5.4 Calculation of Claims and Set-Off
In addition to the objections above, the defendants, in Rt. 2014 s. 577 (Damages in tort), made several arguments in respect of the calculation of each bondholder’s claim, but these were rather quickly dismissed by the Supreme Court. This article questions whether the Supreme Court was right when dismissing these without thorough consideration. Among the questions that need to be answered, when calculating the total loss of the class of bondholders, are:
How to calculate each bondholder’s claim?
How to treat bondholders that have suffered a loss but have divested their bonds?
How to factor in new bondholders that have not suffered any loss?
How to differentiate between the bondholders who have lost and gained on the bonds?
How to factor in that the largely anonymous class of bondholders is constantly changing through trades on the secondary market?
How to adjust the compensation payable by the issuer when some or a group of bondholders have contributed negligently to the loss?(1) The class of bondholders or group thereof could for instance through bondholders’ meetings block certain required actions of a distressed issuer or otherwise force the issuer into settlements that fail or only benefit a few bondholders or creditors.
How to adjust for set-off (if any) against some bondholders if the claim is founded in tort?
At what point in time does one take a snapshot of the current bondholders, in order to calculate the claim?
How to take into account bondholders who divest the bonds after the snapshot is taken?
It would certainly break the limits of this article, if these questions were to be adequately examined. Thus, only a few principal remarks shall be made in this respect.
The Supreme Court briefly noted that the loss pertaining to the bonds would be the same regardless of the above questions, but made certain reservations in respect of (ii) and (vi).(2) Rt. 2014 s. 577 [35] In theory, as the court noted, the loss could be the same for all bondholders; however, it is an established rule of law that the actual loss needs to be calculated individually. Consequently, the total loss of the class of bondholders in Rt. 2014 s. 577 (Damages in tort) would not amount to the estimated return, had the security not been violated, less the actual return received.(3) ibid
In the high yield market, there are, as previously mentioned, professional investors specialising in purchasing bonds of distressed issuers and who threaten the issuers with bankruptcy to make a tidy profit when the other creditors cave in. A new bondholder purchasing bonds when the price is already low and who might not have suffered any loss, must not be entitled to compensation although other bondholders are entitled to such.
By allowing the Nordic Trustee to sue for damages, either in contract or in tort, the court overlooked the fact that these calculations will in practice prove rather difficult. It is nonetheless for the Nordic Trustee to prove the loss of each bondholder and the total amount claimed. Consequently, the Nordic Trustee will have to be put to strict proof as to the quantum of damages. Still, the issuer may have difficulties with challenging the calculations of the Nordic Trustee, when not knowing the identities of the bondholders.
Following the first Supreme Court ruling, the Court of Appeal dealt with the liability of the other guarantors of Thule Drilling ASA and their objections as to contributory negligence or bad faith on the part of the bondholders.(4) Judgment of 19 May 2015 by Borgarting Court of Appeal (LB-2015-137094) The Court of Appeal noted that that each bondholder’s claim and potential liability had to be assessed individually.(5) ibid A bondholder could not be identified with other bondholders and/or the class of bondholders, or vice versa.(6) ibid. A possible exception could be identification through decisions by the bondholder’s meetings pursuant to cl. 15 of the standard bond terms (n 6). As a result, the issuer, its guarantors or other parties with a liability towards the bondholders, will have to raise and prove their objections against each relevant bondholder or group thereof. This may in turn prove difficult, and shows the complexity of calculating or challenging the claim. In the present case, however, the Court of Appeal found, after an overall assessment, that the objections were unsuccessful.(7) LB-2015-137094 (n 137)