Two Recent Cases Test Legality Of Consent Payments And Exit Consents Under English Law

The ongoing global financial crisis has resulted in a number of debt restructuring transactions as a result of companies being unable to meet with their debt obligations. In distressed situations, issuers typically seek investor consent to amend existing terms and conditions, often to relax covenants, reschedule payments, limit events of default and remove restrictions on raising further capital. In two recent High Court cases, noteholder resolutions were challenged by minority investors whose rights were affected by the majority's binding decisions. For the first time, the English courts have attempted to establish the limits of acceptable practice in the context of consent solicitations through the judgments in Azevedo v Imcopa [2012] EWHC 1849 (Comm) and Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank Corporation Limited) [2012] EWHC 2090 (Ch).

Monetary Inducement—The Consent Payment

One strategy frequently employed by issuers to incentivise noteholders to give their consent to proposed changes is known as the "consent payment". A consent payment is a payment of cash or other consideration by the issuer to noteholders in exchange for noteholder consent to amend the existing terms and conditions of the notes. Consent payments have survived judicial scrutiny in the US, where it has been held that such payments are generally permissible. However, prior to the decision in Azevedo, no English court had directly considered the validity of consent payments under English law. The Court's decision reaffirmed the general understanding that consent payments would be valid if openly disclosed and offered to all noteholders on an equal basis prior to any noteholder meeting. The Facts in the Azevedo Case. In 2006, the Imcopa Group of companies issued US$100 million 10.375 per cent. guaranteed notes due 2009. The group subsequently implemented a restructuring plan in order for it to service its existing debt. This gave rise to three successive resolutions amending the terms and conditions of the notes and postponing certain interest payments. Consent payments were offered to all noteholders who voted in favour of the proposed resolutions, and the resolutions were subsequently passed. The Claims Made in the Azevedo Case. The claimants, two individual investors, subsequently sought declarations for repudiation and breach of contract, on two main grounds.

First, it was argued that the consent payments were in essence a bribe and the noteholder resolutions were therefore invalid under English law. Second, it was argued that as payments were made only to certain noteholders, the different treatment of consenting and nonconsenting noteholders violated the fundamental requirement for all noteholders as a class to be treated pari passu and without preference among themselves. The High Court Judgment in the Azevedo Case. The Court held that the consent payments were not fraudulent or illegal as they had the following characteristics: (i) they were openly disclosed to all noteholders before the noteholder meeting and vote took place; (ii) they were payable on an equal basis to all those noteholders voting in favour of the relevant consent solicitation; and (iii) each noteholder was entitled and free to vote in favour of or against the consent solicitation as it saw fit. Further, the consent payments constituted separate consideration paid by the solicitation agent to investors, in return for...