an invalid notice of acceleration.

Reasoning: The Lords held that the mandatory obligation imposed by Condition 12 (and related Trust Deed provisions) was owed to the bondholders and arose once the Trustee and bondholders had established the Event of Default between themselves and the bondholders had made the required request. The Trustee's obligation did not depend on the issuer accepting or being unable to challenge the Event of Default; if the issuer wished to avert an invalid notice it had available the remedy of an interim injunction. On the indemnity point the House reviewed possible causes of action the issuer might bring (breach of contract by implication, negligence, economic torts such as conspiracy and unlawful means interference) and rejected them as not reasonably arguable. The Trustee was therefore entitled to require indemnity to cover costs of litigation but not to insist on an indemnity to cover speculative damages claims which lacked reasonable legal foundation under English law. The Trustee's cross-appeal was dismissed.

Appeal allowed (Concord). The House of Lords held that, once the Trustee had certified a materially prejudicial Event of Default and the requisite bondholder request had been made, the Trustee was under a mandatory obligation to give a Condition 12 notice of acceleration subject to receiving a satisfactory indemnity. The Trustee was entitled to be indemnified for legal costs but not reasonably entitled to require an indemnity against speculative damages claims by the issuer because such claims were not reasonably arguable in contract or tort under English law; cross-appeal dismissed.

Appeal from the Court of Appeal ([2004] EWCA Civ 1001). First instance and interlocutory proceedings in the Chancery Division (Peter Smith J; Vice-Chancellor Sir Andrew Morritt). The Court of Appeal (Jonathan Parker LJ and others) made directions to determine the issuer's challenge before the Trustee was obliged to serve an acceleration notice; Concord appealed to the House of Lords.