Law Debenture Trust Corporation Plc v Elektrim Finance BV & Ors [2005] EWHC 1999 (Ch)

Case No HC05CO0554[2005] EWHC 1999 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 14 September 2005
Before
THE HONOURABLE MR. JUSTICE HART
Between
THE LAW DEBENTURE TRUST CORPORATION p.l.c.Claimant(1) ELEKTRIM FINANCE B.V.Defendants(2) ELEKTRIM S.A.Defendant(3) CONCORD TRUSTDefendant
Mr. Robert Hildyard QC and Mr. Andrew Clutterbuck (instructed by Simmons & Simmons) for Claimant.Mr. Stephen Auld QC and Mr James Hope (instructed by Skadden, Arps, Slate, Meacher & Flom (UK) LLP) for First and Second Defendants.Miss Sue Prevezer QC and Mr Stephen Houseman (instructed by Bingham McCutchen LLP) for Third Defendant.Hearing Hearing dates: 6, 7, 8 th September 2005
Judgment

Mr. Justice Hart:

[1]The claimant (“Law Debenture”) is the trustee of a €510mbond issue in relation to which the first defendant is the issuer and the second defendant is the guarantor. The first defendant is a Dutch special purpose company and the second defendant, which in economic reality was the issuer, is a Polish company. I can refer to them collectively as “Elektrim”. The third defendant (“Concord”) is a bondholder pursuant to that issue.[2]The bonds were originally issued under a trust deed dated 2nd July 1999 which was amended by a supplemental deed of 15th November 1999. The relations between the parties are now governed by an Amended and Restated Trust Deed dated 15th November 2002 (“the Deed”), following a restructuring which took effect from that date. The background to that restructuring is described in paragraph 12 of a witness statement of James Henry Douglas Roome dated 30th June 2005 and filed on behalf of Concord: there had been default by Elektrim on its payment obligations in 2001 which resulted in a re-negotiation of the terms of the issue.[3]The due date for repayment of the bonds following the restructuring was to be 15th December 2005. Law Debenture, however, claims that the repayment date has been accelerated as a result of four events of default having taken place. Two acceleration notices have been given, the first on 18th January 2005, relying on the first three events, and the second, relying on the fourth, on 22nd February 2005.[4]By this application for summary judgment Law Debenture seeks a declaration that the events of default relied on in those acceleration notices have occurred and consequential orders. It is common ground that if any one of the events of default is established to have happened the repayment date will have been accelerated to the date of the relevant acceleration notice. In order to resist Law Debenture’s application Elektrim has therefore to show that there is a real prospect of succeeding at trial in showing that none of the relevant events of default has occurred or that, in relation to all of them, there is some other compelling reason why the matter should be disposed of at trial.[5]The procedural history of the present controversy has been an unusual one. The first bone of contention between the parties concerned an episode, more fully described below, relating to the suspension from Elektrim’s management board of the director nominated by Law Debenture pursuant to the relevant provisions of the Deed, an event which occurred on 16th June 2003. Some of the bondholders took the view that this, if accompanied by a certificate from Law Debenture that it was materially prejudicial to the interests of the bondholders, was an event of default. Law Debenture was, however, not satisfied that it was open to it so to certify without further investigation of the reasons for, and consequences of, the suspension. That dispute was resolved as between Law Debenture and the bondholders by an order of Peter Smith J made on 16th February 2004 which declared that the suspension was a breach and that the breach was materially prejudicial to the interests of the bondholders, and which authorised Law Debenture to certify accordingly. Law Debenture then did so certify. Elektrim was not a party to those proceedings and it is common ground that Elektrim is not bound by that order.[6]Further issues then arose between Law Debenture and the bondholders as to whether Law Debenture was bound to issue an acceleration notice, and if so as to the extent to which it was entitled to be indemnified against the consequences of doing so. These disputes were finally resolved by a decision of the House of Lords on 28th April 2005. Once again Elektrim was not a party to those proceedings, although in its judgment dated 24th July 2004 (which was reversed on appeal) the Court of Appeal held that Elektrim ought to be joined to those proceedings.[7]These proceedings were issued on 9th March 2005 and this application for summary judgment on 23rd June 2005.

The first alleged event of default

[8]The relevant provisions in the Deed are contained in Condition 10(d) of its second Schedule (“the Conditions”). Condition 10(d) of the Conditions consists of ten unnumbered paragraphs. For ease of reference I shall treat those paragraphs as numbered. So far as material they provided as follows:
“(d) Member of Management Board Appointed by the Bondholders [1] So long as the principal amount outstanding of the Bonds exceeds €150,000,000, the Bond Trustee, acting on the written instructions of the holders of at least 25 per cent in principal amount outstanding of the Bonds (an “Instructing Bondholder Group”), shall have the right to require the Supervisory Board of the Guarantor to have appointed one member to the Management Board of the Guarantor nominated by such Instructing Bondholder Group (the “Bondholder Nominated Director”). The Supervisory Board shall have the right to reject any individual nominated by an Instructing Bondholder Group, provided that it shall give reasonable written justification to the Bond Trustee and to the Bondholders in accordance with Condition 16 for such rejection on grounds that (a) the nominee (including any replacement thereof selected by such Instructing Bondholder Group): (i) has sufficient experience; (ii) has a conflict of interest that would prevent the nominee properly conducting the function of a management board member; (iii) is of unsound mind; (iv) is an undischarged bankrupt; or (v) is not a full-time resident of Poland, or (b) the Supervisory Board reasonably considers that the Management Board so constituted could not reasonably be expected to operate on a consensual basis. In the event that the individual nominated by an Instructing Bondholder Group is rejected by the Supervisory Board on the grounds specified in paragraph (b) above, any alternative individual nominated by an Instructing Bondholder Group (with respect to that particular appointment) may only be rejected by the Supervisory Board on one of the grounds specified in paragraph (a) above or on the grounds that the nominee is reasonably considered by the Supervisory Board to be so objectionable (on grounds other than those stated in paragraph (a) above) that it would be impossible for the Management Board to operate on a consensual basis. [2] If the Bondholder Nominated Director shall resign or become incapable of acting or if the Bond Trustee is requested in writing by the holders of at least 50 per cent in principal amount outstanding of the Bonds to request that the Supervisory Board dismiss the Bondholder Nominated Director, then the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, shall have the right to require the Supervisory Board to appoint a replacement member nominated by such Instructing Bondholder Group (subject to the Supervisory Board’s right to reject any individual nominated by an Instructing Bondholder Group as described in the first paragraph of this Condition 10(d)). [3] The Guarantor agrees that its Management Board will consist of two or three members having positions, status and benefits commensurate with their role in the joint management of the Guarantor. Material decisions of the Guarantor and all financial decisions relating to amounts exceeding €25,000 may only be taken with the consensus of the entire Management Board. [4] In the event of any impasse or deadlock of the Management Board that the Supervisory Board reasonably believes to be prejudicial to the interests of the Guarantor, the Supervisory Board may dismiss the entire Management Board or any two members of the Management Board and appoint other persons in their place. In the event that only two members of the Management Board are to be dismissed of which one is the Bondholder Nominated Director, the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, may direct the Supervisory Board as to which of the two members (who are not the Bondholder Nominated Director) shall be dismissed. In addition, the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, shall have the right to require the Supervisory Board to appoint a replacement member nominated by the Bondholders (subject to the Supervisory Board’s right to reject any individual nominated by an Instructing Bondholder Group as described in the first paragraph of this Condition 10(d)). [5] If the Supervisory Board considers that, with respect to material decisions, the Bondholder Nominated Director has acted in breach of his Polish law duty to act in the best interests of the Guarantor, the Supervisory Board may dismiss the Bondholder Nominated Director, provided that the Supervisory Board also dismisses one other member of the Management Board (such member to be chosen in the Supervisory Board’s sole discretion).

(d) ) ”

The sixth paragraph then provides for an arbitration procedure to resolve a dispute as to whether the dismissed Bondholder Nominated Director had acted in breach of his Polish law duties, with a provision that if it be found that he has, then:
“(i) the new Bondholder Nominated Director shall remain a member of the Management Board, (ii) the Supervisory Board shall be entitled to resolve that future decisions of the Guarantor may be taken by two out of the three members of the Management Board (instead of by consensus of the entire Management Board)…”
The seventh and eighth paragraphs are not material for present purposes. The ninth paragraph provides:
“[9] In any circumstances where a Bondholder Nominated Director is dismissed in accordance with this Condition 10(d), the dismissal of such Bondholder Nominated Director shall be on terms that such dismissal shall not be effective until a new Bondholder Nominated Director has been appointed, provided that the Bond Trustee notifies the Supervisory Board of the identity of the proposed new Bondholder Nominated Director within 21 days of being notified of the proposed dismissal by the Supervisory Board of the existing Bondholder Nominated Director.”
Finally the tenth paragraph recorded that the first Bondholder Nominated Director was validly in place as from 15th November 2002. That person was a Mr Rymaszewski (“Mr R”). [1] So long as the principal amount outstanding of the Bonds exceeds €150,000,000, the Bond Trustee, acting on the written instructions of the holders of at least 25 per cent in principal amount outstanding of the Bonds (an “Instructing Bondholder Group”), shall have the right to require the Supervisory Board of the Guarantor to have appointed one member to the Management Board of the Guarantor nominated by such Instructing Bondholder Group (the “Bondholder Nominated Director”). The Supervisory Board shall have the right to reject any individual nominated by an Instructing Bondholder Group, provided that it shall give reasonable written justification to the Bond Trustee and to the Bondholders in accordance with Condition 16 for such rejection on grounds that (a) the nominee (including any replacement thereof selected by such Instructing Bondholder Group): (ii) has a conflict of interest that would prevent the nominee properly conducting the function of a management board member; (iii) is of unsound mind; (iv) is an undischarged bankrupt; or (v) is not a full-time resident of Poland, [2] If the Bondholder Nominated Director shall resign or become incapable of acting or if the Bond Trustee is requested in writing by the holders of at least 50 per cent in principal amount outstanding of the Bonds to request that the Supervisory Board dismiss the Bondholder Nominated Director, then the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, shall have the right to require the Supervisory Board to appoint a replacement member nominated by such Instructing Bondholder Group (subject to the Supervisory Board’s right to reject any individual nominated by an Instructing Bondholder Group as described in the first paragraph of this Condition 10(d)). [3] The Guarantor agrees that its Management Board will consist of two or three members having positions, status and benefits commensurate with their role in the joint management of the Guarantor. Material decisions of the Guarantor and all financial decisions relating to amounts exceeding €25,000 may only be taken with the consensus of the entire Management Board. [4] In the event of any impasse or deadlock of the Management Board that the Supervisory Board reasonably believes to be prejudicial to the interests of the Guarantor, the Supervisory Board may dismiss the entire Management Board or any two members of the Management Board and appoint other persons in their place. In the event that only two members of the Management Board are to be dismissed of which one is the Bondholder Nominated Director, the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, may direct the Supervisory Board as to which of the two members (who are not the Bondholder Nominated Director) shall be dismissed. In addition, the Bond Trustee, acting on the written instructions of an Instructing Bondholder Group, shall have the right to require the Supervisory Board to appoint a replacement member nominated by the Bondholders (subject to the Supervisory Board’s right to reject any individual nominated by an Instructing Bondholder Group as described in the first paragraph of this Condition 10(d)). [5] If the Supervisory Board considers that, with respect to material decisions, the Bondholder Nominated Director has acted in breach of his Polish law duty to act in the best interests of the Guarantor, the Supervisory Board may dismiss the Bondholder Nominated Director, provided that the Supervisory Board also dismisses one other member of the Management Board (such member to be chosen in the Supervisory Board’s sole discretion).

(d) ) ”

[9]Condition 12 of the Conditions provided that:
“Events of Default The Bond Trustee at its discretion may, and if so requested in writing by the holders of at least thirty per cent in principal amount outstanding of the Bonds or if so directed by and Extraordinary Resolution of the bondholders shall (subject in each case to being indemnified to its satisfaction), give notice to the Issuer and the Guarantor that the Bonds are, and they shall accordingly immediately become, due and repayable at their relevant redemption value, together with the accrued Interest Amount as provided in the Bond Trust Deed, upon the occurrence of any of the following events (“Events of Default”):” followed by fourteen numbered sub-paragraphs of which the relevant one for present purposes is: “(ii) If either the Issuer or Guarantor fails to perform or observe any of its other respective obligations under the Bonds, the Bond Trust Deed, the Pledge Agreements, the Mortgages, the Assignments, the Security Administration Agreement or the Deed of Delegation or if any event occurs or any action is taken or fails to be taken which is (or but for the provisions of any applicable law would be) a breach of any of the covenants referred to in Condition 10 and in any such case (except where the Bond Trustee considers the same to be incapable of remedy when no such continuation or notice is hereinafter referred to will be required) the same continues for the period of 30 days (or such longer period as the Bond Trustee may permit) next following the service by the Bond Trustee on the Issuer or Guarantor of notice requiring the same to be remedied, except in the case of an Issuer failing to make the First Initial Payment and such failure continuing for a period of three days next following the service by the Bond Trustee on the Issuer or Guarantor of notice requiring the same to be remedied; or”
The Condition is then subject to a proviso in the following terms:
“provided that in the case of paragraphs (ii), (iv) or (xiv) or, in relation to a Material Subsidiary [sc all paragraphs]other than paragraphs (v) to (ix) (inclusive) or (xiii), the Bond Trustee shall have certified that such event is materially prejudicial to the interest of the Bondholders.”
[10]On 16th June 2003 the Supervisory Board of Elektrim “suspended” Mr R from the Management Board. Elektrim informed Law Debenture of this in a faxed letter dated 17th June 2003 which read, in material part, as follows:
“We would also like to inform that on 16 June 2003 the Supervisory Board has adopted a resolution concerning suspending Mr. Piotr Rymaszewski. The reason for suspending Mr. Piotr Rymaszewski was and [sic] impasse that in reasonable believe [sic] of the Supervisory Board is prejudicial to the interests of Elektrim S.A. In accordance with the procedure specified in Article 10d of the Amended and Restated Terms and Conditions of the Bonds we hereby expect appointing of the new Management Board member.”
That was followed by a further letter on the following day which explained:
“1. Mr. Piotr Rymaszewski has been suspended, but he is still a member of the Management Board, and has not been replaced with another member. 2. Voting by Mr. Piotr Rymaszewski against the resolution of the Management Board about granting a loan for the purpose of re-financing the repayment of the PAK Loan (loan agreement dated 6 November 2002) made the repayment of the loan impossible. For the above mentioned person and other the breach of the agreement did not occur.”
[11]The transactions which Mr R had sought to block related to the manner in which a loan of €32 million due to be repaid to Elektrim by a company called Zespó Elektrowni Patnów Adamow Konin SA (“PAK”) was to be dealt with. PAK is a company with important power generation interests in which Elektrim held some 40%. Elektrim was due to make a payment of €32m under the bonds and had cash available to it of that amount. In order to enable PAK to repay its debt (a failure to do so being itself an event of default) Elektrim lent €32m to its 98% owned subsidiary Elektrim-Megadex SA (“Megadex”) secured against Medgadex’s stake in a newly created Megadex subsidiary, Embud Sp. 2.0.0. (“Embud”). Megadex then subscribed the €32m to PAK secured against various PAK assets, PAK then repaid its loan to Elektrim, and Elektrim paid the bondholders. The money thus went in a circle, creating in the process(i) a loan repayable by Megadex to Elektrim and(ii) a loan repayable by PAK to Embud. The first of those was discharged by Megadex transferring to Elektrim its shareholding in Embud. The loan was repayable by PAK to Embud and was apparently backed up by Elektrim giving security to Embud over Elektrim’s stake in PAK.[12]On the evidence before me there is an issue as to the motivation behind this series of transactions. Law Debenture’s misgivings about it have been increased by what subsequently appears to have happened, namely a further series of transactions which have resulted ultimately in Elektrim’s stake in PAK becoming owned by a company called Investicje Polskie, whose majority shareholder is Mr Zygmunt Solovz who is the largest shareholder in Elektrim and the chairman of its Supervisory Board. Elektrim’s position is that the series of transactions in 2003 was a bona fide attempt to make the best possible use of Elektrim’s limited resources: by routing the money in the way in which it did, rather than by simply lending it to PAK, Elektrim was able to capitalise Embud and take full direct control of Embud.[13]That issue, broadly characterisable as the bona fides of the resolution from which Mr R dissented, cannot be resolved by the court on this application. It does, however, have a bearing on the urgency with which this application is being heard because the most critical of the recent series of transactions, the transfer by Elektrim to Embud of its shares in PAK, took place on 15th June 2005, that is six months before the date (15.12.05) on which the bonds become repayable even if (contrary to Law Debenture’s case) they are not already repayable as a result of the events of default. Under Polish bankruptcy law, the period prior to the filing of a bankruptcy application within which transactions between related companies (i.e. Elektrim and Embud) can automatically be invalidated is six months.[14]On 2.07.03 Elektrim informed Law Debenture that it had requested the Supervisory Board to reinstate Mr R. By letter dated 24.07.03 Law Debenture gave notice to Elektrim that it regarded the suspension as a breach of Condition 10d., and required it to remedy the breach within 30 days. On 20.8.03 Elektrim’s Supervisory Board refused to reinstate Mr R. Elektrim has subsequently invited Law Debenture to nominate a new Bondholder Nominated Director with a view to his appointment, an invitation which Law Debenture has declined.[15]The Supervisory Board’s power to suspend Mr R derived from Article 383 of the Polish Commercial Companies Code (“CCC”). Elektrim has adduced expert evidence as to the relevant provisions of the CCC in the form of an opinion of Dr.Hab. Michal Romanowski. That evidence has not been challenged on this application. Under the CCC the governance of a joint stock company is structured around the Management Board, the Supervisory Board and the General Meeting of Shareholders. The Management Board is responsible for the day-to-day management of the company’s business whereas the Supervisory Board is responsible for the exercise of a “permanent supervision over all areas of the activities of the company” (Art 382 CCC). The Supervisory Board’s powers to intervene in the day-to-day management are limited to either suspending or (where the power to dismiss is conferred on the Supervisory Board) dismissing members of the Management Board. Article 383 #1 confers on the Supervisory Board the power to “suspend, for important reasons, individual or all members of the Management Board from the exercise of their functions”. That power may be exercised even in respect of members who have not been appointed by, or who are not dismissable by, the Supervisory Board (e.g. where the power of appointment and/or dismissal is vested in the General Meeting). Whether “important reasons” exist is a matter for the determination of the Supervisory Board, and it is unclear whether its determination is reviewable. The power to suspend cannot be excluded by the internal constitution of the company and “cannot be effectively excluded or amended by a contract entered into by the company with a third party”. The effect of a suspension is that the Management Board thereafter acts by its non-suspended members and “all decisions required to be reached by the consensus of the Management Board will require the consensus of the non-suspended members of the Management Board.” The state of suspension will cease either when the Supervisory Board so determines or “when the suspended member of the Management Board resigns or is dismissed (i.e., ceases to be a member of the Management Board).” The Supervisory Board also has a duty to ensure a change in the composition of the Management Board in the event of a member becoming incapable of performing his duties: Article 382 #2. Where (as in the case of Elektrim) the Supervisory Board has power to dismiss members of the Management Board, its discretion to do so is untrammelled.[16]The first question which I have to determine is whether the exercise by the Supervisory Board of its power to suspend Mr R was a breach by Elektrim of any of the provisions of Condition 10d. of the Conditions. In support of the proposition that it was, Mr Hildyard QC on behalf of Law Debenture, in submissions which were adopted and elaborated by Miss Prevezer QC on behalf of Concord, submitted that the plain intention of those provisions was that Mr R should be the nominated bondholder director, with full power to participate in the proceedings of the Management Committee, unless and until he was dismissed as a director in accordance with those provisions. Such a dismissal would then not be effective until a new Bondholder Nominated Director had been appointed: see paragraph [9] of Condition 10d. The elaborate provisions of Condition 10d. were, they submitted, plainly designed to ensure that either Mr R or some other Bondholder Nominated Director would at all material times be a member of the Management Board and able to act as such. Accordingly, it was submitted, the so-called suspension was a dismissal which did not comply with the provisions of either paragraphs [4] or [5] of Condition 10d.; further, or alternatively, the suspension produced a situation in which it was impossible for financial decisions relating to amounts exceeding €25,000 to be taken “with the consensus of the entire Management Board” under paragraph [3]; and, further or in the further alternative, that the only remedy available to the Supervisory Board in the event of “impasse or deadlock” was dismissal of Mr R (together with at least one other member) pursuant to paragraph [4].[17]On behalf of Elektrim Mr Auld QC submitted that nothing in Condition 10d. had any relevance to the exercise of a power of suspension; the possibility of suspension was simply not dealt with by the provisions, and had, possibly, been overlooked by Law Debenture and the bondholders when negotiating their terms. Moreover, he submitted, the construction advanced by Mr Hildyard involved the proposition that Elektrim had contracted not to exercise the power of suspension which it could not do in Polish law.[18]In my judgment the critical wording for present purposes is the requirement in paragraph [3] that relevant decision may only be taken with the consensus of the entire Management Board. The Management Board contemplated by that provision is a board consisting of not more than three members of whom one is a Bondholder Nominated Director, and that which in fact existed on 16.06.02 was a board consisting of three members of whom one was Mr R. His suspension as a result of his refusal to assent to the transactions then proposed was plainly done with a view to their implementation without his consent. Unless “consensus of the entire Management Board” is read as “consensus of all members of the Management Board not for the time being subject to suspension” the suspension necessarily involved a breach of this provision. Given the plain purpose of Condition 10d. read as a whole, it would in my judgment be perverse so to read the provision. The fact that in Polish company law decisions of the management board which require consensus under that law may be validly taken by the remaining unsuspended members is nothing to the point. The question is what is meant by “consensus of the entire Management Board” in this Deed which is governed by English law.[19]That conclusion does not involve the proposition that Elektrim has purported to contract not to exercise the power of suspension. All that it involves is that, if the power is exercised, Elektrim will find itself unable to fulfil the requirements of Condition 10d.[20]If that is correct, the second question to be determined is whether Law Debenture’s certificate that the suspension was materially prejudicial to the interests of the bondholders can be challenged. For this purpose Mr Auld did not challenge the proposition that to succeed on this point he needed to show that Law Debenture had acted unreasonably, perversely or in bad faith in giving the certificate (cf. Lewison, The Interpretation of Contracts, 2004, para 1304 and 1307 and per Evans Lombe J in BNP Paribas SA and Ors v Yukos Oil Company [2005] EWHC 1321 at para 19). He submitted that there had in fact been no material prejudice to the interests of the bondholders since Elektrim had at all times recognised the right of the bondholders to nominate a replacement for Mr R.[21]In so submitting, Mr Auld urged me not to adopt the reasoning which had led Peter Smith J. to reach the conclusion that the suspension had occasioned such material prejudice. That reasoning was expressed in the following paragraphs of his judgment ([2004] EWHC 270 (Ch)):
“48. However, the obligation of the Trustee in my opinion, is relatively straightforward. It has to ascertain that there is a breach. It then has to ascertain the consequences of the breach. If the consequences of the breach are that the interests of the Bondholders (as set out above) are materially prejudiced then, and only then can it issue a certificate. In most cases that will require an examination of the circumstances. However, that examination might be short, it might be long, depending on the nature of the breach and the acts complained of. It will also be dependent on the nature of the obligation that is broken. Some obligations (for example the reasons for refusal to accept a newly nominated director under Condition 10(d)) might require factual investigation. 49. Deploying these arguments the Trustee submits that it cannot be required to issue a certificate in respect of a suspension of Mr Rymaszewski until it has investigated the circumstances including the consequences of the disposals by the Board and has concluded that the suspension has caused material prejudice to the interests of the Bondholders. 50. In my view in relation to a total repudiation of Condition 10(d) that is an unnecessary exercise. Given what Mr Roome says about the importance of the Clause, it seems to me that it is self evident that there is present prejudice of a material nature to the interests of the Bondholders. They have a present interest in participating in and if necessary vetoing any transaction. The mere act of exclusion of Mr Rymaszewski is a material breach prejudicial to their interests in my opinion. They have been excluded from the Board, and deprived of their veto rights. 51. Mr Potts QC submitted that of course there may be an exclusion but no action has been taken, so there is a material breach but no material prejudice. I do not accept that. Given the factual background, it was plainly of vital significance that the Bondholders would have this representation and blocking power at all times. 52. Thus Mr Potts QC's argument overlooks the right of the Bondholders to veto transactions even if it might benefit Elektrim but harm them or even if it accrues benefits to them. Of course in any event, in the context of Elektrim it is difficult to see given the low level of 25,000 Euros how there would ever occur a situation where the Board would not be making decisions on a day to day basis in breach of Condition 10(d). 53. A serious breach i.e. the exclusion of Mr Rymaszewski in my opinion becomes an even more serious breach when decisions are taken without him (and thus the Bondholders) being consulted, and if necessary being given the opportunity to which they are entitled to veto the transactions. It is to my mind clear, that there has been material prejudice to the Bondholders' interests. The economic interests and the rights ancillary to the economic interests of the bonds have been prejudiced. It is difficult to see a more clear case of prejudice. 54. It is likely that this will only apply to a total repudiation of Condition 10(d), I say that because during the course of argument Miss Prevezer QC was unable to identify any other provision which would have quite such a significant effect. I should not be taken as deciding, however, that the repudiation of Condition 10(d) is a unique situation. As I have said the exercise required of the Trustee is to evaluate on a breach by breach basis. …… 56…… As I have said in my opinion the purported suspension of Mr Rymaszewski, which is a total repudiation of this fundamental provision, is not only a material breach, it is also self-evidently materially prejudicial to the interests of the Bondholders. I do not see it requires an investigation as to the transactions that have taken place. Even if the transactions objectively examined conferred benefits on the Bondholders or did not affect their interests in economic terms that does not address the fundamental issue which is that they were entitled to be heard and block (if they thought appropriate) any transaction whether it was beneficial or not. That right has been taken away by the breach and is clearly materially prejudicial. They have lost these rights and continue to be deprived of the right to issue them.”
[22]It was submitted that these passages proceeded on the basis of a misinterpretation of the rights given to the bondholders by Condition 10d. of the Conditions and a misunderstanding of Mr R’s duties as a member of the Management Board under Polish law. Thus it was submitted that it was wrong to suggest that Mr R was the bondholders’ representative on the board, and wrong to suggest that Condition 10d. gave the bondholders any right to participate in the decisions of the Management Board. The evidence of Polish law before me (which had not been before Peter Smith J) was that a member of the Management Board “must not act as representatives of any outside interest group (e.g. as a representative of the bondholders on the Management Board), passing information, taking instructions or polling them concerning the decisions to be made by the Management Board.” The provisions did not accordingly give the bondholders any right to be consulted, or any right of veto, in respect of the affairs of the Management Board. The bondholders’ sole right was to require the appointment of a member nominated by them. Once appointed his duties under Polish law were to act in the best interests of the company.[23]There is some force in these criticisms. In fact in the respects which I have mentioned Polish company law appears to be no different from English company law. Nevertheless the practical importance to the bondholders of having their own nominee on the Management Board, and of his ability to veto its decisions, seems to me obvious. Condition 10d contemplates that that right of veto will only be lost in the event contemplated by paragraph [5] and the procedures to be followed in accordance with that paragraph and paragraph [6]. I agree with Peter Smith J’s conclusion that the effective removal of Mr R otherwise than in accordance with its provisions amounted to a total repudiation of the provision and as such was capable of being certified by Law Debenture as materially prejudicing the interests of the bondholders.[24]That material prejudice, consisting as it did in an abrogation of the bondholders’ rights under the Conditions, was in my judgment neither lessened nor removed by Elektrim’s invitation to Law Debenture to nominate a replacement for Mr R. That was simply an attempt by Elektrim to force on the bondholders a regime which was not the contractual one.[25]Accordingly in my judgment Law Debenture is entitled to succeed in relation to this event of default.

The second alleged event of default

[26]Condition 12(xiii) makes it an event of default if:
“(i) all or any part of the undertaking, assets and revenues of the Guarantor [i.e. Elektrim], the Issuer [i.e. Elektrim Finance] or any Material Subsidiary is condemned, seized or otherwise appropriated by any person acting under the authority of any national, regional or local government or any political sub-division thereof or (ii) the Guarantor, the Issuer or any Material Subsidiary is prevented by any such person from exercising control over all or any material part of its undertaking, assets and revenues”
[27]One of the Material Subsidiaries, as defined by Condition 4(d), was Megadex. On about 2.1.04 the Polish tax authorities carried out an administrative execution against Megadex’s bank accounts, to satisfy various substantial tax liabilities totalling some PLN53 million. It is not disputed that the authorities who carried out the execution were within the Condition 12(xiii) definition of “any person acting under the authority of any national, regional or local government or any political sub-division thereof”. The issue is whether the nature of the execution levied entitles Law Debenture to say that the bank accounts were “condemned seized or otherwise appropriated” within the meaning of the Condition.[28]As a matter of ordinary language there seems to be little difficulty in describing the nature of the execution as a seizure. The Polish statute under which it took place, in the translation which has been placed before the court itself uses the words “seizes” and “seized” to describe the process: see Article 80. #1 of the Law dated 17th June 1966 on Administrative Enforcement Procedure. Moreover Elektrim’s own financial statements so describe it. Thus in the consolidated financial report for the second quarter of 2004 there is a reference to Megadex having “undertaken actions aimed at recovering funds seized by the tax authorities as a result of the execution”.[29]The same report records among the consequences of the execution that Megadex is currently disabled from participating in tenders as a general contractor, and that this represents “a significant financial burden”, but also looked forward to the time when a positive solution to the problem with the tax authorities might have been arrived at.[30]The question whether the execution was validly effected in Polish law is currently the subject of litigation in Poland. The current state of play is that Megadex has obtained a ruling from the Voivodship Administrative Court on 16.2.05 in its favour, setting aside the execution. That ruling is under appeal by the tax authorities.[31]Mr Auld submitted that there were three reasons why the execution had not amounted to a seizure within the meaning of the Condition. First he submitted that the phrase “condemned seized or otherwise appropriated” had to be construed in the light of the other Conditions, and in particular Condition 12(vi)). Condition 12 (vi) applies where “a distress, execution, attachment, sequestration or other process is levied or enforced upon or sued out or put in force against the whole or any part of the undertaking or assets … (being substantial in relation to the undertaking or assets of the Guarantor and its Subsidiaries taken as a whole)”[32]Condition 12(vi) thus contains, unlike the first limb of Condition 12(xiii), a criterion of materiality. Mr Auld submitted that the wording of Condition 12(vi) was plainly apt to cover the process of execution which had here taken place (which he characterised as simply a process of enforcement of a VAT liability), and suggested that something quite different was contemplated by the wording of the first limb of Condition 12(xiii). That submission was buttressed by a further submission that an event of default could not fall under more than one of the sub-paragraphs of Condition 12. Thirdly, he submitted (alternatively to those submissions) that Condition 12(xiii) could only apply to a lawful “seizure”, and that there was a real prospect of Elektrim establishing at trial that the seizure in this case had not been lawful.[33]I am unable to accept those submissions. The existence, and content, of Condition 12(vi) does not enable one to narrow the meaning of “seized” in Condition 12(xiii). Indeed it is difficult to give it a meaning which would exclude the type of execution which occurred here and leave it with some definite content. Mr Auld suggested that the type of seizure in contemplation was what he described as a “Mugabe” type of seizure, by which I took him to mean a confiscation of dubious legality. I do not, however, consider that the words are confined to such a, relatively indefinite, concept. Nor do I consider that there is any warrant for the suggestion that a particular event may not be a default under more than one of the sub-paragraphs. There are several cases within Condition 12 where more than one sub-paragraph may apply to the same event, for example sub-paragraph (iv) and (xii). Finally there is, in my judgment, little to be said for the argument that sub-paragraph (xiii) applies only to seizures, etc, which are lawful. An unlawful governmental seizure is at least as likely, if not more, to imperil the bondholders’ security as a lawful one.[34]Accordingly I do not consider that Elektrim has a real prospect of resisting the claim that this event of default has occurred.

The third event of default

[35]Interest of €8,714,644.51 was due to be paid on the Bonds on 15.12.04. Under Condition 12(i) it is an event of default if the interest is not paid within fourteen days of the due date. Elektrim claims that it did pay this sum to Law Debenture. Law Debenture denies this.[36]The facts relevant to this issue are not in dispute. As at 13th December 2004 a sum sufficient to discharge the liability was standing to the credit of an account (“the Security Account”) maintained by Elektrim at Citibank Handlowy w Warszawie SA (“CHW”). Elektrim’s rights to and in respect of the Security Account “including all amounts standing at any time to the credit of the Security Account” were, as part of the security arrangements under the Deed, charged in favour of Citibank NA (acting by its Canary Wharf branch) as “Security Agent” under an agreement (“the Security Administration Agreement”) whereby the Security Agent held Law Debenture’s securities under the arrangements as its delegate.[37]On 13th December 2004 Elektrim purported to instruct the Security Agent to debit the Security Account with €8,714,644.51 and to pay the same on 14th December 2004 to Citibank NA (Carmelle Street branch) for payment to the bondholders. The latter branch of Citibank acted as “Principal Paying and Transfer Agent” under an agreement of even date with the Deed (“the Amended and Restated Paying and Transfer Agency Agreement”). The Security Agent was not obliged to comply with that instruction, being required under the Security Administration Agreement to act on Law Debenture’s instructions. Law Debenture declined to give the instruction necessary to enable the Security Agent to make this payment and it was accordingly not made.[38]On the face of it Law Debenture was entitled to take this stance given the rights it had, via the Security Agent, over the monies standing to the credit of the Security Account, and the duties which it owed to the bondholders to maintain the securities which it held. The argument that Law Debenture was not entitled to maintain this stance proceeds on the basis that it had itself been, and remained, in breach of an obligation to allow Elektrim free access to and use of monies which had been generated in January 2004 as the result of a sale by Elektrim of its equity interest in a company called Mostosal Warszawa SA (“Mostosal”).[39]Pursuant to Condition 8(a)(iv) of the Conditions Elektrim had granted Law Debenture a registered pledge over its equity interest in Mostosal, which was defined as a “Small Asset” for the purposes of the Conditions. Condition 8(e) provided so far as material as follows: (e) Release Upon Disposal of Small Asset or Real Estate Asset So long as there is no unremedied Event of Default, the security granted with respect to the Bonds over any Small Asset or Real Estate Asset shall be released if the Guarantor disposes of its interest in such Small Asset or Real Estate Asset for a total consideration equal to or greater than the relevant Hurdle Value (a “Qualifying Sale”). The Bond Trustee and the Security Agent shall release the security over such Small Asset or Real Estate Asset (conditional upon completion of the Qualifying Sale and payment for the relevant Small Asset or Real Estate Asset, as the case may be) in accordance with the procedure described in the Security Administration Agreement. For the avoidance of doubt, the Guarantor and its Subsidiaries shall be free to apply the proceeds of any Qualifying Sale in their sole discretion.[40]The relevant procedure in the Security Administration Agreement is contained in clause 7.3 which is in the following terms:
“7.3 Release of Small Asset Security and/or Real Estate Security in Connection with a Sale. (a) In connection with any Qualifying Sale or any Non Qualifying Sale that has been approved by the Bondholders as described in Condition 8(e) (each, an “Asset Sale Transaction”) in respect of Elektrim’s shares in any Small Asset Subsidiary and/or any Real Estate Asset (the “Sale Asset”), Elektrim shall notify the Trustee and the Security Agent in writing at least ten Business Days prior to the proposed entry into an Asset Sale Transaction and shall provide the Trustee and the Security Agent with a certificate signed by two Authorised Signatories of Elektrim confirming that (i) no unremedied Event of Default exists as at that date, and (ii) such Asset Sale Transaction is a Qualifying Sale or a Non Qualifying Sale that has been approved by the Trustee, as the case may be. The Trustee and the Security Agent may accept such certificate as conclusive evidence of the information set out therein and the Trustee and the Security Agent shall not be bound to call for further evidence or be responsible for any loss that may be occasioned by either of them relying and acting upon such certificate. (b) The Security Agent shall, within five Business Days of receipt of written instructions from the Trustee (such instructions to be delivered by the Trustee to the Security Agent not later than two Business Days following receipt of the notice from Elektrim), deliver to Elektrim and the proposed buyer of the Sale Asset a signed initial statement of release (countersigned on behalf of the Trustee and to be acknowledged and accepted on behalf of Elektrim and such proposed buyer) substantially in the form of Part V of Annex C hereto. (c) On the date of completion of the Asset Sale Transaction, Elektrim shall notify the Trustee and the Security Agent in writing that the Asset Sale Transaction has been completed and shall deliver to the Trustee and the Security Agent a certificate signed by two Authorised Signatories of Elektrim confirming that no unremedied Event or Default exists as at such date. The Trustee and the Security Agent may accept such certificate as conclusive evidence of the information set out therein and the Trustee and the Security Agent shall not be bound to call for further evidence or be responsible for any loss which may be occasioned by either of them relying and acting upon such certificate. Upon receipt of such certificate, the Security Agent shall deliver to Elektrim and the proposed buyer of the Sale Asset a signed and notarised final statement of release (countersigned on behalf of the Trustee and to be acknowledged and accepted on behalf of Elektrim and such proposed buyer) substantially in the form of Part VI of Annex C hereto. (d) The Trustee and the Security Agent (following the receipt of written instruction from the Trustee) shall also deliver any other documents and take any other actions as may be necessary under Polish law in order to evidence or effect the release of the security over the Sale Asset and the completion of the sale of the Sale Asset.”
[41]In respect of the sale of Elektrim’s shares in Mostosal the Security Agent issued Elektrim with an Initial Statement of Release dated 5th December 2003, countersigned by Law Debenture confirming its agreement to its terms. That document, which followed the format laid down by the Security Administration Agreement, stated that it would not be “effective until the Security Agent has received written confirmation from Elektrim S.A. (signed by two Authorised Signatories of Elektrim S.A.) that it has completed a sale agreement or other analogous transaction with respect to the Shares (the “Condition”) and shall be null and void if the Condition has not been satisfied within two months of the date of this Initial Statement of Release or if an Event of Default occurs following delivery of this Initial Statement of Release to Elektrim but prior to the delivery of the Final Statement of Release (as defined below). “Completion” of a sale agreement or other analogous transaction with respect to the Shares shall mean the time at which(i) all conditions precedent to such sale or transaction are satisfied (other than any release of the security over the Shares), and(ii) the seller receives full payment for the Shares.”[42]It went on to say, inter alia, that “The Security Agent shall deliver a final statement of Release (the “Final Statement of Release”), substantially in the form attached in the Appendix hereto, as soon as the Condition has been satisfied. The delivery of the Final Statement of Release shall discharge our obligation to deliver a final statement of release under section 7.3(c) of the Security Administration Agreement.”[43]On 28th February Elektrim gave notice to the Security Agent that it had completed “a sale agreement or other analogous transaction” with respect to the Mostosal Shares and confirmed that “to the best of our knowledge an Event of Default has not occurred.” This notice appears to have been rejected by the Security Agent as inadequate and was replaced by a further notice dated 4th February 2004 which identified the sale as having been that contemplated by the Initial Statement of Release but was otherwise in the same form. That too appears not to have satisfied either the Security Agent or Law Debenture and a further notice was served dated 6th February 2004 which unequivocally asserted that there no unremedied event of default existed and which confirmed receipt of the purchase price.[44]At this point in time Law Debenture’s position, as against the bondholders, was that it was not open to it to certify that the suspension of Mr R constituted an event of default. It was awaiting Peter Smith J’s determination on the point which was not in the event obtained until 16th February 2004. Following delivery of his judgment Law Debenture on 17th February 2004 gave notice that an event of default had occurred and declined to issue a Final Statement of Release in respect of the sale proceeds which had been received by the third party broker. That third party broker did not therefore release the funds to Elektrim.[45]On 16th November 2004 Elektrim wrote to Law Debenture indicating that its intention was to use the Mostosal sale proceeds to pay the interest due to the bondholders in December 2004, and inviting Law Debenture’s cooperation to allow this to be done, either by issuing a final statement of release or by exercising its powers under Clause 20 of the Deed. Law Debenture’s answer was that the existence of the First Event of Default made it impossible for it to release the funds. A meeting of bondholders subsequently convened by Law Debenture also refused to authorise the release.[46]Elektrim’s solution was to instruct the third party broker to pay the proceeds into the Security Account. The third party broker complied with that instruction. This was all done without seeking Law Debenture’s consent or approval. Elektrim then purported to give the instruction for payment from that account referred to in paragraph 37 above.[47]Mr Hope, who argued this part of the case on behalf of Elektrim, submitted that Law Debenture had been bound to issue a Final Statement of Release as at 6th February for two reasons. First, he submitted that Law Debenture, having accepted as at the date of the Initial Statement of Release that there had at that date been no unremedied event of default (the only one in question at that point being the suspension of Mr R) could not rely on that as being an event of default for the purposes of the Final Statement of Release: that followed from the terms in which the Initial Statement of Release had been given. Secondly, he submitted that Law Debenture ought to have made its judgement as to whether or not to accept Elektrim’s 6th February certification that there was no subsisting unremedied event of default immediately on its receipt and had not been entitled to await the outcome of the proceedings before Peter Smith J before making its decision.[48]I am not satisfied that the terms of the Initial Statement of Release did commit Law Debenture to issue a Final Statement of Release provided only that there was no new event of default in the period following the Initial Statement of Release. The only wording in the Initial Statement of Release which arguably has that effect is that which I have quoted in paragraph 42 above. That wording, however, appears to me to concerned only with the position of the Security Agent and with the satisfaction of “the Condition” and not at all with the question whether Law Debenture has accepted, or will accept, that there is no unremedied event of default for the purposes of any Final Statement of Release. Clause 7.3(c) of the Security Administration Agreement leaves it to Law Debenture to decide whether or not to accept Elektrim’s own certificate to that effect. That provision also provides a reason why the second submission cannot be correct: since Law Debenture is not bound to accept Elektrim’s certificate as conclusive evidence, it is inherent that Law Debenture should have an opportunity to consider it.[49]It appears to me, however, to be unnecessary to decide these points. If I am right in relation to the second event of default, that itself provided a justification (whether or not either Law Debenture or Elektrim knew of it at the time) for Law Debenture’s refusal to issue the Final Statement of Release.[50]Accordingly, quite apart from the fact that the proceeds of the Mostosal share sale were voluntarily paid into the Security Account by Elektrim and thereby subjected to the charge on that account, Elektrim was never in a position where it could insist as against Law Debenture that those proceeds were freely available to it.[51]Law Debenture contends that in any event there was insufficient money in the Security Account to discharge the liability to pay interest having regard to Law Denture’s own entitlement to apply monies in that account to reimburse itself for costs and expenses incurred by it in the exercise of its functions as trustee. The amount standing to the credit of the Security Account at the relevant date (including the Mostosal proceeds) was €8,880,494.81. The interest payment was €8,714,644.51. Law Debenture’s position as to its costs and expenses was set out in a letter to Elektrim dated 10th December 2004 in the following terms:
“We have previously written to you about our right to take our fees and expenses first out of the money standing to the credit of the Security Account. We have also made clear to you that we have the right to be fully paid for all fees and expenses including those which you have rejected in your recent letter. To avoid us using funds in the Security Account to meet our fees and expenses and those of the Security Agent which are outstanding please pay the amounts of GBP 878,597.36 and USD 16,808.47 to our account (details below) without further delay.”
[52]That demand was not met. The Euro equivalent of those sums as at 10th December 2004 was €1,284,306.20. Those costs included costs of £440,420.20 incurred by Law Debenture in connection with the proceedings against Concord. Law Debenture has accepted for the purposes of this summary judgment application that these Concord costs should be left out of account for present purposes. However, even leaving them out of account, it contends that the amount of the shortfall in the Security Account was €481,035.74. There is no dispute about the arithmetic as such.[53]Law Debenture’s claim to be entitled to resort to the Security Account in respect of monies owed to it in priority to sums owed to the bondholders arises under Clause 11 of the Deed which provides as follows:
“11. Application of Moneys 11.1 All moneys received by the Trustee under these presents and/or under the Security Documents shall be held by the Trustee upon trust to apply them (subject to Clause 13): (A) first in payment or satisfaction of all amounts then due and unpaid under Clauses 16 and/or 17(J) to the Trustee; (B) secondly in or towards payment pari passu and rateably of all Principal, premium (if any), interest and any other amounts then due and unpaid in respect of the Bonds; and (C) thirdly in payment of the balance (if any) to the Issuer or the Guarantor (without prejudice to, or liability in respect of, any question as to how such payment to the Issuer or Guarantor shall be dealt with as between the Issuer or the Guarantor and any other person).” (A) first in payment or satisfaction of all amounts then due and unpaid under Clauses 16 and/or 17(J) to the Trustee; (B) secondly in or towards payment pari passu and rateably of all Principal, premium (if any), interest and any other amounts then due and unpaid in respect of the Bonds; and (C) thirdly in payment of the balance (if any) to the Issuer or the Guarantor (without prejudice to, or liability in respect of, any question as to how such payment to the Issuer or Guarantor shall be dealt with as between the Issuer or the Guarantor and any other person).”
[54]Mr Hope submitted that Law Debenture was not entitled to deduct its costs and expenses under this provision because no event of default had occurred and, in any event, the relevant monies had not been received by Law Debenture but had been received by the Security Agent. Mr Hildyard riposted that Clause 11 did not require there to have been an event of default (a submission which I accept) and that either the sums should be treated as having been received by Law Debenture for the purposes of Clause 11 (the Security Agent acting as its delegate) or (if not so received) Law Debenture was entitled to prevent the monies in the Security Account from being used to pay the liability to the bondholders until it had been indemnified against its own liabilities.[55]In my judgment the latter submission is correct.[56]Mr Hope further submitted that Law Debenture could not demonstrate that there were costs and expenses owing to it in excess of the difference between the interest payment due and the amount standing to the credit of the Security Account. However, for this submission to succeed Elektrim has to show that it has a prospect of reducing the amount owed by it to Law Debenture to a figure below the difference between the amount of the interest payment and the sum standing to the credit of the Security Account. For the reasons given below I do not think that it does. Moreover it seems to me that so long as the amount due to Law Debenture was in issue, Law Debenture was entitled to exercise its rights over the Security Account as security for what it bona fide claimed to be due.

The Fourth Event of Default

[57]By Condition 12(viii), there is an Event of Default:
“if … proceedings shall have been initiated against … the Guarantor [i.e. Elektrim] … under any applicable bankruptcy, reorganisation or insolvency law”
[58]On 18th February 2005 Alstom Power sp. z.o.o. (“Alstom”) filed an application with the Warsaw District Court for the bankruptcy of Elektrim. That application was defended by Elektrim on the grounds that the debts on which it was founded were the subject of bona fide dispute and that the application was brought in bad faith. The application has subsequently been withdrawn without any declaration of bankruptcy having been made.[59]Expert evidence (of Dr Feliks Zedler) as to Polish bankruptcy law was adduced by Elektrim. That evidence was to the effect that the relevant law is contained in the Law dated February 28th 2003 – Law on Bankruptcy and Reconstruction (Official Journal No 60, item 535 as amended) (“the Law”). Dr Zedler explains that Polish bankruptcy proceedings involve two stages. The first involves proceedings leading to a declaration of bankruptcy. The second, which he describes as “bankruptcy proceedings proper”, take place after the declaration of bankruptcy has been made. The Law does not itself prescribe the consequences of the withdrawal of proceedings at the first stage, but Dr Zedler’s opinion is that the matter is regulated by Article 203 of the Code of Civil Procedure, paragraph 2 of which has the effect of providing that “a petition for the declaration of bankruptcy once withdrawn does not give rise to any of the effects which the Bankruptcy Law attaches to its filing. Further under the law “the mere filing of a petition has no legal implications on the debtor’s contractual relations”.[60]Mr Auld relied on this evidence of Polish law in support of his submissions that no “initiation” of bankruptcy proceedings had taken place within the meaning to be ascribed to that expression in Condition 12(viii). However, it seems to me impossible as a matter of construing the wording of the Condition to avoid the conclusion both that proceedings were initiated and that they were proceedings under an applicable bankruptcy law. The fact that Polish law attaches no significance to the petition once it has been withdrawn does not mean that the fact of its having been presented does not have significance under Condition 12(viii). The result is a harsh one in the case of a petition which has been improperly presented, but is one for which the parties have contracted (cf the provision considered by the Court of Appeal in Martyn Rose Ltd and another v AKG Group Ltd and others [2003] EWCA Civ 375, [2003] 2 BCLC 102). Its harshness is potentially mitigated by the fact that Law Debenture has a power (under Clause 20 of the Deed) to waive the breach if satisfied that the interests of the bondholders will not be materially prejudiced.[61]Accordingly Law Debenture is in my judgment entitled to rely on this Fourth Event of Default.

Law Debenture’s Costs

[62]Law Debenture has a contractual entitlement to costs and expenses incurred by virtue of clauses 16.5 and 17.1(J) of the Deed which, so far as material, provide as follows:
“16.5 The Issuer shall also pay or discharge all Liabilities properly incurred by the Trustee in relation to the preparation and execution of, the exercise of its powers and the performance of its duties under, and in any other manner in relation to, these presents and the Security Documents….” “17.1(J) …. the Issuer and the Guarantor shall indemnify the Trustee ….. and keep it ….indemnified against all Liabilities to which it … may be or become subject or which may be incurred by it …. in the execution or purported execution of any of its … trusts, powers, authorities and discretions under these presents …. or in respect of any other matter or thing done or omitted in any way relating to these presents” “Liability” is defined by Clause 1.1. as meaning “any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever …. and legal fees and expenses properly incurred on a full indemnity basis.”
In addition reference needs to be made to 17(G) which provides “(G) Save as expressly otherwise provided in these presents, the Trustee shall have absolute and uncontrolled discretion as to the exercise of its trusts, powers, authorities and discretions under these presents and the Security Documents (the exercise of which as between the Trustee and the Bondholders shall be conclusive and binding on the Bondholders) and shall not be responsible for any Liability which may result from their exercise or non-exercise.” and to Clause 18 which is in the following terms:
“18. Trustee’s Liability 18.1 Nothing in these presents shall in any case in which the Trustee has failed to show the degree of care and diligence required of it as trustee having regard to the provisions of these presents conferring on it any trusts, powers, authorities or discretions exempt the Trustee from or indemnify it against any liability for breach of trust.” “any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever …. and legal fees and expenses properly incurred on a full indemnity basis.” “(G) Save as expressly otherwise provided in these presents, the Trustee shall have absolute and uncontrolled discretion as to the exercise of its trusts, powers, authorities and discretions under these presents and the Security Documents (the exercise of which as between the Trustee and the Bondholders shall be conclusive and binding on the Bondholders) and shall not be responsible for any Liability which may result from their exercise or non-exercise.” “18. Trustee’s Liability 18.1 Nothing in these presents shall in any case in which the Trustee has failed to show the degree of care and diligence required of it as trustee having regard to the provisions of these presents conferring on it any trusts, powers, authorities or discretions exempt the Trustee from or indemnify it against any liability for breach of trust.”
[63]The costs which Law Debenture seeks against Elektrim in these proceedings have been summarised under six categories in the evidence of Mr Burgess given on its behalf (of which the following is itself only a summary and in relation to which I give the figures without the up-dating provided shortly prior to the hearing): i) Category 1: UK legal costs since 19th April relating to Trust and Bond matters including Events of Default, indemnification issues, proceedings with Concord, and proceedings threatened by Elektrim SA in April 2004. These are all evidenced by invoices from Law Debenture’s English solicitors, Simmons & Simmons, dated from 12.5.04 through to 17.06.05 and totalling, exclusive of VAT, £1,256,370.48. Approximately £741,000 relates to the Concord proceedings and advice as to Law Debenture’s own position. ii) Category 2: UK costs related to Elektrim’s Notice of Arbitration given on 7th January 2005. Again these consist of Simmons & Simmons invoices totalling £30,154.64. iii) Category 3: UK legal costs relating to enforcement actions in Poland. Three such actions have been taken namely, first, an application for the liquidation of Elektrim pursuant to instructions given by more than 30% of the bondholders; secondly, enforcement action taken with respect to the Security Account taken on similar instructions; and, thirdly, attachment proceedings in relation to certain of Elektrim’s assets taken by way of interim relief. The total of Simmons & Simmons invoices under these heads rendered between 25.4.05 and 17.6.05 is £142,374.45. iv) Category 4: Costs of Polish Legal advice and representation. These consist of the fees and disbursements of Polish lawyers, Wardynski, and consist of invoices totalling $119,813.68, €16,032 and £7,513.50. v) Category 5: Costs of the Security Agent. These consist of invoices from the Security Agent totalling £172,203.19 and €33,713.00. vi) Category 6: UK costs related to these proceedings These total £100,266.53.[64]In each case Mr Burgess (an employee of Law Debenture) has given evidence that the costs were properly and necessarily incurred and that the fees charged were reasonable.[65]Elektrim’s case is that the Category 1 costs, so far as they consisted of costs of the proceedings against Concord or in relation to Law Debenture’s own position, were “improperly incurred and wasted”. Law Debenture has conceded for the purposes of this application that there is a triable issue here. That, however, still leaves a substantial claim under this head (of which approximately £438,177 relates to the period prior to 10th December 2004) in relation to which Elektrim says merely that it has insufficient information to be able to assess whether these costs were properly and reasonably incurred. Elektrim makes this same point in relation also to Categories 2-6.[66]As to that Law Debenture has exhibited all the relevant invoices with accompanying narrative. The submission made on its behalf is that, at this summary judgment stage, it is incumbent on Elektrim to put forward a proper case to suggest that some part of the costs might have been improperly incurred, and that absent such a case it is entitled to a money judgment for the costs. Even if such a case had been put forward, it was submitted, relying on Gomba Holdings (UK) Ltd v. Minories Finance Ltd (No 2) [1993] Ch 171, that the appropriate order was judgment in its favour, with an order for assessment of the disputed costs on the indemnity basis.[67]By written submissions supplied to the court during the course of Law Debenture’s reply, it was submitted that Elektrim was entitled to be satisfied that the costs claimed had been “reasonably incurred and reasonable in amount” (reflecting the wording of an assessment), and that before the court could determine that question Elektrim was entitled to ask for an “account” of the costs to be gone through in the course of which it would be entitled to dispute particular items as having been unreasonably incurred or unreasonable in amount. At that stage the court would have a discretion as to whether or not to order an assessment. Elektrim’s contention was that despite having been supplied with the relevant invoices, and a narrative breakdown of those invoices, it was still short of the necessary information about(a) the applicable hourly rates or seniority of the fee earners in question and(b) the applicable categories of work to which particular items related, in particular in relation to which amounts relate to Law Debenture’s own position and the Concord proceedings and which fall outside those categories.[68]The principal issue between the parties is thus as to the stage in the proceedings at which it is appropriate for the court to consider whether or not to direct an assessment. Law Debenture’s position, as I understand it, is that this is the appropriate stage and that, Elektrim not having advanced any positive case as to unreasonableness in relation to particular items, is not entitled to an order for assessment of the costs. It is, I think, accepted that there is room for supplying Elektrim with further information (not hitherto requested) as to the breakdown of the Category 1 costs between those in relation to which it accepts that there is a triable issue and the other categories. Elektrim’s position is that it is entitled to ask for some general account before the court decides whether or not to order payment of the sums claimed or to direct their assessment, and that before that process has taken place it is not under any liability to pay these costs.[69]The decision of the Court of Appeal in Gomba does not directly answer this question. That case concerned, centrally, the question whether, on the taking of a mortgage account before the Master of what was due to the mortgagee in respect of its costs incurred (there being a contractual entitlement to costs on an indemnity basis), the mortgagor was entitled to raise an objection based on unreasonableness as to items of costs which had not already been ordered to be taxed in the mortgage proceedings. The answer given by the Court of Appeal was that such an objection could be made, but that the mortgagor had to show “a clear case” of unreasonableness (ibid at p 187A). It would then be open to the court to direct that the issue be resolved by, or with the assistance of, a process of taxation.[70]Some assistance can be derived from considering the analogous position of the solicitor’s ability to obtain summary judgment against his own client on a bill in circumstances where the client has no statutory right to taxation. The position was summarised by Evans LJ, delivering the judgment of the Court of Appeal, in Turner & Co v. O. Palomo SA [2000] 1 WLR 37 at 48 in the following terms “It seems to us also that the approach adopted in Jones & Son v. Whitehouse [1918] 2 K.B. 61 was a straightforward application of the principles which govern any application for summary judgment under Order 14. In 1918 the solicitor was required to serve a particularised bill of costs. It was then for the defendant to show “plausible” grounds for objecting to individual items. If he did so, then the court would inquire into the reasonableness of those items, but without embarking on a full-scale taxation or an inquiry into the whole bill. Today, the solicitor is entitled to deliver a gross sum bill, as the solicitors have done in the present case. In those circumstances, if no breakdown has been provided, then the most that the defendant can be expected to do is to challenge the reasonableness of the total sum claimed. The language used in In re Park, 41 Ch.D. 326 reflects the same approach, though at a time when the question of reasonableness was for a jury to decide, subject to the court ruling that the evidence disclosed a prima facie or even conclusive case.”[71]In the present case the detailed narrative with which Elektrim has been supplied in support of the invoices is, in my judgment, sufficient to make this case analogous with the particularised bills which had been delivered in Jones & Son v. Whitehouse, and no “plausible reason” or “clear case” has been advanced as to unreasonableness in relation to any particular item. Accordingly, subject to my directing an inquiry (in default of agreement) as to what part of the Category 1 costs does not come within the category in relation to which it is conceded that there is a triable issue, Law Debenture is in my judgment entitled to summary judgment in respect of those costs without an assessment.[72]The same applies, in my judgment, to the other Categories of costs claimed. The only other point of principle raised in the evidence related to those parts of the costs attributable to the Polish bankruptcy proceedings. These proceedings, which Law Debenture was obliged to take on the instructions it had received from the bondholders, were not successful at first instance, the Polish court taking the view that unless and until the questions of English law had been resolved either in the arbitration proceedings commenced by Elektrim or in these proceedings, it was not appropriate to grant the relief sought. An appeal is pending. The Polish court rejected Elektrim’s submission that that the application had been brought in bad faith. There has been no appeal against that. Given the width of Law Debenture’s discretion under the Deed, and having regard to its duties to the bondholders, I have not been persuaded that Elektrim has a real prospect of showing at trial that the costs incurred by Law Debenture in relation to this exercise were costs which were either improperly incurred or incurred negligently or in breach of trust.[73]Accordingly, subject only to the qualification which I have made, Law Debenture is entitled to judgment in respect of its costs as claimed. The precise form of the order will be the subject of further argument. There will also be further argument as to the way in which the order should reflect any credit to be given to Elektrim in respect of recoveries made by Law Debenture as a result of the enforcement action it has taken in relation to the Security Account.

Cited in 2 later judgments