18 Jul 2013

Bondholder consents: guidance from the English courts

by Nick Poole, Anthony Burke

Bondholders and bond issuers that are involved with (or contemplating) a bond restructure should be mindful of the issues pertaining to the use of consent payments and exit consents.

Two recent English decisions should make bondholders and bond issuers that are involved with (or contemplating) a bond restructure carefully consider how they deploy consent payments and exit consents.

Azevedo – consent payments acceptable

In Azevedo v Imcopa Importacao, Exportacao E Industria De Oleos Ltd [2013] EWCA Civ 364, the English Court of Appeal held that it was acceptable for a company to offer a "carrot" to bondholders to vote in favour of a restructuring proposal. Imcopa (the issuer) proposed resolutions postponing the payment of interest that was due under the bonds and offered a cash payment to bondholders who voted in favour of the resolution, in the event that the resolution passed. Those that did not vote in favour of the resolution or did not vote on the resolution at all were not entitled to receive the payment.

The claimants voted against the resolutions and argued that the offer and associated payments were unlawful as they were in breach of the pari passu principle, which was explicitly required by the Trust Deed, or alternatively they were a bribe and so were unlawful under English law.

The Court found that the pari passu obligation only applied to money in the hands of the Trustee and in this case the money did not pass through the hands of the Trustee.

As to the second argument, the Court found that it is not inconsistent with English company law for an offer of payment to be made to bondholders who vote in favour of a resolution, where payment is available to all members of the class and provided that the basis of the payment is made clear in the documents relating to the resolution.

The Court continued to state that it is inappropriate to speak of bribery in this context as the details of the scheme were fully disclosed to all bondholders and therefore no member of the class was excluded from participating in the benefits of the offer.

"Buying" the consent of bondholders

Azevedo is authority for consent payments being acceptable under English law on the condition that such payments are clearly disclosed and available equally to all bondholders of a particular class. We expect to see increased use of consent payments to facilitate debt restructuring as companies continue to struggle to manage their debt.

Assénagon – the exit consent was an unacceptable coercive threat

In Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch), the English High Court considered the use of "exit consents".

The issuer made an offer to exchange old bonds for new bonds (with different terms). To accept the exchange, bondholders were required to direct a proxy to vote in favour of the exchange and to amend the terms of the original bonds to allow the issuer to redeem them for nominal consideration (€0.01 per €1,000 in principal amount of the original bonds).

The deadline to accept the exchange offer was before the bondholder meeting. Bondholders that did not accept the exchange could not therefore wait for the outcome of the take-up of the exchange until deciding how to vote at the meeting as, by that time, there was insufficient time to have their voting instructions processed through the relevant clearing house / custodian.

The incentive to vote in favour of such a proposal is commonly known as an exit consent. Justice Briggs held that the process had not been validly undertaken and that it was unlawful for the majority bondholders to assist the coercion of the minority by voting for a resolution which would destroy the minority's value of their bonds:

"[an] exit consent is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less. Its only function is the intimidation of a potential minority, based upon the fear of any individual member of the class that, by rejecting the exchange and voting against the resolution, he (or it) will be left out in the cold."

Assénagon broad implications

It is understood (and acknowledged in Assénagon) that exit consents have been increasingly used for the restructure of bonds governed by English law, particularly in relation to banks and other lending institutions requiring to be restructured following the GFC. This means that the Assénagon case may have much wider implications than just the dispute between the parties in this instance.

Assénagon appeal will not be pursued

It is noted in Azevedo that the previously foreshadowed appeal of the decision in Assénagon will not be pursued as the issuer has gone into special liquidation with the special liquidators deciding not to pursue the appeal.

These are English cases, what does it mean for me?

The above cases are likely to impact the way bonds governed by English law can be restructured.

While the decisions are not binding on Australian courts, it is recognised that English authorities generally can provide assistance to Australian courts and it can be expected that English Court of Appeal and English High Court decisions will be persuasive on Australian courts.

Both bondholders and issuers should give careful consideration to the terms of any proposed restructure and assess their rights and the potential risks of challenge in light of these decisions.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.