Banking Case Law - Duties and Obligations of a Bond Issue Trustee 

July, 2005 -

Concord Trust v Law Debenture ( Law Debenture House of Lords considered the obligations and liabilities of bond issue trustees in relation to notices of acceleration. Facts: Elektrim, a polish telecommunications company issued bonds which provided that the trustee may at its discretion, or shall, if so requested by at least 30% of bondholders, serve notice on Elektrim upon the occurrence of any specified event of default, subject to being indemnified by the bondholders to the trustees’ satisfaction. Elektrim defaulted and failed to remedy the default. The trustee obtained High Court guidance that the default was materially prejudiced to the bondholders, advised the bondholders that requests from 30% of bondholders to serve an acceleration notice had been received and requested an indemnity. Various indemnities were offered but rejected as unsatisfactory. Elektrim had indicated to the trustee that acceleration would result in a significant loss to the Company and that it might litigate if the trustee accelerated. Consequently, the trustee sought an indemnity adequate to cover such a situation. The bondholders initiated proceedings on the basis that the indemnities offered were adequate. The Court of Appeal ordered that an indemnity to cover the costs of litigation was sufficient and the trustee should commence proceedings to determine whether the proposed acceleration notice would be valid, but was not obliged to serve such notice until that time. Held: The bondholders appealed. The House of Lords addressed the issue of the indemnity and whether the trustee had a right to an indemnity to cover exposure to an action by Elektrim for damages. The court examined contractual and tortious liability to identify the worst case scenario for the trustee. Under contract, the court held that it was relevant only if the relevant trust deed prohibited the service of an invalid acceleration notice, which it did not nor could be implied to, in this instance. Under tort, the Courts considered there was no duty of care by the trustee to Elektrim and it would not be negligent in serving an acceleration notice following an event of default. Accordingly, the Court held that subject to receipt of a satisfactory indemnity, the trustee was obliged to serve the acceleration notice.



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