Azevedo & Anor v Imcopa Importacao, Exportacao E Industria De Oleos Ltd & Ors

In this appeal, from an order of Mr Justice Hamblen dated 30 May 2012, the appellants contend that it is not lawful under English law for a company to undertake a process which they characterise as buying the votes of the holders of notes or other securities issued by the company. To put the point more formally, the issue is whether English law permits a company to solicit and procure votes in support of a financial restructuring proposal by offering and making cash payments to those members of the relevant class who vote in favour of the proposal but excluding from the payment those who vote against it or do not vote on the resolution at all. The process is referred to as consent solicitation, and the payments as consent payments.

In 2006 the Second Defendant, incorporated in Uruguay and therefore known in the proceedings as Imcopa U, issued $100 million 10.375% guaranteed notes with a maturity date in 2009 (the Notes). The Notes were guaranteed by its parent company, the First Defendant, incorporated in Brazil and therefore known as Imcopa B. The Third Defendant, as its name suggests, is a Cayman company and therefore known as Imcopa C. The Notes were governed by a Trust Deed dated 27 November 2006 made between Imcopa U as Issuer, Imcopa B as Guarantor and the Bank of New York (now Bank of New York Mellon) (hereafter BNY) as Trustee. The Notes are governed by English law, with an English jurisdiction clause. The Claimants invested in the Notes in the amount of $1.2 million.

The resolution which is at issue in these proceedings was proposed in October 2010 as part of a process of restructuring the Imcopa group’s obligations. It involved postponing a payment of interest due under the Notes. The notice of the meeting explained that a payment would be made to those voting in favour of the resolution, and would not be made to other Noteholders. The resolution was passed by an overwhelming majority, but the Claimants were not among those voting in its favour, despite having voted in favour of earlier similar resolutions. They now contend that the making of the consent payments only to those voting in favour was unlawful, either because it was a breach of the pari passu principle or because, although not secret, it was in the nature of a bribe and as such not permitted under English company law.

As before the judge, the Claimants were represented by Mr Simon Goldblatt Q.C. leading Ms Karen Gough, and the Defendants by Mr Ben Valentin. I am grateful to Counsel for their clear, sustained and eloquent oral submissions, as also for the written material provided.

The judge rejected the contentions advanced by Mr Goldblatt in an impressive judgment delivered extempore: [2012] EWHC 1849 (Comm). The appeal also challenges, separately, the judge’s order as to costs. Permission to appeal was granted by Sir Richard Buxton. I agree with the judge on the main appeal, and I find no misdirection in the way he dealt with the issue of costs. I would therefore dismiss the appeal. My reasons follow.

The Trust Deed dated 27 November 2006 contains a covenant by the Issuer with the Trustee to pay to the Trustee all sums due by way of principal and interest on the Notes, in clause 2, and it also contains the guarantee by Imcopa B in clause 5. Clause 6.1 is a declaration of trust, relevantly as follows:

“6.1

All moneys received by the Trustee in respect of the Notes or amounts payable under the Trust Deed will, despite any appropriation of all or part of them by the Issuer or the Guarantor, be held by the Trustee on trust to apply them:

6.1.1

[first, in payment of costs, charges, expenses etc. of the Trustee,]

6.1.2

second, in payment of any amounts owing in respect of the Notes pari passu and rateably”

Schedule 3 to the Deed sets out provisions for meetings of Noteholders. By clause 2.1 a meeting has power, by extraordinary resolution,

“to sanction any proposal by the Issuer, the Guarantor or the Trustee for any modification, abrogation, variation or compromise of, or arrangement in respect of, the rights of the Noteholders against the Issuer or the Guarantor, whether or not those rights arise under the Trust Deed”

However, a special quorum applies to any resolution which would have the effect of modifying the maturity of the Notes or the dates on which interest was payable on them: clause 2.9. An extraordinary resolution must be passed by a majority of 75% of those voting on it. A special quorum resolution requires the attendance at the meeting of representatives of the holders of not less than 75% of the Notes eligible for voting on the resolution. In practice, voting at meetings was by proxy, and the persons appointed as proxies cast votes in respect of all Notes as regards which the holders had appointed them as proxies. Thus, there was no difference between the Notes represented at the meeting, in this sense, and the Notes in respect of which votes were cast at the meeting.

These provisions applied to the resolution with which this appeal is concerned. So, in order to get the resolution passed, the Issuer had to persuade the holders of at least 75% of all the Notes to cast their votes, and at least 75% of those voting to vote in favour of the resolution. That explains the offer of the consent payments.

The terms and conditions of the Notes are set out, with the form of certificate for the Notes, in a schedule to the Trust Deed. Among these terms and conditions is Condition 3 which reiterates the guarantee of the Notes and also has this provision as to the status of the Notes:

“The Notes constitute (subject to Condition 4) direct, unconditional, unsecured and unsubordinated obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes and of the Guarantor under the Guarantee shall, save for such exceptions as may be provided by applicable legislation and subject to Condition 4, at all times rank at least equally with all their respective other present and future unsecured and unsubordinated obligations.”

Condition 4 includes a negative pledge covenant and other provisions. Mr Goldblatt addressed us in some detail on some of these provisions, but it does not seem to me that anything turns on them for the purposes of the issues that are live on the appeal.

Condition 12 deals with meetings of Noteholders and modifications, in terms which follow those of the Trust Deed already mentioned.

I mention at this point a provision relevant to the position of the Third Defendant. Clause 14 of the Trust Deed allows for substitution of another company as principal debtor under the Trust Deed and the Notes in place of the Issuer, by agreement of the Trustee, without requiring the consent of Noteholders. This power was used in December 2007 to replace Imcopa B as Issuer by Imcopa C. Under clause 14.2.2, an agreement by the Trustee under this provision “will, if so expressed, release the Issuer … from any or all of its obligations under the Trust Deed or the Notes”. The Claimants contend that Imcopa B remains liable under the Trust Deed and the Notes despite the substitution of Imcopa C. I will come to that point later.

On the same date as the Trust Deed an agency agreement was entered into between Imcopa U, Imcopa B, the Trustee and other parties, including the Bank of New York, London, by which BNY London was appointed as Principal Paying Agent in respect of the Notes, BNY was appointed as registrar, and other agency appointments were established. BNY and BNY London are not separate legal entities, but they were treated as having separate functions in this context.

The Imcopa restructuring plan was initiated in late 2008, in order to address financial problems resulting from the financial crisis of that year. It led to four resolutions being put to the Noteholders, each of which was approved by the necessary majority and with the necessary quorum. In May 2011 the Brazilian court confirmed the reorganisation plan. The Claimants voted in favour of the first three resolutions.

The first of the resolutions, in May 2009, did not propose any relevant modification of the obligations of the Issuer and therefore did not require the special quorum. Just under 65% of the votes were cast on the resolution, the votes in favour being over 95%. The second resolution was put at a meeting in November 2009. It was to postpone the date of maturity of the Notes and to cancel a payment of interest otherwise due under the Notes on 27 November 2009. Accordingly the special quorum provision did apply. On this occasion over 90% of the eligible votes were cast, with over 99% in favour. Payment of a consent payment was part of this proposal, to be paid to those voting in favour of the resolution. The third resolution, put in June 2010, postponed the maturity date of the Notes still further, and also introduced amortisation provisions as regards the principal, and it also amended the provision for payment of interest. On this occasion votes were cast in respect of over 94% of the Notes, of which more than 99% were in favour. Consent payments were offered and paid in respect of this resolution as well.

The last and crucial meeting was convened for 26 October 2010. This was preceded by a consent solicitation statement dated 4 October 2010 sent out on behalf of Imcopa C, by HSBC Securities (USA) Inc as solicitation agent. This explained that, subject to the passing of the extraordinary resolution which was proposed to be put at the meeting, Imcopa C as Issuer offered to pay a cash amount to each Noteholder from whom valid voting instructions (referred to as the Consent) in favour of the proposal were received and not revoked. The payment was to be $25.94 for every $1,000 principal amount of the Notes which were the subject of the Consent. This was explained in the notice of the meeting as being half of the amount of interest that would have accrued on the relevant principal of the Notes from 10 November 2009 to 9 May 2010. I will refer to the payments made to those voting in favour of this last resolution as the Consent Payments.

The resolution to be put to the meeting involved further amendments to the provisions for payment of interest, and different amortisation arrangements for principal. Because of these and some other aspects of the proposal, the special quorum provision applied. I do not need to go into the somewhat complicated details of the proposal. The meeting was duly held on 26 October 2010. It was attended by persons holding valid voting instructions from Noteholders in respect of over 88% of the Notes, so the special quorum provision was satisfied. Of these, the votes of over 98% were cast in favour of the resolution, so it was passed as an extraordinary resolution. As in the case of previous resolutions, the effect of the resolution was then embodied in a supplemental Trust Deed which amended the 2006 Trust Deed (as previously varied) so as to put the latest proposal into effect as between all relevant parties.

We were shown the sequence of documentation for the 26 October 2010 meeting, but I do not need to refer to more of it than is set out above.

The Claimants’ claim is for the payment by each Defendant of $1.2 million as the return of money lent, or as damages for repudiatory breach of contract, or as money had and received to the Claimants’ use, with interest, as well as a declaration that the three resolutions of the Noteholders purportedly passed on 10 November 2009, 1 June 2010 and 26 October 2010 were invalid, illegal and ineffective in English law, and other relief.

The relevant allegations in the Particulars of Claim are as follows.

The substitution of Imcopa C is alleged, but it is said that Imcopa U was not thereby released from its liability as Issuer up to the date of substitution.

Under the heading Illegality, the case is made in this way. As a requirement of the contract and a fundamental requirement of law and equity, the Noteholders as a class must be treated pari passu in all respects without any preference between the Notes or as between themselves. The offer and payment of the Consent Payments only to those who voted in favour of the resolution contravened the contract and the law and initiated a repudiatory breach of contract. Despite the power of the requisite majority of Noteholders to bind the class as a whole, it was unlawful to offer or pay to some Noteholders, but not to all of them, benefits which did not form part of the scheme to be voted on. The Consent Payments were in the nature of a bribe, in fraud of those Noteholders from whom they were withheld, and rendered unlawful each scheme the subject of the relevant resolution. Moreover each member of the class, in voting as such, was bound to exercise the vote with the interests of the class itself kept in view as dominant, and acceptance of the proposal to pay money in return for a favourable vote rendered the majority votes ineffective, so that they could not and did not bind those Noteholders who did not vote in favour. The consequence is said to be that the resolutions were void and of no effect, albeit that the Claimants accept that, having voted in favour on the first two relevant occasions and having accepted the consent payments then offered, they cannot complain of the repudiation of the contract on those occasions.

It is to be noted that the Claimants’ case does not include any allegation of oppressiveness, unfairness or bad faith in relation to the solicitation or any other aspect of the process which led to the passing of the resolution.

Under the heading of Damages in contract, at paragraph 33, the Claimants alleged in the first sentence that, for the purposes of the three consent solicitations, BNY “was put in funds” by the Imcopa group to make payment of “sums equivalent to interest” to the consenting Noteholders, including funds to pay the sums withheld from the Claimants in November 2010 because they did not vote in favour of the resolution. On that basis they claimed $31,128 by way of damages in contract, being the amount of the Consent Payment that would have been paid to them if they had voted in favour of the resolution.

In turn the Defendants’ position on the issues now relevant was as follows. Imcopa U was validly and effectively released when Imcopa C was substituted as Issuer. The details and documentation of the successive resolutions were set out, including the fact that the offer and terms of the consent payment were in each case made clear and explicit in the documents. The alleged illegality of the provision for and payment of the consent payments was denied, as was the allegation that they were to be regarded as bribes or as a fraud on the non-consenting Noteholders. Thus the Defendants put in issue all the Claimants’ allegations as to the illegality and invalidity of the resolutions.

As to paragraph 33 of the Particulars of Claim, the Defendants admitted the first sentence but denied that the Claimants were entitled to receive the Consent Payment or any equivalent to it. By choosing not to vote on the resolution they had elected not to receive the Consent Payment. The Defendants denied having committed any breach of contract of any kind or any other wrongful act.

The applications before the judge sought the summary determination of the case each way. The Claimants applied for summary judgment under CPR Part 24, as did the Defendants, who also applied for some or all of the claim to be struck out under CPR Part 3.4.

There are allegations in the statements of case which would not be capable of summary determination. In particular the Defendants put forward a number of contentions on the basis that the solicitation and payment of consent payments in circumstances such as those of the present case is a longstanding and widely known practice in the debt market, and that what was done in this case was consistent with standard market practice applicable to financial debt instruments governed by English law. Those are contentions which the judge could not and did not consider. We do not know the position either way. In their skeleton arguments the parties adopted contrary positions, Mr Goldblatt asserting that there is no evidence that “the direct buying of votes has so far been attempted in England”, and Mr Valentin referring to a “well-established practice” of soliciting consent for amendment to bonds by offering consent payments to those who vote in favour. There is no evidence before the court on this point, and we are not aware of any judicial decision on the point in England prior to the present case. There are decisions in the Chancery Court of the State of Delaware concerned with this sort of practice, dating from some time back, some of which were cited to the judge and more to us, and there is academic literature about the practice in that jurisdiction and elsewhere in the United States.

A case note about the judge’s decision by Mr Paul Deakins of Clifford Chance, entitled “Noteholder meetings: paying the price for change”, at (2012) Corporate Rescue and Insolvency Journal 176, suggests that it has been a common practice for some time in English law transactions (and for longer in the USA), but that is not, of course, evidence.

We have to decide the point without the benefit of any previous English authority of direct relevance, other than the judge’s judgment in this very case, and regardless of whether the practice of consent solicitation had been used extensively, rarely, or not at all in the English market before the Imcopa group’s restructuring proposals.

A company which faces financial difficulties, even in less severe circumstances than existed in 2008 and since then, may need to secure the agreement of various classes of creditors if it is to be able to survive despite not being able to comply to the letter with the terms of its debt obligations. It is likely to have some creditors who are banks, whether individually or on a syndicated basis, and it may well have others who are the holders of bonds or notes. These classes differ in a number of material respects. One is that the members of a syndicate of banks know what other banks are in the syndicate and they are likely to be able to collaborate (if they wish to) on an informed basis, in order to maximise their bargaining power. By contrast, the members of a class of bond or note holders will not know who the other members of the class are, and will not be able to collaborate with each other or to take decisions as to what would be in their own best interests on an informed basis as to the attitude of other members of the class. They are faced with a version of the so-called Prisoner’s Dilemma. This arises in a situation in which two prisoners are being interrogated separately, neither knowing what the other will say or has said. Each is unable to tell how the other’s conduct may affect his own position and therefore what conduct would be in his own best interests.

Another graphic description of the uncertainty faced by an individual voter in this situation is called the Trembling Hand Perfect Nash equilibrium, as discussed in an article “Do Bondholders Lose from Junk Bond Covenant Changes?”, by Marcel Kahan and Bruce Tuckman, Journal of Business (University of Chicago Press) October 1993 vol 66 page 499. (Neither this article nor that mentioned at paragraph [30] above was cited to us; neither affects my reasoning or my conclusion so I did not consider it necessary to invite submissions from Counsel about either.)

It is inherent in this sort of situation that one Noteholder can only guess at the decision likely to be taken by others, and must recognise that, apart from the fact that the consent of enough Noteholders is essential if the company is to be able to secure the variation of the terms of its relevant debt obligations that may be essential to its survival, no individual Noteholder has any particular bargaining strength. Those who subscribe for obligations of this kind or who purchase such bonds or notes in the market can be assumed to be sophisticated and experienced investors, but they will know or come to realise that they are on their own when it comes to deciding how to vote on a proposal such as those put forward by the Imcopa group.

It is, no doubt, sensible and practical for there to be provisions by which the terms of the relevant obligations can be varied, so long as a proper process is followed. The cases show that such provisions have been used for a long time. The requirements of an extraordinary resolution and a special quorum are there to make it possible but not too easy. In particular, it is the special quorum requirement that provides the company with a special reason to offer members of the class an incentive to vote on the resolution, and, of course, preferably to vote in favour of the resolution. A benefit which is available to all members of the class whether or not they cast their vote does not provide that incentive. It may, therefore, not lead to the casting of enough votes to satisfy the special quorum provision. However strong the vote in favour may be, the resolution may therefore fail because not enough of the class voted on it. The first of the four resolutions which I have mentioned did not involve the special quorum requirement, and it would not have been passed if it had, since although the majority vote was 95% of those cast, less than 75% of those entitled to vote did in fact cast their votes. This being so, whether or not the solicitation of votes by means of the offer of consent payments is an established practice in the English market, it is possible to see why it was undertaken in the present case and why it might be undertaken in other similar situations.

Shortly after the judge decided this case, Mr Justice Briggs decided another case concerned with somewhat similar issues: Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch). In that case bondholders had been asked to vote in favour of a proposal which involved the exchange of their bonds for the issue of new bonds. Those who did not vote in favour of the proposal had their bonds cancelled for a nominal consideration. The deadline for exchange was set as a time before the meeting at which the relevant resolution would be proposed, so that the non-consenting bondholders did not have a second chance. The incentive in that type of case is referred to as an exit consent. Briggs J held that the process had not been validly undertaken, accepting two of the three arguments for the non-consenting bondholders. The company appealed and the bondholders cross-appealed on the point which he had decided against them. That appeal was due to come on together with the present appeal but, not long before the date for the appeal hearing, the issuer of the bonds went into special liquidation under Irish law and the special liquidators decided not to pursue the appeal. Accordingly the issues raised in that case, which had attracted a good deal of academic and professional interest, remain open to be tested at appellate level.

Both parties in the present case made some submissions by reference to the Assénagon case, but it seems to me that it is too far away from the present case on the facts to be of any particular assistance.

By the consent solicitations made by Imcopa C in the present case, the Issuer made an offer to each member of the class of Noteholders, in the terms of an “if” contract: if you cast the votes that you are entitled to as a Noteholder by giving valid and irrevocable voting instructions to a proxy to vote in favour of the resolution, and if the resolution is duly passed, then I will pay you the stated amount in proportion to the relevant Notes. If a given Noteholder acted on that offer by appointing a proxy in time with valid and irrevocable instructions to vote in favour of the resolution, and if the resolution was passed, then as a matter of English contract law he would be entitled to payment in accordance with the offer, by analogy with such cases as Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256. It was not suggested that, by itself, the contract would not be effective and binding on contract law principles. The argument is that to give effect to it is incompatible with the terms of the documents which govern the Notes, or with principles of English company law, or both.

The main arguments presented by Mr Goldblatt in support of the appeal fell into two categories: first, that the Consent Payments infringe the pari passu principle and, secondly, that even if they do not, they are inherently unlawful under English company law. I deal with the pari passu point first.

The rule requiring pari passu treatment of all members of a class is a basic principle of insolvency law in England, whether as regards companies or individuals. The present case is not concerned with insolvency law, however, and the principle has to be invoked by reference to the terms of the relevant documents.

The principle is reflected in the contractual documentation, above all in clause 6.1.2 of the Trust Deed, quoted at paragraph [6] above. So far as any funds are concerned which are held by the Trustee either as “moneys received by the Trustee in respect of the Notes” or as “amounts payable under the Trust Deed”, they are held on trust to be applied (after discharge of amounts due to the Trustee) in payment of amounts owing in respect of the Notes pari passu and rateably. That provision therefore applies to funds held by the Trustee, as part of the declaration of the trusts on which those funds are held. In addition, Condition 3 of the Terms and Conditions of the Notes states that the Notes rank pari passu and without any preference among themselves.

According to Imcopa, the funds used for payment of the Consent Payments were not at any time held by the Trustee, and even if they had been, they were not received by the Trustee in respect of the Notes nor were they amounts payable under the Trust Deed. Accordingly, it is said, clause 6 of the Trust Deed did not apply to them. The judge accepted this contention, saying at paragraph 66 that the payments were to be made by the solicitation agent in return for acceptance of the offer being made.

The Claimants made a number of points in support of their argument that clause 6 does apply. They argued that the judge was wrong on the facts (and on the pleadings) to say that the money was not held by the Trustee, and that as such it was money received in respect of the Notes, so it was caught by clause 6.

I must deal with the point about the pleaded case here. As noted above, the Claimants asserted in paragraph 33 of the Particulars of Claim, as part of their case as to damage, rather than as establishing liability in principle, that Imcopa C had put the Trustee in funds to make the Consent Payments, and the Defendants admitted that assertion.

However, the Defendants argued that the true position, which can be seen from the documents, is that the Consent Payments never passed through the hands of the Trustee. The Consent Solicitation said in terms that the payment would be made by the Issuer, and would be made to accounts in Euroclear or Clearstream, as specified in instructions provided by the Information Agent following the relevant meeting. The judge may not have been correct to say that the Solicitation Agent had any role in the making of the payments, but he was right, they say, to hold that the money was never in the hands of the Trustee, and therefore also right to hold that clause 6 did not apply to it.

In response to the Claimants’ reliance on this point in the pleading in their skeleton argument on the appeal, the Defendants’ solicitors, in correspondence with those acting for the Claimants, sought to point out what they said was the correct position, by reference to the Consent Solicitation, and proposed an amendment to paragraph 39.1 of the Defence, which would bring the pleading into line with the documents, inviting the Claimants to agree to the amendment being made. This would introduce a denial of the allegation that BNY as Trustee was put in funds to make the Consent Payments, and would assert that the payments were made directly by Imcopa C as Issuer. This invitation was declined.

Of course it would have been better if the Defendants had not made the admission which they made in paragraph 39.1 of the Defence. But the allegation in paragraph 33 of the Particulars of Claim was not put forward as being part of the basis on which the Claimants alleged that the Consent Payments were unlawful or in breach of contract. Accordingly, it is understandable that what is now said to be the significance of the allegation was missed by those representing the Defendants.

As it seems to me, there being no suggestion by the Claimants that the terms of the Consent Solicitation do not represent the underlying reality, it is right for the court to proceed by reference to that document, rather than on the basis of the admitted allegation in the pleadings, which is inconsistent with that document.

I would therefore hold that the judge was right to reject the Claimants’ case based on clause 6.1.2 of the Trust Deed, because the money required to make the Consent Payments to those voting in favour of the resolution was not at any stage held by the Trustee.

There is no other valid basis in the Trust Deed or the Terms and Conditions of the Notes for the argument that the relevant funds had to be applied pari passu as between all the Noteholders. I therefore pass on to the Claimants’ more fundamental argument, that the offer and payment of consent payments only to those members of the class who voted in favour of the resolution is of itself unlawful.

Mr Goldblatt started with the proposition that “a majority of shareholders cannot put company assets into their own pockets to the exclusion of the minority”, for which he cited Menier v Hooper’s Telegraph Works (1874) LR 9 Ch 350. In that case the plaintiff held 2,000 shares in the European and South American Telegraph Company, and the Hooper’s Telegraph Company held 3,000 such shares, with only 325 other shares issued, held by 13 people of whom ten were directors. The European Company and the Hooper’s Telegraph Company undertook contractual arrangements with a view to laying a cable between Europe and South America, but the concession was claimed by a third company. Litigation followed, but the European Company abandoned its claims in the litigation, with the result that the Hooper’s Company was able to enter into a transaction with the third company for its own advantage. In effect, the directors were alleged to have so acted as to benefit the majority shareholder, not providing any proportionate benefit for the minority shareholders. In the words of Sir William James, LJ, “the minority of the shareholders say in effect that the majority has divided the assets of the company, more or less, between themselves, to the exclusion of the minority”. The issue before the court was whether the plaintiff was properly entitled to bring the action on behalf of himself and all other shareholders in the European company other than the Defendants. The Court of Appeal in Chancery held that he was so entitled, and observed that it was not open to the majority to do what it was alleged that they had done, expropriating the minority.

Mr Goldblatt’s argument was that the payment of the Consent Payments to only the Noteholders who voted in favour of the resolution amounts to the same, albeit that the majority is a much bigger proportion of the shareholders, that the composition of that majority was not established by the fact of the distinct and conflicting interest that the Hooper’s Company had in that case, but was only settled by the events of the vote, and that any Noteholder who wished to do so could bring himself within the majority and therefore make himself entitled to receive the Consent Payment, by instructing his proxy to cast his vote in favour of the resolution.

I do not in any way doubt the propositions for which Menier is cited, but it does not seem to me that it has anything of value to contribute to the analysis of the present case. The critical difference is that, in that case, the composition of the majority was not affected in any way by the resolution. The majority consisted of those who had a distinct interest in the subject matter of the resolution, and the resolution was such as to favour them in any event.

Much more to the point are two other cases cited to the judge and to us. The first is Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2 Ch 324, a decision of Parker J. In this case, the company had issued debentures in the amount of £200,000 bearing interest at 4½% which were guaranteed, as to £150,000 by the Law Guarantee Society, and as to £50,000 by the British Steamship Investment Trust, that Trust having taken up £47,000 of the debentures. The Society and the Trust were joint trustees of the debenture trust deed, which provided for remuneration to the trustees in consideration of their guarantees. The trust deed contained what was said to be the usual provision for the majority to bind a minority on matters which included the acceptance of alternative property or securities in place of the debentures. The Society, which had gone into voluntary liquidation, offered to retire from the trusteeship and to give up its right to payments, in consideration of being released from its guarantee. The company proposed to the debenture-holders that they should accept non-guaranteed debentures with 5% interest in place of the previous debentures, but that payments by the company to the Trust should not be affected, other than by the Trust giving credit for the additional ½% interest on the debentures which it had previously guaranteed. That provision was necessary to secure the agreement of the Trust to support the resolution, and the Trust’s support was essential to the resolution being passed. The terms as between the company and the Trust were fully disclosed in the documents giving notice of the resolution.

The resolution was put to the meeting and was passed by the necessary majority. The Trust voted in its favour, but for which it would not have been passed. The plaintiff, who had not voted in favour of the resolution, brought the action claiming that the resolution had been procured by a bribe to the Trust, that the resolution was not binding on her, and that she was not bound to surrender her debentures.

Parker J rejected the claim. At page 333 he said this:

“It appears to me that the term “bribery” cannot be used appropriately in connection with this case. The powers conferred by the trust deed on a majority of the debenture-holders must, of course, be exercised bona fide, and the Court can no doubt interfere to prevent unfairness or oppression, but, subject to this, each debenture-holder may vote with regard to his individual interests, though these interests may be peculiar to himself and not shared by other debenture-holders. No one could have objected to the Trust voting for a scheme merely because its operation would put an end to all liability under the guarantee, or against a scheme merely because its operation might put an end to all payments accruing under the guarantee. Further, where, as in this case, there is, as between different holders, a diversity of interest, it may be necessary or advisable, as a matter of business fairness, to make special provision for special interests, and I do not think there is any equity precluding a debenture-holder voting for or against a scheme containing such special provision merely because he is interested thereunder.

A secret bargain by one debenture-holder for special treatment might be considered as corrupt and in the nature of bribery, but, in my opinion, there can be no question of bribery where a scheme openly provides for the separate treatment of persons with special interests. The only question is whether these persons are incapacitated from voting on the scheme, and I can see no grounds in equity for so holding. I think, however, that, where there are diverse interests, and none the less where those diverse interests are specially provided for, the Court ought to consider carefully the fairness of any scheme by which a majority of debenture-holders seeks to bind a minority.”

The second relevant case, in which Parker J’s decision was approved, is a decision of the Privy Council on appeal from Canada: British American Nickel Corporation Ltd v M J O’Brien Ltd. [1927] AC 369. The essential facts of that case were similar, but with one crucial difference. The British American Nickel Corporation had issued mortgage bonds secured by a trust deed which gave power to a majority of the bondholders to bind the minority. The company proposed a restructuring scheme involving the replacement of these bonds by bonds of a different issue, on different terms. This proposal was passed by the necessary three-quarters majority. It would not have been so passed without the support of the holder of a large number of bonds. His support was procured by the promise of a large block of ordinary stock of the company, not then of great value but potentially valuable if the price of nickel recovered. That benefit to him was promised well before the resolution was put to the bondholders, but it was not mentioned in the documents which gave notice of the resolution.

Viscount Haldane, giving the opinion of the Privy Council, made some observations in general terms about powers for a majority to bind a minority of debenture holders. At page 371 he said this:

“To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by section 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted.”

He then cited and considered some other cases, including Menier. At page 373 he went on as follows:

“It has been suggested that the decision in these two cases on the last point is difficult to reconcile with the restriction already referred to, where the power is conferred, not on shareholders generally, but on a special class, say, of debenture holders, where a majority, in exercising a power to modify the rights of a minority, must exercise that power in the interests of the class as a whole. This is a principle which goes beyond that applied in Menier v. Hooper’s Telegraph Works, inasmuch as it does not depend on misappropriation or fraud being proved. But their Lordships do not think that there is any real difficulty in combining the principle that while usually a holder of shares or debentures may vote as his interest directs, he is subject to the further principle that where his vote is conferred on him as a member of a class he must conform to the interest of the class itself when seeking to exercise the power conferred on him in his capacity of being a member. The second principle is a negative one, one which puts a restriction on the completeness of freedom under the first, without excluding such freedom wholly.

The distinction, which may prove a fine one, is well illustrated in the carefully worded judgment of Parker J. in Goodfellow v Nelson Line. It was there held that while the power conferred by a trust deed on a majority of debenture holders to bind a minority must be exercised bona fide, and while the Court has power to prevent some sorts at least of unfairness or oppression, a debenture holder may, subject to this vote in accordance with his individual interests, though these may be peculiar to himself and not shared by the other members of the class. It was true that a secret bargain to secure his vote by special treatment might be treated as bribery, but where the scheme to be voted upon itself provides, as it did in that case, openly for special treatment of a debenture holder with a special interest, he may vote, inasmuch as the other members of the class had themselves known from the first of the scheme. Their Lordships think that Parker J. accurately applied in his judgment the law on this point.”

Mr Goldblatt did not invoke the principle that a member of the class must exercise his vote in conformity with the interests of the class as a whole. No allegation is made in the Particulars of Claim of any failure to comply with any such obligation.

Rather, he submitted that, while the judgment of Parker J, endorsed by the Privy Council, shows that special treatment may be justified of a person or class with a special interest, so long as it is fully disclosed to all, that does not justify what was done in this case, because no member of the class of Noteholders had any special interest distinct from that of any other. Accordingly, he said, the special treatment of those who voted in favour of the resolution was not sanctioned by these decisions.

It is true that the present case does not involve securing the support of a member of the class who had a special interest, as the Trust did in Goodfellow. When Parker J said that “there can be no question of bribery where a scheme openly provides for the separate treatment of persons with special interests”, he spoke according to the facts of the case. He did not thereby state that distinct treatment of distinct members of the class was only permitted if some had a special interest. That question was not before him.

It seems to me that it is inappropriate to speak of bribery, in this context, where all the details of the scheme are fully disclosed to all members of the class. Moreover, I can see nothing wrong or unlawful, in general terms, in a process of putting to all members of a class a proposal which offers benefits open to all who vote in favour of the resolution, but not to the others. No member of the class is thereby excluded from participation in the offered benefits except by his own choice as to whether, and if so how, to vote. I reject the argument that a resolution is necessarily invalid if the result of it being passed is to treat different members of the relevant class differently, and also the proposition that different treatment is only permissible if it corresponds to a diversity of interest as between different members of the class, so that one or some have a special interest for which different provision needs to be made.

As I say, Parker J’s decision in Goodfellow is not authority against the validity of what was done in the present case. Nor is either the British American Nickel Corporation case or Menier.

As the judge observed, the validity of the course followed in the present case is supported by textbook writers. He quoted Palmer’s Company Law at paragraph 12.068. Mr Goldblatt criticised this passage, wrongly in my judgment, for not being limited to a case where one or some members of the class have a special interest requiring special treatment. He also referred to another passage in the same paragraph, as follows:

“The court will scrutinize any scheme where the majority of a class will also benefit from the scheme in another capacity, which benefit is not available to the dissenting minority.”

That is supported in the footnote by a reference to Allen v Gold Reefs of West Africa [1900] 1 Ch 656, and the rules about fraud on a minority. Menier is an example of just such a case. It does not fit with the circumstances of the present case, where the same benefit was available to all members of the class. All they had to do was to vote in favour of the resolution. In Menier, by contrast, the dissenting minority could not obtain any benefit from the resolution, because of the nature of the proposal to be voted on. The passage quoted by the judge is justified in the footnotes, correctly in my view, by reference to Goodfellow and to British American Nickel Corporation.

That part of Palmer is within the discussion of schemes of arrangement, for which the court’s sanction is necessary. More directly relevant, and to the same effect, is paragraph 13.51, as follows:

“The operation of majority clauses has been discussed in a number of cases. In sum, the powers of the meeting depend entirely on the true construction of the provisions in question. Each class of persons may vote in accordance with its own interests, provided that the whole scheme is fair, but not where there is a secret bargain to secure the vote of persons controlling the majority.”

Gore-Browne on Companies puts forward much the same proposition at paragraph 29[8].

Mr Goldblatt characterised what had happened in this case as the company participating in a process which ought to be left up to the relevant class, here the Noteholders, and he submitted that this was not legitimate. He further described the votes of the assenting Noteholders as being “sold” to the company. I have to say that this seems to me a misdescription of the process, just as his description of a restructuring as being a euphemism for a breach of contract was also wide of the mark. So far as the latter point is concerned, a company can only succeed in restructuring its obligations if it can obtain the consent of all necessary creditors, but if it has that consent then what follows is in accordance with the relevant contracts as varied, and is not a breach of contract. That is true whether the consent is obtained individually or by means of a procedure such as that laid down in the documents in this case whereby a majority of the class can bind the entire class. Equally, if a vote is cast in the way which the company has proposed and asked for, and has encouraged Noteholders to think would be in their best interests as well as in those of the company, that is not the “sale” of a vote even if the company has offered an incentive to fortify the encouragement. Moreover, I see nothing wrong in principle with the idea that a company, which has taken the view that a particular course of action is in its best interests and in those of its creditors and shareholders, but which requires favourable votes from one or more classes, should take part in the process which leads to the relevant resolution being put to the necessary vote. It seems to me that it would be extraordinary to suggest that the company cannot take part in the process. Indeed, in practical terms, it must do so. The only issue is whether it is allowed to strengthen its urging and encouragement in favour of a vote by offering an incentive. For my part I find no objection to that in principle under English law, so long as all is open and above board.

The judge had been shown some decisions of the Chancery Court of Delaware about consent payments, and some American articles discussing the practice, to which he referred at paragraphs 55 to 60 of his judgment. We have been shown some additional decisions and writings. This is interesting material from a comparative point of view. I am hesitant about placing any significant reliance on what we have been shown about the law and practice of Delaware, despite the high respect which the Chancery Court of that State deservedly commands, given that we are not in a position to be confident that we have been shown all that there is to be seen about the relevant principles, and also given that the statutory and regulatory context in Delaware may well be different in material respects from that which prevails in this jurisdiction. However, nothing that we have been shown, whether by way of judicial decision or of academic or practitioner comment, seems to me to provide any support at all for Mr Goldblatt’s argument. So far as the material shown to us allows us to judge, it seems to me that the course followed in the present case by the Imcopa group would be likely to be upheld as valid and proper if it were subject to the law of Delaware instead of to English law.

For the reasons which I have set out above, I would hold that it is not inconsistent with English company law, or with the documents governing the Notes in the present case, for the Issuer to offer a consent payment to Noteholders who vote in favour of a resolution proposed for their consideration as a class, where the 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 meeting and the vote, as was the case here. The payment was available to all Noteholders, conditionally only on their doing that which was within their power, namely exercising their right to vote in a particular way. There was therefore no pre-ordained discrimination between a majority and a minority, as there was in the case of Menier. The validity of such an offer, and of complying with it in the cases where it is accepted by a Noteholder’s actions, is not dependent on there being some special interest which needs to be provided for, as there was in Goodfellow. So far as the documents governing the Note issue are concerned, the pari passu obligation only, relevantly, affects money in the hands of the Trustee and, despite the admission in the Defence, it is clear that the funds in question did not pass into or through the hands of the Trustee. Nothing else in the documents could require the Consent Payments to be dealt with otherwise than in accordance with the individual contracts created by the Issuer’s offer and each Noteholder’s acceptance of it by conduct.

Except insofar as it has been necessary to deal separately with points raised for the first time before us, or developed in a different way, my reasons are the same as those of the judge and it would have been sufficient to say that his conclusion was correct for the reasons that he gave.

The Defendants relied, among other things, on a “no action” provision in clause 9.1 of the Trust Deed, by virtue of which only the Trustee is entitled to proceed against the Issuer or the Guarantor, except in circumstances which have not arisen. However, it was accepted as reasonably arguable that, if the Issuer or the Guarantor could be shown to be in repudiatory breach of the contract, they would not be entitled to rely on the no action provision. As the judge said at paragraph 38, it followed that the merits of reliance on the no action provision were dependent on the merits of the Claimants’ arguments on the main point. If they could show a sufficiently good case on the substance, they would not be defeated by the no action provision. If they could not, then the Defendants did not need the no action provision. I agree with the judge on this, and this aspect of the case did not feature in the course of argument before us.

Since I would reject the challenge to the validity of what was done in the present case, it is not necessary to consider at any length the separate claim against Imcopa U. It is sufficient for me to say that I agree with the judge’s reasons, set out at paragraphs 25 to 33 of his judgment, for holding not only that Imcopa U was validly replaced as Issuer by Imcopa C in December 2007, but also that it was released from its obligations as Issuer at the same time. I do not need to add anything more on this point.

The judge ordered the Claimants to pay the Defendants’ costs of the proceedings, including their costs incurred in relation to an application for security for costs which the Defendants made but which was not brought to a hearing, for lack of time, before the substantive hearing. As regards those costs, the judge disallowed 25% of the Defendants’ costs. The Claimants appealed on the basis that they should not have had to pay any part of the Defendants’ costs of that application, and that, to the contrary, the Defendants should have been ordered to pay their costs of that application, and on the indemnity basis. Time did not permit substantial oral submissions on this aspect of the appeal at the hearing, but we had the benefit of Mr Goldblatt’s skeleton argument on this point from the proceedings below, as well as the evidence adduced in relation to it, together with written submissions in the parties’ skeleton arguments on the appeal, and also the full transcript of the hearing below as regards costs, in the course of which submissions were made for the Claimants both by Mr Goldblatt and by Ms Gough. I have considered all of those. I see no error or misdirection in what the judge said about this in his supplementary judgment dealing with consequential matters. I would therefore dismiss that aspect of the appeal as well.

I agree.

I also agree.