MarIus

4.4.1 The rulings of the lower courts

Before discussing the final ruling of the Supreme Court, it is worth identifying the arguments that convinced the lower courts. The Nordic Trustee contended that the practical need for allowing the suit was the same as in the two previous cases, but the lower courts found that one had to distinguish between claims in contract and claims in tort.(4) TOSLO-2011-164647 (n 87) and LB-2013-68997 (n 88). Thule Drilling successfully argued that the reasoning in Rt. 2010 s. 402 (Attachment Order) was not applicable to tortious claims.(5) ibid

The lower courts held that the bondholders had not contractually agreed to refrain from a legal action for claims in tort against the defendants, i.e. that the no-action clause was inapplicable.(6) ibid. Had the claim in tort been brought against the issuer or any of its guarantors, the no-action clause would arguably have applied. In the UK and the US, the no-action clause is interpreted as covering both claims in contract and in tort, see for instance Elektrim S.A. v Vivendi Holdings 1 Corp and Law Debenture Trust Corporation PLC [2008] EWCA Civ 1178 [101] and Feldbaum v. McCrory, 1992 WL 119095 *6 (Del.Ch. June 2, 1992). It is to be noted that the defendants were not party to the bond terms, the guarantee or any other security document. Moreover, the courts found that one must distinguish between the individual bondholders with regards to: (i) calculation of loss, (ii) set off, and (iii) contributory negligence.(7) TOSLO-2011-164647 (n 87) and LB-2013-68997 (n 88) In order to ensure proper disclosure of the disputed matter, including items (i) to (iii), the adversarial judicial system requires that the bondholders are themselves parties to the proceedings.(8) ibid The fact that the bill initiated by the Nordic Trustee, at least on the face of it, only dealt with claims in contract was taken by the lower courts to indicate that claims in tort were never anticipated as being comprised by the Nordic Trustee’s title to sue.(9) ibid It is likely that the bill did not expressly cater for suits in tort against third parties since such a suit was not envisaged when the bill was drafted.

Prior to the expansion of the bond market into a separate high yield market, the need to take legal action on the basis of the bond terms had barely occurred, even less a need to sue in tort. The lower courts assumed that a suit in tort would be a rare phenomenon. Liability due to evasion of secured assets is uncommon, but with today’s distressed issuers, directors are more likely to face liability if they have not been prudent when conducting business or if they fail to file for bankruptcy when the company has no real prospects of survival.(10) Although directors’ liability is codified in the Limited Liability Companies Act of 1997, the liability is found in tort.

In light of its reasoning, the lower courts held that a statutory amendment of the law would be necessary, in order to allow the suit by the Nordic Trustee in its own name.(11) TOSLO-2011-164647 (n 87) and LB-2013-68997 (n 88) All the concerns raised by the Supreme Court in Rt. 1989 s. 338 (Eviction) were equally applicable to the present case. It was merely a question of convenience, rather than an actual need for the Nordic Trustee to be vested with a right of action in this case.(12) ibid The trust of the international market was not threatened when it came to claims in tort.(13) ibid Thus, the lower courts did not acknowledge the Nordic Trustee’s argument that it would facilitate a coordinated action, in addition to distribution of damages pari passu.

4.4.2 Digression: Rt. 2010 s. 646 (IPR Manager)

A brief digression is appropriate before turning to the Supreme Court’s ruling on the title to sue for damages in tort. Shortly after its ruling in Rt. 2010 s. 402 (Attachment Order), the Supreme Court was yet again faced with the question of a representative’s title to sue; this time through a suit filed by a private company managing intellectual property rights (IPR) on behalf of media companies organised through a trade organisation.(14) Rt. 2010 s. 646

The Supreme Court noted that recent case law allowed an independent custodian to sue in its own name on behalf of the real party in interest, provided the custodian is free to manage the claims and thereby bind the beneficiary claimant to its decisions.(15) ibid [24] Similar to its reasoning in Rt. 2010 s. 402 (Attachment Order), the court highlighted the contractual agreement between the manager and the IPR holders.(16) ibid [25] The manager was responsible for the monitoring of potential IPR violations and vested with powers to take action on behalf of the IPR holders. Accordingly, the court ruled that the manager had title to sue in its own name.(17) ibid [25]-[26]

This ruling is another example of the Supreme Court’s pragmatic approach. Its focus was on the genuine need for vesting the manager with a right to sue in its own name, rather than reaching a conclusion based on the fact that the manager was merely a representative of the IPR holders.

Both Rt. 2010 s. 402 (Attachment Order) and Rt. 2010 s. 646 (IPR Manager) show a development in a representative’s right to sue in its own name on behalf of the real party in interest. Constituting an exception from the main rule, these rulings are not to be interpreted too liberally. The underpinning reasoning for allowing these suits in the name of the representative was the conferment of authority on the representative, including authority to independently manage any claims with binding effect upon the beneficial claimant. A judgment in favour of the representative would normally be binding upon the real party in interest by virtue of section 19-15 of the Civil Procedure Act, due to the contractual agreement between the representative and the real party in interest.(18) Refer to the explanation of section 19-15 in note 72. These rulings do not, however, establish a general right of a representative to sue in its own name.

4.4.3 Final ruling of the Supreme Court

Returning to the third Thule Drilling case, the Supreme Court reiterated that section 1-3 of the Civil Procedure Act formed the basis for assessing title to sue.(19) Rt. 2014 s. 577 [29] Noting its reasoning in Rt. 2010 s. 402 (Attachment Order), the court questioned whether the genuine need to allow the Nordic Trustee a right of action had changed when the claim was made in tort and against other parties than the issuer and/or its guarantor(s).(20) ibid [31], [33] The defendants raised several counter arguments, which the court dealt with in turn.

First, it was contended that each bondholder’s loss would have to be calculated individually, as such loss would not necessarily amount to the nominal value of the bonds.(21) ibid [34] On the contrary, the court found that the loss would, in principle, be the same even though the bonds were traded.(22) ibid [35] The loss would amount to the estimated return had the security not been violated, less the actual return received.(23) ibid A reservation was, however, made in respect of (i) any contributory negligence on the part of a bondholder or a group thereof, and (ii) the loss of claim following divestment of the bonds.(24) ibid This article disagrees with the Supreme Court’s reasoning on this point. Establishing a bondholder’s actual loss is a much more complex exercise than the court envisaged. Hence, the calculation of loss is subject to a more detailed examination in sub-section 5.4 below.

Furthermore, the court emphasised the importance of equal treatment of the bondholders.(25) ibid [36] In the eyes of the court, this could only be achieved by allowing the Nordic Trustee to sue in its own name.(26) ibid [37] If the bondholders’ claim were to be dealt with in parallel or successive proceedings, it would not only be irrational, but the risk of an unfair distribution of costs was immense.(27) ibid In theory, a class action(28) A class action is not available for interlocutory orders, which was the case in Rt. 2010 s. 402. would ensure an adequate process and a fair allocation of costs, but due to the shifting and anonymous nature of the class of bondholders, the court found that a class action was not, after all, a viable alternative.(29) Rt. 2014 s. 577 [38]

Despite the court’s finding that tortious claims were not barred by the no‑action clause in this case,(30) ibid [43] the court noted that the contractual framework – entitling the Nordic Trustee to take all necessary actions in order to recover any amount outstanding(31) See cl. 14.2 (c) of the standard bond terms (n 6) – supported the Nordic Trustee’s title to sue even for tortious claims against third parties.(32) Rt. 2014 s. 577 [41] With this interpretation of the bond terms, the bondholders are likely to be bound by a judgment obtained by the Nordic Trustee by virtue of section 19-15 of the Civil Procedure Act, although this was not a determining factor according to the Supreme Court.(33) ibid [42]. Refer to the explanation of section 19-15 in note 72.

The opponents also argued that the identity of the bondholders – the real parties in interest – had to be known in order to secure proper disclosure. As previously mentioned, the identity of the bondholders is not publically available and a court ruling against VPS would be necessary to obtain access to the record of bondholders.(34) cf. the Securities Trading Act 2007 section 8-1. Even a court order would not reveal the identity of the bondholders registered with a custodian, only the name of the custodian.(35) For instance Euroclear or Clearstream. The Supreme Court simply remarked that individuals or entities not party to the proceedings are under a general obligation to testify in court.(36) Rt. 2014 s. 577 [40] In any event, it was deemed unlikely that unknown bondholders would have information of substantial nature; such was presumably in the possession of the Nordic Trustee.(37) ibid

Finally, the court concluded that there were no compelling reasons against vesting the Nordic Trustee with a right of action for tortious claims against third parties.(38) ibid [44]