Vol 6 (2009) - Issue 2

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Elektrim SA v Vivendi Holdings 1 Corp [2008] EWCA Civ 1178

In Elektrim SA v Vivendi Holdings 1 Corp [2008] EWCA Civ 1178, the Court of Appeal was asked to determine the effectiveness of a 'no-action' clause whereby bondholders are generally prevented from acting against the issuer in disputes relating to bonds other than through the bond trustee, and to establish the extent to which a bond trustee owes fiduciary duties to the noteholders.

The facts

Vivendi Universal SA ('Vivendi') had been in dispute with Elektrim SA ('Elektrim') since 1999. The dispute related to a Polish joint venture established by Vivendi and Elektrim ('Telco'). Vivendi's assertion was that Telco had been established to acquire Elektrim’s interest in Polska Telefonia Cyfrowa ('PTC'). PTC was a joint venture between Deutsche Telekom AG ('DT') and Elektrim.

DT claimed that it had an option over Elektrim‘s shareholding in PTC under the terms of a 1995 shareholder agreement.

Elektrim Finance BV (the 'Issuer'), a special purpose vehicle, issued EUR 510,000,000 2% bonds (the 'Bonds') in 1999. The Issuer's obligations were guaranteed by Elektrim. The trust deed (the 'Trust Deed') and conditions (the 'Bond Conditions') applicable to the Bonds were governed by English law. The trustee of the Bond issue was Law Debenture Trust Corporation plc (the 'Trustee'). The Trust Deed and the Bond Conditions contained no-action clauses prohibiting the holders of the Bonds (the 'Bondholders') from proceeding directly against Elektrim or the Issuer to enforce performance of the Bonds unless the Trustee was instructed to act by the requisite percentage of Bondholders (30%) and failed to do so, and stated that the Trustee was not obliged to enforce the provisions of the Trust Deed or the Bond Conditions unless so instructed.

In 2002, the Bonds were restructured and a requirement was inserted into the Bond Conditions for Elektrim to pay an additional payment to the Bondholders following maturity of the Bonds (the 'equity kicker'). This equity kicker would not be payable if the market value of Elektrim’s assets fell below EUR 160,000,000.
The Bonds defaulted in 2005.
Since 2001 the Bondholders had been represented by a Bondholders' committee including Acciona and Trafalg') was also a member of the committee and held around 8% of the Bonds on behalf of various investors.

On 3 March 2005, the Trustee issued a bankruptcy petition in the Polish bankruptcy court against Elektrim on the instructions of more than 30% of the Bondholders.

Pursuant to a series of awards by the Vienna Court of Arbitration culminating in an award on 2 October 2006, it was determined that DT had a valid option over the PTC shares and that Elektrim was required to transfer the shares to DT in exchange for a payment equal to the book value of the PTC shares and such additional consideration as the tribunal subsequently determined. The Trustee notified the Bondholder committee of the decision on 5 October 2006.

The Bondholder committee's lawyers subsequently sent an email indicating that the committee approved of the Trustee applying for an adjournment of the Polish bankruptcy proceedings against Elektrim in order to consider the effect of the 2 October 2006 arbitration award. The Trustee obtained an adjournment.

Elektrim paid EUR 525,000,000 to the Trustee on 23 October 2006 using the consideration paid by DT for the shares. The bondholder committee's lawyers sent an email to the Trustee on 27 October stating that Acciona and Trafalgar, as holders of nearly 40% of the Bonds, approved of the Trustee applying for a direction from the Polish bankruptcy court that the payment by Elektrim was lawful and, if the direction was obtained, applying for the bankruptcy petition to be dismissed or withdrawn. The direction was obtained, the petition was withdrawn and the funds were subsequently distributed to the Bondholders by the Trustee.

In May 2007, Vivendi Holdings 1 Corp ('VH1'), an affiliate of Vivendi, entered into an assignment agreement with Everest to acquire the Bonds owned by Everest and all related rights.

VH1 subsequently commenced proceedings against the Trustee and Elektrim in Florida alleging, among other things, that Elektrim had fraudulently induced Everest to purchase the Bonds by: making false statements regarding Elektrim's assets; representing that it would pay the equity kicker while diminishing its assets; and falsely representing the legality of the transfer of the PTC shares to DT.