Concord Trust v The Law Debenture Trust Corporation Plc

Factual and Procedural Background

By a Trust Deed dated 15th November 2002, between Company A (the Issuer), Company B (the Guarantor), and the Defendant (the Trustee), the Trustee was appointed to act for bondholders in relation to a £510 million bond issue due 2005. The bonds contained a provision allowing the Trustee, at its discretion or upon request by holders of at least 30% of the bonds, to declare the bonds immediately due and repayable upon the occurrence of specified Events of Default, provided the Trustee was indemnified to its satisfaction.

One such Event of Default was a failure by the Issuer or Guarantor to perform obligations under the bonds or Trust Deed, certified by the Trustee as materially prejudicial to bondholders' interests.

In February 2004, a judgment by Judge [Last Name] declared breaches by the Issuer and Guarantor, enabling the Trustee to certify an Event of Default without further investigation. The Trustee so certified on 17th February 2004. Subsequently, the Trustee received requests from over 30% of bondholders to accelerate the bonds but required an indemnity before issuing such notice.

Correspondence ensued between solicitors for the Trustee and those representing an ad hoc committee of bondholders holding about 45% of the bonds, led by the Plaintiff, concerning the adequacy of the indemnity offered.

The Plaintiff issued a claim seeking a declaration that the Trustee was obliged to give notice accelerating the bonds forthwith. The Trustee contended that the indemnity offered was unsatisfactory and that it was under no obligation to accelerate.

The background includes complex shareholding structures involving the Guarantor and its subsidiaries, and a separate agreement with a third party that could trigger share purchase rights upon the Guarantor becoming "economically impaired," a risk linked to acceleration of the bonds.

The bonds had a prior history of default and restructuring, with insolvency proceedings in the Guarantor's jurisdiction and eventual restructuring into the current bonds. The Trust Deed contains detailed provisions governing the Trustee's powers, indemnities, and the rights of bondholders, including the power to appoint a nominated director to the Guarantor's management board, which was at issue in the original breach.

Following the breach and certification of default, the Trustee sought indemnities to cover potential liabilities arising from acceleration, including possible claims by the Guarantor or third parties. The Plaintiff's offered indemnities were rejected by the Trustee as unsatisfactory, leading to this litigation.

Legal Issues Presented

1. Whether the Trustee is obliged to give notice to the Issuer and Guarantor declaring the bonds immediately due and repayable despite not being satisfied with the indemnity offered.
2. Whether the Trustee's refusal to accept the indemnity proffered by the Plaintiff was unreasonable or irrational in the Wednesbury sense.
3. The scope and effect of the Trustee's discretion under the Trust Deed and bonds regarding requiring indemnity before acceleration.
4. The potential liability and quantum of damages the Trustee might face in the event of wrongful acceleration.
5. The applicability and effect of indemnity and exclusion clauses in the Trust Deed in protecting the Trustee from liability.

Arguments of the Parties

Appellant's (Plaintiff's) Arguments

• The Trustee is obliged to accelerate the bonds once a request by holders of over 30% has been received and an Event of Default certified.
• The Trustee's conclusion that the indemnity offered was unsatisfactory is so unreasonable and irrational that it should be disregarded.
• The Trustee's demand for a letter of credit from a major clearing bank is wholly unreasonable and disproportionate.
• The Trustee should accept counter-indemnities from individual bondholders rather than insisting on joint and several liability.
• The Trustee's assessment of potential liability and required indemnity is excessive and speculative.

Respondent's (Trustee's) Arguments

• The Trustee is entitled to require an indemnity to its satisfaction before accelerating the bonds, as per the Trust Deed and bond conditions.
• The indemnity offered by the Plaintiff and associated parties was not joint and several and lacked sufficient financial security.
• There is a real risk of substantial liability, potentially up to £876 million or more, arising from wrongful acceleration claims by the Guarantor or related parties.
• The Trustee's discretion to reject indemnities is subject to Wednesbury reasonableness, and its decision was reasonable given the worst-case scenario.
• Exclusion and indemnity clauses in the Trust Deed do not clearly protect the Trustee from such third-party claims, so requiring adequate indemnity is justified.
• The Trustee is not obliged to accelerate the bonds without adequate protection, and the Plaintiff bears the burden of proving unreasonableness.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by outlining the contractual framework in the Trust Deed and bond conditions, emphasizing the Trustee’s discretion to require indemnity before accelerating the bonds. It recognized that the Trustee’s discretion is subject to the Wednesbury standard of reasonableness, meaning the court will only intervene if the Trustee’s decision is irrational or perverse.

The court considered the factual background, including the prior judgment certifying an Event of Default and the potential consequences of acceleration, notably the risk that acceleration might trigger a contractual right for a third party to buy shares held by subsidiaries at book value, potentially causing significant financial loss.

The court analyzed the indemnity clauses and exclusion provisions relied upon by the Plaintiff, concluding that these do not clearly protect the Trustee from claims by the Guarantor arising from wrongful acceleration. The indemnity clauses primarily cover third-party claims and liabilities properly incurred, which would not include liabilities arising from the Trustee’s own breach.

In assessing the indemnity offered by the Plaintiff, the court took into account confidential financial information and the Trustee's concerns about the sufficiency of the indemnity, including the lack of joint and several liability and uncertainties about the financial standing of the indemnifiers.

The court concluded that the Trustee’s requirement for a more robust indemnity, potentially including a letter of credit from a major clearing bank, was not unreasonable given the magnitude and duration of potential liabilities under a worst-case scenario.

The court rejected the Plaintiff’s argument that the Trustee’s refusal to accept the indemnity was irrational or unreasonable, finding that the Trustee’s decision fell within the scope of reasonable discretion under the Wednesbury standard.

Holding and Implications

The court DISMISSED the Plaintiff’s application seeking an order compelling the Trustee to accelerate the bonds without a satisfactory indemnity.

The direct effect of this decision is that the Trustee is entitled to withhold acceleration of the bonds until it receives an indemnity to its satisfaction, protecting it against potential claims arising from acceleration. No new legal precedent was established; the decision reaffirms established principles regarding the scope of contractual discretion and the Wednesbury standard of reasonableness applied to trustees’ decisions.