Concord Trust v The Law Debenture Trust Corporation Plc

By a Trust Deed dated 15th November 2002 (“the Trust Deed”) and made between Elektrim Finance BV (“the Issuer”) (1), Elektrim SA (“Elektrim”) (2) and the defendant The Law Debenture Trust Corporation plc (“the Trustee”) (3) the Trustee was constituted the trustee for bondholders in relation to an issue of €510m 2% bonds due 2005 by the Issuer and guaranteed by Elektrim. Condition 12 of the Bond provides that

“The..Trustee at its discretion may, and if so requested by the holders of at least 30 per cent in principal amount outstanding of the Bonds or if so directed by an Extraordinary Resolution of the Bondholders shall (subject in each case to being indemnified to its satisfaction), give notice to the Issuer and [Elektrim] that the Bonds are, and they shall accordingly immediately become due and repayable at their relevant redemption value, together with the accrued Interest Amount as provided in the Bond Trust Deed, upon the occurrence of any of the following events (“Events of Default”)..”

One of such events is a failure by the Issuer or Elektrim to perform or observe any of its obligations under the Bonds or the Trust Deed if the Trustee shall have certified that such event is materially prejudicial to the interests of the bondholders.

On 16th February 2004 Peter Smith J declared, in proceedings to which the claimant (“Concord”) and the Trustee (but not the Issuer or Elektrim) were parties, that the Issuer and Elektrim were in breach of a condition in the Bonds and that the Trustee was at liberty to certify without any further enquiry or investigation that such breach is materially prejudicial to the interests of the bondholders. On 17th February 2004 the Trustee so certified. By a notice dated 22nd March 2004 the Trustee informed bondholders that it had received requests from holders of over 30% of the bonds (by value) to declare the bonds to be immediately due and payable. The notice continued

“The conditions of the Bonds make clear that prior to making such a declaration in respect of the Bonds, the Trustee may require that it be indemnified to its satisfaction. The Trustee hereby gives notice that it does require such an indemnity prior to making such a declaration.”

Correspondence, to which I shall refer in greater detail later, on the subject of an indemnity between the solicitors for the Trustee and the solicitors for Concord, representing an ad hoc committee of bondholders holding about 45% of the bonds in issue, ensued.

By a letter dated 29th April 2004 the solicitors for the Trustee wrote to those for Concord stating that the Trustee had been unable to conclude that the indemnity proffered was satisfactory. On 30th April 2004 Concord issued the Part 8 claim form now before me by which it seeks a declaration that the Trustee

“is obliged forthwith to give notice to [the Issuer and Elektrim] that the Bonds as defined in [the Trust Deed] are accelerated in accordance with Condition 12 of the Trust Deed.”

In summary the Trustee contends that as the indemnity proffered by Concord was not satisfactory to the Trustee the Trustee is under no obligation to give notice to the Issuer or Elektrim to the effect that the bonds are immediately due and repayable. Concord maintains that the conclusion of the Trustee that the indemnity proffered is not satisfactory is, in all the circumstances, so unreasonable and irrational that it should be ignored.

Elektrim is a company incorporated in the Republic of Poland. It is the parent company of a group specialising in telecommunications and energy. Its principal assets are a 49% shareholding in and loans to Elektrim Telecommuikacja Sp.z.oo. (“ET”) and a 49% shareholding in Carcom Warszawa Sp z.o.o. (“Carcom”). The remaining 51% shareholding in ET and Carcom is held by Vivendi Universal SA or its associate Ymer Finance. ET and Carcom hold 51% of the shares in Polska Telefonia Cyfrowa Sp.z.oo (“PTC”), the largest mobile telephone company in Poland. The remaining 49% shareholding in PTC is held by Deutsche Telekom (“DT”), a company incorporated in Germany.

There is an agreement relating to shareholdings in PTC to which at least Elektrim and DT are parties. The agreement (“the PTC Agreement”) is not in evidence and the secondary evidence as to its contents is obscure. It seems likely that the PTC Agreement was made on 21st December 1995 and amended on 11th March 1997. It is the belief of Concord (as expressed in its solicitors’ letter dated 12th May 2004) that

“if DT can prove that Elektrim has become ‘economically impaired’ it may exercise a right to purchase Elektrim’s shares in PTC from Elektrim at a price close to book value”.

This belief is confirmed by a letter dated 2nd April 2004 from solicitors for Elektrim in which they state that a claim by DT of economic impairment of Elektrim will give rise to a contractual remedy entitling DT to buy Elektrim’s shares in PTC for book value.

The bonds were originally issued in July 1999 in the form of 1,795m PLN 3.75% Euro-linked Exchangeable bonds on the terms of a Trust Deed dated 2nd July 1999 and made between the Issuer (1), Elektrim (2) and the Trustee (3) as amended by a further Trust Deed dated 14th July 1999 and made by the same parties. The optional redemption date was 17th December 2001. On 19th December 2001 the Trustee gave notice of default to the Issuer and Elektrim in respect of their failure to repay 479.3m Euros on 17th December 2001. Insolvency proceedings against the Issuer and Elektrim were commenced in Poland in January 2002 but did not succeed because Elektrim entered a Polish composition with its creditors. This lasted until 22nd August 2002 when the composition was terminated on the footing that Elektrim would forthwith restructure the bonds. On 2nd September 2002 Elektrim defaulted on this obligation as well. On 13th September 2002 Elektrim applied for its own bankruptcy in Poland.

Eventually the bonds were restructured, in accordance with the terms of the Trust Deed, as €510m 2% bonds repayable on 15th December 2005. I have referred in paragraph 1 above to the provision in the Trust Deed central to this dispute. I should now refer to other material provisions which are governed by and to be construed in accordance with English Law.

Clause 1 contains a number of definitions to be applied unless inconsistent with the context, including

“Event of Default means any of the conditions, events or acts provided in condition 12 to be events on the happening of which the Bonds would, subject only to notice by the Trustee as therein provided become immediately due and repayable”

“Liability means any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever (including without limitation in respect of taxes, duties, levies, imposts and other charges) and including any value added tax or similar tax chargeable in respect thereof and legal fees properly incurred on a full indemnity basis”

“These presents means this Trust Deed and the Schedules and any Trust Deed supplemental hereto and the Schedules (if any) thereto and the bonds and the conditions all as from time to time modified in accordance with the provisions herein or therein contained”

Clause 2 contains the covenants by the Issuer with the Trustee to repay and to pay interest on the amounts for the time being not repaid. Clause 3 provides for the form and issue of the bonds. Clauses 7 and 8 contain the covenants of Elektrim, as guarantor, with the Trustee. Clause 9 deals with enforcement. Clause 9.1 authorises the Trustee at its discretion and without notice to take such proceedings as it thinks fit against the Issuer or Elektrim to enforce their respective obligations. Clauses 9.3 and 10.1 are in the following terms

“9.3

In case of an Event of Default, the Trustee may, and shall if requested to do so in writing by holders of at least thirty per cent in principal amount outstanding of the Bonds or if so directed by an Extraordinary Resolution of the holders of the Bonds and, in either case, subject to it being secured and/or indemnified to its satisfaction, direct the Security Agent to enforce the Security Documents in favour of the Bondholders, subject to the terms of the Security Administration Agreement and subject, in the case of the Submissions to Execution, to clauses 9.4 and 9.5 below.”

“10.1

The Trustee shall not be bound to take any proceedings mentioned in Clause 9 or any other action in relation to these presents unless respectively directed or requested to do so (i) by an Extraordinary Resolution of the holders of the Bonds or (ii) in writing by the holders of at least thirty per cent in principal amount outstanding of the Bonds and in either (i) or (ii) then only if it shall be indemnified to its satisfaction against all Liabilities to which it may thereby render itself liable or which it may incur by so doing.”

The Trust Deed also contains a number of provisions limiting or excluding what might otherwise be a liability of the Trustee which are relied on by Concord. They include

“16.5

The Issuer shall also pay or discharge all Liabilities properly incurred by the Trustee in relation to the preparation and execution of the exercise of its powers and the performance of its duties under, and in any other manner in relation to, these presents and the Security Documents (including all Liabilities properly incurred by the Trustee in relation to the preparation and execution of any supplemental deeds, including but not limited to legal and travelling expenses and any stamp, issue, registration, documentary and other taxes or duties paid or payable by the Trustee in connection with any action taken or contemplated by or on behalf of the Trustee for enforcing, or resolving any doubt concerning or for any other purpose in relation to, these presents. The Issuer and the Guarantor confirm that all amounts payable by the Trustee to the Security Agent under the Security Documents shall be Liabilities.”

“17.1

The Trustee shall have all the powers conferred upon Trustees by the Trustee Act 1925 of England and Wales and by way of supplement thereto it is expressly declared as follows:

(A)

The Trustee may in relation to these presents and the Security Documents act on the advice or opinion of or any information obtained from any lawyer, valuer, accountant, surveyor, banker, broker, auctioneer or other expert considered by the Trustee to be of due repute whether obtained by the Issuer, the Guarantor, the Trustee or otherwise and shall not be responsible for any loss occasioned by so acting. The Trustee may rely, without liability to the Bondholders, on any certificate or report prepared by the Auditors pursuant to these presents or the Security Documents whether or not addressed to the Trustee.

(B)

Any such advice, opinion or information may be sent or obtained by letter, telex, telegram, facsimile or cable and the Trustee shall not be liable for acting on any advice, opinion or information purporting to be conveyed by any such letter, telex, telegram, facsimile transmission or cable although the same shall contain some error or shall not be authentic.

.....

(G)

Save as expressly otherwise provided in these presents, the Trustee shall have absolute and uncontrolled discretion as to the exercise of its trusts, powers, authorities and discretions under these presents and the Security Documents (the exercise of which as between the Trustee and the Bondholders shall be conclusive and binding on the Bondholders) and shall not be responsible for any Liability which may result from their exercise or non-exercise.

.....

(J)

Without prejudice to the right of indemnity by law given to trustees, the Issuer and the Guarantor shall indemnify the Trustee and every Appointee (including the Security Agent) and keep it or him indemnified against all Liabilities to which it or he may be or become subject or which may be incurred by it or by him in the execution or purported execution of any of its or his trusts, powers, authorities and discretions under these presents or its or his functions under any such appointment or in respect of any other matter or thing done or omitted in any way relating to these presents.

.....

(N)

The Trustee as between itself and the Bondholders may determine all questions and doubts arising in relation to any of the provisions of these presents and the Security Documents. Every such determination, whether or not relating in whole or in part to the acts or proceedings of the Trustee, shall be conclusive and shall bind the Trustee and the Bondholders.”

“20.1

The Trustee may without prejudice to its rights in respect of any subsequent breach, Event of Default or Potential Event of Default from time to time and at any time but only if and in so far as in its opinion the interests of the Bondholders shall not be materially prejudiced thereby waive or authorise any breach or proposed breach by the Issuer or the Guarantor of any of the covenants or provisions contained in these presents or the Security Documents or determine that any Event of Default or Potential Event of Default shall not be treated as such for the purposes of these presents PROVIDED ALWAYS THAT the Trustee shall not exercise any powers conferred on it by this Clause in contravention of any express direction given by Extraordinary Resolution or by a request under Condition 12 but so that no such direction or request shall affect any waiver, authorisation or determination previously given or made. Any such waiver, authorisation or determination may be given or made on such terms and subject to such conditions (if any) as the Trustee may determine, shall be binding on the Bondholders and, unless the Trustee agrees otherwise, shall be notified by the Issuer to the Bondholders in accordance with Condition 16 as soon as practicable thereafter.”

Clause 27 provides that Elektrim will provide security for its obligations as set out in condition 8 of the conditions of the bonds. Under Polish law such security had to be held by a bank. Accordingly Citibank was constituted the security agent of the Trustee under the provisions of a separate Security Administration Agreement. The security includes a first registered pledge over the shareholdings of Elektrim in ET and Carcom and the debts due by ET to Elektrim.

Condition 10(d) conferred on the Trustee the right to require the supervisory board of Elektrim to appoint to the management board of Elektrim a person nominated by the holders of not less than 25% of the outstanding bonds (by value). Material decisions of the board of Elektrim might only be taken with the consent of the entire management board. The supervisory board of Elektrim might dismiss the nominated director on specific grounds but if it did so such director might initiate arbitration proceedings to determine whether his dismissal had been authorised. In any circumstances where a nominated director was dismissed it was not to take effect until a new nominated director had been appointed.

Condition 12 specified the Events of Default, one of which, set out at length in sub-paragraph (ii) is the failure of either the Issuer or Elektrim to perform or observe any obligation under the bonds or Trust Deed so long as the Trustee certified such event to be materially prejudicial to the interests of the bondholders. Condition 13 entitles a bondholder to proceed directly against the Issuer or Elektrim if the Trustee having become bound to proceed fails to do so within a reasonable time and such failure is continuing.

The bondholders nominated Mr Piotr Rymaszewski to be their nominated director and he was duly appointed to the management board of Elektrim. In June 2003 Elektrim purported to suspend Mr Piotr Rymaszewski and invited the bondholders to nominate another individual for appointment. It was considered that there was no power to suspend the nominated director even if, which was not admitted, Elektrim was entitled to dismiss him. Accordingly on 24th July 2003 the Trustee gave a notice of default and required Elektrim to remedy its breach of covenant. Elektrim failed to do so. This led to the proceedings before Peter Smith J in February 2004 to which I shall refer shortly.

On 16th September 2003 Elektrim announced that DT, Vivendi Universal SA, Elektrim (in agreement with the bondholders representative on the board of Elektrim) and Ymer Finance had reached an agreement in principle whereby DT’s interest in PTC would be increased from 49% to 100% for a cash sum of €1.1bn. Such sum was to be allocated as to €691m to Vivendi Universal, €400m to Elektrim and €9m to Ymer Finance. The agreement in principle was never in fact concluded or completed. The Trustee relies on the announcement as an indication of the open market value of PTC.

The proceedings before Peter Smith J were commenced by a claim form issued by the Trustee as claimant against Acciona SA, Concord and Mizuho International plc as defendants. The Trustee thereby sought directions as to the true construction and application of the provisions of condition 12 requiring it to certify that a failure to perform or observe a provision of the conditions was materially prejudicial to the interests of the bondholders. The occasion for doing so was the suspension of Mr Piotr Rymaszewski from the management board of Elektrim in June 2003. Peter Smith J concluded that it was. In paragraphs 56 and 57 of his judgment he said

“56....In my opinion the purported suspension of Mr. Rymaszewski, which is a total repudiation of this fundamental provision, is not only a material breach, it is also self-evidently materially prejudicial to the interests of the bondholders. I do not see it requires an investigation as to the transactions that have taken place. Even if the transactions objectively examined conferred benefits on the Bondholders or did not affect their interests in economic terms that does not address the fundamental issue which is that they were entitled to be heard and block (if they thought appropriate) any transaction whether it was beneficial or not. That right has been taken away by the breach and is clearly materially prejudicial. They have lost these rights and continue to be deprived of the right to issue them.

57.

Accordingly, I would answer the question by determining that the suspension of Mr. Rymaszewski in breach of Condition 10(d) is a breach of Condition 12(ii) which is materially prejudicial to the interests of the Bondholders and that the Trustee can certify to that effect without the need for any further investigation.”

As I have already recorded the Trustee certified the event of default on 17th February 2004.

On 26th February 2004 the solicitors for Concord sent to those for the Trustee a form of indemnity to be entered into by Concord, Elliott Associates LP and Acciona SA. It would indemnify the Trustee in respect of proceedings against the Issuer or Elektrim to enforce the bonds and was based on a form of indemnity proposed in the autumn 2003. The indemnifiers were, however, to be liable only severally for a proportion of the liability incurred by the Trustee. This was not satisfactory to the Trustee. On 2nd March 2004 its solicitors returned the draft amended so as to provide, amongst other things, for the liability of the indemnifiers to be joint and several and to cover claims which might be made against it as a result of any acceleration or enforcement proceedings. The solicitors for Concord demurred and in an e-mail sent on 9th March 2004 the solicitors for the Trustee confirmed that the Trustee had a distinct preference for a joint and several liability on the part of the indemnifiers. They indicated that if the liability was not to be joint and several then other provisions would have to be ‘substantially beefed up’.

As I have already recorded, on 22nd March 2004 the Trustee gave notice to the bondholders that it had received requests from over 30% of bondholders (by value) to declare the bonds to be immediately due and repayable but pointed out its requirement for an indemnity to its satisfaction.

On 2nd April 2004 solicitors for Elektrim wrote to the solicitors for both the Trustee and Concord. They pointed out that acceleration of repayment of the bonds would give rise to a claim by DT against Elektrim based on alleged economic impairment giving rise to the right to buy the 51% shareholding in PTC at book value. They continued

“Any such claim (and clearly any such outcome) would severely damage the value of the PTC shares owned by ET with direct consequences on the value of security pledged to secure the bonds and on the prospects for full repayment on or before the maturity of the bonds....This risk is a part of the overall consideration the Trustee should give to any acceleration request (as well as to its own indemnity arrangements). Based on what we understand of the facts today – this risk remains a compelling factor against acceleration of the bonds.”

Later with regard to the proceedings before Peter Smith J, to which Elektrim had not been a party, they added

“This is not the time and place to vent these issues in detail but you should be aware that our client has raised with us its serious concerns regarding the proceedings, facts and underlying Polish legal assumptions which appear to underpin that decision.”

On 16th April 2004 the solicitors for Elektrim wrote again to those for Concord asking for an undertaking to give 2 days notice to Elektrim before delivering an indemnity to the Trustee and for Concord to authorise the Trustee to give 2 days’ notice to Elektrim before issuing a notice of acceleration. The writer expressed the hope that such undertakings “would enable vigorous settlement negotiations to be undertaken”.

On Monday 19th April 2004 the solicitors for Elektrim notified those for the Trustee of their clients’ intention to make an ex parte application in the Commercial Court for an injunction to restrain the Trustee from declaring the bonds to be immediately due and repayable. The solicitors for the Trustee notified those for Concord. The latter asked Elektrim to desist from applying for the injunction for 48 hours to enable them to complete consideration of the requests made by Elektrim in the letter of 16th April 2004. In the event the application for an injunction was not made.

On 20th April 2004 the solicitors for the Trustee wrote again to those for Concord with a further draft of the indemnity it sought extended to cover any damages arising under the arbitration proceedings then threatened by Elektrim. On the same day the solicitors for Concord sought an undertaking from Elektrim that it would not arrange for the sale of ET’s stake in PTC. It was not given.

On 23rd April 2004 the solicitors for Concord sent to the Trustee and its solicitor an indemnity “which we believe is in satisfactory form” executed by both Concord and Elliott Associates LP. They indicated that they expected the Trustee to accelerate the bonds that day and emphasised that the Trustee should not tell Elektrim of the delivery of the indemnity and imminent acceleration. The indemnifier was Concord and its obligations were guaranteed by Elliott Associates LP. The form had not been negotiated between the solicitors for the Trustee and Concord. Later that day the solicitors for the Trustee replied to the effect that the Trustee had expected a joint and several indemnity from Acciona and Elliott Associates and wanted legal opinions as to the validity of the obligations undertaken by the Elliott companies. Later still the solicitors for Concord sent to those for the Trustee on a strictly privileged and confidential basis audited financial information relating to Elliott Associates LP.

Further exchanges between the solicitors for the Trustee and Concord took place later in the evening of 23rd April. The former pointed out a number of features of the form of indemnity submitted by Concord with which it did not agree. The latter supplied the legal opinions previously requested. On Monday 26th April 2004 the solicitors for Concord wrote commenting on the form of indemnity sought by the Trustee. They suggested that some of the provisions sought by the Trustee went beyond what was reasonable and asked the Trustee to point out all the specific provisions which it found unreasonable and their reasoned justification for those findings. On the same day Elliott Associates LP wrote to the Trustee undertaking to give the Trustee 10 days’ prior notice of any return to partners of 50% or more of total partners’ capital.

On 27th April 2004 the solicitors for the Trustee warned those for Concord that the Trustee was not then satisfied with the indemnity on the financial front, particularly in view of the length of time that litigation arising out of an acceleration might last. On 28th April 2004 the solicitors for Concord wrote a long letter responding to the various points made by the Trustee and enclosing a further deed of indemnity executed by both Concord and Elliott Associates LP. They asked the solicitors for the Trustee “to confirm by return that the Trustee will now accelerate the bonds without further delay”. The solicitors for the Trustee replied on the same day commenting on the letter from the solicitors for Concord, in particular in relation to the financial standing of Elliott Associates LP. Concord’s solicitors replied the following day emphasising the strong financial background and stability of Elliott Associates LP through the years. They expressed the opinion that “they have provided an extremely satisfactory indemnity”.

The Trustee remained unmoved. On 29th April 2004 its solicitors wrote

“Unfortunately, in these circumstances Law Debenture are not able to reach the conclusion that the indemnity proffered is satisfactory.

The magnitude of the liabilities which may be incurred by acceleration are such that unfortunately the Trustee requires greater comfort than Elliott has to date provided. The Trustee still has a number of concerns including the uncertainty surrounding the level and composition of Elliott’s assets from time to time and, in particular, the fact that these may be affected by matters such as the possibility that capital can be withdrawn and that Elliott may not be ready to liquidate assets to meet any demand. This uncertainty is not acceptable to the Trustee. As a result, the Trustee has reached the conclusion that in order to accelerate without delay a guarantee or an indemnity from a body such as a major clearing bank is required.

This is in no way a comment on Elliott’s standing. It is simply that in these circumstances in particular given the comments made by Hunter Baker in his letter to you and to us of 2 April 2004, it is possible to see that post any acceleration, the Trustee could be in receipt of a claim for many hundreds of millions of Euro.”

The solicitors for Concord replied the same day indicating their view that the indemnity “should be more than satisfactory to the Trustee” and that “any reasonable trustee would accept it”. It described the Trustee’s request for a guarantee from a major clearing bank as “wholly unreasonable”. They concluded by stating that they would be instituting proceedings in the Chancery Division the next day seeking declaratory relief.

The claim form was duly issued on 30th April 2004. It was supported by a witness statement made the same day by Mr Roome, a partner in the solicitors acting for Concord. In paragraph 15 he criticised the attitude of the Trustee and of the points made by its solicitors. In paragraph 15.13 he dealt with the cost of providing a bank guarantee for a period of five years in the sum of €500m as between €13m and €14m per annum. On 3rd May 2004 the solicitors for Concord wrote to those for the Trustee in relation to a letter from Elektrim dated 29th April 2004. They pointed out

“2.

Elektrim has one valuable asset, namely its shares in ET and Carcom, which in turn hold shares in PTC, the very substantial Polish Telecommunications company. Elektrim is aware that it is contrary to the terms and conditions of the Bonds (see Condition 12(vii)) for Elektrim to sell this asset without Bondholder consent. Elektrim has nonetheless been openly negotiating for the sale of this asset.

3.

The Committee of Bondholders is extremely concerned that the proceeds of any sale of the PTC shares (in breach of Condition 12(vii) of the Bonds) would be dissipated by ET and Carcom or otherwise used for purposes other than the redemption of the Bonds.”

On 5th May 2004 the solicitors for the Trustee wrote to those for Concord at length setting out the information and protection the Trustee required. They enclosed a form of Letter of Credit. The form of Letter of Credit was in a sum of €1bn. for a period of 12 years. They concluded

“For the avoidance of doubt, we should make clear that given the possible scale of liabilities and the duration of the risk an unsupported indemnity from Elliott Associates LP will not satisfy [the Trustee].”

They confirmed that as at that date 71.88% of the bondholders had requested acceleration.

On 7th May 2004 the solicitors for Concord gave further information relating to Elliott Associates LP. It does not appear to me to be any more informative than the information given before. On 12th May 2004 the solicitors for Concord wrote again and at length making most of the points raised in argument before me. The correspondence continued in the same vein with letters dated 14th, 18th and 19th May 2004.

It was common ground that if it could be established that the conclusion reached by the Trustee that the indemnity offered was not to “its satisfaction” was unreasonable in the Wednesbury sense then the Trustee could not rely on it as a defence to the relief sought. It is as well from time to time to remind oneself exactly what ‘unreasonable in the Wednesbury sense’ means. The reference is, of course, to the decision of the Court of Appeal in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. The issue was whether the local authority, which was entitled to impose such conditions as it thought fit, was entitled to impose the condition on Sunday performances that no children under 15 should be admitted. The plaintiff contended that the condition was unreasonable and so beyond the power of the local authority. In dealing with that contention Lord Greene MR said (p.230)

“[Counsel for the plaintiff, Mr Gallop] based his argument on the word “unreasonable” which he treated as an independent ground for attacking the decision of the authority; but once it is conceded, as it must be conceded in this case, that the particular subject-matter dealt with by this condition was one which it was competent for the authority to consider, there, in my opinion is an end of the case. Once that is granted, Mr. Gallop is bound to say that the decision of the authority is wrong because it is unreasonable, and in saying that he is really saying that the ultimate arbiter of what is and is not reasonable is the court and not the local authority. It is just there, it seems to me, that the argument breaks down. It is clear that the local authority are entrusted by Parliament with the decision on a matter which the knowledge and experience of that authority can best be trusted to deal with. The subject matter with which the condition deals is one relevant for its consideration. They have considered it and come to a decision on it. It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the courts can interfere. That, I think is quite right; but to prove a case of that kind would require something overwhelming, and in this case, the facts do not come anywhere near anything of that kind. I think Mr. Gallop in the end agreed that his proposition that the decision of the local authority can be upset if it is proved to be unreasonable, really meant that it must be proved to be unreasonable in the sense that the court considers it to be a decision that no reasonable body could have come to. It is not what the court considers unreasonable, a different thing altogether.”

That principle has been approved and applied by the House of Lords in countless cases, including Dundee General Hospitals Board of Management v Walker [1952] 1 AER 896. In that case a testator gave a legacy to a named hospital to be paid “only if my trustees shall in their sole and absolute discretion be satisfied that at my death the said infirmary has not been taken over...” The trustees decided on the advice of counsel that the legacy should not be paid and their decision was challenged by the hospital. Lord Reid said (p.905)

“I am satisfied that these words show that the testator did not intend that there should be anything in the nature of an appeal from the decision of his trustees. But, by making his trustees the sole judges of a question a testator does not entirely exclude recourse to the court by persons aggrieved by the trustees’ decision. If it can be shown that the trustees considered the wrong question, or that, although they purported to consider the right question they did not apply their minds to it or perversely shut their eyes to the facts or that they did not act honestly or in good faith, then there was no true decision and the court will intervene, but nothing of that kind is alleged in this case. The appellants’ case here is that although the respondents acted with deliberation and in good faith, their decision was unreasonable in the sense that no reasonable man could have failed to be satisfied that the infirmary had not been placed under the control of the State before the testator’s death. In this case, the respondents have not objected to that being taken as a proper test and I shall consider the facts on that view, but I wish to reserve my opinion whether that is the proper test in cases of this kind.”

The effect of the authorities has been recently and helpfully summarised by Brooke LJ in Ludgate Insurance Company Ltd v Citibank NA [1998] Ll.L.R. 221 para 35 in the following terms

“It is well established that the circumstances in which a court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited. We were referred to Weinberger v Inglis [1919] AC 606; Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, Docker v Hyams [1969] 1 Lloyd’s Rep 487, and Abu Dhabi National TankerCompany v Product Star Shipping Company Limited [1993] 1 Lloyd’s Rep 397 (“The Product Star”). These cases show that provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.”

To these principles I would add two riders. First, it was suggested by counsel for Concord that the onus was on the Trustee to establish reasonableness. I do not agree. The onus is on the party who seeks to impugn the determination by the Trustee. Accordingly it is for Concord to establish unreasonableness in the Wednesbury sense. Second, a trustee is not required to accept any personal liability for acting in accordance with his trust, see for example Re Grimthorpe [1958] Ch.615, 623. The right to an indemnity, recognised by condition 12, is a right conferred on the Trustee for its own benefit and protection and in priority to the interests of its beneficiaries.

The right of the trustee may therefore conflict with the interest of its beneficiaries. In the case of the comparable right of retainer where the maximum amount of the liability is known the Trustee may not retain trust assets to a value in excess of what is required to discharge it, Re Knox’s Trust [1895] 2 Ch.483. But where the maximum amount is unknown the amount of any retention should be calculated on the basis of what is, on reasonable but not fanciful assumptions in favour of the trustee, the worst case. This is the principle suggested by Lewin on Trusts 17th Ed. para 26.21 which I adopted and applied recently in a matter which, because I heard it in private, cannot be reported. Thus the issue of Wednesbury unreasonableness alleged by Concord must be considered on ‘a worst case scenario’ from the point of view of the Trustee.

Counsel suggests that the question I have to answer is whether it is unreasonable in the Wednesbury sense for the Trustee to require security in the form of a letter of credit from a Bank in the sum of €1bn. for 12 years, as indicated in the letter from the Trustee’s solicitors dated 5th May 2004 to which I have referred in paragraph 28 above. She submits that it is for three reasons:

The first submission was developed in a series of cumulative submissions which may be summarised as follows:

Counsel for the Trustee accepted that the right conferred on the Trustee by condition 12 to be ‘indemnified’ did not entitle the Trustee to insist on security as such. His submission was that the requirement for the indemnity to be to the satisfaction of the Trustee entitled it, within the limits of Wednesbury reasonableness, to reject an indemnity if it was not suitably secured. He also accepted that Vivendi Universal had no direct claim against the Trustee in the event of a wrongful acceleration. He submitted that it could well have an indirect claim through Elektrim.

Counsel for the Trustee submitted that the question was not as formulated by counsel for Concord but as posed by the claim form, namely whether in the circumstances the Trustee is entitled not to be satisfied with the indemnity offered. He submitted that the answer was affirmative with the consequence that the Trustee was under no present obligation to accelerate the bonds. He contended that Elektrim had an arguable claim against the Trustee for damages for breach of contract in the event of a wrongful acceleration of the bonds which could well amount to an award of €1bn. or thereabouts. He suggested that in view of all the uncertainties it is not unreasonable in the Wednesbury sense to require the protection of the Trustee to endure for a period of 12 years. He contended that none of the clauses in the Trust Deed relied on by Concord would provide a clear and complete defence so as to make it unreasonable in the Wednesbury sense to insist on an indemnity.

If the answer to this question is in the negative, as counsel for Concord submits, then the succeeding questions do not arise. The starting point is to recognise that the relationship between the Trustee and Elektrim is contractual. The contract is to be found in the terms of the Trust Deed and of the bonds. Clause 9.3 of the Trust Deed and Condition 12(ii) of the Bonds entitles the Trustee to accelerate the bonds by requiring immediate repayment if there is an event of default. Plainly any notice given under either of those provisions requiring immediate repayment in any case where there is no event of default will constitute a breach of contract. In any such event Elektrim will be entitled to damages assessed in accordance with the usual principles.

The submission for Concord I have summarised in paragraph 36(3)(i) above accepts that Elektrim is not bound by the judgment of Peter Smith J to the effect that the suspension of the nominated director constituted an event of default. But counsel submitted that it is fanciful to suggest that another judge is likely to reach any different conclusion. This submission presupposes that Elektrim would not be in a position to adduce any further evidence or different submissions to those advanced before Peter Smith J. But this is not an assumption the Trustee is required to make. The letter dated 2nd April 2004 from the solicitors for Elektrim, which I have quoted in paragraph 19 above, contains a clear indication that Elektrim would adduce further evidence including evidence of the law of Poland.

Accordingly it is necessary to consider what level of award might be made against the Trustee in the event of Elektrim successfully alleging that there was no event of default entitling the Trustee to accelerate the bonds. The contention of the Trustee is based on the matters referred to in paragraph 5 above. The Trustee contends that the letter from the solicitors for Elektrim dated 2nd April 2004 and the letter from the solicitors for Concord both indicate that there is an agreement or agreements between Elektrim and DT to the effect that if DT can establish that Elektrim has become economically impaired then DT is entitled to acquire the 51% shareholding in PTC it does not already own at book value. The Trustee submits that an acceleration, even if wrongful, may well give rise to such impairment, not least by causing creditors of Elektrim themselves to insist on prompt repayment.

Counsel for Concord submits that such suggestions are fanciful. She contends that an invalid acceleration could not give rise to economic impairment. She points out that Elektrim does not hold the 51% shareholding in PTC so that no loss would be sustained by Elektrim even if DT did succeed in establishing economic impairment of Elektrim.

In my view the submissions of Counsel for the Trustee cannot be stigmatised as fanciful. The agreement or agreements between DT and Elektrim have not been adduced in evidence in this action. The best evidence, and allowing a good deal of latitude in recognition of the need to have regard to ‘the worst case scenario’, is that DT has the right to acquire the outstanding 51% of the shares in PTC at book value. Whether the test is ‘economic impairment’ or whether that is a convenient shorthand for the various insolvency procedures available to creditors of Elektrim is unclear. Further there is no evidence as to what the insolvency processes would be under the law of Poland. Either way it seems to me to be plain that there is a risk that a wrongful acceleration of the bonds could give rise to whatever is the exact event which triggers the right of DT to acquire the shares in PTC.

If the right of DT does arise then will it give rise to some loss and if so to whom? In particular can that loss underpin an award of damages for a comparable amount in favour of Elektrim against the Trustee? Plainly if the true value of the 51% holding in PTC is greater than book value then a loss equivalent to the difference will be sustained by the present holders of that 51%, namely ET and Carcom. Counsel for Concord submits that such a loss, which she does not accept, could not be recoverable either directly or indirectly by Elektrim. As she points out, whatever may have been the position when the agreement between DT and Elektrim was concluded, Elektrim now holds only one share in PTC.

Plainly the loss, if any, will be sustained directly by the present shareholders in PTC, namely ET and Carcom. But Elektrim holds 49% of the shares in both those companies, the remaining 51% being held by Vivendi Universal. If a substantial and corresponding loss is sustained by ET and Carcom because of the loss of the PTC shares at book value then it may diminish the value of their shares in the hands of Elektrim. Such a loss is, in principle, recoverable by Elektrim against the Trustee in respect of the assumed breach by the Trustee of the contract between the Trustee and Elektrim.

Counsel for the Trustee submits that it should not be assumed that the loss arising from the exercise of the pre-emption right of DT over the PTC shares attributable to the 51% shareholding of Vivendi Universal in ET and Carcom is not recoverable by Vivendi from Elektrim and by Elektrim from the Trustee. He points out that there is a partnership between Elektrim and Vivendi Universal constituted by an agreement dated 28th June 2001 of which no details are available. He suggests that it is more than likely that under the agreement Elektrim has provided some protection to Vivendi Universal to protect the latter from the PTC shares being removed from ET and Carcom at an undervalue. It seems to me that this is a good deal more speculative but unless and until the Trustee has been provided with a copy of all the relevant underlying documents I do not see why it should be required to assume that any loss sustained by Vivendi Universal cannot be recovered from Elektrim and by Elektrim from the Trustee if the cause of the shares being taken by DT is economic impairment triggered by an unjustified acceleration of the bonds.

The amount of the loss is also hotly disputed. For the Trustee counsel relies on an announcement made on 16th September 2003 of an offer by DT to buy from ET and Carcom their 51% holding in PTC for €1.1bn. The sale did not proceed but, it is submitted, the offer is some indication of the open market value of 51% of the shares. The Trustee also tentatively suggested in its letter to Concord’s solicitor dated 5th May 2004 that the book value might be as low as €100m; but it got no response. It is the difference between these two figures which led the Trustee to suggest that the amount of the letter of credit it sought should be €1bn.

Counsel for Concord challenged both figures. With regard to the open market value she suggested that, as the press release which gave the bid price as €1.1bn. also showed, only €400m or 36% would have been due to Elektrim. This is true, but of the remaining €700m €691m or 63% of the whole was due to Vivendi Universal. Thus 99% would have been due to Elektrim and Vivendi Universal together. With regard to the book value counsel for Concord relied on the annual report and accounts of PTC for the year 2003, which are available on the web but in Polish, as showing that the book value of the PTC shares is the equivalent of €439m. But that would be the book value for 100% of the shares in PTC; the book value for 51% is €224m. The conclusion counsel for Concord invited me to reach is that the estimate of potential liability at €1bn is so absurd as to indicate clearly how unreasonably the Trustee has approached the whole question of indemnity.

I do not reach that conclusion. The figures are high but they are more than mere speculation. In the absence of any better evidence I do not see why the open market value of 51% of the PTC shares should not be taken to be €1.1bn or thereabouts. Even if it is correct at this stage to fix the book value at €224m. this still gives rise to a loss to Elektrim and Vivendi Universal together of €876m or thereabouts. Accordingly I conclude, in answer to the question I posed at the beginning of this section, that on the basis of such information as is now available and on a worst case scenario a wrongful acceleration could give rise to a claim by Elektrim against the Trustee for damages in the region of €876m or thereabouts.

The first provision on which Concord relies is clause 16.5 which I have set out in full in paragraph 10 above. For Concord it was emphasised that the clause covers all liabilities, as defined in clause 1. That is true but as clause 16.5 makes abundantly clear such a liability must be “properly” incurred if it is to come within the scope of the clause. As the hypothesis is that the liability is one sustained in consequence of the Trustee’s own breach of contract it cannot, in my view, be properly incurred for the purposes of clause 16.5. Accordingly that clause does not avail Concord.

The second provision on which Concord relies is 17.1(G) also quoted in paragraph 10 above. Counsel contends that the liability would be the consequence of the exercise of the power conferred on the Trustee by Clause 9.3 of the Trust Deed and Condition 12(ii) of the Bonds. She suggests that such exercise would be in reliance on advice within clause 17.1(A) and (B). The riposte of counsel for the Trustee, with which I agree, is that the liability envisaged is not the consequence of either the exercise or the non-exercise of any trust, power, authority or discretion thereby conferred but of a breach of contract committed by the Trustee. In consequence the provisions of clause 17.1(G) cannot protect the Trustee either.

The third provision on which Concord relies is clause 17.1(J). This provides an indemnity from Elektrim and the Issuer against liabilities incurred in the purported execution of such trusts, powers, authorities or discretions. This would comprehend a liability incurred in the purported exercise of the powers conferred by Clause 9.3 of the Trust Deed and Condition 12(ii) of the Bonds but it would not necessarily preclude a claim by Elektrim in the first place. I was referred to three cases in which it was held that such a clause did not afford any protection against third party claims.

In The Carlton [1931] P 186 the plaintiffs’ ship which was being towed by the Port Authority’s tugs collided with the wall of a lock cutting due to the negligence of the Port Authority’s employee. The Port Authority defended the consequential claim brought by the plaintiff on the basis of a term in the towage contract whereby the shipowner was obliged to indemnify and hold harmless the Port Authority in respect of damage of any kind arising in connection with the towage. Bateson J concluded (p.194) that the term did not provide a defence to the claim because “it was framed to protect the Port Authority from third party claims, not claims made by the hirer of the tug”.

In Great Western Railway Co. v James Durnford and Sons Ltd (1928) 139 LT 145 Durnford were the lessees of the railway company in respect of premises adjacent to the railway. Durnford constructed a portable gangway which could be swung across the railway so as to move their materials over the railway. The railway company agreed to such use on the basis of a memorandum containing an indemnity by Durnford to the railway company “against all claims and demands or liability whatsoever...arising out of or in connection with the existence or user of” the gangway. Durnford was using the gangway to discharge a load of lime from its lorry into a railway truck when the lorry was struck by another truck being shunted by an employee of the railway company. The railway company relied on the indemnity as a defence to Durnford’s claim for negligence. It failed. Lord Sumner, with whom the other members of the Appellate Committee agreed, considered (p.147) that

“There is no doubt that abundant content for the clause can be found in third party liabilities without having recourse to liabilities between the contracting parties themselves.”

In The Lindenhall [1945] P 8 the plaintiff’s vessel was damaged when being towed by the Port Authority. The Port Authority was found to be liable for negligence but relied on the terms of the towage contract containing an indemnity from the shipowner “against all claims...”. The Court of Appeal applied the decision of Bateson J in The Carlton [1931] P 186 and agreed with the judge in that case that the indemnity “is limited to claims against the port authority by third parties and does not touch claims by the owner of the towed vessel”.

Counsel for the Trustee relies on these three cases in support of his proposition that neither clause 17.1(J) nor, as an alternative ground, Clauses 16.5 or 17.1(G) can be relied on by the Trustee in defence of a claim for breach of contract brought by Elektrim. I am not required to reach any final conclusion on these submissions. Elektrim is not a party to this application. The issue is whether the Trustee is acting unreasonably in the Wednesbury sense in requiring an indemnity on the footing that it is not clear beyond doubt that these clauses would provide a defence to any claim brought by Elektrim. In my judgment the Trustee is not acting unreasonably in that regard. It is entitled to protection by indemnity against the worst case scenario. It is by no means clear that any of these clauses provides a defence to liability which is beyond reasoned argument.

In her reply counsel for Concord also relied on clause 20.1 which is also set out in full in paragraph 10 above. She suggested that this showed that the Trustee could not delay acceleration once a request had been made by 30% of the bondholders. I am unable to accept that submission. The effect if right is to override the right to an indemnity to its satisfaction conferred or recognised by clause 10.1 of the Trust Deed and Condition 12 of the Bond.

For all these reasons I consider that none of the clauses on which Concord relies could provide a clear and unambiguous defence to the claims of Elektrim. It follows that in considering the adequacy or otherwise of the indemnity offered by Concord the Trustee was entitled to consider that it was potentially liable for €876m or thereabouts.

If the indemnity offered by Concord was not adequate to protect the Trustee against such a liability then it cannot have been Wednesbury unreasonable of the Trustee to find it unsatisfactory. The converse does not follow but would have to be considered as a separate issue. The indemnities actually offered, with which the Trustee was not satisfied, were those sent to its solicitors by the solicitors for Concord with their letters of 23rd April 2004 and 28th April referred to in paragraphs 23 and 25 above.

In substance both indemnities were in the same form. Each provided that Concord would within seven days pay to the Trustee

“all losses, liabilities, claims, demands, judgments, actions, costs, charges and expenses which the Trustee may incur or which may be made against it from and after the date of Acceleration in connection with or as a result of any Acceleration or Enforcement Proceedings or Litigation..”

The liability of Concord was guaranteed by Elliott Associates LP.

The objections taken by the Trustee to both forms were, in summary, that

As the financial information in relation to Elliott Associates is confidential I have dealt with these submissions in a confidential annex to this judgment which will be made available in a sealed envelope to each party. It will be for them, primarily Concord, to decide if they wish the contents to remain confidential or whether in all the circumstances they are content that they are made available as part of my judgment. My conclusion, for the reasons therein explained, is that neither indemnity was adequate. It follows that the conclusion of the Trustee that neither form is satisfactory to the Trustee cannot in my judgment be attacked as Wednesbury unreasonable. On that ground I dismiss this application.

Following the rejection by the Trustee of both forms of indemnity there was much further correspondence. In the context of a request by Concord to indicate what would satisfy the Trustee it suggested that it would accept a letter of credit in the sum of €1bn. for 12 years. This was criticised by the solicitors for Concord in their letter of 12th May. In addition they pointed out that the requirements of the Trustee were significantly more onerous than those imposed in connection with an indemnity provided by Acciona SA two years before. They suggested that the Trustee should be satisfied by counter-indemnities given by individual bondholders to Concord.

The Trustee never insisted on receiving a letter of credit in the sum of €1bn. for 12 years. In any event for the reasons I have already given I do not consider that the figure of €1bn. could be stigmatised as Wednesbury unreasonable. Concord might have been able to justify a shorter period and the Trustee might have agreed, but this was never offered. Similarly the Acciona indemnity two years before was given in wholly different circumstances because the relevant event of default was admitted by Elektrim. Further I can see nothing Wednesbury unreasonable in insisting on joint and several liabilities to the Trustee rather than allowing counter-indemnities to be given to Concord.

Reverting to the issue between counsel as to what is the question the court is required to answer, it is not, in my view, whether or not the Trustee was justified in seeking an indemnity by means of a letter of credit in the sum of €1bn. Rather it is whether the Trustee was Wednesbury unreasonable in concluding that the indemnities offered on 23rd and 28th April 2004 were unsatisfactory. For the reasons I have given, in my judgment, the answer to that question is in the negative. Accordingly I dismiss this application.