Since 2016, Brazilian telecom group Oi’s restructuring has led to several court proceedings in the Netherlands. The District Court in Amsterdam decided one issue in March 2018, in a conflict between Cayman Islands-incorporated Capricon Capital (Capricorn) and two Dutch financial vehicles, Portugal Telecom International Finance (PTIF) and Oi Brasil Holdings Co-operative (Finco) – both part of the Oi group and full daughters of Oi SA.
The central question in this proceeding was whether Capricorn’s claims, based on a no-action clause, could be filed by Capricorn as an individual noteholder or whether this right was exclusively reserved for the Trustee (T.I.M. B.V). From 2005 to 2013, PTIF issued seven series of bonds worth a total of €3.4 billion, under a €7.5 billion bond issuance program (PTIF Bonds). The PTIF Bonds are unsecured, but guaranteed by Oi SA.
In the corresponding trust deed, which includes a no-action clause and is governed by English law, Citicorp Trustee Company Limited was appointed as trustee. Part of the no-action provision said: “Only the Trustee may enforce the provisions of these presents. No Noteholder, Receiptholder or Couponholder shall be entitled … to proceed directly against the Issuer or the Guarantor to enforce the performance of any of the provisions of these presents unless the Trustee having become bound as aforesaid to take proceedings fails to do so within a reasonable period and such failure is continuing”.
In June 2015, PTIF lent €4.1 billion to FinCo with a term expiring on 2 June 2016 (the Finco loan). FinCo used the proceeds of the Finco loan to provide funds to Oi SA and other companies in the group. The term of the Finco loan was then extended by argeement, but in November 2015 Capricorn, as holder of the PTIF bonds, objected and demanded that the Finco loan be repaid as soon as possible, and no later than the original repayment date. On 24 December 2015, Capricorn annulled the Finco loan with an out of court action (‘buitengerechtelijk’) under Article 3:45 of the Dutch Civil Code, arguing that the transaction was detrimental to the creditors. By the end of the year, €3.9 billion was outstanding under the Finco loan.
Stripped from many details, the first question to consider is that of admissibility. Is Capricorn a bondholder and therefore a creditor of PTIF? This has to be seen against the general background of the global trade in bonds, where global notes are usually held by a central institute. Individual bondholders then have only indirect rights, such as a balance on a securities account, with institutions that are affiliated directly or indirectly with the central institute. In a well-known case in the Netherlands dealing with New York law-govered bonds in 2003, the Supreme Court of the Netherlands determined that beneficial holders – thus only indirectly entitled – were authorized to exercise voting rights attached to the bonds, and not the legal owner (which was in this case the trustee through whose intermediary the bonds were issued). The beneficial holders could also be considered the economic owners and who had exercised the right to vote in a Chapter 11 procedure before the US Bankruptcy Court in New York, which was closely connected to the suspension of payment proceedings in Amsterdam. In the Dutch case, under the Netherlands Bankruptcy Act, the beneficial holders had to be treated in the same way as creditors, from a point of view of justice and efficiency (author’s italics). In this case, the Supreme Court concluded that they should be entitled to exercise the right to vote.
As a background to the case at hand, Capricorn filed securities settlement statements showing that it holds a PTIF Bond balance with Goldman Sachs, which in turn holds a PTIF Bond balance with the Euroclear Bank central institute. The former directors argued that Capricorn was not a creditor, or that it had not demonstrated that it was a creditor, but they did not put forward any grounds to rebut the authenticity or correctness of the custody account statements, according to the Amsterdam court. On that basis, the court concluded that Capricorn was a bondholder and thus a creditor of PTIF.
The next question forms the main course for this legal dinner: whether the no-action clause in the trust deed deprives individual bondholders of the power to act independently against PTIF, FinCo and their parent company and former directors. This is a question of the interpretation of the no-action clause. In general, the primary purpose of a no-action clause is to protect the issuer, and the other creditors of the issuer, from a proliferation of individual bondholder actions and exposures. The no-action clause also serves the interests of co-bondholders, because they can be disadvantaged by the individual actions of another bondholder that are at odds with their interests. One sees, that through bondholder meetings with predetermined quorums, voting percentages and other requirements, bondholders are expected to come to a common position (usually per separate series of bonds) through the trustee. But does a no-action clause also cover non-contractual obligations related to the bonds? The purpose of such a clause is to prevent widespread, uncoordinated invidivual actions, potentially all over the globe. An individual bondholder that is voted down in a noteholder meeting is in principle bound by the decision taken. This risk is inherent in being a bondholder with insufficient votes and is generally described in the risk factors in the prospectus, which was the case here.
In the Capricorn case, English law was chosen for both the trust and all the non-contractual obligations arising from or in connection with the trust. Such a choice of law should in principle be recognised by the Dutch judge on the basis of the Rome I and II Regulations. The court, however, went directly to the interpretation of a no-action clause under English law, by considering the directors’ view that Capricorn’s claims on the basis of the no-action clause could not be filed by Capricorn as an individual noteholder, but only by the trustee. Whether this position is correct, the court argues, must be answered by interpreting the provisions in the trust deed. The court went on to consider: “This interpretaton must be made on the basis of the rules for interpretation under of the English law applicable to the Trust Deed” and the court cited the 2008 case of Elektrim SA v Vivendi Holdings 1 Corp, in which the Court of Appeal of England and Wales ruled on the explanation of a no-action clause in a trust.
It is rather uncommon for a Dutch court to cite a “foreign” judgment. Did the court ask for expert advice, or did one of the parties provide this information? The latter seems more likely. In light of the Dutch case law to ajudicate “from a point of view of justice and efficiency”, the court’s decision to include non-contractual claims under the no-action clause should, however. not come as a surprise.
In the case at hand, Capricorn stated that the Finco loan is detrimental and should be subject to an actio pauliana – where a creditor’s recovery is predjudiced by a legal act between the debtor and a third party, the legal act can be annulled. Under Dutch law this argument requires quite some evidence. The most important requirements are that (i) the debtor must have performed without an obligation, (ii) he knew or ought to know that prejudice to one or more creditors would result from the performance of the legal act, and (iii) there is a causal relationship between the act of performance and the prejudice. Both prejudice and the element of knowledge are the toughest ones to prove. The case is set to be settled next summer, with a likely appeal on the actio pauliana application set to follow.
Dutch rules for private international law say that whether Capricorn has a right of action or not is a question that must be answered according to national procedural law, under Article 10:3 of the Dutch Civil Code. Now that the court has ruled that the claim rights that Capricorn instituted in these proceedings fall under the no-action clause and are therefore to be allocated to the trustee and not to individual noteholders, Capricorn has no right of action (no ‘ius agendi’). The court not only uses English law, but also Latin designations! The no-action clause is seen in its full effective function in that it prevents individual, uncoordinated actions in many jurisdictions.
– District Court Amsterdam 12 March 2018, ECLI:NL:RBAMS:2018:2799
– Netherlands Supreme Court 26 August 26, NJ 2004/549 (United Pan-Europe Communications N.V.)
– Elektrim SA v Vivendi Holdings 1 Corp  EWCA Civ 1178 (24 October 2008)
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication, but here is a link to the full piece, which appeared in GRR November 2018. See globalrestructuringreview.com