Law Debenture Trust Corporation Plc v Concord Trust & Ors Rev 1

Factual and Procedural Background

The Trustee of 510,000,000 2% Bonds issued by Company A and guaranteed by Company B held the bonds under a Trust Deed. The bonds, governed by bond conditions and secured under a Security Administration Agreement, were due for redemption on 15 December 2005. The Trustee declared an event of default in February 2004 but initially refused to accelerate the bonds, leading bondholders to commence proceedings which resulted in a judgment in their favor in April 2005. Subsequently, the Trustee gave notice of acceleration in January 2005, which Company B disputed, prompting further proceedings.

In February 2005, the Trustee seized certain funds pursuant to its security rights. In September 2005, summary judgment was given in favor of the Trustee, declaring the bonds due and payable with specified principal and interest amounts. However, the amount Company B was ordered to pay was reduced by a credit reflecting seized funds, which the Trustee retained for future liabilities rather than applying toward interest repayment as expected by bondholders.

In October 2006, Company B paid the Trustee a sum of 525 million, leading to the withdrawal of a bankruptcy petition in Poland, without agreement on redemption amount or outstanding litigation. Disputes involving Company B’s principal asset, a shareholding in a telecommunications company, have been ongoing in multiple jurisdictions. The Trustee claimed additional sums due and held funds without distribution despite bondholders’ requests, citing ongoing costs and contingent liabilities.

Company B sought release of securities, including shares in another company (PAK), which were refused by the Trustee. The PAK shares had not become valid security due to lack of required governmental consent. Company B alleged conversion of these shares by the Trustee and threatened legal action if not returned. The Trustee’s retention of the shares was supported by court orders in Poland, and the Trustee maintained that the shares were subject to ongoing legal proceedings.

The court was tasked with determining several issues including whether the bonds were redeemed upon payment, obligations to release security and distribute funds, entitlement of the Trustee to retain funds for costs and contingent liabilities, interest accrual, and validity of a bondholders’ resolution regarding payment priorities.

Legal Issues Presented

1. Whether there was redemption of the Bonds on payment by Company B of 525 million to the Trustee on 26 October 2006;
2. Whether the Trustee was on 26 October 2006 and/or is now obliged to release to Company B the security given under the Trust Deed;
3. Whether the Trustee was on 26 October 2006 and/or is now obliged to distribute the monies (less any sums retained or applied) to the bondholders;
4. Whether the Trustee is entitled to apply the monies (i) to discharge costs, expenses and remuneration already incurred and (ii) to provide a retention against future and/or contingent liabilities, and if so, in what amounts; and whether Company B remains liable to pay the Trustee's costs incurred since 26 October 2006;
5. Whether interest continues to accrue on the Bonds and/or has accrued since 26 October 2006 and if so, at what rate;
6. Whether a resolution passed by the bondholders directing the Trustee to pay the bondholder Group's costs in priority to any payments made to the bondholders generally was validly passed.

Arguments of the Parties

Appellant's Arguments (Company B)

• Company B contended that the payment of 525 million redeemed the bonds and thus the Trustee should release the securities.
• It argued that the PAK shares were never intended as security for the bond debt but only for a contingent payment obligation, and that the Trustee’s retention amounted to conversion.
• Company B submitted that the Trustee should not retain both the monies and the securities simultaneously and that partial redemption of securities should be allowed.
• Company B claimed to have made a valid tender of all sums due, including an offer to pay disputed amounts into escrow, which it contended should suffice to redeem the security and stop interest accrual.
• Company B challenged the Trustee’s calculation of amounts due and interest, and disputed the Trustee’s entitlement to retain funds for contingent liabilities without providing an accounting.
• It argued against the validity of the bondholders’ resolution to prioritize payment of certain costs.

Appellee's Arguments (Trustee and Bondholders)

• The Trustee maintained that the bonds had not been redeemed because payment to the Trustee does not equate to payment to the bondholders, especially where the Trustee retains sums for indemnity and contingent liabilities.
• The Trustee asserted a contractual and equitable right to retain securities and funds until all liabilities, including contingent costs and expenses, were satisfied.
• It argued that the PAK shares never became valid security due to lack of governmental consent, and that retention of the shares was lawful under Polish court orders.
• The Trustee contended that the offer to pay into escrow was not an unconditional tender and thus not a valid redemption.
• It upheld its right to withhold distribution until contingent liabilities were properly accounted for and secured.
• The bondholders supported the Trustee’s position and the validity of their resolution to prioritize payment of their committee’s costs.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
X v A [2000] 1 All ER 490	Trustee's right to indemnity out of trust funds including contingent liabilities and lien on the trust fund.	Confirmed the Trustee’s right to retain trust funds to cover contingent liabilities under the Trust Deed.
Concord Trust v The Law Debenture Trust Corporation plc [2004] EWHC 1216 (Ch)	Calculation of retention for contingent liabilities on reasonable worst case assumptions.	Applied to uphold the Trustee’s right to retain funds for contingent liabilities on a reasonable worst case basis.
Re Rudd and Son Ltd (1986) 2 BCC 98	Equitable right to redeem requires payment of all moneys secured including contingent liabilities.	Used to reject Company B’s argument that security could be redeemed before full payment of all liabilities.
The Law Debenture Trust Corporation plc v Elektrim Finance B.V [2005] EWHC 1999 (Ch)	Summary judgment for accrued costs due to Trustee.	Supported the court’s finding that Company B had admitted liability for accrued Trustee costs.
Hillgate House Ltd v Expert Clothing Services & Sales Ltd [1987] 1 EGLR 65	Acts done pursuant to court order are lawful and do not constitute tort until order is reversed.	Applied to hold that Trustee’s retention of shares under Polish court order was not conversion.
SmithKline Beecham plc v Apotex Europe Ltd [2007] Ch 71	Interim injunctions are not wrongful even if ultimately unsuccessful; damages arise only from cross-undertakings.	Referenced to explain the nature of injunctions and claims arising from court orders.
British American Nickel Corporation Ltd v MJ O'Brien Ltd [1927] AC 369	Power to change bondholders’ rights must be exercised in good faith for the benefit of the class as a whole.	Supported the court’s validation of the bondholders’ resolution to share costs pari passu.

Court's Reasoning and Analysis

The court first analyzed the nature of the contractual and equitable rights relating to redemption of the bonds and the security. It held that the equitable right to redeem does not allow Company B to avoid obligations that would have applied if it had exercised its legal right to redeem on time. The security secures all obligations under the Trust Deed and bond conditions, including contingent liabilities such as the Trustee’s costs and indemnities.

The court rejected Company B’s argument that the PAK shares secured only the contingent payment, construing the relevant clause as securing all obligations but acknowledging that the PAK shares never became valid security due to lack of required consent.

On the question of payment, the court found that Company B’s payment of 525 million did not fully discharge all accrued liabilities due on 26 October 2006, with a shortfall largely attributable to unpaid Trustee costs. An offer to pay disputed sums into escrow was held not to constitute an unconditional tender.

The court applied established principles from Re Rudd and Son Ltd and related authorities to hold that redemption requires provision for contingent liabilities to the Trustee’s satisfaction. Partial redemption of security was rejected as unsupported by contract or equitable jurisdiction.

The court determined that the bonds had not been redeemed because payment to the Trustee is not payment to bondholders until the Trustee distributes funds. The Trustee’s retention of funds for indemnity and contingent liabilities means that the bonds remain outstanding and the securities must be retained.

Interest continues to accrue on the principal amount outstanding until the Trustee determines a payment date, which it is not obliged to do until all amounts due are received. The court found the Trustee’s withholding of distribution reasonable given ongoing litigation risks and claims.

Regarding the PAK shares, the court found no realistic prospect of success for Company B’s conversion claim due to lawful possession under Polish court orders and absence of demand prior to May 2007. The court declined to order the Trustee to procure release of the shares or withdraw intervention in foreign proceedings, indicating that Company B’s remedy lies in the Polish courts.

The court considered competing submissions on whether the Trustee should retain both securities and funds. It concluded that the Trustee’s right to indemnity and lien on the trust fund prevail over the bondholders’ right to immediate payment and Company B’s right to redeem security. The Trustee is entitled to retain a reasonable estimate of contingent liabilities, calculated on a worst case basis, to secure its indemnity.

The court provisionally allowed the Trustee to retain 15,500,000 out of the funds for anticipated costs and contingent liabilities, subject to future adjustment. It also considered and dismissed the merit of a new claim against the Trustee by a third party, holding it does not bar distribution.

The Trustee’s proposed conditions on distribution, requiring indemnities or identification of beneficial bondholders, were rejected as inconsistent with the contractual scheme governing payment through nominee accounts.

Finally, the court addressed the calculation of interest due, rejecting a calculation including interest on interest under the Trust Deed but allowing for further argument on interest under the Judgments Act 1838. The court upheld the validity of the bondholders’ resolution directing payment of committee costs in priority, finding it fair and within their powers.

Holding and Implications

HOLDING: The court held that the bonds had not been redeemed by Company B’s payment of 525 million, that Company B is not entitled to redeem the security before full redemption of the bonds including all accrued and contingent liabilities, and that the Trustee is entitled to retain both the security and sufficient funds to cover contingent liabilities and costs. The Trustee is not obliged to distribute funds to bondholders until these liabilities are secured. The Trustee’s retention of the PAK shares was lawful under Polish court orders, and Company B’s conversion claim lacks realistic prospect of success. The bondholders’ resolution to prioritize payment of committee costs was valid.

IMPLICATIONS: As a direct consequence, Company B remains liable for Trustee costs and interest continues to accrue on the bonds until full payment is made and the Trustee distributes funds. The Trustee’s right of retention for indemnity purposes takes precedence over Company B’s redemption rights and bondholders’ entitlement to payment. The decision does not create new precedent but clarifies the interaction between contractual terms, equitable rights, and trustee indemnity in complex bond security arrangements involving contingent liabilities and multi-jurisdictional disputes.