English courts are willing to uphold no-action clauses, which are commonly found in transactions involving a trustee structure, and will not be easily persuaded by noteholders that such note issuance clauses can be circumvented, as indicated by the outcome of a recent case.
In Elektrim S.A. v Vivendi Holdings I Corp  EWCA Civ 1178, the English Court of Appeal confirmed the effectiveness of no-action clauses in bond documents. The recent decision from the English High Court in Fairhold Securitisation Limited v Clifden IOM No.1 Limited has added some useful clarification regarding how and when noteholders can act when a note trustee is directed to take action such as enforcement in a transaction which includes a typical no-action clause.
Can a Purported Noteholder Direct the Note Trustee When There’s a No-Action Clause?
According to the terms of the transaction under consideration in the Fairhold Securitisation case, noteholders were not permitted to “proceed directly against the Issuer… or to enforce the Issuer Security unless the Note Trustee, having become bound to do so, fails to do so within a reasonable period and such failure shall be continuing ... .”
The transaction documents (typically) provided that the note trustee was only bound to act if directed to do so by an extraordinary resolution or in writing by at least 25 percent in aggregate principal amount outstanding of the notes (subject to the usual conditions including indemnity).
However, a purported noteholder wanted to appoint administrators of the issuer, under the U.K. insolvency regime using the out of court procedure available under the Insolvency Act 1986. Making the argument based on an implied agency under the no-action clause, the purported noteholder planned to issue a direction to the note trustee to make the appointment and then anticipating that the note trustee would not do so, to take steps to appoint the administrators itself.
But the judge did not find adequate evidence that the purported noteholder held a sufficient number of notes that would satisfy the 25 percent threshold required by the transaction documents to give a direction to the note trustee. This finding was sufficient for the Court to hold that the appointment of the administrators was void and of no effect.
In fact, the judge ruled in the Fairhold Securitisation case that the “appointment was totally flawed” because it appears that the purported noteholder took steps to effect the appointment before giving the direction to the note trustee, so that no direct rights of enforcement could ever have arisen.
A Note Trustee Must Have Reasonable Time to Respond
The judge also said that the note trustee was entitled to a reasonable amount of time to verify holdings, review the directions, take advice and obtain satisfactory indemnification. The judge did not specifically define what amount of time is reasonable but indicated that 24 hours was insufficient. According to the judge, “… 24 hours is unlikely to be long enough for the Note Trustee to weigh up the options, take advice, investigate the indemnity; and … investigate whether they were actually dealing with somebody who is entitled to give a direction at all.”
A Noteholder’s Options When a Note Trustee Fails to Act on a Direction
In the Fairhold Securitisation case, the purported noteholder argued that where a noteholder was permitted by the no-action clause to act, because the note trustee was bound to act but had not done so, the noteholder itself could act in the name of the note trustee to do what the note trustee can do, which includes appointing administrators. Without such implied agency, noteholders would have a right of enforcement but no remedy, the purported noteholder further argued.
However, the judge rejected the argument and instead highlighted a number of remedies available to noteholders, including going to the courts for a direction for the note trustee to act on their instruction, replacing the note trustee or exercising the right of any creditor of the issuer under the Insolvency Act 1986 to apply to the courts for the appointment of an administrator. In the judge’s opinion, the transaction documents worked “perfectly satisfactorily without the implication of” an implied agency.
More Useful Guidance for Note Trustees
The judge’s comments on the no-action clause in the Fairhold Securitisation case are helpful in further understanding how such clauses work. Since the purpose of the clause is to prevent multiplicity of actions by individual noteholders, the decisions in these cases are not surprising. In fact, the courts have been quick to recognise that the trustee structure in these transactions will not work if this type of clause is not upheld.
Furthermore, the judge’s comments on how note trustees can respond to a direction from noteholders are equally helpful. Most importantly, the judge said that note trustees are entitled to see proof of holdings before acting on any written directions from noteholders. In this case the judge was “struck” by the lack of such proof, saying that “[w]ithout that factual basis, of course, [the noteholder was] not in a position to give the direction.”