Satinland Finance SARL & Anor v BNP Paribas Trust Corporation UK Ltd & Anor

This is an application to strike out this newly commenced claim, or alternatively for defendants’ summary judgment in respect of it, on the footing that it is doomed to fail. The claim is a claim by subordinated noteholders, the notes being issued by the second defendant, Irish Nationwide Building Society (“INBS”). The first defendant (“BNP”) is the trustee of the note issue. The claimants say that they are together holders of more than 25% of the relevant notes and that that gives them the right to give the trustee a direction which is part of the subject of this claim.

In this claim, commenced by a Part 8 claim form, the Claimants, as holders of that 25%, seek a direction to enforce a demand which they say they have properly made on the trustee under the conditions of the notes, to the effect that the trustee immediately present a petition to wind up INBS. In the alternative, they apply under the jurisdiction of the court to control trustees for a direction that the trustee should accept an anticipatory breach of the terms of the notes which they say has occurred, and immediately thereafter petition to wind up INBS.

In the next section of this judgment I shall deal with the relevant factual and contractual background. The Claimants relied on those facts as giving rise to their claim and started this Part 8 claim by a claim form issued on 3^rd November 2010. They managed more or less immediately to get an order for expedition of the trial of the whole claim, and they have a trial date for some time in December. However, the Defendants claim that they are able to deal a knockout blow to the claim, even assuming very many other matters against themselves and have issued an application to strike it out on that footing. It is that application that comes before me. The application notice was issued on 10^th November 2010 and on 15^th November 2010 Henderson J made an order that this application be expedited as well, and it arrived before me on 18^th November. I heard it on that date and on 19^th November. Thus it is an expedited application to strike out an expedited action. The justification for that is said to be the need to remove uncertainty in respect of what is a major Irish financial organisation. For ease of exposition I shall hereafter refer to it as an application to strike out even though it is also an application for summary judgment. It was not suggested that the result would be different under either the one or the other of the heads. The essence of the matter is that, even making all sorts of evidential, inferential and analytical assumptions in favour of the claimants, the claim is still bound to fail, and that that can be demonstrated sufficiently clearly even at this very early stage of the action. While the application to strike out or for summary judgment was made by INBS, it was supported by BNP. The claimants were represented by Mr Neil Calver QC; INBS by Mr Mark Howard QC, and BNP by Mr Robert Miles QC.

The notes in question in this case were part of a ten billion “Euro medium term note programme”, the offering circular for which was dated 24^th November 2008. I can take the relevant terms and conditions from the form annexed to that circular. The actual notes in question, in terms of amount, interest rate and so on, were described in “final terms” dated 10^th August 2009. The issue is described as:

“the issue of £126,131,000 Lower Tier II Notes due 2016”.

The interest rate was 13%, payable on 12^th August each year.

The relevant particular terms or conditions, germane to the matter before me, are as follows.

Central to the claims of the claimants is condition 2(b) of the Conditions, which deals with subordination:

“(A)

The Dated Subordinated Notes and the Receipts and Coupons relating thereto constitute direct, unsecured and, in accordance with sub-paragraph (B) below, subordinated obligations of the Issuer and rank pari passu without any preference among themselves.

(B)

The claims of the holders of Dated Subordinated Notes and the Receipts and Coupons relating thereto will, in the event of the winding up or other dissolution of the Issuer, be subordinated in right of payment in the manner provided in the Trust Deed to the claims of all Senior Creditors, present and future, of the issuer and will rank, in the event of the winding up or other dissolution of the Issuer, at least pari passu in right of payment with all other Subordinated Indebtedness, present and future, of the Issuer.”

The noteholders are holders of Dated Subordinated Notes within that condition. The effect of this condition is that they are subordinated behind Senior Creditors (whose definition I do not need to set out).

Interest is provided for in Condition 4, and payment of principal in condition 6:

“4.

INTEREST

Interest on Fixed Rate Notes”

Each Fixed Rate Note bears interest from (and including) the Interest Commencement Date at the rate(s) per annum equal to the Rate(s) of Interest. Interest will be payable in arrear on the Interest Payment Date(s) in each year up to (and including) the Maturity Date.”

“REDEMPTION AND PURCHASE”

“(a)

Redemption and maturity

Unless previously redeemed or purchased and cancelled as specified below, each Senior Note and each Dated Subordinated Note (including each Index Linked Redemption Note and Dual Currency Redemption Note) will be redeemed by the Issuer at its Final Redemption Amount specified in, or determined in the manner specified in, the applicable Final Terms in the relevant Specified Currency on the Maturity Date.”

The redemption date for the notes is in 2016.

The events of default are central to this strike out application:

(b) Events of Default relating to Dated Subordinated Notes

It will be noted that condition 2(b)(B) refers to subordination as provided for in the trust deed. Clause 2(H) of the trust deed deals with that:

(1) In the event of the winding up of the Issuer, all amounts in respect of the Dated Subordinated Notes and the Receipts and Coupons (if any) relating thereto paid to the Trustee by the liquidator of the Issuer in the winding up of the Issuer (including, without limitation, principal, interest and any amounts paid for the account of holders of Dated Subordinated Notes and/or the Receipts and/or the Coupons relating thereto (if any) under Clause 21) shall be held by the Trustee upon trust:

first for payment or satisfaction of all amounts then due and unpaid under Clauses 14 and 15(J) to the Trustee and/or any Appointee;

secondly for payment of claims of all Senior Creditors in the winding up of the Issuer to the extent that such claims are admitted to proof in the winding up (not having been satisfied out of the other resources of the relevant Issuer) excluding interest accruing after commencement of the winding up; and

thirdly as to the balance (if any) in or towards payment of the amounts owing on or in respect of the Dated Subordinated Notes and the Receipts and Coupons relating thereto (if any).”

Clause 15 supplements the Trustee Acts in relation to functions of the trustee, and clause 15(G) provides:

“Save as expressly otherwise provided in these presents, the Trustee shall have absolute and uncontrolled discretion as the exercise or non-exercise of its trusts, powers, authorities and discretions under these presents (the exercise or non-exercise of which as between the Trustee and the Noteholders, the Receiptholders and Couponholders shall be conclusive and binding on the Noteholders, the Receiptholders and Couponholders) and (subject to clause 16) shall not be responsible for any Liability which may result from their exercise or non-exercise.”

Clause 16 sets out a standard of liability of the trustee; it is not material to this application.

Clause 15(P) provides that in connection with the exercise of its functions, the trustee shall have regard to the general interests of all the Noteholders as a class and not the particular interests of some only of the noteholders.

Other than the provisions of 2(b) and 2(c), which are subject to Irish law, the conditions are subject to English Law. So is the Trust Deed, other than the provisions of clause 2(H), which again is subject to Irish law.

INBS is a company incorporated and existing under the laws of Ireland under the Irish Building Societies Act 1989. It has registered offices in Dublin. In common with a number of other Irish financial institutions it has encountered serious financial problems. As a response to that the Irish Government established the National Asset Management Agency (“NAMA”) to acquire performing and non-performing loans from participating institutions. INBS is one of those institutions.

On 30^th March 2010 the Minister for Finance, Mr Brian Lenihan, made a statement to the Irish Parliament about the amount of assets transferred by INBS to NAMA, and referring to a need to inject very large sums of money to enable INBS to comply with its regulatory requirements. The statement went on:

“I intend to inject the necessary capital through a combination of €100 million in Special Investment Shares in the Society and a Promissory Note for €2.6 billion issued to the Society, giving INBS a small buffer. This Note will be paid over 10-15 years, which will reduce the impact on the Exchequer this year. Following the investment by means of the Special Investment Share, the State will have extensive powers as well as economic ownership of INBS. As a result, the State will control the Society…

As in the case of Anglo-Irish Bank, a new management team is now in charge of INBS. I will insist on Board changes in the changed ownership circumstances.”

The precise terms of the rights given by the Special Investment Share were not in evidence before me, but it is the case of the claimants that it gives very extensive rights of control in relation to INBS. For the purposes of this application that is not disputed by the defendants.

On 30^th September 2010 Mr Lenihan issued a further statement confirming additional capital support would be required by certain Irish financial institutions including INBS and another one known as Anglo Irish Bank. He said:

“On 30^th March I announced that INBS would not have a future as an independent stand-alone entity. The institution is now under public control and arrangements for its sale or integration into another institution are being advanced in discussion between the State, the European Commission and the Society…

The same approach will be adopted for Subordinated Bondholders in INBS as in Anglo.”

It is said that as a consequence of the statement, the rating agencies downgraded the notes.

In the statement the Minister also said:

“…It is right that the holders of Anglo’s subordinate debt should share the costs which have arisen…

I expect the subordinated debt holders to make a significant contribution towards meeting the costs of Anglo.”

It is said by the claimants that these statements amounted to a statement by the Government that Anglo would not meet its obligations in full to the holders of its subordinated debt. Anglo Irish announced an offer to buy in subordinated debt at a large discount, with a proposal to vary the terms of the debt after the buy-back so as to procure that it was largely valueless to those who did not accept the offer. Its announcement cited another part of the 30^th September statement in which the Minister said that his department was working on “resolution and reorganisation legislation, which will enable the implementation of reorganisation measures specific to Anglo Irish Bank and INBS which will address the issue of burden-sharing by subordinated shareholders.” The claimants point to this statement and to what has happened in Anglo Irish, and say it is to be taken to be a threat of legislation to enforce offers like the Anglo Irish offer on INBS.

The claimants have been corresponding over this matter for over a month, and issued their proceedings on 3^rd November claiming the first form of relief described above, relying on condition 9(b)(D). INBS then issued its application to strike out or for summary judgment on 9^th November, and in an apparent response the claimants sought to amend their claim form on 15^th November (after the expedition hearing) to add their alternative basis of claim (relying on the court’s inherent jurisdiction over trustees). Thus when the striking out application was launched it was in relation to the first claim only, but the defendants have now taken on the alternative claim as well. They say, with a degree of plausibility, that the alternative claim was proposed when the claimants saw the nature of the attack on the main claim. It is also said by the defendants that the first claim and its basis have not been consistently put over that period of time, but it is unnecessary to go into that because it is necessary for me to deal with the claim as it is now put.

The first claim, as pleaded, has the following elements:

The primary case shifted its focus during argument, probably as a result of the claimants’ seeing the arguments of the defendants to the effect that the scheme of condition 9(b) was such as to prevent a petition based on a failure to pay principal, interest or damages. The claim form, and the pre-action correspondence, suggested that the petition should be based on anticipatory breach of the three provisions referred to above. However, in argument (as foreshadowed in the preceding skeleton argument) the focus shifted to what were said to be breaches of, or a renunciation of, condition 2(b). It was said that INBS had evidenced an intention to impose losses on the subordinated noteholders otherwise than in accordance with that provision. They have a contractual entitlement to be subordinated only in accordance with condition 2(b)(B) and that entitlement was renounced in the announcements above (and in particular the 30^th September announcement). INBS was threatening to impose losses outside that scheme (and to promote the Irish government from a creditor with rights ranking below the claimants to one ranking above it), and the appropriate remedy was a winding up petition on the basis that a winding up was just and equitable (which is a ground available in Ireland). This would crystallise the subordination, and would not, of itself, accelerate the payment of principal or interest.

Mr Calver QC was not, to my eyes, always consistent in the manner in which he deployed the doctrine of renunciation in this limb of his claim. He clearly stated that he did not rely on a renunciation in connection with his claims in relation to condition 2(b)(B), but did seek to feed in his submissions that there had been a renunciation or anticipatory breach of the payment obligations – there had been clear indication that the principal and interest would not be payable on the payment date of the former. Any petition would not, he said, be based on debt or damages, but would be on the just and equitable grounds. It would be extraordinary if there was no remedy now in a case such as this, where there had been the threats that are alleged (and which are taken for present purposes to have been made), and that the only remedy was to wait for some default, or someone else’s petition, under condition 9. There must be some remedy, and a just and equitable petition was it.

The alternative claim is one made under the court’s powers to direct and control trustees, and seeks a direction that BNP should be directed to accept the repudiation of INBS and forthwith to petition the Irish court for the winding up of INBS “based on [BNP’s] claim for damages against INBS”.

The defendants seek to strike out this action on the footing that even if the factual background has the legal consequences alleged, the claims are still bound to fail because the structure of the bonds is such that there can be no petition based on the legal basis propounded, and the claimants are not entitled to require the presentation of the petition relied on.

So far as the first claim is concerned, the defendants said that a petition based on anticipatory breaches of the money obligations (whether sounding in debt or damages) would be prevented by the terms of condition 9(b). While condition 9(b)C) allowed for remedies, the trustee could not petition (and therefore the claimants could not require a petition) because a petition would be prevented by the proviso since it would be one which sought early payment or would be an attempt to recover (or enforce recovery of) damages. Damages for anticipatory breach was not a remedy open to these bondholders anyway, because it would be contrary to the subordination scheme. Condition 2(b)(B) did not contain any relevant obligation. Accordingly, the first claim was bound to fail.

So far as the alternative basis is concerned, they (and in particular BNP) say that the circumstances do not exist which entitle the claimants to apply for directions, or for the court to give them.

It is important to bear in mind the assumptions that are to be made for present purposes. The claim is based on the evidential material referred to above, which is assumed for present purposes to be accurate (the defendants have put in no evidence on this application, or in the Part 8 claim itself). It is further to be assumed that the pronouncements of the Minister should, in the circumstances relied on, be treated as pronouncements of INBS itself and that that is capable of being a renunciation of, or an anticipatory breach of, the repayment terms of the bonds in terms of having a repudiatory quality. (It is not to be assumed that the doctrine of repudiation is capable of applying to the notes in this case – the defendants take a point of construction on that.) The defendants say that nonetheless, even allowing all those assumptions (which will be contested if the action is fought in full) the true construction of the conditions does not allow the petition which is required by the claimants, and that that position cannot be improved by a trial. I should therefore strike the claim out now.

I bear in mind that this is not a trial of this claim, and it would be wrong to conduct something which might be called a mini-trial. It is an application to strike out, and an application for summary judgment. It is therefore not the occasion of the determination of real disputes of fact. The defendants can only succeed if they establish that, even given the primary facts alleged and the other matters assumed against them, the claim is bound to fail. It is open to me to determine questions of construction of the documents in question, but only if the matter is sufficiently clear to be determinable at this stage, short of a trial. If there is doubt about the clarity of the point then the matter would have to proceed to that trial. On the other hand, if the matter is clear enough, and additional evidence would not assist the debate, it is open to me to decide the point against the claimants. I have borne in mind all these points.

Condition 9(b) deals not only with events of default; it also limits the relief which the trustee (on behalf of the noteholders) can pursue. Paragraph (A) sets out what the trustee is entitled to do if there is a default in the interest payments (which will be periodic) and capital payments (which will be due in 2016). The remedy is to petition; any other remedy is explicitly excluded. The effect of this is that subordination in the winding up will take place pursuant to clause 2(H) of the trust deed. By this basic mechanism the trustee is prevented from getting a money judgment which could be enforced against INBS pari passu with other creditors; successful relief (winding up) will lead to this debt having its correct place in the subordination regime.

If the company is wound up, whether under paragraph (A) or another procedure initiated by someone else, the trustee may serve a notice which is capable of accelerating the payment of principal (if the events happen before 2016) – see paragraph (B). However, since there will a fortiori be a winding up in place, the subordination regime remains intact.

Paragraph (C) deals with other enforcements. The claimants rely on it and I will have to come back to its effect in the context of these proceedings, but for the moment it is sufficient to point out that it excludes enforcement of the obligation to pay principal and interest (see the words in brackets) and prevents the acceleration of payments and prevents proceedings which would result in an obligation to pay damages (see the proviso and the last 3 words of the paragraph). Thus it is in essence apparently intended to allow the enforcement of non-monetary obligations. If one wants examples of such obligations there is a long list of covenants by the issuer in clause 13 of the trust deed.

Mr Howard for INBS submits that these three provisions provide limits on recovery mechanisms which are quite consistent with, and indeed are necessary for, the maintenance of a regime under which the indebtedness on the notes is subordinated. I agree with him. If all goes well there will be repayment in accordance with the terms of the notes in 2016, but not before (subject to exceptions which are not material here) and payment of interest in the meanwhile. If all does not go well the focus on recoveries (if there has to be enforcement) is via a winding up. As soon as one is in a winding up the subordination provisions kick in. If this regime is to work then one has to prevent other recovery mechanisms, and one has to prevent acceleration of the payment obligation as well, which is the importance of the phrase “but not before” in my description earlier in this paragraph. Other creditors have an interest in the subordination if there is an insolvency, and in there being no premature payment too – that latter element is part of the subordination that has been contracted for. That is particularly important in the present case because it is common ground that this is Tier II capital in the regulatory scheme applying to INBS (as is conceded by the claimants’ witness, Mr Nicholas Brocklesby in his evidence) and it is of the essence of such capital that there will be restrictions on the priority with which it can be repaid.

The claimants’ original formulation of the right to petition was that the winding up proceedings would be to enforce “the entirety of the Issuer’s obligations in respect of the Subordinated Notes”. This would have included the obligations under clauses 4 and 6 (interest and principal). However, no doubt when faced with a skeleton argument from INBS at an early stage, which set out the difficulties faced by such a claim insofar as it involved claims for damages, claims for payment or accelerated payment, its focus shifted away from those matters and conditions (though they still formed part of its case on anticipatory breach) and towards condition 2(b). The claimants maintain that a winding up petition can appropriately be brought within condition 9(b)(C) as being to enforce an obligation arising out of that condition, or to enforce it as being a provision.

Condition 9(b)(C) is a restrictive provision which rules out certain enforcement procedures. It applies to “any obligation, condition or provision” in (inter alia) the conditions and if it is to be invoked then one must identify with care the “obligation, condition or provision” relied on. Mr Calver relies on condition 2(b) which he says is a term which provides that subordination will take place only in accordance with that clause; and he also says that it contains an obligation that nothing would be done to prevent the subordination in accordance with that condition. In that way he relies on the condition as a provision which needs enforcing, and also says that there is an obligation which needs enforcing. They need enforcing, and enforcement is justified, because INBS has demonstrated an intention to bring about a subordination which operates otherwise than as described in that condition in that there is an intention to impose losses on the subordinated creditors as referred to in the ministerial statements, and that payments will not be made on maturity of the bonds.

This requires careful unpacking. It puts the case in two or three different ways. It is necessary to consider what it is that clause 2(b) actually does.

In my view condition 2(b) does not contain any obligation at all, within the meaning of condition 9(b)(C). Paragraph (A) looks a bit as though it is descriptive, as does paragraph (B), though on analysis the latter is probably a little more than that. What it does not do, however, is in terms to give rise to an obligation to the noteholders which they can enforce in any meaningful sense. The rights of the trustee to claim from INBS are contained in the conditions and there is a covenant to pay in the trust deed as well (in paragraph 2(B), not set out above). The right of the noteholders to claim moneys once the trustee has some, and the corresponding obligations of the trustee to the noteholders, are set out in clause 2(H) of the trust deed. Condition 2(b)(B) does not contain any express obligation on INBS to do anything. It provides for and describes the subordination of the rights of noteholders as being “in the manner provided in the Trust Deed”. If anything it describes a burden on the noteholders, not an obligation to them. They do not have a right to be subordinated, which they can enforce (which would be a very odd concept); if anything, it is other creditors who have a right to have them subordinated. So in its terms it does not set out an obligation.

Mr Calver’s argument seeks to avoid this consequence by saying that there is an obligation to do nothing to prevent the noteholders from being subordinated in accordance with condition 2(b). There is, he says, a right to rank pari passu with the other subordinated indebtedness. INBS is said to threaten to breach this obligation.

This obligation cannot be spelled out of the words in condition 2(b). It does not say any such thing, and one cannot arrive at it by a process of construction. If there is such an obligation then it must be an implied term. I do not think that these documents admit of such an implication. First, the conditions and the trust deed constitute full and detailed expositions of the terms of notes, and the notes are to be publicly traded. That leaves much less room for implied terms. Second, the proposed implication smacks of a negative pledge, and the documents demonstrate that consideration has already been given to the extent of negative pledges. Condition 3 of the notes contains a form of negative pledge, but it operates only in favour of the Senior Noteholders, not the subordinated noteholders. So consideration has been given to negative pledges, and the subordinated noteholders have not got the benefit of one. That makes an implication in their favour virtually impossible to sustain. Third, the root of implication is necessity, and in this case the implication is commercially unnecessary. The obligations to pay are set out in the conditions and the subordination is dealt with in the trust deed, and reinforced by the restrictions on enforcement rights contained in conditions 9(b)(A) and 9(b)(B). The position of the subordinated noteholders in the debt constellation is fixed by those provisions and by the elaborate surrounding supporting mechanisms, and it is not necessary to add the gloss suggested by Mr Calver. The subordination takes place in a winding up in accordance with those documents. Such protections as the noteholders are entitled to are set out in the elaborate contractual scheme and it is not commercially necessary, and indeed in my view it is commercially inappropriate, to add one such as that suggested by Mr Calver.

So this line of Mr Calver’s argument fails at this early stage in the reasoning. However, he has an alternative line. He points out, correctly, that condition 9(b)(C) refers to the trustees enforcing a “provision”, and not merely an obligation. Clause 2(b)(B) is a provision, and the trustees ought to enforce that.

This line does not help him. One has to ask what is to be “enforced”. As stated above, the wording does not seem to give much which operates to the benefit of the subordinated noteholders – it describes their burden. They do apparently have the benefit of being able to rank pari passu with other subordinated noteholders, but that does not help this part of the argument. So there does not seem to be anything here which makes it a provision which the noteholders can “enforce”. When Mr Calver’s case on this is investigated further one finds that he says that this “provision” is one the effect of which is that the subordinated noteholders will only be subordinated in a winding up, and then only in accordance with condition 2(b)(B). The emphasis is on the word “only”. It is Mr Calver’s way of pushing the term beyond describing its effect in a winding up and introducing something with the effect of the implied term which I have rejected. The point fails as the implied term fails.

So the claimants fail on this line of argument too. They cannot point to an obligation or provision which they would seek to “enforce” by their winding up petition. This would be enough to dispose of their primary case because they cannot bring their proposed trustees’ petition within those crucial words of condition 9(b)(C). However, they also face additional difficulties.

The first additional difficulty is associated with the points made above but has additional elements. The trustee may bring proceedings to “enforce” an obligation, condition or provision binding on the issuer. I was not shown any authority on the meaning of this word other than the definitions in the Shorter Oxford English Dictionary and Concise Oxford Dictionary –to “compel observance of” or to “compel obedience to”. That makes sense if the trustees commence proceedings requiring the Issuer to do something, stop doing something or seeking compensation for an infringement of an obligation under the documentation. But it is not easy to see how a winding up petition is an enforcement for these purposes. The only remedy sought is a winding up petition. That does not enforce anything in any meaningful sense. It does not make INBS do anything which it is wrongfully not doing, or produce any compensation for some wrongful act. I think that the claimants would say that it will de facto stop the sort of thing that they say has been threatened, but they still have to set up a relevant obligation (as to which see above) and the petition does not really enforce that obligation. It merely frustrates a proposed breach of it. I do not think that is fairly within condition 9(b)(C).

Next Mr Howard takes the point that if the petition could be brought within the concept of enforcing a provision or obligation, it would in fact be a petition to enforce the payment of principal and interest for which clause 2(H) of the trust deed provides. That, he says, is contrary to the words in brackets in condition 9(b)(C). I think he is right about that. The claimants cannot have it both ways. If they say there is some sort of obligation to preserve their subordinated status, and they seek to enforce that via a petition then they are in my view enforcing an obligation for the payment of principal or interest. They are concerned that the payment obligation will not be complied with; the petition is their step to remedy that. So they are seeking to enforce a provision (I will avoid the word obligation – it is even more difficult for the claimants than “provision”) for the payment of principal and interest. If the claimants say they are not seeking to enforce that provision, then it is hard to see what the legitimate objective of the petition could be and how it could be brought within condition 9(b)(C) at all.

Mr Howard also took the point that what was intended by the claimants’ proposed petition was in reality an acceleration of the payment of principal and interest, and was therefore barred by the proviso to condition 9(b)(C). Mr Calver’s response was that the petition by itself would not have that “consequence”, which is the word used in the condition. Before anything becomes payable early there must be a separate notice under condition 9(b)(B). I think that Mr Calver may be right about that. However, Mr Howard does not need this argument. He succeeds at an earlier stage in the reasoning.

Mr Calver, understandably, played on the merits. He sought to say that what was proposed was unfair. One way in which he put his case was that INBS was seeking to impose losses on the subordinated noteholders outside a winding up, and that that was wrong. That does not seem to me to be a relevant legal analysis. If his clients wish to avail themselves of their rights under condition 9(b)(D) to require the trustees to do something, they must bring themselves within condition 9(b)(C) (the two prior paragraphs do not assist them in this case). The generalised description which he gives does not achieve that. It is really an appeal to the merits of the situation.

I confess I do not fully understand what it really means. The subordinated noteholders (or more correctly their trustee) have their rights to payment of principal and interest under conditions 4 and 6. They then have their subordinated rights under clause 2(H) of the trust deed. Their enforcement mechanisms are severely constrained under the conditions. Ultimately, unless there is a payment at the end of the contract period under condition 6 they only have rights in a winding up. They may or may not suffer a loss, depending on the state of the society at the time of the winding up. I do not understand how they can suffer a loss “outside the winding up”.

So this really is a plea to the merits. That is, of course, usually a good start on a petition to wind up on just and equitable grounds, but it does not get one home. And it must not be misplaced. Mr Howard analysed the situation in a way which demonstrates how this subordination works, and which really demonstrates why, in the circumstances, it is not unfair that the claimants cannot have the remedy they seek. Condition 9(b) is the contractual side of the subordination, and prevents the noteholders from being promoted. Condition 9(b)(A) prohibits any remedy other than a winding up in the event of default. Thus they are barred from getting a money judgment and enforcing that outside the subordination scheme. Condition 9(b)(B) allows for acceleration of the payment obligation, but only where there is a winding up. The trustee is not rendered powerless in relation to the rest of the provisions governing the notes. It has the power to enforce them under condition 9(b)(C), but subject to very important qualifications – it cannot enforce the provisions for payment, it cannot accelerate payment and it cannot claim damages. I will have to revert to the damages point when I consider the alternative claim.

All this makes sense when one considers the subordinated nature of the notes. If these contractual provisions were not in place the noteholders (or their trustee) could side-step the subordination by getting a judgment in the event of a default. Again, this will be elaborated on below when I consider the alternative claim. It makes even more sense when one bears in mind that this is Tier II regulatory capital which is not supposed to be repayable early, and in respect of which subordination is required. Against this setting it is not unfair that the subordinated noteholders should have obstacles placed in their way if they seek to do what they seek to do in this case. Of course, if they can find a contractual provision that they can rely on and bring themselves within condition 9(b)(C) (via 9(b)(D)) then they can enforce it. But they cannot do so in this case, and that is neither surprising nor unfair in the circumstances. The trouble with being a subordinated noteholder is that you are subordinated. That has its obvious drawbacks, but it also has potential benefits – in this case a 13% interest rate. This claim fails because the noteholders have come up against a drawback. Mr Calver urged on me, both in relation to this limb of his claim and in relation to the alternative limb, that while the analysis of the position of the subordinated noteholders, and their disabilities, would be good for a more normal situation, this was an extraordinary situation, and it would be equally extraordinary if the noteholders were apparently powerless in the face of what they are apparently threatened with. It may be that the current circumstances of the Irish economy are extraordinary, but the answer to this part of the case (and the alternative part) lies not in the application of such adjectives, and in any event the circumstances of the noteholders is not really that extraordinary. The proper analysis is that they are faced with a situation in which they are facing a risk of losses which is inherent in the risk they take as subordinated noteholders. Their rights and opportunities remain governed by the terms of the notes and the other issue documents. Adding superlative adjectives does not affect that.

In the circumstances the first way in which the claimants seek to put their case fails. It cannot be substantiated. The position is clear as a matter of construction, and would not be improved (for the claimants) or altered by further evidence or a trial. There is no petition which the trustee could properly bring which would fall within condition 9(b)(C). In those circumstances it is appropriate to strike out this limb of the claim, or dismiss it, and I do so.

This case is brought under the jurisdiction of the court to give directions to trustees. The claimants say that if they cannot give a direction to the trustee under condition 9(b)(D) they are nonetheless entitled to ask to the court to direct the trustees to present a winding up petition in the circumstances, and based on the material, appearing below.

The reasoning and case runs thus. The acts and pronouncements of the Minister, which are to be attributed to INBS, amount to a clear statement that the principal and interest on the subordinated notes will not be paid. That is a renunciation of the contract, amounting to a repudiatory breach. It is open to the trustee to accept that breach, terminate the contract and seek damages. That would turn the contractual payment obligation into a claim for damages, presumably in the amount of the debt but possibly subject to a reduction for early payment – this was not made clear but does not matter. The important point is the existence of a damages claim. It is said that the trustee ought to accept the repudiation and use the resulting damages claim as the basis of a petition. Since it has declined to do so it should be directed by the court to do so.

The trustee has indeed declined to do so. It says that there has not been any repudiatory conduct attributable to INBS; that even if there has been renunciatory conduct it should not attempt to accept an anticipatory breach because to do so would not be in the interests of all the noteholders; a petition based on the damages claim would be based on a disputed debt and would therefore fail; if in fact there were no repudiatory breach then if it were to purport to accept a repudiation it would run the risk of being held to have repudiated the contract itself so that no principal or interest could be recovered at all; and that a petition would be inadmissible anyway because of the provisions of condition 9(b)(C). Having said all that, its main ground for resisting the alternative claim is that the basis for the court’s intervening to give directions to a trustee at the behest of a beneficiary in relation to a discretion such as that which the trustee has exercised here has not been made out.

Mr Howard supports the trustee in this. He emphasises the hopelessness of the petition which the claimants say should be presented, but also agrees that circumstances do not exist which justify the court’s intervention.

Mr Miles and Mr Howard rely on Re Londonderry’s Settlement [1965] Ch 918 as standing in the way of the court’s giving the direction sought. At p 936 Salmon LJ said:

“The settlement gave an absolute discretion to appoint to the trustees and not to the courts. So long as the trustees exercise this power with the consent of persons called appointors under the settlement and exercise it bona fide with no improper motive, their exercise of the power cannot be challenged in the courts – and their reasons for acting as they did are, accordingly, immaterial. This is one of the grounds for the rule that trustees are not obliged to disclose to beneficiaries their reasons for exercising a discretionary power…”

They say that this applies to the decision whether or not to accept an arguable repudiation, and ultimately to present a petition. No bad faith or improper motive has been alleged so the trustee’s decision not to go down that route cannot be challenged by the noteholders, on normal trust principles.

Mr Calver sought to distinguish that case on the footing that it was concerned with the exercise of appointments over property, not the sort of discretionary activity which accompanies a decision whether or not to accept a repudiation of a contract or not, or whether to start litigation against a counterparty. He pointed to Lewin on Trusts 18^th Edn at para 43-04:

“If the trustees fail to pursue a claim which is vested in them in their capacity as such, then a beneficiary may commence an administration action against the trustees to compel them to take proceedings to enforce the claim. If a serious question arises as to whether or not the trustee ought to sue, then the court will determine the question in accordance with the principles applicable to Beddoes proceedings.”

He also relied on certain dicta at p 609-10 of Sharpe v San Paolo Railway Co (1873) 8 Ch App 597.

The last-mentioned dicta do not assist Mr Calver. They concern what happens where trustees fail to bring proceedings they ought to bring and the right of the beneficiary to sue in his own name, joining the trustees. That is not the question in the present matter (or at least not yet). Nor does the first sentence in the extract from Lewin assist. It refers to a “failure” to bring proceedings, which connotes a breach of duty – it seems to apply to a situation where the trustees really ought to sue but have not done so. It does not apply to the exercise of a discretion as to whether to take a pre-action step (here, accepting a repudiation) and thereafter sue.

I consider that the sort of principles expounded in Londonderry apply to a decision whether to treat the acts of the Minister as repudiatory conduct in this case, and to a decision as to whether to litigate thereafter (which must, realistically, be considered together by any responsible trustee). I accept that they were pronounced in the context of an appointment of an interest under a trust, which Salmon LJ thought it would be particularly invidious to have other beneficiaries challenging too easily, but the same underlying principles apply to discretions such as that which I have to consider. That they have a discretion would be undoubted anyway, but it is made even clearer by clause 15(G) of the Trust Deed. In a commercial setting such as the present, and against the background of that provision, it seems to me that this discretion is a very good example of the sort of things to which the principles should apply to prevent a multiplicity of challenges which would not be commercial.

If the matter stopped at an inquiry as to bad faith or wrongful conduct then the application for directions in this case would plainly fail. The burden of the challenge would be on the claimants, and they have not alleged a lack of bona fides or improper motive against the trustee. They have simply added the claim for directions as an apparent response to the immediate attack on the first way in which they put their case, without putting in any additional evidence, and the existing evidence does not contain material of the sort that Salmon LJ indicated was necessary. While the claimants might be able to say that they do not need to advance their whole case at this stage, they must advance at least something, and they have not. I think it unlikely in the extreme that they will be able even to allege, let alone prove, the sort of conduct which comes under the headings described by Salmon LJ. Subject to the point that comes next, they have not advanced any other case for the intervention of the court.

However, that turns out to be not quite the end of the matter. Paragraph 29-320 of Lewin summarises various other bases on which beneficiaries can challenge the exercise of a power after the event. One of those is that the trustee has made a faulty judgment as to a state of facts where that judgment is a pre-condition of the exercise of the power. Mr Calver did not point to that catalogue, or that particular entry in it, but he did say that in a letter of 1^st November 2010, in which the trustees declined to agree to the request of the claimants that it should petition for the winding up of INBS, it was stated that the trustee’s view was that the Minister’s remarks could not amount to a refusal by INBS to comply with its contractual obligations and that it was the view of the trustee that there had not been an anticipatory breach. That, he said, meant that the decision was taken on a misinformed basis and ought to be revisited. He said that I had to treat that as a misinformed basis, for the purposes of this application, because I had to assume that the Minister’s remarks were to be attributed to INBS, and that there was, as a result, an anticipatory breach – see above. This point was something of an afterthought in submissions, coming, as it did, when the normal round of submissions had been completed, but bearing in mind the importance of this case I should not ignore it for that reason. Since it is not articulated in any pleading, or indeed in any evidence, it is tempting to give it no weight, but I shall not do that either. As a result, however, I have to ascertain what must logically underlie such a claim if it is good without the benefit of a fully reasoned case from the claimants.

This claim would have to be one based on a failure by a trustee to come to a conclusion it ought to have come to. The claimants can only get the direction they seek if they can establish that the decision to accept a repudiation and to petition was the only reasonable and proper decision to which they can have come. The relevant pleading, and therefore the relevant assumption, for the purposes of that application, would have to be that there was an obvious repudiation and a right to accept, and that the trustee ought to have appreciated that. An allegation that there was a repudiation capable of acceptance would not be a sufficient allegation to underpin this way of putting the case. It would be no good merely establishing, as a matter of law and fact, that there had been a repudiation. The point only works for Mr Calver at this stage if the result would have been plain to the trustee. That is really the unstated nature of this newly stated case. For that reason the assumption Mr Calver urges on me does not go far enough for him.

If it be alleged that I should assume the fuller assumption just identified, I would say that I would not do that for at least two reasons. First, this part of the case has not been articulated in that way, and in the absence of at least an allegation that the trustee ought to have acknowledged there was a repudiation and a right to accept it, I am not prepared to allow that factor to intrude into the case. Second, and allied with that, it seems to me to be inconceivable that it could properly be alleged that the trustee ought to have appreciated that the only answer to the question of whether there had been a repudiation which could be acted on was Yes. The point is, for these purposes, debatable, and from the point of view of the trustee taking a decision on these points the view that it was not a repudiation was a justifiable one. The trustee has apparently reached a judgment on the legal effect of some primary facts, and it cannot be said to be a perverse judgment. This is not to gainsay the assumption made in the other parts of the proceedings; it is considering the correct points in the context of what Mr Calver’s complaint has to be taken to be.

So even with the benefit of an assumption operating in relation to other parts of the case, Mr Calver’s new way of putting this point does not give him a case for saying that the trustee got it so wrong that it should be the subject of a direction from the court. He does not have a pleaded case on the point, and in the real world I do not see how he can mount one.

Furthermore, there are other answers to this claim for directions even if one considers that the trustee ought to have given greater weight to the possibility that there had been a repudiation capable of acceptance. The trustee has also considered the matter on the footing that there is something capable of being a repudiation. The letter of the 1^st November sets out the reasoning. It stated the trustee’s view that it did not consider there to have been a repudiation by virtue of the statements of the Minister; a claim for damages would be a disputed claim and therefore could not be the proper subject of a winding up petition; that an acceptance of an alleged repudiatory breach itself posed risks of being a repudiation by the trustee if the trustee was not entitled to do it; that the risks of giving up a claim to principal and interest in the hope of a damages claim were not in the interest of the class of noteholders as a whole; that even if there had been a repudiation, and even if that repudiation could be accepted, as a matter of legal analysis a petition would not be within condition 9(b)(C); and that therefore the trustee could not agree to the request of the claimants. In other words, it was saying that even if there were an arguable case for there being a repudiation, there were good reasons for not seeking to accept the repudiation and launch a petition. In the light of that letter, in the light of the analysis of the subordination regime as I have set it out above, and in the absence of any reasoned attack on that line of reasoning in these proceedings, it seems to me that the case for seeking a direction that the trustee should petition is hopeless.

I should elaborate on this a little more. One particular aspect of the decision-making process is worthy of mention, since it seems to me that by itself it amounts to an answer to any suggestion that the trustee should accept a repudiation and petition to wind up. The winding up claim would be based on the availability of a damages claim. The analysis would be the familiar one – the right to claim performance under the contract would be substituted by the right to claim damages. Conditions of the contract which, on their true construction, were not intended to persist after a termination would perish. Mr Calver said that condition 9(b)(C) would fall into that category. Thus the trustee for the bondholders would have an unsubordinated damages claim.

To allow this to happen would, as Mr Howard observed, drive a coach and horses through the subordination mechanism. A claim for damages would not be subordinated, so in one bound the noteholders would be free. They would have exchanged their right to subordinated debt in 6 years time for an immediate right to an unsubordinated debt ranking pari passu with all the other unsubordinated debt. That seems quite remarkable. If the argument is good then presumably a claim form could be issued and a money judgment obtained. So one would have a situation in which the only remedy for an actual default would be the presentation of a petition (see condition 9(b)(A)) with subordination arising in the subsequent winding up; but for this anticipatory breach, unattended by any present default, all methods of enforcement are available and the subordination falls away. That seems equally remarkable. Perhaps acknowledging the undesirably striking effects of this line of analysis, Mr Calver suggested that any damages claim would have an estoppel attaching to them which would require the damages to be subordinated to other claims. He did not develop this suggestion, and in my view it is not capable of development because it just does not work.

What this demonstrates is a choice between two things as a matter of construction of the conditions. The first is the carefully crafted subordination regime, governing regulatory Tier II capital, which would prevent a damages claim being enforced whether by a petition or otherwise (see condition 9(b)(C)), and the second is a state of affairs in which a repudiation plus acceptance is capable of doing away with that regime and elevating the claimants to the status of ordinary unsecured creditors. The choice between those two is in my view obvious, and sufficiently obvious to enable me to reach a view on it on this striking out/summary judgment application. It is in favour of the former. Either the doctrine of repudiation and acceptance has no part to play in this contractual relationship because of the other terms of the contract with which it is inconsistent (which would be my preferred view) or it is technically live but of no use to the claimants because if they accepted the repudiation condition 9(b)(C) prevents the trustees from claiming the damages. If the doctrine applies, that is a provision which manifestly has to survive the termination because it is part of the subordination regime and of the essence of the whole relationship. Either way, the mechanism is not one of which the trustees can avail themselves.

That being the case, it is plain that the trustees would never be directed to treat the Ministerial statements as a repudiation, to accept that repudiation and to petition for winding up on the basis of the resulting damages claim. I consider that it is possible to reach that view now, and that a trial will add nothing to the debate which would assist the claimants on the point. I have, of course, considered whether it might improve by the time of a trial, but on the material presented in this case by the claimants (on whom the burden of establishing the case for a direction must lie) I consider that there is no basis on which it can be judged that they might have a better case by trial.

I therefore find that the alternative claim is bound to fail. The claimants have not established, and will not be able to establish, any ground for the court to intervene in its jurisdiction to direct and control trustees, and even if the question were live it is plain that no court would give the direction sought. I am alive to the point that this judgment is being made at a very early stage in this action, and in part as to a newly introduced claim which (it might be said) has not yet been elaborated. However, the claimants do have to have made some sort of case if they are to resist the attacks made on them in this application, and they have not done so. Nor do I think that there is any real prospect of their doing so.

Accordingly, this action fails. So far as this is an application for defendants’ summary judgment, I would dismiss the action. So far as it is a striking out application, I would strike the claim out. I am not aware that there is any material difference between those two courses, but I will hear debate on the point on the giving of this judgment if any party thinks the distinction might matter.