Azevedo & Anor v Imcopa Importacao, Exportaacao E Industria De Oleos Ltda & Ors

The final sentence of clause 9.1 of the trust deed provides:

“Only the Trustee may enforce the provisions of the Notes or this Trust Deed and no Noteholder shall be entitled to proceed directly against the Issuer or the Guarantor unless the Trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing.”

Under the trust deed, the only circumstance in which the trustee might become “bound” to proceed against the issuer or the guarantor are those set out in the first sentence of clause 9.1, namely where, after the notes have become due and payable:

“(a)

It shall have been so directed by an Extraordinary Resolution or so requested in writing by the holders of at least one-fifth in the principal amount of the outstanding Notes and

(b)

it shall have been indemnified and/or secured to its satisfaction against all liabilities, proceedings, claims and demands to which it may thereby become liable and all costs, charges and expenses which may be incurred by it in connection therewith.”

A provision to similar effect is made in the final sentence of condition 13 of the terms and conditions of the notes. Further, condition 17 of the notes also provided:

“No person shall have any right to enforce any term or condition of the Notes under Contracts (Rights of Third Parties) Act 1999.”

The Particulars of Claim contain no allegation that the trustee was bound to proceed against either Imcopa C (as issuer) or Imcopa B (as guarantor) in respect of any of the matters raised by the present claim. The defendants contend that it follows that the claimants are not entitled to bring and are precluded from bringing the present claim against both Imcopa B and Imcopa C by the provisions of clause 9.1 of the trust deed and/or condition 13 of the terms and conditions of the notes.

The claimants contend that the no action clause cannot be relied upon where there has been an accepted repudiation of the contract. The defendants did not dispute that this was at least arguably correct. The grounds upon which the claimants contend that they are entitled to bring this claim, notwithstanding the no action clause, are therefore bound up with claims on the merits, which I shall now address.

In order to make good their pleaded case, the claimants would have to establish that the consent payments made in connection with the restructuring were either: (1) in the nature of illegal bribes made toward any noteholder to whom they were not paid; and/or (2) gave rise to repudiation and breach of contract which the claimants were entitled to accept and have accepted.

The defendants submit there is no real prospect of the claimants establishing any of the essential elements of their claim.

In support of their case, the claimants advance two main points. First, they contend that the offer of a consent payment to the noteholders if they voted in a particular way was a bribe, was illegal and invalidated the vote taken. Secondly, they contend that the different treatment of consenting and non-consenting noteholders violated the fundamental requirement that the noteholders as a class should be treated pari passu in all respects, without any preference between the notes or amongst themselves.

In support of their contention that the consent payments were a bribe and illegal, the claimants rely principally on two authorities.

First, they rely on Goodfellow v Nelson Line Liverpool Limited [1912] 2 Ch 324. In that case, the company had issued debentures to the amount of £200,000 bearing interest at 4.5 per cent, and guaranteed as to £150,000 by the Law Guarantee Society, which then went into voluntary liquidation, and as to the remaining £50,000 by the BS Investment Trust, £47,000 of these debentures being taken up by the Trust itself.

The Society and Trust were joint trustees of a trust deed securing the debentures and providing for remuneration and certain payments to the Society and Trust in consideration of their respective guarantees and giving to a majority of the debenture holders the usual powers to bind a minority. The Society’s liquidators offered to retire from the trusteeship and to forgo any further payments under the trust deed in consideration of being released from its guarantee. The company desired to accept this offer and submitted a scheme to the debenture holders, providing that they should accept non-guaranteed debentures bearing interest at 5 per cent in lieu of the guaranteed debentures, bearing interest at 4.5 per cent, and also providing in effect that all payments failing to be made by the company to the Trust under the trust deed should remain unaffected, except that the Trust should give credit for the additional 10 shillings interest on the debentures formally guaranteed by them. Without this provision, the Trust would not have supported the scheme. A resolution in favour of the scheme was passed by the requisite majority debenture holders, the Trust, without whose vote it would not have been carried, voting in favour of the resolution. The plaintiff, the holder of a debenture guaranteed by the Society, impeached the resolution on the grounds that the payments to be made to the Trust were in the nature of a bribe to induce the Trust to vote in favour of the scheme. The plaintiff’s claim was rejected by Parker J, who held that the separate treatment of the Trust openly provided for by the scheme was not in the nature of a bribe and that the Trust was not thereby incapacitated from voting on the scheme.

In his judgment Parker J stated that:

“It is further observable that the special provisions to be made in favour of the Trust were prominently referred to in the notice convening the meeting and were part of the scheme submitted to the meeting. At the meeting the scheme was, in fact, approved by the requisite majority. But the Trust, in respect of its holding of £47,500, and also the holders of the further £2,500 guaranteed by the Trust, voted in favour of the scheme, and it is clear that but for the fact that the Trust voted in favour of the scheme the resolution adopting it would not have been carried by the requisite majority. Under these circumstances the plaintiff contends that the resolution is not binding on her, notwithstanding the provisions of the trust deed, because, she says, the company procured it to be passed by bribing the Trust.

It appears to me that the term ‘bribery’ cannot be used appropriately in connection with this case. The powers conferred by the trust deed on a majority of the debenture-holders must, of course, be exercised bona fide, and the Court can no doubt interfere to prevent unfairness or oppression, but, subject to this, each debenture-holder may vote with regard to his individual interests, though these interests may be peculiar to himself and not shared by other debenture-holders ...

A secret bargain by one debenture-holder for special treatment might be considered as corrupt and in the nature of bribery, but, in my opinion, there can be no question of bribery where a scheme openly provides for the separate treatment of persons with special interests. The only question is whether these persons are incapacitated from voting on the scheme, and I can see no grounds in equity for so holding.”

The claimants contend that this case shows that if the consent payments are properly to be characterised as a bribe that it would invalidate any vote taken in the light thereof. However, it does not provide any support for their case that the consent payments are to be so characterised. On the contrary, it shows that where a scheme openly provides for a particular payment and it is not in any way “secret” then it is unlikely to be characterised.

Secondly, they rely on British American Nickel Corporation Limited v M J O’Brien [1927] AC 369. In that case a company, incorporated in Canada, issued mortgage bonds secured by a trust deed, which gave power to a majority of the bondholders to sanction any modification of the rights of the bondholders. A scheme for the reconstruction of the company provided for the mortgage bonds being exchanged for income bonds subject to an issue of first income bonds. The scheme was sanctioned by the majority of the bondholders requisite under the trust deed. The required majority would not have been obtained but for the vote of a holder of a large number of bonds (a Mr John Booth) whose support of the scheme was obtained by the promise of a large block of ordinary stock, an arrangement which was not mentioned in the scheme. It was held by the Privy Council that the resolution was invalid because the bondholder in voting had not treated the interests of the whole class of bondholders as the dominant consideration.

In giving the judgment of the Privy Council, Viscount Haldane considered the case of Goodfellow, as to which he said as follows:

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

In relation to the facts, Viscount Haldane stated as follows:

“Mr John R Booth’s vote was necessary in order to gain the required majority of bondholders and it was secured by a promise to give him $2,000,000 of the ordinary stock of the Nickel Corporation. This stock was at the time of little value, but it was evidenced that if the price of nickel rose it might become of value. The promise to Mr. Booth was made seven months before the new scheme was submitted to the bondholders,

... at the trial in the Supreme Court of Ontario, Kelly J. held that what was really done was that the majority at the meeting did not act in the bona fide exercise of their rights which the majority might exercise, but in consideration of what would benefit Nickel Corporation and the personal interests of those votes were to be secured. The vote had been influenced by special negotiations in advance of the meeting.”

Viscount Haldane concluded as follows:

“The Lordships are of the opinion that judgment was rightly given to the respondents in this appeal. In the first place, it is plain, even from his own letters, that before Mr J. R. Booth would agree to the scheme of 1921, his vote had to be secured by the promise of $2,000,000 ordinary stock of Nickel Corporation. No doubt he was entitled in giving his vote to consider his own interests. But as that vote had come to him as a member of a class, he was bound to exercise it with the interests of the class itself kept in view as dominant. It may be that, as Ferguson J.A. thought, he and those with whom he was negotiating considered the scheme the best way out of the difficulties with which the Corporation was beset, but they had something else to consider in the first place. Their duty was to look at the difficulties of the bondholders as a class, and not to give any one of these bondholders a special personal advantage, not forming part of the scheme to be voted for in order to induce him to assent.”

The claimants rely in particular on the passage that their duty was to look to the difficulties of the bondholders as a class and not “to give any one of these bondholders a special personal advantage not forming part of the scheme to be voted for in order to induce him to assent”. They submit that in this case, the consenting noteholders were being given a “special personal advantage” in order to induce them to assent and that that is properly to be characterised as a bribe. However, as the defendants point out, the “special personal advantage” in the British American Nickel case was a secret agreement which was the result of special negotiations in advance, and which was not disclosed as part of the scheme to be voted upon. Further, Viscount Haldane approved the decision in Goodfellow to the effect that:

“... where the scheme to be voted upon itself provides, as it did in that case, openly for special treatment of a debenture holder with a special interest, he may vote, inasmuch as the other members of the class had themselves known from the first of the scheme.”

I do not consider that the authorities relied upon by the claimants bear out the case which they seek to make, and I reject their case on a number of grounds.

First, the authorities show that payments offered in exchange for votes do not constitute bribery where the relevant scheme has openly provided for the separate treatment of persons with a different interest, and such persons were not incapacitated from voting on the scheme. The fact this is the correct interpretation of the Goodfellow and the British American Nickel cases is borne out by Palmer’s Company Law paragraph 12.068, which states as follows when referring to those cases:

“If the holder of a substantial block of the class concerned is offered an inducement to support the scheme, this may well make the purported approval void, unless it is disclosed to the other members. If full disclosure is made, the court will, in appropriate circumstances, approve the scheme and even allow the votes of the person concerned.” (emphasis added)

Secondly, the consent payments offered in this case had the following characteristics, which are inconsistent with any case of bribery, fraud or illegality: (1) they were openly and repeatedly disclosed and explained in documents made available to all noteholders before the relevant noteholder meeting and vote took place; (2) the consent payments were payable on an equal basis to all those noteholders voting in favour of the relevant consent solicitation; (3) each noteholder was entitled and free to vote in favour of or against the consent solicitation as it saw fit.

Thirdly, although there appears to be no English case in which the validity of the modern variant of payments to bondholders, known as consent payments, has been considered, the issue has arisen in a number of cases in the leading US corporation jurisdiction of Delaware, where consent solicitation and consent payments appear to have been a commonly used means of debt restructuring since at least the 1980s. The Delaware court has held that such payments within certain limits are permissible. One example of this is Kass v Eastern Airlines Inc [1986] WL 13008 (Del Ch), which was concerned with proposed amendments to an airline’s bond indentures. Faced with the contention by the claimant bondholder that vote buying was wrong in law, Allen C held at page 4:

“The fact that the offer in this case is one made publicly to all voters on the same terms that each bondholder is free to accept or reject it precludes, in my opinion, a conclusion that it disenfranchises any voter or group of voters (although the same could not perhaps be said were the offer of consideration in exchange for a bondholder’s vote not made to all bondholders on the same terms).”

In relation to his suggested qualification, he stated further, as follows at page 5:

“For example, had Eastern not made its offer to all bondholders on the same terms, but had it privately paid money to sufficient holders to carry the election, one would no doubt more feel some confidence in concluding provisionally at least, that such conduct was so inconsistent with the concept of voting implied by the amendment provision that it constituted a violation of what must have been the reasonable expectation on the contracting parties.”

That such payments have been a commonplace feature of debt refinancing in the United States is borne out by an article on the topic published in 1991 entitled, “Legal Aspects of Public Debt Restructurings: Exchange Offers, Consent Solicitations and Tender Offers”, 4 De Paul Business Law Journal 49. In that article, the authors noted at page 59 that:

“A consent solicitation is a debt restructuring mechanism pursuant to which the issuer solicits consents from its bondholders to the adoption of amendments to the indenture governing the issuer’s debt securities. This is often done in exchange for the issuer’s payment to consenting bondholders of a consent fee or other form of consideration.”

It then gives in the footnote examples of various recent consent solicitations. The authors continue further on at page 70:

“Consent solicitations typically involve the payment of cash or other forms of consideration by the issuer to its bondholders in exchange for their consent to proposed amendments to the governing indenture. Although such consent payments have been challenged as a form of ‘vote-buying,’ violative of public policy and in breach of an implied duty of good faith and fair dealing, it is well established that such payments, within certain limits, are permissible.”

As to the limits here referred to, the authors point out by reference to the Kass case that:

“In response to the allegations of “vote buying” and a breach of an implied duty of good faith and fair dealing, the court in Kass emphasized that had Eastern not made a solicitation offer to all bondholders on the same terms, but rather had paid privately paid money to a sufficient number of holders to ensure adoption of the proposed amendments, a different result would likely have been reached. The validity of consents obtained as a result of offering disparate amounts or a form of consideration to bondholders or consideration offered to some but not all bondholders is therefore subject to question.”

The emphasis on the significance of a private rather than open offer being made and on the offer being made on the same terms to all is consistent with the approach in the English law authorities, as set out above.

For all these reasons, I conclude that there was nothing fraudulent or illegal about the open consent payments offered alike to all noteholders, that they were not a bribe and that the vote was not invalidated thereby.

As to the claimants’ contention that noteholders were not being treated pari passu, I agree with the defendants that the consent payments were not inconsistent with the pari passu status of the note.

First, each of the consent solicitations where consent payments were offered involved postponing the date on which interest would become payable to all noteholders. On approval of the relevant extraordinary resolution, therefore none of the noteholders would have received the interest payment which would otherwise have been due at that time. This quantification of the terms of the notes, once approved by resolution, was binding on all noteholders equally. The consent payments did not therefore represent the payment of interest to some but not all noteholders.

Secondly, the consent payments did not involve the conferral of benefits on some but not all noteholders, but the payment of consideration to those voting in favour in return for their agreement to the consent solicitation.

Thirdly, the offer of consent payments was made openly to each and every noteholder and was not paid pursuant to any obligation owed to all noteholders contained in the notes.

Fourthly, the consent payments did not involve payments being made by the trustee under the trust deed. The payment was to be made by the solicitation agent in return for acceptance of the offer being made. It therefore does not fall within clause 6 of the trust deed, being the pari passu contractual provision relied upon by the claimants. Further, there is nothing in the trust deed or the notes which prevents the payment of consent payments in conjunction with the consent solicitations.

As to the claimants’ arguments on repudiation, these depend on showing that the voting on the extraordinary resolution was invalid and that the consequent purported but unlawful variation to the contractual documentation was repudiatory. However, since I have found that there are no grounds for impugning the vote taken, the repudiation argument must fail.

Finally, although it is not contended that the consent solicitation was unfair or oppressive, it should be noted in this context that: (1) in voting on two occasions on consent solicitations involving consent payments and personally receiving such payments, the claimants effectively acknowledged that at least those consent payments were lawful and waived any right to contend otherwise; (2) all three consent solicitations were passed by an overwhelming vote by majority of noteholders and are therefore binding on all noteholders pursuant to the terms of the trust deed and the notes; and (3) each of the consent solicitations forms part of the reorganisation plan which has now been formally confirmed by the Brazilian court on a basis which makes it binding as a matter of Brazilian law on all noteholders.

For all these reasons, I accept the defendants’ case that the claimants’ substantive claims have no real prospect of success and should be dismissed. In those circumstances, it further follows no grounds have been made out for going behind the no action clause, and for that reason also the claims must be dismissed.

The claimants’ application for summary judgment is accordingly dismissed and the defendants’ cross-application for summary judgment is granted.

In relation to permission to appeal, I am not going to grant permission. I will give my reasons in writing, but I am not satisfied the appeal would have a real prospect of success, and although Mr Goldblatt has submitted that there are in this case other compelling reasons why there should be an appeal because of the potential importance of some of the issues of law raised, I consider that that should more appropriately be considered by the Court of Appeal and I am not persuaded that I should grant permission on that basis, but I will set out brief reasons in writing in the usual way.

Various issues have arisen in relation to costs. The first is whether costs of the action should be paid on an indemnity basis. The defendants submit they should, and they have referred me to the relevant rule in CPR and also to the judgment of Sir Anthony Colman in National Westminster Bank Plc v Rabobank Nederland [2008] 3 Costs LR 396, in particular paragraphs 26 and 29. Paragraph 26 sets out a citation from the judgment of Tomlinson J in the caser of Three Rivers District Council v Governor and Company of the Bank of England [2006] EWHC 816 (Comm) and I refer in particular to paragraphs 1 to 6 of that judgment.

The main reasons advanced for indemnity costs were firstly it was said the claim was speculative and thin. Although I have granted summary judgment to the defendants, I accept the claimants had an arguable case and I would not characterise it as being speculative.

Secondly, it is said the case involved allegations of fraud, illegality and bribery. It is true that was the nature of the characterisation of the vote-buying case but it was not a case which involved allegations of dishonesty. The allegations of fraud were essentially of a technical nature based on the authorities and the alleged wider and superior principle of turning one’s face against any form of vote buying. So I would not regard this as a case where there have been serious allegations of dishonesty made or like allegations which have been found to be unfounded.

Thirdly, it is said this is a case where there was a no action clause and I was referred to another judgment of Colman J in the National Westminster Bank case where he made the point that in relation to cases which involve proceedings brought in breach of an arbitration clause or exclusive jurisdiction clause, indemnity costs may be awarded, not least to reflect the fact that the winning party may well have a right to damages in an equivalent amount in any event. Those cases do not apply directly here in relation to the no action clause which was part of the trust deed. Further, the claimants had an arguable case on this, even if the real prospect of success threshold was not met. If they had an arguable case for the purpose of making the application in relation to the merits, then they had an arguable case on repudiation, and therefore on displacing the no action clause, as the defendants accepted during the case of argument.

Fourthly, it was said there were unsatisfactory features of the claimants’ conduct of litigation and I was referred to various procedural defaults which they say the claimants were guilty of, but I do not regard any of those as being sufficient as taking this case out of the norm or in showing unreasonable conduct such as to justify an order for indemnity costs. So looking at all the various points made by the defendants, I am not satisfied this is one of those cases that justifies, in the exercise of my discretion, an indemnity costs’ order.

The next issue relates to what costs should be ordered. It is not in dispute that the defendants should have their costs of the action. What is in dispute is whether those costs should include the costs of their security for costs application. This application was initially issued in respect of costs of the action. It was then refined when the point was taken that in the light of the Nasser v United Bank of Kuwait decision, the relevant costs of security, if there was to be any, should relate to costs of enforcement. It was then changed to relate to costs of enforcement.

The obvious intention was that the application should come on before the summary judgment application because they were seeking security for costs up to the stage of summary judgment. Unfortunately, the date originally fixed for the hearing was stood out. The claimants’ estimate was that the hearing would take up to a day, whereas the defence estimate was 45 minutes. It seems to me once the claimants’ position became one that it was going to take up to a day, it was inevitable, regardless of the reasonableness of the defendants’ estimate, that the matter was to be stood out and despite attempts to relist it before the summary judgment application, it was not so relisted but was relisted to come on together with the summary judgment application. That meant it could not be dealt with before the summary judgment application and if (as indeed occurred) the claim was dismissed, then there would be no point to the application anyway.

It was in those circumstances that the defendants did not press any application at the relisted hearing, although the claimants did put in a detailed skeleton argument relating to the issues of security for costs. It is unfortunate the parties did not correspond to see whether they could agree what should happen in relation to the security for costs application, but it seems to be fairly obvious that it could not properly be dealt with or there was no point in dealing with it prior to the determination of the summary judgment application once it had been listed to come on at the same time.

The claimants also say there was never any basis for seeking security because they could have obtained security through withholding interest payments that would otherwise be due or entering into some agreement to hold those interest payments in lieu of security. I am not satisfied it has been shown there was any clear alternative to seeking an order. There was no clear offer of a payment into court or something equivalent to it, so I do not accept it was unreasonable to pursue the application for security for costs.

I do accept there is some force in the point that the original application was made on too wide a basis, as was acknowledged when the application was then limited to enforcement costs. In those circumstances, I consider there should be some discount to the costs to be awarded, but a case such as this where proceedings have been brought but the claim has been dismissed, a claimant must recognise there is always a chance of security for costs’ application being made and security for costs becoming part of the costs of the action. That risk materialised here, and I think in principle the claimants should pay the security for costs as part of the costs of the action, but I propose to discount the costs that would otherwise be awarded to the defendants in respect of that application by 25 per cent to reflect the reformulation of the way in which the application was being put forward.

I then turn to the further issue of whether these costs should be summarily assessed or subject to detailed assessment. Both sides have put in schedules in a fairly similar format. The defendants’ schedule in relation to costs of the action, apart from security for costs, is £80,000, which is similarly contrasted with the claimants’ figure of some £110,000. The defendants’ figure in relation to security for costs is some £45,000, being contrasted with the claimants’ figure of some £72,000. Although points have been made in relation to some of the detail such as work on documents, when one looks at the matter broadly and by comparison to the claimants’ own costs, it does not appear that the costs being claimed here are unreasonable and although it is said there is not sufficient detail to deal with summary assessment, both parties have put forward a summary assessment form, both have put forward costs on a similar basis and on a form which is quite usual in relation to summary assessment. So I do not accept that I cannot or should not summarily assess the costs. However, in doing so, I shall take into account the 25 per cent that should be taken off for costs in relation to security for costs’ application and I also take into account that on detailed assessment, each shows it is likely that cost appeals will be taxed down to a certain extent. In all circumstances, I consider the appropriate figure for summary assessment of the total costs is a figure of £100,000.