High Court refuses declarations sought by trustee of unsecured notes as to amounts due and payable by issuer

In Part 8 proceedings brought by the trustee of certain unsecured notes, the High Court has refused to exercise its discretion to grant declarations as to the amounts due and payable by the issuer of the notes: The Bank of New York Mellon, London Branch v Essar Steel India Ltd [2018] EWHC 3177 (Ch). The court reached this conclusion notwithstanding the fact that the issuer was clearly in default under the notes, did not take any steps in the proceedings and was not represented before the court.

The decision offers some cautionary guidance as to the steps that those exercising corporate trustee functions might consider taking when applying for declaratory relief in relation to non-payment by the issuer of notes or other debt instruments. In particular, the court in this case found that:

• In the absence of any evidence to confirm that other proceedings involving the issuer (an insolvency process in India) would not be affected by declarations made by the English court, the potential for those foreign proceedings to be affected was a factor that pointed clearly against the making of the declarations.
• In circumstances where a third party who might be affected by the declarations (the insolvency professional in India) was not before the court and had been unable to make submissions, granting the declarations would amount to an "improper interference" in a foreign process being conducted by another party if the declarations were to affect the foreign process.

To the extent that the court appears to have taken a strict approach to the exercise of its discretion in this case, this may be explained by the court's decision to adopt a "conservative mindset" against granting the declaration, because of the issuer's non-participation in the proceedings. It is noteworthy that the court adopted this approach even though the issuer's non-participation was not the fault of the claimant, and the claim was made under Part 8 and therefore did not turn on a factual dispute.

Background

The defendant (the "Issuer") issued certain US Dollar 0.25% unsecured notes (the "Notes"), which were constituted under the terms of a trust deed dated 5 December 2003 (the "Trust Deed"). The claimant was the trustee (the "Trustee") of the Notes.

The Trustee issued a Part 8 Claim in July 2018 seeking declarations against the Issuer as to the amounts due and payable in respect of the Notes. The Issuer took no step in the proceedings and was not represented at the hearing.

To determine whether the declarations sought should be made, the court said there were three questions to resolve:

1. Did the Trustee have standing to bring the claim?
2. Was the Defendant properly before the court, so that it could properly determine the substance of the Part 8 Claim?
3. Was it appropriate to make the declarations sought by the Trustee?

Decision

Having found that the Trustee had standing to bring the claim and the Issuer was properly before the court (by service of the claim form on a service agent appointed under the Trust Deed), the court held that it would be inappropriate to make the declarations sought by the Trustee.

The court noted that the power to grant declaratory relief is discretionary (Rolls Royce plc v Unite the Union [2009] EWCA Civ 387). In exercising that discretion, the court said it was required to take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose and whether there were other special reasons why or why not the court should grant the declaration (Finance Services Authority v Rourke  [2002] CP Rep 14).

The key reasons given by the court for finding that the declarations sought by the Trustee should not be made were as follows:

Both sides of the argument will not be put

The court said it was required to ensure that all those affected were either before the court or would have their arguments put before the court (Rolls Royce at [120](6)).

The court accepted that it would be "invidious and wrong" to allow a defendant's non-participation in proceedings to prevent the making of declarations (particularly where this was not the fault of the claimant, and where the claim was made under Part 8 and did not turn on substantial disputes of fact – as here). However, where the defendant was absent, the court considered that it was required to approach the exercise of its discretion with "something of a conservative mindset against the granting of a declaration".

Potential effect on a third party not before the court

The court noted that the Issuer was the subject of an insolvency process in India, but the effect of the instant proceedings on that insolvency process (and on the insolvency professional appointed in India) was unclear. There was no Indian law before the court to confirm the position.

The court found that the possibility of the insolvency professional being affected by declarations made in English court proceedings to which he/she was not a party was a factor that pointed clearly against the making of declarations.

The existence of a real and present dispute and the potential for interference in a foreign process

The court emphasised the need for a real and present dispute between the parties, which would be resolved by the making of the declaration.

The court found that it was "difficult to identify such a dispute as between the Trustee and the [d]efendant", because although the Issuer was in default under the Notes, there was not a discernible dispute as to terms of the Notes or the Issuer's obligations and it was not a case where the Issuer would pay if the declarations sought were made. It appeared to be a case where the Issuer simply could not pay and the granting of a declaration would not resolve the position in respect of the Issuer.

Further, the court understood that there were some points of dispute between the insolvency professional in India and the Trustee. As noted above, the court did not have evidence as to whether the declarations sought would affect the Indian insolvency process. However, if they did, then in the court's view such declarations would amount to an "improper interference" in a foreign process being conducted by a party (the insolvency professional in India) who was not before the court and had been unable to make submissions. The court said this was not cured by the fact that the Indian insolvency process did not preclude claims for declaratory relief; and/or that the insolvency proceedings had not been recognised in this jurisdiction.

In light of the above, the court considered that it would be inappropriate to make the declarations sought by the Trustee and declined to do so.