Dealing in securities – Defendants issuing guaranteed notes – Claimants investing

Azevedo and Alvarez v Imcopa Importacao, Exportaacao e Industria de Oleos Ltda and other companies: Queen's Bench Division, Commercial Court: 30 May 2012

The claimants were two individual investors who jointly invested in guaranteed notes issued by the defendant group of companies. The defendant companies were part of the Imcopa Group of companies. The first defendant, Imcopa B, incorporated in Brazil, was the Imcopa Group's parent company. The second defendant, Imcopa U, incorporated in Uruguay, was a wholly-owned subsidiary of Imcopa B. The third defendant, Imcopa C, a Cayman-incorporated company, was a subsidiary of Imcopa B.

In 2006, the Imcopa Group completed a refinancing of its business by means of an issue of $100m, 10.375% guaranteed notes, with a maturity date in 2009 (the notes). By resolution of the general shareholders, Imcopa U would be the issuer and Imcopa B would be the guarantor of the notes. The notes were constituted and had the benefit of a trust deed (the trust deed) with the Bank of New York being the trustee (the trustee). The claimants jointly invested in the notes in the sum of $1.2m. Title to the notes passed by registration in a register kept by the trustee as registrar.

In addition to the provisions within the trust deed, the notes were issued subject to terms and conditions as set out in schedule 1 to the trust deed. The trust deed, provided, inter alia, for the amount and form of the notes, that Imcopa B would unconditionally and irrevocably guarantee the issuer's payment obligations in respect of the notes, that it was governed by English law with jurisdiction confirmed on the English court, that only the trustee was entitled to enforce a revision of the notes or trust deed and no noteholder was entitled to proceed directly against the issuer or the guarantor unless the trust had become bound to proceed against them by reason of extraordinary resolution passed by one-fifth of noteholders, but had failed to do so, and that an extraordinary resolution would be binding on all the noteholders, whether or not present at the meeting and that the passing of such a resolution would be conclusive evidence that the circumstances justified its being passed.

In December 2007, Imcopa C was substituted for Imcopa U as issuer. In June 2008, certain amendments were made to the trust deed and conditions of the notes, as referred to in a second supplemental trust deed, dated 2 June 2008. The amendments were made pursuant to the extraordinary resolution procedure in the schedule to the trust deed. In late 2008, the Imcopa Group appointed Deloitte Touche Tohmatsu to prepare a restructuring plan aimed at obtaining sufficient resources to service is existing debt obligations and develop its business plan.

The Imcopa Group made detailed proposals to all existing noteholders, which were duly approved by extraordinary resolutions, in May 2009 (the May 2009 consent solicitation), October 2009 (the October 2009 consent solicitation), May 2010 (the May 2010 consent solicitation) and October 2010 (the October 2010 consent solicitation). In conjunction with three of those consent solicitations, in October 2009, May 2010 and October 2010, it was openly proposed in documentation sent to all noteholders that a 'consent payment' would be made to all those noteholders voting in favour of the extraordinary resolution. Each of the extraordinary resolutions approving the consent solicitations was passed by an overwhelming majority of noteholders, both by reference to votes cast and to principal amount outstanding.

The claimants voted in favour of the first three consent solicitations, and received consent payments as a result of voting in favour of the extraordinary resolutions. The claimants did not vote in favour of the October 2010 consent solicitation and thus did not receive a consent payment. On 16 May 2011, the Brazilian court granted confirmation of the reorganisation plan, which became binding by Brazilian law on all secured and unsecured financial creditors of Imcopa, including the noteholders.

The claimants sought, inter alia: (i) a declaration that the extraordinary resolutions in respect of the last of the three consent solicitations had been illegal, invalid and ineffective in English law; (ii) a declaration that the contract between the parties, as represented by the claimants' investment in the notes, had been terminated by repudiation; (iii) a declaration that each of the defendants was liable to refund to the claimants the purchase price of $1.2m; (iv) orders made on various bases for the payment of $1.2m to the claimants; and (v) orders against Imcopa C and Imcopa B for the payment of damages for breach of contract in the amount of $31,128, being the amount represented by the consent payment, which was not received by the claimants as a result of the October 2010 consent solicitation. The defendants made cross-applications to strike out or to obtain summary judgment in respect of those claims.

The defendants contended, inter alia, that: (i) the claim against Imcopa U should be struck out as Imcopa U had been released from any and all obligations under the trust deed and the notes when it was substituted as issuer on 28 December 2007; (ii) the claim against Imcopa C and Imcopa B, and to the extent it had not been released, Imcopa U, was brought in breach of the express prohibition on the claimants bringing proceedings directly against the issuer or the guarantor contained within the trust deed and conditions of the notes and, on that basis, the claim against each of them should be struck out; (iii) the consent payments should not be characterised as a bribe, as alleged by the claimant, as they had not been in any way secret and, therefore, that would not invalidate any vote taken in light of such payments; and (iv) the claimants had no real prospects of succeeding and summary judgment should, therefore, be granted in favour of the defendants.

The court ruled: (1) The assertion that Imcopa U had not itself been discharged from its own responsibility up to the date of substitution was not made out. Even if Imcopa U had remained responsible following substitution in respect of any liability arising before 28 December 2007, the claimants had effectively conceded that Imcopa U had had no responsibility after that date. That was significant since the cause of action arose only from the consent solicitation entered into from October 2009 and there was no allegation that Imcopa U had been in any way involved or responsible in that or any subsequent consent solicitation (see [32] of the judgment). The claim against Imcopa U would be dismissed (see [33] of the judgment).

(2) Payments offered in exchange for votes did not constitute bribery where the relevant scheme had openly provided for the separate treatment of persons with a different interest, and such persons would not be incapacitated from voting on the scheme (see [53] of the judgment). In the instant case, the payments offered in exchange for votes did not constitute bribery. The payments had the following characteristics which were inconsistent with any case of bribery, fraud or illegality: (i) they had been openly and repeatedly disclosed and explained in documents made available to all noteholders before the relevant noteholder meeting and vote took place; (ii) the consent payments had been payable on an equal basis to all those noteholders voting in favour of the relevant consent solicitation; and (iii) each noteholder had been entitled and free to vote in favour or against the consent solicitation as it saw fit.

Although there appeared to have been no English case in which consent payments had been considered, the issue had arisen in a number of case in the leading United States corporation jurisdiction of Delaware, where consent solicitation and consent payments appeared to have been a commonly used means of debt restructuring since at lease the 1980s. Furthermore, there was nothing in the trust deed or the notes which prevented the payment of consent payments in conjunction with the consent solicitations.

In respect of the claimants' arguments on repudiation, those depended on showing that the voting on the extraordinary resolutions had been invalid and that the consequent purported but unlawful variation to the contractual documentation had been repudiatory. However, since there had been no grounds for impugning the vote taken, the repudiation argument failed (see [54], [55], [66], [67] of the judgment). The claimants' case had no real prospect of success and would be dismissed. The claimants' application for summary judgment would accordingly be dismissed and the defendants' cross-application for summary judgment would be granted (see [69], [70] of the judgment).

Goodfellow v Nelson Line (Liverpool) Ltd [1912] 2 Ch 324 considered; British America Nickel Corpn v M J O'Brien Ltd [1927] AC 369 considered.

Simon Goldblatt QC and Karen Gough (instructed by R A Rosen & Co) for the claimants; Ben Valentin (instructed by Shearman & Sterling (London) LLP) for the defendants.