8 The Need for Legal Codification Revisited
This article has explored the Nordic Trustee’s right to sue and be sued in its own name, and especially the challenges pertaining to a legal action against the class of bondholders. In the wake of the rulings of the lower courts in the first Thule Drilling case,(1) TOBYF-2009-44929 (n 28) and LB-2009-96441 (n 29) the government prepared – on the initiative of the Nordic Trustee – a bill to cater for the Nordic Trustee’s right to sue and be sued in its own name. Due to the changes in the Nordic Trustee’s functions following the rise of the high-yield market in Norway, a legal codification of its right to sue and be sued should perhaps be revisited.
Although the Supreme Court was arguably right in allowing the legal actions by the Nordic Trustee in its own name in the Thule Drilling cases, there are still certain challenges arising from the legal status of the Nordic Trustee. The Norwegian bond market has adopted, and the Thule Drilling cases accepted, certain features of the Anglo-Saxon bond markets and bond trustees, while other aspects are still uncertain due to the fact that the Nordic Trustee is a contractual establishment, rather than a legal one.
Section 5 pinpoints certain shortcomings of the Supreme Courts’ reasoning concerning the Nordic Trustee’s title to sue, which could benefit from legal review and possibly codification. Furthermore, a bill could assist in determining whether the legal action against the Nordic Trustee falls within the first or second category as set out above in sub-section 7.1. There are probably some scenarios where one would need to determine whether the legal action is correctly aimed at the Nordic Trustee in its capacity as such or if it should have been filed against the individual bondholders or a group thereof.(2) For example where the Nordic Trustee has acted upon an instruction by the bondholders’ meeting. Additionally, a codification could also seek to avert some of the imbalance pertaining to the lack of a right to sue the bondholders in the name of the Nordic Trustee.
A natural starting point for this discussion is the draft bill prepared in connection with the first Thule Drilling case. It aimed to regulate the Nordic Trustee’s right to sue and be sued in its own name. The draft provision was to be included in a new chapter, being 5a, to the Securities Trading Act:
§ 5-1a Bond trustees’ title to sue etc.(3) Author’s unofficial translation of the draft provision contained in the letter from the Financial Supervisory Authority of Norway to the Ministry of Finance dated 24 November 2009 available at <www.regjeringen.no/contentassets/341240bc72f946ba80a76d169e873c41/brev_kredittilsynet_24.11.09.pdf> accessed 31 March 2017
An entity, which in the agreement with the borrower is appointed as a representative of the lenders (bond trustee etc), has title to sue and to be sued with binding effect upon the lenders being party to the bond terms in cases concerning the bond terms and ancillary agreements provided that:
the lenders are prohibited from pursuing any claims on their own pursuant to the bond terms, and
the bond terms concerns the issuance of negotiable securities within the meaning of section 2-2 second paragraph no. 2 of the this Act and that are registered in a securities register subject to supervision by an EEA-state.
The above provision intended to accommodate legal actions by and against the Nordic Trustee, provided that: (i) the action concerns a dispute arising from the bond terms or ancillary agreements, (ii) the bond terms contain a no-action clause, and (iii) the bonds are registered in a securities register under supervision by an EEA-state. The draft provision does not distinguish between suits against the Nordic Trustee in respect of its actions performed in its capacity as bond trustee and suits against the bondholders in the name of the Nordic Trustee. However, the bill did seem only to contemplate the former, but it is to be noted that the bill did not pay much attention to the Nordic Trustee’s right to be sued in its own name.(4) Refer to the letter from the Financial Supervisory Authority of Norway to the Ministry of Finance dated 24 November 2009 (n 182) and the letter from the Nordic Trustee to Ministry of Finance dated 27 October 2009 (n12)
The bill, however, was long forgotten when the Supreme Court ruled that the Nordic Trustee did have a right of action in Rt. 2010 s. 402 (Attachment Order). Nonetheless, the Nordic Trustee had to argue two additional cases in front of the Supreme Court before it was allowed a right to file for bankruptcy and to sue for damages in tort against parties not privy to the bond terms. Thus, there may be further challenges to the Nordic Trustee’s title to sue or enforce in the future.
In an attempt to avert the imbalance pertaining to the fact that the bondholders cannot be sued in the name of the Nordic Trustee, the bill could for instance provide that the class of bondholders is jointly and severally liable for case costs and damages for wrongful arrest in excess of the amount settled by the Nordic Trustee. Such a potential liability would however not sit well with the investors.(5) Pension funds, for instance, are large investors in bonds, and this type of risk is likely to be unacceptable. In order to still make the bond issue acceptable to the market, one would potentially have to cap such a liability at the level of each bondholder’s investment. In theory, one could also allow a cross action against the bondholders in the name of the Nordic Trustee in direct connection to an action filed by the Nordic Trustee. The latter is likely to be deemed unacceptable by the market, although it will only be relevant in a very few cases.(6) Like for instance in LB-2015-137094 (n 137). It is certainly a balancing act to secure the attractiveness of the Norwegian bond market and at the same time avert some of the imbalance in respect of the inability to sue the bondholders in the name of the Nordic Trustee.
A legal codification of the Nordic Trustee’s right to sue and be sued in its own name should perhaps be subject to more scrutiny than the ad-hoc bill. Among the issues that may benefit from regulation are: (i) specification of categories of contractual and tortious claims that the Nordic Trustee can sue and be sued in respect of, (ii) a judgment’s binding effect upon the real parties in interest (i.e. the bondholders), (iii) liability for case costs and damages for wrongful arrest or similar, (iv) set-off (when relevant), (v) the effect of secondary trading on an ongoing lawsuit by the Nordic Trustee on behalf the bondholders, including extinction of rights and claims, and (vi) the question of which entities may act as bond trustees, and possibly some core rights and obligations of bond trustees.
In order to cater for items (i) - (vi) above, a more extensive bill will need to be prepared. However, the draft bill does cover the most crucial elements, which are the Nordic Trustee’s right to sue on behalf of the bondholders and to be sued in its own name (arguably only in respect of acts performed in its capacity as bond trustee), together with the binding effect of a judgment upon the real parties in interest. When the draft bill was published, it was stressed that it was not the time to consider regulation of which entities that can act as bond trustees, as it was feared that this would significantly delay the process. Now, however, it may be worthwhile to at least look into this issue.(7) Such regulations are for instance in place in the US, see the Trust Indenture Act of 1939 (TIA) 15 U.S.C. §§ 77jjj ‘Eligibility and disqualification of trustee’.
Due to EEA-regulations, there are some regulations pertaining to bond trustees in Norway; e.g. the Financial Collateral Act. The regulations are, however, fragmented and inconsistent; especially when bearing in mind that the bond trustee is only a contractual establishment in Norway. Thus, a legal codification and to some extent a reform may prove useful to clarify the legal status of the Nordic Trustee, whose existence is crucial to the Norwegian high yield bond market.