Neutral Citation Number: [2013] EWCA Civ 364
Case No: A3/2012/1532
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE HAMBLEN
[2012] EWHC 1849 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 22 April 2013
Before:
LORD JUSTICE LLOYD
LORD JUSTICE AIKENS
and
LORD JUSTICE BEATSON
--------------------Between:
(1) SERGIO BARREIROS AZEVEDO
(2) VERA CINTIA ALVAREZ
- and (1) IMCOPA IMPORTAÇÃO, EXPORTAÇÃO E
INDÚSTRIA DE OLĖOS LTDA
(2) IMCOPA INTERNATIONAL S.A.
(3) IMCOPA INTERNATIONAL CAYMAN LTD
Claimants
Appellants
Defendants
Respondents
----------------------------------------Simon Goldblatt Q.C. and Karen Gough (instructed by R A Rosen & Co) for the Appellants
Ben Valentin (instructed by Shearman & Sterling (London) LLP) for the Respondents
Hearing date: 11 March 2013
---------------------
Approved Judgment
Judgment Approved by the court for handing down.
Azevedo v Imcopa
Lord Justice Lloyd:
Introduction and summary
1.
In this appeal, from an order of Mr Justice Hamblen dated 30 May 2012, the
appellants contend that it is not lawful under English law for a company to undertake
a process which they characterise as buying the votes of the holders of notes or other
securities issued by the company. To put the point more formally, the issue is
whether English law permits a company to solicit and procure votes in support of a
financial restructuring proposal by offering and making cash payments to those
members of the relevant class who vote in favour of the proposal but excluding from
the payment those who vote against it or do not vote on the resolution at all. The
process is referred to as consent solicitation, and the payments as consent payments.
2.
In 2006 the Second Defendant, incorporated in Uruguay and therefore known in the
proceedings as Imcopa U, issued $100 million 10.375% guaranteed notes with a
maturity date in 2009 (the Notes). The Notes were guaranteed by its parent company,
the First Defendant, incorporated in Brazil and therefore known as Imcopa B. The
Third Defendant, as its name suggests, is a Cayman company and therefore known as
Imcopa C. The Notes were governed by a Trust Deed dated 27 November 2006 made
between Imcopa U as Issuer, Imcopa B as Guarantor and the Bank of New York (now
Bank of New York Mellon) (hereafter BNY) as Trustee. The Notes are governed by
English law, with an English jurisdiction clause. The Claimants invested in the Notes
in the amount of $1.2 million.
3.
The resolution which is at issue in these proceedings was proposed in October 2010 as
part of a process of restructuring the Imcopa group’s obligations. It involved
postponing a payment of interest due under the Notes. The notice of the meeting
explained that a payment would be made to those voting in favour of the resolution,
and would not be made to other Noteholders. The resolution was passed by an
overwhelming majority, but the Claimants were not among those voting in its favour,
despite having voted in favour of earlier similar resolutions. They now contend that
the making of the consent payments only to those voting in favour was unlawful,
either because it was a breach of the pari passu principle or because, although not
secret, it was in the nature of a bribe and as such not permitted under English
company law.
4.
As before the judge, the Claimants were represented by Mr Simon Goldblatt Q.C.
leading Ms Karen Gough, and the Defendants by Mr Ben Valentin. I am grateful to
Counsel for their clear, sustained and eloquent oral submissions, as also for the
written material provided.
5.
The judge rejected the contentions advanced by Mr Goldblatt in an impressive
judgment delivered extempore: [2012] EWHC 1849 (Comm). The appeal also
challenges, separately, the judge’s order as to costs. Permission to appeal was granted
by Sir Richard Buxton. I agree with the judge on the main appeal, and I find no
misdirection in the way he dealt with the issue of costs. I would therefore dismiss the
appeal. My reasons follow.
Judgment Approved by the court for handing down.
Azevedo v Imcopa
The Notes
6.
The Trust Deed dated 27 November 2006 contains a covenant by the Issuer with the
Trustee to pay to the Trustee all sums due by way of principal and interest on the
Notes, in clause 2, and it also contains the guarantee by Imcopa B in clause 5. Clause
6.1 is a declaration of trust, relevantly as follows:
“6.1
All moneys received by the Trustee in respect of the Notes or
amounts payable under the Trust Deed will, despite any appropriation
of all or part of them by the Issuer or the Guarantor, be held by the
Trustee on trust to apply them:
6.1.1 [first, in payment of costs, charges, expenses etc. of the
Trustee,]
6.1.2 second, in payment of any amounts owing in respect of
the Notes pari passu and rateably”
7.
Schedule 3 to the Deed sets out provisions for meetings of Noteholders. By clause
2.1 a meeting has power, by extraordinary resolution,
“to sanction any proposal by the Issuer, the Guarantor or the Trustee
for any modification, abrogation, variation or compromise of, or
arrangement in respect of, the rights of the Noteholders against the
Issuer or the Guarantor, whether or not those rights arise under the
Trust Deed”
8.
However, a special quorum applies to any resolution which would have the effect of
modifying the maturity of the Notes or the dates on which interest was payable on
them: clause 2.9. An extraordinary resolution must be passed by a majority of 75% of
those voting on it. A special quorum resolution requires the attendance at the meeting
of representatives of the holders of not less than 75% of the Notes eligible for voting
on the resolution. In practice, voting at meetings was by proxy, and the persons
appointed as proxies cast votes in respect of all Notes as regards which the holders
had appointed them as proxies. Thus, there was no difference between the Notes
represented at the meeting, in this sense, and the Notes in respect of which votes were
cast at the meeting.
9.
These provisions applied to the resolution with which this appeal is concerned. So, in
order to get the resolution passed, the Issuer had to persuade the holders of at least
75% of all the Notes to cast their votes, and at least 75% of those voting to vote in
favour of the resolution. That explains the offer of the consent payments.
10.
The terms and conditions of the Notes are set out, with the form of certificate for the
Notes, in a schedule to the Trust Deed. Among these terms and conditions is
Condition 3 which reiterates the guarantee of the Notes and also has this provision as
to the status of the Notes:
“The Notes constitute (subject to Condition 4) direct, unconditional,
unsecured and unsubordinated obligations of the Issuer and shall at all
times rank pari passu and without any preference among themselves.
Judgment Approved by the court for handing down.
Azevedo v Imcopa
The payment obligations of the Issuer under the Notes and of the
Guarantor under the Guarantee shall, save for such exceptions as may
be provided by applicable legislation and subject to Condition 4, at all
times rank at least equally with all their respective other present and
future unsecured and unsubordinated obligations.”
11.
Condition 4 includes a negative pledge covenant and other provisions. Mr Goldblatt
addressed us in some detail on some of these provisions, but it does not seem to me
that anything turns on them for the purposes of the issues that are live on the appeal.
12.
Condition 12 deals with meetings of Noteholders and modifications, in terms which
follow those of the Trust Deed already mentioned.
13.
I mention at this point a provision relevant to the position of the Third Defendant.
Clause 14 of the Trust Deed allows for substitution of another company as principal
debtor under the Trust Deed and the Notes in place of the Issuer, by agreement of the
Trustee, without requiring the consent of Noteholders. This power was used in
December 2007 to replace Imcopa B as Issuer by Imcopa C. Under clause 14.2.2, an
agreement by the Trustee under this provision “will, if so expressed, release the Issuer
… from any or all of its obligations under the Trust Deed or the Notes”. The
Claimants contend that Imcopa B remains liable under the Trust Deed and the Notes
despite the substitution of Imcopa C. I will come to that point later.
14.
On the same date as the Trust Deed an agency agreement was entered into between
Imcopa U, Imcopa B, the Trustee and other parties, including the Bank of New York,
London, by which BNY London was appointed as Principal Paying Agent in respect
of the Notes, BNY was appointed as registrar, and other agency appointments were
established. BNY and BNY London are not separate legal entities, but they were
treated as having separate functions in this context.
The resolutions
15.
The Imcopa restructuring plan was initiated in late 2008, in order to address financial
problems resulting from the financial crisis of that year. It led to four resolutions
being put to the Noteholders, each of which was approved by the necessary majority
and with the necessary quorum. In May 2011 the Brazilian court confirmed the
reorganisation plan. The Claimants voted in favour of the first three resolutions.
16.
The first of the resolutions, in May 2009, did not propose any relevant modification of
the obligations of the Issuer and therefore did not require the special quorum. Just
under 65% of the votes were cast on the resolution, the votes in favour being over
95%. The second resolution was put at a meeting in November 2009. It was to
postpone the date of maturity of the Notes and to cancel a payment of interest
otherwise due under the Notes on 27 November 2009. Accordingly the special
quorum provision did apply. On this occasion over 90% of the eligible votes were
cast, with over 99% in favour. Payment of a consent payment was part of this
proposal, to be paid to those voting in favour of the resolution. The third resolution,
put in June 2010, postponed the maturity date of the Notes still further, and also
introduced amortisation provisions as regards the principal, and it also amended the
provision for payment of interest. On this occasion votes were cast in respect of over
Judgment Approved by the court for handing down.
Azevedo v Imcopa
94% of the Notes, of which more than 99% were in favour. Consent payments were
offered and paid in respect of this resolution as well.
17.
The last and crucial meeting was convened for 26 October 2010. This was preceded
by a consent solicitation statement dated 4 October 2010 sent out on behalf of Imcopa
C, by HSBC Securities (USA) Inc as solicitation agent. This explained that, subject
to the passing of the extraordinary resolution which was proposed to be put at the
meeting, Imcopa C as Issuer offered to pay a cash amount to each Noteholder from
whom valid voting instructions (referred to as the Consent) in favour of the proposal
were received and not revoked. The payment was to be $25.94 for every $1,000
principal amount of the Notes which were the subject of the Consent. This was
explained in the notice of the meeting as being half of the amount of interest that
would have accrued on the relevant principal of the Notes from 10 November 2009 to
9 May 2010. I will refer to the payments made to those voting in favour of this last
resolution as the Consent Payments.
18.
The resolution to be put to the meeting involved further amendments to the provisions
for payment of interest, and different amortisation arrangements for principal.
Because of these and some other aspects of the proposal, the special quorum provision
applied. I do not need to go into the somewhat complicated details of the proposal.
The meeting was duly held on 26 October 2010. It was attended by persons holding
valid voting instructions from Noteholders in respect of over 88% of the Notes, so the
special quorum provision was satisfied. Of these, the votes of over 98% were cast in
favour of the resolution, so it was passed as an extraordinary resolution. As in the
case of previous resolutions, the effect of the resolution was then embodied in a
supplemental Trust Deed which amended the 2006 Trust Deed (as previously varied)
so as to put the latest proposal into effect as between all relevant parties.
19.
We were shown the sequence of documentation for the 26 October 2010 meeting, but
I do not need to refer to more of it than is set out above.
The issues as pleaded
20.
The Claimants’ claim is for the payment by each Defendant of $1.2 million as the
return of money lent, or as damages for repudiatory breach of contract, or as money
had and received to the Claimants’ use, with interest, as well as a declaration that the
three resolutions of the Noteholders purportedly passed on 10 November 2009, 1 June
2010 and 26 October 2010 were invalid, illegal and ineffective in English law, and
other relief.
21.
The relevant allegations in the Particulars of Claim are as follows.
22.
The substitution of Imcopa C is alleged, but it is said that Imcopa U was not thereby
released from its liability as Issuer up to the date of substitution.
23.
Under the heading Illegality, the case is made in this way. As a requirement of the
contract and a fundamental requirement of law and equity, the Noteholders as a class
must be treated pari passu in all respects without any preference between the Notes or
as between themselves. The offer and payment of the Consent Payments only to
those who voted in favour of the resolution contravened the contract and the law and
initiated a repudiatory breach of contract. Despite the power of the requisite majority
Judgment Approved by the court for handing down.
Azevedo v Imcopa
of Noteholders to bind the class as a whole, it was unlawful to offer or pay to some
Noteholders, but not to all of them, benefits which did not form part of the scheme to
be voted on. The Consent Payments were in the nature of a bribe, in fraud of those
Noteholders from whom they were withheld, and rendered unlawful each scheme the
subject of the relevant resolution. Moreover each member of the class, in voting as
such, was bound to exercise the vote with the interests of the class itself kept in view
as dominant, and acceptance of the proposal to pay money in return for a favourable
vote rendered the majority votes ineffective, so that they could not and did not bind
those Noteholders who did not vote in favour. The consequence is said to be that the
resolutions were void and of no effect, albeit that the Claimants accept that, having
voted in favour on the first two relevant occasions and having accepted the consent
payments then offered, they cannot complain of the repudiation of the contract on
those occasions.
24.
It is to be noted that the Claimants’ case does not include any allegation of
oppressiveness, unfairness or bad faith in relation to the solicitation or any other
aspect of the process which led to the passing of the resolution.
25.
Under the heading of Damages in contract, at paragraph 33, the Claimants alleged in
the first sentence that, for the purposes of the three consent solicitations, BNY “was
put in funds” by the Imcopa group to make payment of “sums equivalent to interest”
to the consenting Noteholders, including funds to pay the sums withheld from the
Claimants in November 2010 because they did not vote in favour of the resolution.
On that basis they claimed $31,128 by way of damages in contract, being the amount
of the Consent Payment that would have been paid to them if they had voted in favour
of the resolution.
26.
In turn the Defendants’ position on the issues now relevant was as follows. Imcopa U
was validly and effectively released when Imcopa C was substituted as Issuer. The
details and documentation of the successive resolutions were set out, including the
fact that the offer and terms of the consent payment were in each case made clear and
explicit in the documents. The alleged illegality of the provision for and payment of
the consent payments was denied, as was the allegation that they were to be regarded
as bribes or as a fraud on the non-consenting Noteholders. Thus the Defendants put in
issue all the Claimants’ allegations as to the illegality and invalidity of the resolutions.
27.
As to paragraph 33 of the Particulars of Claim, the Defendants admitted the first
sentence but denied that the Claimants were entitled to receive the Consent Payment
or any equivalent to it. By choosing not to vote on the resolution they had elected not
to receive the Consent Payment. The Defendants denied having committed any
breach of contract of any kind or any other wrongful act.
28.
The applications before the judge sought the summary determination of the case each
way. The Claimants applied for summary judgment under CPR Part 24, as did the
Defendants, who also applied for some or all of the claim to be struck out under CPR
Part 3.4.
Market factors
29.
There are allegations in the statements of case which would not be capable of
summary determination. In particular the Defendants put forward a number of
Judgment Approved by the court for handing down.
Azevedo v Imcopa
contentions on the basis that the solicitation and payment of consent payments in
circumstances such as those of the present case is a longstanding and widely known
practice in the debt market, and that what was done in this case was consistent with
standard market practice applicable to financial debt instruments governed by English
law. Those are contentions which the judge could not and did not consider. We do
not know the position either way. In their skeleton arguments the parties adopted
contrary positions, Mr Goldblatt asserting that there is no evidence that “the direct
buying of votes has so far been attempted in England”, and Mr Valentin referring to a
“well-established practice” of soliciting consent for amendment to bonds by offering
consent payments to those who vote in favour. There is no evidence before the court
on this point, and we are not aware of any judicial decision on the point in England
prior to the present case. There are decisions in the Chancery Court of the State of
Delaware concerned with this sort of practice, dating from some time back, some of
which were cited to the judge and more to us, and there is academic literature about
the practice in that jurisdiction and elsewhere in the United States.
30.
A case note about the judge’s decision by Mr Paul Deakins of Clifford Chance,
entitled “Noteholder meetings: paying the price for change”, at (2012) Corporate
Rescue and Insolvency Journal 176, suggests that it has been a common practice for
some time in English law transactions (and for longer in the USA), but that is not, of
course, evidence.
31.
We have to decide the point without the benefit of any previous English authority of
direct relevance, other than the judge’s judgment in this very case, and regardless of
whether the practice of consent solicitation had been used extensively, rarely, or not at
all in the English market before the Imcopa group’s restructuring proposals.
32.
A company which faces financial difficulties, even in less severe circumstances than
existed in 2008 and since then, may need to secure the agreement of various classes of
creditors if it is to be able to survive despite not being able to comply to the letter with
the terms of its debt obligations. It is likely to have some creditors who are banks,
whether individually or on a syndicated basis, and it may well have others who are the
holders of bonds or notes. These classes differ in a number of material respects. One
is that the members of a syndicate of banks know what other banks are in the
syndicate and they are likely to be able to collaborate (if they wish to) on an informed
basis, in order to maximise their bargaining power. By contrast, the members of a
class of bond or note holders will not know who the other members of the class are,
and will not be able to collaborate with each other or to take decisions as to what
would be in their own best interests on an informed basis as to the attitude of other
members of the class. They are faced with a version of the so-called Prisoner’s
Dilemma. This arises in a situation in which two prisoners are being interrogated
separately, neither knowing what the other will say or has said. Each is unable to tell
how the other’s conduct may affect his own position and therefore what conduct
would be in his own best interests.
33.
Another graphic description of the uncertainty faced by an individual voter in this
situation is called the Trembling Hand Perfect Nash equilibrium, as discussed in an
article “Do Bondholders Lose from Junk Bond Covenant Changes?”, by Marcel
Kahan and Bruce Tuckman, Journal of Business (University of Chicago Press)
October 1993 vol 66 page 499. (Neither this article nor that mentioned at paragraph
Judgment Approved by the court for handing down.
Azevedo v Imcopa
[30] above was cited to us; neither affects my reasoning or my conclusion so I did not
consider it necessary to invite submissions from Counsel about either.)
34.
It is inherent in this sort of situation that one Noteholder can only guess at the
decision likely to be taken by others, and must recognise that, apart from the fact that
the consent of enough Noteholders is essential if the company is to be able to secure
the variation of the terms of its relevant debt obligations that may be essential to its
survival, no individual Noteholder has any particular bargaining strength. Those who
subscribe for obligations of this kind or who purchase such bonds or notes in the
market can be assumed to be sophisticated and experienced investors, but they will
know or come to realise that they are on their own when it comes to deciding how to
vote on a proposal such as those put forward by the Imcopa group.
35.
It is, no doubt, sensible and practical for there to be provisions by which the terms of
the relevant obligations can be varied, so long as a proper process is followed. The
cases show that such provisions have been used for a long time. The requirements of
an extraordinary resolution and a special quorum are there to make it possible but not
too easy. In particular, it is the special quorum requirement that provides the
company with a special reason to offer members of the class an incentive to vote on
the resolution, and, of course, preferably to vote in favour of the resolution. A benefit
which is available to all members of the class whether or not they cast their vote does
not provide that incentive. It may, therefore, not lead to the casting of enough votes
to satisfy the special quorum provision. However strong the vote in favour may be,
the resolution may therefore fail because not enough of the class voted on it. The first
of the four resolutions which I have mentioned did not involve the special quorum
requirement, and it would not have been passed if it had, since although the majority
vote was 95% of those cast, less than 75% of those entitled to vote did in fact cast
their votes. This being so, whether or not the solicitation of votes by means of the
offer of consent payments is an established practice in the English market, it is
possible to see why it was undertaken in the present case and why it might be
undertaken in other similar situations.
36.
Shortly after the judge decided this case, Mr Justice Briggs decided another case
concerned with somewhat similar issues: Assénagon Asset Management S.A. v Irish
Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch). In that case bondholders
had been asked to vote in favour of a proposal which involved the exchange of their
bonds for the issue of new bonds. Those who did not vote in favour of the proposal
had their bonds cancelled for a nominal consideration. The deadline for exchange
was set as a time before the meeting at which the relevant resolution would be
proposed, so that the non-consenting bondholders did not have a second chance. The
incentive in that type of case is referred to as an exit consent. Briggs J held that the
process had not been validly undertaken, accepting two of the three arguments for the
non-consenting bondholders. The company appealed and the bondholders crossappealed on the point which he had decided against them. That appeal was due to
come on together with the present appeal but, not long before the date for the appeal
hearing, the issuer of the bonds went into special liquidation under Irish law and the
special liquidators decided not to pursue the appeal. Accordingly the issues raised in
that case, which had attracted a good deal of academic and professional interest,
remain open to be tested at appellate level.
Judgment Approved by the court for handing down.
37.
Azevedo v Imcopa
Both parties in the present case made some submissions by reference to the
Assénagon case, but it seems to me that it is too far away from the present case on the
facts to be of any particular assistance.
The effect of the consent solicitation as an offer, and its acceptance
38.
By the consent solicitations made by Imcopa C in the present case, the Issuer made an
offer to each member of the class of Noteholders, in the terms of an “if” contract: if
you cast the votes that you are entitled to as a Noteholder by giving valid and
irrevocable voting instructions to a proxy to vote in favour of the resolution, and if the
resolution is duly passed, then I will pay you the stated amount in proportion to the
relevant Notes. If a given Noteholder acted on that offer by appointing a proxy in
time with valid and irrevocable instructions to vote in favour of the resolution, and if
the resolution was passed, then as a matter of English contract law he would be
entitled to payment in accordance with the offer, by analogy with such cases as Carlill
v Carbolic Smoke Ball Company [1893] 1 QB 256. It was not suggested that, by
itself, the contract would not be effective and binding on contract law principles. The
argument is that to give effect to it is incompatible with the terms of the documents
which govern the Notes, or with principles of English company law, or both.
The pari passu principle
39.
The main arguments presented by Mr Goldblatt in support of the appeal fell into two
categories: first, that the Consent Payments infringe the pari passu principle and,
secondly, that even if they do not, they are inherently unlawful under English
company law. I deal with the pari passu point first.
40.
The rule requiring pari passu treatment of all members of a class is a basic principle of
insolvency law in England, whether as regards companies or individuals. The present
case is not concerned with insolvency law, however, and the principle has to be
invoked by reference to the terms of the relevant documents.
41.
The principle is reflected in the contractual documentation, above all in clause 6.1.2
of the Trust Deed, quoted at paragraph [6] above. So far as any funds are concerned
which are held by the Trustee either as “moneys received by the Trustee in respect of
the Notes” or as “amounts payable under the Trust Deed”, they are held on trust to be
applied (after discharge of amounts due to the Trustee) in payment of amounts owing
in respect of the Notes pari passu and rateably. That provision therefore applies to
funds held by the Trustee, as part of the declaration of the trusts on which those funds
are held. In addition, Condition 3 of the Terms and Conditions of the Notes states that
the Notes rank pari passu and without any preference among themselves.
42.
According to Imcopa, the funds used for payment of the Consent Payments were not
at any time held by the Trustee, and even if they had been, they were not received by
the Trustee in respect of the Notes nor were they amounts payable under the Trust
Deed. Accordingly, it is said, clause 6 of the Trust Deed did not apply to them. The
judge accepted this contention, saying at paragraph 66 that the payments were to be
made by the solicitation agent in return for acceptance of the offer being made.
43.
The Claimants made a number of points in support of their argument that clause 6
does apply. They argued that the judge was wrong on the facts (and on the pleadings)
Judgment Approved by the court for handing down.
Azevedo v Imcopa
to say that the money was not held by the Trustee, and that as such it was money
received in respect of the Notes, so it was caught by clause 6.
44.
I must deal with the point about the pleaded case here. As noted above, the Claimants
asserted in paragraph 33 of the Particulars of Claim, as part of their case as to damage,
rather than as establishing liability in principle, that Imcopa C had put the Trustee in
funds to make the Consent Payments, and the Defendants admitted that assertion.
45.
However, the Defendants argued that the true position, which can be seen from the
documents, is that the Consent Payments never passed through the hands of the
Trustee. The Consent Solicitation said in terms that the payment would be made by
the Issuer, and would be made to accounts in Euroclear or Clearstream, as specified in
instructions provided by the Information Agent following the relevant meeting. The
judge may not have been correct to say that the Solicitation Agent had any role in the
making of the payments, but he was right, they say, to hold that the money was never
in the hands of the Trustee, and therefore also right to hold that clause 6 did not apply
to it.
46.
In response to the Claimants’ reliance on this point in the pleading in their skeleton
argument on the appeal, the Defendants’ solicitors, in correspondence with those
acting for the Claimants, sought to point out what they said was the correct position,
by reference to the Consent Solicitation, and proposed an amendment to paragraph
39.1 of the Defence, which would bring the pleading into line with the documents,
inviting the Claimants to agree to the amendment being made. This would introduce
a denial of the allegation that BNY as Trustee was put in funds to make the Consent
Payments, and would assert that the payments were made directly by Imcopa C as
Issuer. This invitation was declined.
47.
Of course it would have been better if the Defendants had not made the admission
which they made in paragraph 39.1 of the Defence. But the allegation in paragraph
33 of the Particulars of Claim was not put forward as being part of the basis on which
the Claimants alleged that the Consent Payments were unlawful or in breach of
contract. Accordingly, it is understandable that what is now said to be the
significance of the allegation was missed by those representing the Defendants.
48.
As it seems to me, there being no suggestion by the Claimants that the terms of the
Consent Solicitation do not represent the underlying reality, it is right for the court to
proceed by reference to that document, rather than on the basis of the admitted
allegation in the pleadings, which is inconsistent with that document.
49.
I would therefore hold that the judge was right to reject the Claimants’ case based on
clause 6.1.2 of the Trust Deed, because the money required to make the Consent
Payments to those voting in favour of the resolution was not at any stage held by the
Trustee.
50.
There is no other valid basis in the Trust Deed or the Terms and Conditions of the
Notes for the argument that the relevant funds had to be applied pari passu as between
all the Noteholders. I therefore pass on to the Claimants’ more fundamental
argument, that the offer and payment of consent payments only to those members of
the class who voted in favour of the resolution is of itself unlawful.
Judgment Approved by the court for handing down.
Azevedo v Imcopa
Are consent payment arrangements unlawful under English company law?
51.
Mr Goldblatt started with the proposition that “a majority of shareholders cannot put
company assets into their own pockets to the exclusion of the minority”, for which he
cited Menier v Hooper’s Telegraph Works (1874) LR 9 Ch 350. In that case the
plaintiff held 2,000 shares in the European and South American Telegraph Company,
and the Hooper’s Telegraph Company held 3,000 such shares, with only 325 other
shares issued, held by 13 people of whom ten were directors. The European
Company and the Hooper’s Telegraph Company undertook contractual arrangements
with a view to laying a cable between Europe and South America, but the concession
was claimed by a third company. Litigation followed, but the European Company
abandoned its claims in the litigation, with the result that the Hooper’s Company was
able to enter into a transaction with the third company for its own advantage. In
effect, the directors were alleged to have so acted as to benefit the majority
shareholder, not providing any proportionate benefit for the minority shareholders. In
the words of Sir William James, LJ, “the minority of the shareholders say in effect
that the majority has divided the assets of the company, more or less, between
themselves, to the exclusion of the minority”. The issue before the court was whether
the plaintiff was properly entitled to bring the action on behalf of himself and all other
shareholders in the European company other than the Defendants. The Court of
Appeal in Chancery held that he was so entitled, and observed that it was not open to
the majority to do what it was alleged that they had done, expropriating the minority.
52.
Mr Goldblatt’s argument was that the payment of the Consent Payments to only the
Noteholders who voted in favour of the resolution amounts to the same, albeit that the
majority is a much bigger proportion of the shareholders, that the composition of that
majority was not established by the fact of the distinct and conflicting interest that the
Hooper’s Company had in that case, but was only settled by the events of the vote,
and that any Noteholder who wished to do so could bring himself within the majority
and therefore make himself entitled to receive the Consent Payment, by instructing his
proxy to cast his vote in favour of the resolution.
53.
I do not in any way doubt the propositions for which Menier is cited, but it does not
seem to me that it has anything of value to contribute to the analysis of the present
case. The critical difference is that, in that case, the composition of the majority was
not affected in any way by the resolution. The majority consisted of those who had a
distinct interest in the subject matter of the resolution, and the resolution was such as
to favour them in any event.
54.
Much more to the point are two other cases cited to the judge and to us. The first is
Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2 Ch 324, a decision of Parker J. In
this case, the company had issued debentures in the amount of £200,000 bearing
interest at 4½% which were guaranteed, as to £150,000 by the Law Guarantee
Society, and as to £50,000 by the British Steamship Investment Trust, that Trust
having taken up £47,000 of the debentures. The Society and the Trust were joint
trustees of the debenture trust deed, which provided for remuneration to the trustees in
consideration of their guarantees. The trust deed contained what was said to be the
usual provision for the majority to bind a minority on matters which included the
acceptance of alternative property or securities in place of the debentures. The
Society, which had gone into voluntary liquidation, offered to retire from the
trusteeship and to give up its right to payments, in consideration of being released
Judgment Approved by the court for handing down.
Azevedo v Imcopa
from its guarantee. The company proposed to the debenture-holders that they should
accept non-guaranteed debentures with 5% interest in place of the previous
debentures, but that payments by the company to the Trust should not be affected,
other than by the Trust giving credit for the additional ½% interest on the debentures
which it had previously guaranteed. That provision was necessary to secure the
agreement of the Trust to support the resolution, and the Trust’s support was essential
to the resolution being passed. The terms as between the company and the Trust were
fully disclosed in the documents giving notice of the resolution.
55.
The resolution was put to the meeting and was passed by the necessary majority. The
Trust voted in its favour, but for which it would not have been passed. The plaintiff,
who had not voted in favour of the resolution, brought the action claiming that the
resolution had been procured by a bribe to the Trust, that the resolution was not
binding on her, and that she was not bound to surrender her debentures.
56.
Parker J rejected the claim. At page 333 he said this:
“It appears to me that the term “bribery” cannot be used appropriately
in connection with this case. The powers conferred by the trust deed
on a majority of the debenture-holders must, of course, be exercised
bona fide, and the Court can no doubt interfere to prevent unfairness or
oppression, but, subject to this, each debenture-holder may vote with
regard to his individual interests, though these interests may be
peculiar to himself and not shared by other debenture-holders. No one
could have objected to the Trust voting for a scheme merely because
its operation would put an end to all liability under the guarantee, or
against a scheme merely because its operation might put an end to all
payments accruing under the guarantee. Further, where, as in this case,
there is, as between different holders, a diversity of interest, it may be
necessary or advisable, as a matter of business fairness, to make
special provision for special interests, and I do not think there is any
equity precluding a debenture-holder voting for or against a scheme
containing such special provision merely because he is interested
thereunder.
A secret bargain by one debenture-holder for special treatment might
be considered as corrupt and in the nature of bribery, but, in my
opinion, there can be no question of bribery where a scheme openly
provides for the separate treatment of persons with special interests.
The only question is whether these persons are incapacitated from
voting on the scheme, and I can see no grounds in equity for so
holding. I think, however, that, where there are diverse interests, and
none the less where those diverse interests are specially provided for,
the Court ought to consider carefully the fairness of any scheme by
which a majority of debenture-holders seeks to bind a minority.”
57.
The second relevant case, in which Parker J’s decision was approved, is a decision of
the Privy Council on appeal from Canada: British American Nickel Corporation Ltd v
M J O’Brien Ltd. [1927] AC 369. The essential facts of that case were similar, but
with one crucial difference. The British American Nickel Corporation had issued
mortgage bonds secured by a trust deed which gave power to a majority of the
Judgment Approved by the court for handing down.
Azevedo v Imcopa
bondholders to bind the minority. The company proposed a restructuring scheme
involving the replacement of these bonds by bonds of a different issue, on different
terms. This proposal was passed by the necessary three-quarters majority. It would
not have been so passed without the support of the holder of a large number of bonds.
His support was procured by the promise of a large block of ordinary stock of the
company, not then of great value but potentially valuable if the price of nickel
recovered. That benefit to him was promised well before the resolution was put to the
bondholders, but it was not mentioned in the documents which gave notice of the
resolution.
58.
Viscount Haldane, giving the opinion of the Privy Council, made some observations
in general terms about powers for a majority to bind a minority of debenture holders.
At page 371 he said this:
“To give a power to modify the terms on which debentures in a
company are secured is not uncommon in practice. The business
interests of the company may render such a power expedient, even in
the interests of the class of debenture holders as a whole. The
provision is usually made in the form of a power, conferred by the
instrument constituting the debenture security, upon the majority of the
class of holders. It often enables them to modify, by resolution
properly passed, the security itself. The provision of such a power to a
majority bears some analogy to such a power as that conferred by
section 13 of the English Companies Act of 1908, which enables a
majority of the shareholders by special resolution to alter the articles of
association. There is, however, a restriction of such powers, when
conferred on a majority of a special class in order to enable that
majority to bind a minority. They must be exercised subject to a
general principle, which is applicable to all authorities conferred on
majorities of classes enabling them to bind minorities; namely, that the
power given must be exercised for the purpose of benefiting the class
as a whole, and not merely individual members only. Subject to this,
the power may be unrestricted.”
59.
He then cited and considered some other cases, including Menier. At page 373 he
went on as follows:
“It has been suggested that the decision in these two cases on the last
point is difficult to reconcile with the restriction already referred to,
where the power is conferred, not on shareholders generally, but on a
special class, say, of debenture holders, where a majority, in exercising
a power to modify the rights of a minority, must exercise that power in
the interests of the class as a whole. This is a principle which goes
beyond that applied in Menier v. Hooper’s Telegraph Works, inasmuch
as it does not depend on misappropriation or fraud being proved. But
their Lordships do not think that there is any real difficulty in
combining the principle that while usually a holder of shares or
debentures may vote as his interest directs, he is subject to the further
principle that where his vote is conferred on him as a member of a
class he must conform to the interest of the class itself when seeking to
exercise the power conferred on him in his capacity of being a
Judgment Approved by the court for handing down.
Azevedo v Imcopa
member. The second principle is a negative one, one which puts a
restriction on the completeness of freedom under the first, without
excluding such freedom wholly.
The distinction, which may prove a fine one, is well illustrated in the
carefully worded judgment of Parker J. in Goodfellow v Nelson Line.
It was there held that while the power conferred by a trust deed on a
majority of debenture holders to bind a minority must be exercised
bona fide, and while the Court has power to prevent some sorts at least
of unfairness or oppression, a debenture holder may, subject to this
vote in accordance with his individual interests, though these may be
peculiar to himself and not shared by the other members of the class.
It was true that a secret bargain to secure his vote by special treatment
might be treated as bribery, but where the scheme to be voted upon
itself provides, as it did in that case, openly for special treatment of a
debenture holder with a special interest, he may vote, inasmuch as the
other members of the class had themselves known from the first of the
scheme. Their Lordships think that Parker J. accurately applied in his
judgment the law on this point.”
60.
Mr Goldblatt did not invoke the principle that a member of the class must exercise his
vote in conformity with the interests of the class as a whole. No allegation is made in
the Particulars of Claim of any failure to comply with any such obligation.
61.
Rather, he submitted that, while the judgment of Parker J, endorsed by the Privy
Council, shows that special treatment may be justified of a person or class with a
special interest, so long as it is fully disclosed to all, that does not justify what was
done in this case, because no member of the class of Noteholders had any special
interest distinct from that of any other. Accordingly, he said, the special treatment of
those who voted in favour of the resolution was not sanctioned by these decisions.
62.
It is true that the present case does not involve securing the support of a member of
the class who had a special interest, as the Trust did in Goodfellow. When Parker J
said that “there can be no question of bribery where a scheme openly provides for the
separate treatment of persons with special interests”, he spoke according to the facts
of the case. He did not thereby state that distinct treatment of distinct members of the
class was only permitted if some had a special interest. That question was not before
him.
63.
It seems to me that it is inappropriate to speak of bribery, in this context, where all the
details of the scheme are fully disclosed to all members of the class. Moreover, I can
see nothing wrong or unlawful, in general terms, in a process of putting to all
members of a class a proposal which offers benefits open to all who vote in favour of
the resolution, but not to the others. No member of the class is thereby excluded from
participation in the offered benefits except by his own choice as to whether, and if so
how, to vote. I reject the argument that a resolution is necessarily invalid if the result
of it being passed is to treat different members of the relevant class differently, and
also the proposition that different treatment is only permissible if it corresponds to a
diversity of interest as between different members of the class, so that one or some
have a special interest for which different provision needs to be made.
Judgment Approved by the court for handing down.
Azevedo v Imcopa
64.
As I say, Parker J’s decision in Goodfellow is not authority against the validity of
what was done in the present case. Nor is either the British American Nickel
Corporation case or Menier.
65.
As the judge observed, the validity of the course followed in the present case is
supported by textbook writers. He quoted Palmer’s Company Law at paragraph
12.068. Mr Goldblatt criticised this passage, wrongly in my judgment, for not being
limited to a case where one or some members of the class have a special interest
requiring special treatment. He also referred to another passage in the same
paragraph, as follows:
“The court will scrutinize any scheme where the majority of a class
will also benefit from the scheme in another capacity, which benefit is
not available to the dissenting minority.”
66.
That is supported in the footnote by a reference to Allen v Gold Reefs of West Africa
[1900] 1 Ch 656, and the rules about fraud on a minority. Menier is an example of
just such a case. It does not fit with the circumstances of the present case, where the
same benefit was available to all members of the class. All they had to do was to vote
in favour of the resolution. In Menier, by contrast, the dissenting minority could not
obtain any benefit from the resolution, because of the nature of the proposal to be
voted on. The passage quoted by the judge is justified in the footnotes, correctly in
my view, by reference to Goodfellow and to British American Nickel Corporation.
67.
That part of Palmer is within the discussion of schemes of arrangement, for which the
court’s sanction is necessary. More directly relevant, and to the same effect, is
paragraph 13.51, as follows:
“The operation of majority clauses has been discussed in a number of
cases. In sum, the powers of the meeting depend entirely on the true
construction of the provisions in question. Each class of persons may
vote in accordance with its own interests, provided that the whole
scheme is fair, but not where there is a secret bargain to secure the vote
of persons controlling the majority.”
68.
Gore-Browne on Companies puts forward much the same proposition at paragraph
29[8].
69.
Mr Goldblatt characterised what had happened in this case as the company
participating in a process which ought to be left up to the relevant class, here the
Noteholders, and he submitted that this was not legitimate. He further described the
votes of the assenting Noteholders as being “sold” to the company. I have to say that
this seems to me a misdescription of the process, just as his description of a
restructuring as being a euphemism for a breach of contract was also wide of the
mark. So far as the latter point is concerned, a company can only succeed in
restructuring its obligations if it can obtain the consent of all necessary creditors, but
if it has that consent then what follows is in accordance with the relevant contracts as
varied, and is not a breach of contract. That is true whether the consent is obtained
individually or by means of a procedure such as that laid down in the documents in
this case whereby a majority of the class can bind the entire class. Equally, if a vote is
cast in the way which the company has proposed and asked for, and has encouraged
Judgment Approved by the court for handing down.
Azevedo v Imcopa
Noteholders to think would be in their best interests as well as in those of the
company, that is not the “sale” of a vote even if the company has offered an incentive
to fortify the encouragement. Moreover, I see nothing wrong in principle with the
idea that a company, which has taken the view that a particular course of action is in
its best interests and in those of its creditors and shareholders, but which requires
favourable votes from one or more classes, should take part in the process which leads
to the relevant resolution being put to the necessary vote. It seems to me that it would
be extraordinary to suggest that the company cannot take part in the process. Indeed,
in practical terms, it must do so. The only issue is whether it is allowed to strengthen
its urging and encouragement in favour of a vote by offering an incentive. For my
part I find no objection to that in principle under English law, so long as all is open
and above board.
70.
The judge had been shown some decisions of the Chancery Court of Delaware about
consent payments, and some American articles discussing the practice, to which he
referred at paragraphs 55 to 60 of his judgment. We have been shown some
additional decisions and writings. This is interesting material from a comparative
point of view. I am hesitant about placing any significant reliance on what we have
been shown about the law and practice of Delaware, despite the high respect which
the Chancery Court of that State deservedly commands, given that we are not in a
position to be confident that we have been shown all that there is to be seen about the
relevant principles, and also given that the statutory and regulatory context in
Delaware may well be different in material respects from that which prevails in this
jurisdiction. However, nothing that we have been shown, whether by way of judicial
decision or of academic or practitioner comment, seems to me to provide any support
at all for Mr Goldblatt’s argument. So far as the material shown to us allows us to
judge, it seems to me that the course followed in the present case by the Imcopa group
would be likely to be upheld as valid and proper if it were subject to the law of
Delaware instead of to English law.
71.
For the reasons which I have set out above, I would hold that it is not inconsistent
with English company law, or with the documents governing the Notes in the present
case, for the Issuer to offer a consent payment to Noteholders who vote in favour of a
resolution proposed for their consideration as a class, where the payment is available
to all members of the class, and provided that the basis of the payment is made clear
in the documents relating to the resolution, the meeting and the vote, as was the case
here. The payment was available to all Noteholders, conditionally only on their doing
that which was within their power, namely exercising their right to vote in a particular
way. There was therefore no pre-ordained discrimination between a majority and a
minority, as there was in the case of Menier. The validity of such an offer, and of
complying with it in the cases where it is accepted by a Noteholder’s actions, is not
dependent on there being some special interest which needs to be provided for, as
there was in Goodfellow. So far as the documents governing the Note issue are
concerned, the pari passu obligation only, relevantly, affects money in the hands of
the Trustee and, despite the admission in the Defence, it is clear that the funds in
question did not pass into or through the hands of the Trustee. Nothing else in the
documents could require the Consent Payments to be dealt with otherwise than in
accordance with the individual contracts created by the Issuer’s offer and each
Noteholder’s acceptance of it by conduct.
Judgment Approved by the court for handing down.
72.
Azevedo v Imcopa
Except insofar as it has been necessary to deal separately with points raised for the
first time before us, or developed in a different way, my reasons are the same as those
of the judge and it would have been sufficient to say that his conclusion was correct
for the reasons that he gave.
Other issues
73.
The Defendants relied, among other things, on a “no action” provision in clause 9.1 of
the Trust Deed, by virtue of which only the Trustee is entitled to proceed against the
Issuer or the Guarantor, except in circumstances which have not arisen. However, it
was accepted as reasonably arguable that, if the Issuer or the Guarantor could be
shown to be in repudiatory breach of the contract, they would not be entitled to rely
on the no action provision. As the judge said at paragraph 38, it followed that the
merits of reliance on the no action provision were dependent on the merits of the
Claimants’ arguments on the main point. If they could show a sufficiently good case
on the substance, they would not be defeated by the no action provision. If they could
not, then the Defendants did not need the no action provision. I agree with the judge
on this, and this aspect of the case did not feature in the course of argument before us.
The claim against Imcopa U
74.
Since I would reject the challenge to the validity of what was done in the present case,
it is not necessary to consider at any length the separate claim against Imcopa U. It is
sufficient for me to say that I agree with the judge’s reasons, set out at paragraphs 25
to 33 of his judgment, for holding not only that Imcopa U was validly replaced as
Issuer by Imcopa C in December 2007, but also that it was released from its
obligations as Issuer at the same time. I do not need to add anything more on this
point.
The appeal against the judge’s costs order
75.
The judge ordered the Claimants to pay the Defendants’ costs of the proceedings,
including their costs incurred in relation to an application for security for costs which
the Defendants made but which was not brought to a hearing, for lack of time, before
the substantive hearing. As regards those costs, the judge disallowed 25% of the
Defendants’ costs. The Claimants appealed on the basis that they should not have had
to pay any part of the Defendants’ costs of that application, and that, to the contrary,
the Defendants should have been ordered to pay their costs of that application, and on
the indemnity basis. Time did not permit substantial oral submissions on this aspect
of the appeal at the hearing, but we had the benefit of Mr Goldblatt’s skeleton
argument on this point from the proceedings below, as well as the evidence adduced
in relation to it, together with written submissions in the parties’ skeleton arguments
on the appeal, and also the full transcript of the hearing below as regards costs, in the
course of which submissions were made for the Claimants both by Mr Goldblatt and
by Ms Gough. I have considered all of those. I see no error or misdirection in what
the judge said about this in his supplementary judgment dealing with consequential
matters. I would therefore dismiss that aspect of the appeal as well.
Lord Justice Aikens
76.
I agree.
Judgment Approved by the court for handing down.
Lord Justice Beatson
77.
I also agree.
Azevedo v Imcopa