Are 'payments' offered to loan note holders to encourage their consent to documentation changes allowed?
In an interesting recent case, Sergio Azevedo v Imcopa Importacao, the validity of 'consent payments' offered to loan note holders to secure their votes in favour of certain amendments to the terms of the notes was considered, and the result may be surprising to some.
Imcopa SA had issued loan notes subject to the terms of a trust deed, which permitted the notes to be varied, provided 75% of the noteholders consented to the amendments. All amounts owing under the loan notes were to be paid on a pari passu - equal footing - basis.
The claimants had invested $1.2m in the notes.
There was a proposed restructuring which required a series of amendments to the terms of the loan notes. The issuer offered all the noteholders a 'consent payment', where they agreed to vote in favour of the proposed amendments. The claimants consented to two of the three amendments, and received the related payments. All the amendments were, however, approved by a majority of the noteholders, and the proposed restructure was approved by the Brazilian courts.
The claimants then claimed that the consent payments were unlawful as they breached the pari passu principle and/or amounted to a bribe.
The claimants appeal was dismissed by Court of Appeal. The offer had been made to all noteholders on the terms that if they voted in favour of the resolution and it was duly passed, then the stated amount would be paid in proportion to the notes held by them.
Therefore, if a noteholder accepted the offer and the resolution was passed, under English contract law he was entitled to payment under that offer.
But did this breach the trust deed or English company law? The Court held that it did not on, the following bases:
- The pari passu principle did not apply to the payment of the consent payments as they were paid directly, and the relevant funds were never in the hands of the trustee who was the subject of the pari passu obligation.
- There was no bribery involved as the consent payments were openly offered to all noteholders and were payable on an equal basis. In addition, there was no discrimination between those noteholders who voted in favour and those who did not as the offer was open to all noteholders and each could elect which way to vote. As such, no noteholder was excluded from receiving the consent payment, except through their own choice.
As companies come under increasing financial constraints, particularly those saddled with considerable debt, attempts at restructuring debt due under loan notes or similar is common, which is likely to require the consent of noteholders.
Consent solicitations and accompanying consent payments are often sought and this case confirms that such payments are, in principle, valid under English law provided that they are made openly and equally to all noteholders, they are payable on an equal basis and voting on them is unrestricted.
In addition, consent payments paid by the issuer directly rather than through the trustee will help avoid contractual challenge under any pari passu payment obligations in trust documentation.
Case: Sergio Azevedo & Anor v Imcopa Importacao, Exportacao E Industria de Oleas Ltda & Ors  EWCA Civ 364