Bonds and Trustees, the Protection of the Trustee - Essay Example

Bonds and Trustees Re (i) Most bondholders employ a trustee to oversee the transactions involving their bondholding. A trusteeship agreement embodies in the Trust Deed the conditions and obligations involved thereon. Like any other contracts, the provisions of a trust deed govern the relationship between parties. The legal structure of a trust agreement so provide that the rights of the bondholders are vested in the trustee through the trust agreement which confers upon the trustee rights to “represent the holder in dealing with the issuer and to enforce action on their collective behalf”. Thus, where the deed so provides that the trustee shall have the sole power to transact business involving the bonds, this shall be enforceable. In other words, by virtue of the trust agreement, subject to the provisions of the deed, the trustee shall represent the bondholder and the bondholder shall not be allowed to represent him/herself unless there is a breach of the agreement, which will render it unenforceable. Thus, the provision in the conditions of trust, which states, “no bondholder may take enforcement action against the issuer following a default unless the trustee, having become obliged to act thereon, has failed to do so” is valid. As held in case of Highberry Ltd v Colt Telecom Group Plc (No.2) (2003) a no action clause is valid. Under Chapter 29 Part 1 of the Trustee Act 2000, the trustee has the duty to “exercise such care and skill as is reasonable in the circumstances, having regard in particular- (a) to any special knowledge or experience that he has or holds himself out as having, and (b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession .” The degree of care in transacting business for and in behalf of the bondholders binds the trustee to deliver what is in the best interest of the bondholder. The same rules apply as in the case of negligence . Therefore, where the trustee is faced with a situation where it become obliged to act, the failure thereof to act accordingly would constitute a statutory breach as well as of the agreement. In case of The Law Debenture Trust Corporation Plc v. Acciona S.A., Concord Trust (2004) the term “beneficial interest” was discussed by court and in relation to the right of the bondholder to be consulted by the trustee on actions involving the bonds. Although part of the decision states that, “The fundamental issue…is that they were entitled to be heard and block (if they thought appropriate) any transaction whether it was beneficial or not”, this does not give the bondholder the right to interfere at any turn on the execution of the duties and responsibilities of the trustee as long as it is being performed within the purview of the authority given to it by the bondholder. Conversely, where the trustee performed an act upon which it became legally bound to act thereon, it could not be sued for breach or for negligence. Re (ii) ) As the alter ego of the bondholders, the trustee has the duty to protect the interest of the holders in all its dealings. In the exercise of its duties and functions, the trustee needs to look into matters, which may be considered as “relevant event” which may cause prejudice to the interest of the holders. Peter Smith J. in the High Court considered the concept of “material prejudice” in the case of Law Debenture Trust Corporation PLC v Acciona SA where an event of default allegedly had occurred. Where the trustee is called to decide whether or not an event is “materially prejudicial”, the elements of continuing and existing action as well as proximity should be considered. In other words, the trustee must see to it that the event is currently happening and that there is imminent threat to the interest of the bondholders. Such prejudice must be real and not just mere perceived danger. Material prejudice did not necessarily mean the same thing as material breach, as such prejudice might exist even without such a breach and even the existence of a material breach might not, on the facts, mean that the interests of the bondholders had been materially prejudiced. The primary questions that should be asked by the trustee are that will this current event diminish the interest of value of the bonds at hand? Will the present event have negative effects on the interest of bondholders? In other words, before an action should be taken, all relevant information must be gathered and investigated by the trustee. In any event where there is a clear showing that the answer to these questions is yes and the results of the investigation all points out to the possibility of detriment to the bondholders, then by virtue of the trust agreement which confers power on the trustee to act in behalf of the holders to promote its interest, then, the trustee must act accordingly. Re (iii) The ultimate purpose for having a trustee is convenience both on the side of the issuer and the bondholders. Where there is a trustee, the issuer will only deal with the trustee and not with the individual bondholder. On the other hand, the bondholders will be assured that there is somebody who is taking care of their bonds transactions and that they can depend on the trustee to exercise the it functions as provided in the deed. What then is the protection of the trustee? A trust deed may contain provisions, which will protect the right for the trustee. As previously discussed, a trust agreement like the provisions embodied in the deed determine any other contract. The authority of the trustee emanates from the provisions of the deeds subject to statutory limitations and laws governing breaches of contracts. However, in the event of doubts as to the meaning and interpretation of the provisions on the trust deed, it shall be construed strictly against the trustee following the provisions of Section 2(2) Unfair Contract Terms Act 1977 which states requires the “satisfaction of the requirements of reasonableness.” It is important under this provision to make sure that the bondholders understood the magnitude of the powers they confer upon the trustee to handle their affairs. A good example of provisions that confer protection on the trustee is the “no action” clause. A “no action” clause could embody therein several provisions which will allow the trustee to act on its own volition as long as it will not have prejudicial consequences on the interest of the bondholders and also subject to the inherent limitations of good faith and equitable transaction, as provided by law. It must always be noted however that in the case of Derry v Peek (1889) , the Court ruled that a trustee may only be guilty of fraud if there is intent to defraud and would only be liable for damages where it can be showed that “such loss or damage shall be caused by his own actual fraud.” Under the “no action” clause as enunciated in the case of Highberry ltd v Colt Telecom Group Plc (No.2), the trustee has the right to determine what action to take in case of default or imminent default. The trustee is called on to ascertain and rely on its judgment as to where or not to take actions. Where a trustee is called upon to perform an act to prevent losses on the part of the bondholders, the trustee has the right to discern what is the best action to be employed. The rules therefore in exercising its duties of representation is that the trustee must exercise proper discretion, its must act rationally as oppose to rush and uncalculated actions, it must be well informed before it acts and should act only on relevant matters and not on the mundane things. Actions of the trustee shall be subject to redress under the provisions of the Trustee Act 2000, Section 192(2) of Companies Act 1985 the and the Misrepresentation Act 1967. Another form of protection to the trustee comes with it engagement with other entities. As decided in the case of Kelly v Cooper (1993) and in case of Prince Jefri Bolkiah Appellant v. KPMG (A Firm) Respondents [1999] , the Court ruled that a trustee may engage in business with other clients including those competing companies as long as it maintains confidentiality of information. Confidentiality may be maintained by keeping separate segments of the trustee company to handle different companies their transaction, taking great care that no information will be passed between the segments. As ruled by the Court in the Bolkiah case, erecting a Chinese Wall which will effective separate the different offices and prevent communications and interactions which may unwittingly disclose confidential information should be observed to maintain confidentiality of information. Chinese walls as normally involve a combination of the following arrangements: (i) the physical separation of the various departments in order to insulate them from each other - this often extends to such matters of detail as dining arrangements; (ii) an educational programme, normally recurring, to emphasise the importance of not improperly or inadvertently divulging confidential information; (iii) strict and carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed and the maintaining of proper records where this occurs; (iv) monitoring by compliance officers of the effectiveness of the wall; (v) disciplinary sanctions where there has been a breach of the wall.” The obligation of the trustee towards the client normally ends where the trustee deed expires. However, the obligation to keep confidential the information generated by the trustee regarding the business of the client during the subsistence of the trust agreement shall remain confidential and should not be revealed by the trustee even after the expiration or termination of the trust agreement . References Books and laws 1. August R, (2004) “International Business Law: Text Cases and Reading” Fourth Edition, Pearson 2. Arnold G, (2002) Corporate Financial Management, Second Edition, Harlow, FT Prentice Hall 3. Cranston R, (2002) “Principles of Banking Law, 3rd Edition, Oxford University Press 4. Ferren E, (1999) “Company Law and Corporate Finance”, Oxford University Press 5. Ross S, (1999) “Corporate Finance”, Fifth Edition, McGraw-Hill 6. Watson D, (1998) “Corporate Finance: Principles and Practice”, Pitman 7. Trustee Act 200 online available at http://www.opsi.gov.uk/acts/acts2000/00029--h.htm#sch1 8. Misrepresentation Act 1967 9. Companies Act 1985 10. Consultation Paper on Fiduciary Duties and Regulatory Rules the Law Commission (1992) (Law. Com. No. 124) 11. Unfair Contract Terms Act 1977 Cases 1. Highberry Ltd. V Colt Telecom Group Plc EWHC 2815 2. Henderson v Merrett Syndicates (1995) 2 AC 145 at 205 3. Concord Trust v Law Debenture Trust Corp Plc (2005) 1 All E.R. (Comm) 699 4. Plc v. Acciona S.A., Concord Trust (2004) EWHC 270 (Ch) 5. Derry v Peek (1889) L.R. 14 App. Cas. 337 6. Speight v Gaunt (1893) 9 App Cas 1 at 19 7. Barlett v Barclays Bank Trust Co. (1980) Ch 515 at 534 8. Kelly v Cooper (1993) A.C. 205 9. Jefri Bolkiah Appellant v. KPMG (A Firm) Respondents[1999] 2 W.L.R. 215 10. Young v Robson Rhodes (1999) 3 All ER 524 Read More