Law Debenture Trust Corporation Plc v Elektrim SA & Anor

A contractual valuation mechanism must be construed in accordance with its language, structure and commercial purpose. A direction to determine fair market value “by reference to” consolidated accounts does not make those accounts conclusive. Valuers may make reasonable adjustments where accounting treatment would distort fair market value.

The involvement of a hypothetical third party does not automatically require damages to be assessed as a percentage loss of a chance. Courts should determine legal questions and make their best assessment of concrete value. Probability-weighted alternative scenarios may be suitable where an outcome depends on negotiations or other extra-legal decisions, but require caution in commercial valuation cases.

The Trustee held covenants securing bonds issued by Elektrim Finance BV and guaranteed by Elektrim SA. The bond conditions entitled Bondholders to a Contingent Payment calculated principally by reference to the fair market value of Elektrim’s assets. Elektrim failed to operate the contractual valuation machinery.

Sales J awarded the Trustee €153,857,683 in damages. Elektrim appealed against liability and the valuation of interests in telecommunications and electricity-generating businesses. The Trustee cross-appealed for an award of up to €655,160,781. The central issues concerned the construction of the Contingent Payment provisions, the proper valuation methodology, and whether damages should be assessed by probability-weighting several possible decisions of the hypothetical investment-bank valuers.

1. Both the appeal and the cross-appeal were dismissed. The joint judgment held that actual redemption of the bonds by the Repayment Maturity Date was not a condition precedent to Elektrim’s obligation to make the Contingent Payment. The second sentence of condition 6(k) governed distribution and calculation mechanics. It was subordinate to the unconditional payment obligation in its first sentence and clause 2.3 of the Trust Deed. Elektrim’s construction would allow its own failure to redeem the bonds to defeat the agreed commercial benefit.

2. The requirement to determine fair market value “by reference to” consolidated accounts did not make the balance sheet an immutable inventory. The controlling objective was to determine the fair market value of Elektrim’s assets. Valuers could and, where necessary, had to adjust the accounts, consider their notes and take account of relevant events occurring before the valuation date. They nevertheless had to comply with the express direction to disregard contingent liabilities.

3. Applying the International Accounting Standards definition, an asset was a resource controlled by an entity from which future economic benefits were expected to flow. The relevant question was where those benefits would go, rather than whether English law would technically classify the holding as a trust. The disputed PTC shares were therefore an asset of ET rather than Elektrim.

4. The PTC shares were properly valued at €1.45 billion by reference to the sufficiently advanced draft settlement with the option holder. Book cost understated their value, while €2.4 billion represented an unencumbered interest which neither relevant company could sell. The judge was entitled to use the negotiated offer as evidence of what a hypothetical purchaser would pay.

5. The mere need to assess what third-party valuers would have done did not make the claim one requiring percentage-based loss-of-a-chance damages. The court should decide legal questions for itself and make its best assessment of a concrete asset’s value. Constructing a table of probabilities for several possible valuation approaches would be over-complicated and no more reliable. Elektrim’s new objections to the valuation of the PAK shares had not been put to the expert below and could not be raised for the first time on appeal.

1. Court of Appeal (Civil Division): Elektrim’s appeal and the Trustee’s cross-appeal were dismissed by a joint judgment: [2010] EWCA Civ 1142.
2. High Court of Justice, Chancery Division: Sales J ordered Elektrim to pay the Trustee €153,857,683, before interest and costs, as damages for breach of the bond conditions. No citation is stated in the judgment.