Bond trustees and their discretion - some recent developments

United Kingdom

Bondholders and trustees should take note of the two recent cases of The Law Debenture Trust Corporation plc v Acciona SA (at first instance) and Concord Trust v The Law Debenture Trust Corporation plc (in the Court of Appeal). Both cases relate to bonds issued by Elektrum BV and concern the exercise of trustees' discretion. They provide a welcome confirmation and clarification of some protections afforded to trustees by English law.

In the Acciona case, the issuer had removed the bondholders' nominee director. The trustee asked the court to determine whether the issuer's actions were "materially prejudicial" to the bondholders, which would allow it to accelerate the bonds. The Court held that an examination by the trustee of all the circumstances and consequences of the issuer's actions was unnecessary because it was "self evident" that the removal of the director was, by its very nature, materially prejudicial; it deprived bondholders of representation on the board and their right of veto. In reaching its own decision on the existence of prejudice, the Court did not think that a detailed analysis of what constituted "material prejudice" based on case law or dictionaries was necessary, an approach some commentators have questioned.

The Concord Trust case concerned trustee indemnities. Under the trust deed, the trustee did not have to accelerate the bonds unless it was indemnified to its satisfaction. The trustee and the bondholders agreed that the bonds should be accelerated, but the trustee claimed it was not satisfied with the indemnities given. Concord Trust, a bondholder, brought this action on the basis that the trustee's rejection of the indemnity provided by it and certain other bondholders was unreasonable. The Court applied the concept of "Wednesbury unreasonableness", a concept familiar in administrative law: the trustee's decision would only be unreasonable if no reasonable person could have reached that decision. Applying the test, the Court refused to overturn the trustee's decision. In essence, the Court took the view that so long as decisions are reached in good faith and are not so "obviously" unreasonable as to be perverse or in defiance of reason, courts should not interfere: clearly, good news for trustees.

The second case also reminds us of the protection that English law affords to trustees in two respects. Firstly, it affirms that the burden of proof is on the party asserting unreasonableness against a trustee. Secondly, it confirms that the trustee is entitled to an indemnity in respect of its duties; the trustee need shoulder no personal liability.

If you would like any further information on the cases or on the role of trustees generally, please contact Jason Harding on +44 (0)20 7367 3138 or at [email protected] , or Stephen Hewett on +44 (0)20 7367 2970 or at [email protected] .