MarIus

7.3.1 Why the need to sue the bondholders in the name of the Nordic Trustee?

The scenarios outlined, in sub-section 7.1 above, are examples, some more practical than others, of situations that can give rise to a need to bring a legal action against the bondholders. If the need to sue the bondholders arises, there are in theory two options: (a) the suit is brought against individual bondholders or a group thereof, or (b) the suit is brought against the class of bondholders in the name of the Nordic Trustee. Due to the anonymous and shifting nature of the class of bondholders, a suit may only be brought against the main known bondholders if alternative (a) is pursued.

However, the main bondholders are not likely to be in the same jurisdiction. Consequently, multiple lawsuits in different jurisdictions may be anticipated if one cannot establish jurisdiction in Norway.(1) Bondholders resident in a state party to the Lugano Convention of 2007 may pursuant to art. 5 no. 6 be sued in the state where the trustee resides. Section 4-3 of the Civil Procedure Act further provides that: “Disputes in international matters may only be brought before the Norwegian courts if the facts of the case have a sufficiently strong connection to Norway.” (University of Oslo’s unofficial translation (n 52)) A claimant suing the bondholders in one or several foreign jurisdictions faces great litigation risk and costs. Should the identity of the main bondholders be unknown or their jurisdiction too exotic to engage in, the claimant is effectively left without any remedy. This is arguably a risk that the issuer must be taken to have assumed, but the same cannot be said about other creditors or the bankruptcy estate of the issuer. Nonetheless, if the legal action is to be aimed at the class of bondholders, the claimant will have to sue the bondholders in the name of the Nordic Trustee.

7.3.2 Is it possible to sue the bondholders in the name of the Nordic Trustee?

The practical need to sue the bondholders in the name of the Nordic Trustee is quite clear if the need to sue the bondholders should arise in the first place. This question is however more complex than the one in sub-section 7.2 above. Accordingly, this article will seek to identify the relevant factors the courts are likely to take into account if faced with this issue.

Absence of legal authority. As mentioned, there is no answer to this question in case law, and one will yet again have to establish an exception from the main rule that the real party in interest cannot be sued in the name of a representative.

The starting point is, as always, section 1-3 of the Civil Procedure Act, which requires a genuine need on the part of the claimant in order for the bondholders to be sued in the name of the Nordic Trustee. This article argues that a party who is wanting to sue the class of bondholders, has a genuine need to do so in the name of the Nordic Trustee. Due to the anonymous and shifting nature of the class of bondholders, there is no other way of securing that the action is filed against all bondholders. If such an action were to be allowed by the courts, it would be more efficient in the sense that it is likely to be legally binding upon the class of bondholders under Norwegian law,(2) By virtue of section 19-15 of the Civil Procedure Act, a judgment may become binding upon third parties not party to the court proceedings provided that the third party “would be bound by a corresponding agreement on the subject matter of the action due to their relationship with the party.” (University of Oslo’s unofficial translation (n 52)) although one may face subsequent challenges with enforcement abroad. This genuine and practical need itself may however be insufficient in this scenario.

No contractual basis. Despite the fact that parties cannot in principle make contractual arrangements concerning title to sue or be sued, one of the main arguments in favour of the Nordic Trustee’s title to sue was in fact the contractual framework and the no-action clause. This framework was even relied upon to some extent by the Supreme Court in respect of tortious claims against parties not privy to the bond terms.(3) Rt. 2014 s. 577 [41], [43] The main purposes of the no-action clause are: (i) to protect the issuer from multiple (and frivolous) lawsuits, and (ii) to cater for a rational mechanism through which the bondholders can take legal action with an equal share of the profit and costs.

Contrary to the clear language of the no-action clause, whereby the bondholders waive any right of action, it is questionable whether the bondholders have contractually agreed to be sued in the name of the Nordic Trustee. Without an express or implied term to that effect, there is no contractual basis for suing the bondholders in the name of the Nordic Trustee. One would also need to distinguish between suits by the issuer and third parties. According to cl. 16 (1)(a) of the bond terms, the bondholders have not expressly agreed to be sued in the name of the Nordic Trustee by either the issuer or a third party:

The Bond Trustee has power and authority to act on behalf of, and/or represent, the Bondholders in all matters, including but not limited to taking any legal or other action, including enforcement of these Bond Terms, and the commencement of bankruptcy or other insolvency proceedings against the Issuer, or others.(4) Nordic Trustee’s standard bond terms (n 6)

Conferment of powers to sue or be sued would in general require clear wording, which the no-action clause, together with cl. 16(1)(a), do provide when it comes to barring suits from the bondholders and vesting title to sue with the Nordic Trustee. However, the wording “power and authority to act on behalf of, and/or represent, the Bondholders in all matters” (emphasis added) may be interpreted to also include a suit against the bondholders in the name of the Nordic Trustee. In particular, when the Nordic Trustee has title to sue on behalf of the bondholders, a right to sue the bondholders in the name of the trustee would ensure a fully symmetric procedural rule.

One the other hand, if that was the intention, conferral of such a significant right should have been expressly stated in the bond terms. The ability to be sued in the name of the Nordic Trustee is not going to sit well with the bondholders. The bondholders are investors who will accept losing their investment but not incurring liability. If this had been an identified risk, the bond terms would arguably have included a general disclaimer of liability, or at least a cap on liability, in favour of the bondholders. In the UK and US, the bondholders are not party to the bond terms, and thus there is no contractual basis for suing the bondholders in the name of the bond trustee. For that reason, such a right was arguably not contemplated when the Nordic Trustee’s standard bond terms were drafted.

It is to be noted in this respect that there are differences with regards to the legal status of a bond trustee under Norwegian law, compared to that of the UK and the US. In Norway, the bond trustee is merely a representative of the bondholders without a defined legal status, while in the UK and US, the bond trustee is a definite legal entity, which allows the bond trustee to sue and be sued in its own name.(5) A trustee may be defined as “[t]he person appointed, or required by law, to execute a trust; one in whom an estate, interest, or power is vested, under an express or implied agreement to administer or exercise it for the benefit or to the use of another”, see Black's Law Dictionary, <thelawdictionary.org/trustee/> accessed 27 May 2017. However, there is no legal authority or contractual arrangement in those jurisdictions for suing the bondholders in the name of the bond trustee.

Considering the vague wording contained in the bond terms and the UK and US stance, the Norwegian contractual framework is not a strong argument in favour of a right to sue the bondholders in the name of the Nordic Trustee. Consequently, the bondholders would be likely to challenge such a suit on the basis that they can only be sued in their own names.

No mirroring of the reasons supporting title to sue.One may seek to find arguments in support of the right to sue the bondholders in the name of the Nordic Trustee by mirroring the reasons supporting the Nordic Trustee’s title to sue on behalf of the bondholders. However, it is difficult to mirror the Supreme Court’s reasoning in the Thule Drilling cases, since, as summarised in sub-section 4.5 above, it was unilaterally focused on the title to sue. Thus, it appears that the Thule Drilling cases have established an asymmetric procedural rule, whereby the Nordic Trustee has title to sue on behalf of the bondholders, but the issuer or another party cannot sue the bondholders in the name of the Nordic Trustee.

It is therefore prudent to question whether the Supreme Court was wrong in its unilateral approach. At first, it seems odd to have vested the Nordic Trustee with title to sue on behalf of the bondholders without having considered the opposite scenario. The Supreme Court accepted that the market has adopted a foreign legal concept – the bond trustee – and vested it with title to sue, without having properly considered the implications of such a vesting. As mentioned, the bond trustee is not a definite legal entity in Norway, like it is in the US and the UK. However, as contended in subsection 5.5 above, the Supreme Court’s reasoning was pragmatic and necessary, if one were to preserve the Norwegian bond market in its present form. Nonetheless, there is not much support in favour of a right to sue the bondholders in the name of the Nordic Trustee, to be found in the Supreme Court’s reasoning on the title to sue.

Symmetry. An argument resting on ensuring symmetry, when it comes to the possibility of suing the bondholders in the name of the Nordic Trustee, may however have some bearing on its own. If the genuine need for the bondholders to unite and sue the issuer via the Nordic Trustee is considered strong enough to allow such an action, then why would the genuine need to sue the bondholders in the name of the Nordic Trustee not be regarded as equally pressing? First, it is to be stressed that the need to sue the issuer or an obligor is significantly more likely to arise, than the need to sue the bondholders. Moreover, some of the asymmetry is averted by the fact that one is likely to be allowed to sue the Nordic Trustee in its own name in respect of actions performed in its capacity as bond trustee (or security holder) as outlined above in sub-section 7.2.

Noting that the Supreme Court has reiterated that an exception from the main rule requires explicit legal authority in both Rt. 1989 s. 338 (Eviction) and Rt. 2006 s. 238 (American Receiver), it is unlikely that an argument resting on symmetry will be sufficient in the absence of a contractual framework catering for such an approach; especially when this is not the case in the UK or the US.

Troubles at the enforcement stage. Assuming that the bondholders could in fact be sued in the name of the Nordic Trustee, this does not necessarily mean that the claimant will be successful if a judgement is obtained in its favour. The Nordic Trustee has never been in possession of the funds stemming from the bond issue, nor will it be liable towards the claimant, save for case costs and damages for wrongful arrest. If a judgment is obtained against the bondholders in the name of the Nordic Trustee, it will in turn have to be enforced against the bondholders, unless payment is made voluntarily. Enforcement against bondholders in foreign jurisdictions is likely to prove difficult and may weaken the purpose of suing the bondholders in the name of the Nordic Trustee.

The jurisdiction of the individual bondholder may not accept a judgment against the Nordic Trustee as binding upon the individual bondholder. Given that it is not possible to sue the bondholders in the name of the bond trustee in the UK or the US – the origins of the bond market – enforcement of such a judgment abroad is likely to prove challenging. Obviously, the bondholder will argue that it was not properly notified of the legal action and/or that it was not a party to the legal proceedings.(6) Notification of a suit against the bondholders in the name of the Nordic Trustee could be communicated through VPS or published on www.stamdata.no, where the Nordic Trustee publishes important information.

Moreover, the bonds are traded on the open market,(7) E.g. the stock exchange, OTC or other regulated market place. rendering the class of bondholders a shifting group. Divestment of and investment in bonds may affect the bondholder’s individual responsibility. If the issuer sues the class of bondholders for breach of the bond terms, a question arises as to whether the issuer can hold bondholders liable, where they become holders of bonds after the time of breach. Another question is whether such a responsibility is joint and severable.

If an action in the name of the Nordic Trustee were to be allowed, it is evident that one may face prolonged discussions or even further court cases regarding the nature of liability and which bondholders are to be held liable. Nonetheless, these challenges are likely to further convince the Norwegian courts that the bondholders cannot be sued in the name of the Nordic Trustee.

7.3.3 The conclusion and possible consequences thereof

The above sub-sections show that there is no contractual framework allowing the bondholders to be sued in the name of the Nordic Trustee. Nor is there any legal authority to that effect, and the practical and legal obstacles are likely to prevent any attempt at suing the bondholders in the name of the Nordic Trustee. As a result, the main rule – that a representative cannot be sued on behalf of the real party in interest – applies. The practical need which supports a right to sue the bondholders in the name of the Nordic Trustee is arguably insufficient and the courts are likely to see no other option than to dismiss such a legal action. Any party wishing to sue the bondholders is left with the option of suing the main known bondholders in accessible jurisdictions, which in itself is not a simple exercise.

One of the main differences between legal actions against the bondholders themselves and an action in the name of the Nordic Trustee, apart from the increase of litigation costs and risk, is the difficulties of establishing the identity of the main bondholders that need to be overcome before the legal action is initiated, rather than at the stage of enforcement. Another substantial difference is that the claimant may need to file suits in several jurisdictions in parallel. However, if an action against the individual bondholder is successful, then the chances of a successful enforcement increase significantly.

The conclusion that one cannot sue the bondholders in the name of the Nordic Trustee does, however, have some undesired effects. Bearing in mind that the Nordic Trustee does have a right to sue in its own name on the bondholders’ behalf, this conclusion entails an element of imbalance to the disfavour of a claimant seeking to sue the bondholders. An action concerning liability for excess damages for wrongful arrest, as discussed in sub-section 5.2 above, cannot be filed against the individual bondholders in the name of the Nordic Trustee. Such an action will have to be brought against the individual bondholders themselves, despite the fact that the loss on the part of the issuer, was in fact caused by the bondholders through the action filed by the Nordic Trustee.

Furthermore, the challenges arising from the anonymous, shifting class of bondholders and enforcement in foreign jurisdictions are also likely to prevent a bankruptcy estate from pursuing claims against the bondholders. As a result, the class of bondholders may de facto be safe from avoidance actions by the issuer’s bankruptcy estate.(8) This would not be the case with traditional bank financing, whereby the participating banks in the loan syndicates are more easily identified.

Nonetheless, there is no legal authority supporting another exception to the main rule that a representative cannot be sued in its own name on behalf of the real party in interest. In any event, the legal and practical implications pertaining to such an exception are likely to be too great to overcome.