Payments For Creditors To Vote For Proposals Held Not To Be Bribes

Originally published June 6, 2012

Keywords: creditors debts, restructuring proposals, illegal bribe, pari passu principle,

A facilitation payment to encourage creditors to vote through the restructuring proposals of creditors' debts has been held by the High Court not to be an illegal bribe. The court had regard to the fact that the offer of payment was made openly to all relevant creditors, none of whom were prevented from voting on the proposal. As such, where a creditor consented and received the facilitation payment, this was not contrary to the pari passu principle.

The facts

The case heard last week by the court involved a claim against Brazilian, Uruguayan and Cayman companies (the "Defendants") by claimant loan note holders (the "Claimant"). The Cayman Defendant was the issuer of bonds in the form of loan notes (having been substituted for the Uruguayan Defendant, which had originally issued the bonds). A restructuring plan was drafted, which contained three proposals. These proposals were sent to all loan note holders as consent solicitations: if consent to the proposals was provided, the loan note holder would receive a payment.

The Claimant consented to, and received the payment relating to, the first two proposals, but refused to consent to the third. However, all three proposals were voted through by the requisite three-quarters majority of the loan note holders and the Brazilian courts approved the restructuring.

The Claimant claimed repayment under the loan notes plus damages for repudiatory breach of the loan note purchase contract on the ground that the payments offered to loan note holders constituted an illegal bribe and were contrary to the pari passu principle. The Defendants applied to strike out the claimant's claim as the trust deed governing the bonds contained a clause specifically precluding direct action against the issuer. In reply, the Claimant asserted that both the Uruguayan and Cayman Defendants were liable and that the Defendants could not rely on the clause precluding direct action against the issuer because it had repudiated the contract by its breach.

The decision

The court refused the Claimant's claim and granted the Defendant's cross-application. The court held that payments offered as consent solicitations were not illegal bribes when offered openly to all creditors and none was incapacitated from voting1. The court also considered a decision of the court in Delaware2 (in the absence of English...