Despite valid service on the issuer, the English court refused to grant declarations sought by a corporate trustee as to amounts outstanding under unsecured notes issued by a now-insolvent issuer. The declarations would be inappropriate as the issuer did not participate in the court process, and the impact of the declarations on a foreign insolvency process was uncertain – they could potentially interfere in that process. On an important procedural point, the court concluded that service on a process agent appointed irrevocably in a finance document was valid notwithstanding unilateral action by the issuer to terminate that appointment: Bank of New York Mellon v Essar Steel India Ltd [2018] EWHC 3177 (Ch)

In December 2003, Essar Steel India Limited, an Indian company (the Issuer) issued USD31,580,000 in 0.25% unsecured 15 year notes (the Notes), constituted under the terms of a trust deed (the Trust Deed) appointing The Bank of New York Mellon as trustee (Trustee). The Notes were governed by English law, the English courts were vested with non-exclusive jurisdiction, and the Issuer irrevocably both submitted to English jurisdiction and appointed an English process agent for the purpose of accepting service.

In August 2017, insolvency proceedings were initiated against the Issuer in India. The Trustee submitted proofs of claim in India in relation to the amounts outstanding under the Notes. However, there was some dispute in the Indian proceedings as to the Trustee's standing to file such claims.

Separately, the Trustee commenced a claim in England, seeking declarations against the Issuer as to the amounts due and payable under the Notes. The English claim was a "Part 8" claim, an alternative and more efficient procedure available in the English court where the dispute involves questions of law and no substantial dispute of fact. The Issuer took no steps in the English proceedings, and was not represented. Before reaching final judgment at the trial in the absence of the Issuer, the judge considered three questions:

  1. Did the Trustee have standing to bring the claim for declaratory relief?
  2. Had the Issuer been properly served and brought before the court even though the Issuer had revoked the authority of the process agent?
  3. Was it appropriate to make the declarations sought by the Trustee?

Trustee had clear standing to bring a claim

In the usual fashion, although the noteholders were the beneficial owners of the Notes, their interests were held on trust by the Trustee under the terms of the Trust Deed. This had the legal effect that the beneficiary under the trust (ie the noteholders) could not sue in relation to the trust property. As such, any suit in respect of the trust property should be brought by a trustee, absent a wrongful failure to act on the part of the trustee, which would entitle a beneficiary under the Vandepitte procedure to take over the trustee's claim.

The court recognised that this prima facie legal position had been codified contractually in the Trust Deed by virtue of the 'no-action' clause. The clause (a standard version of which will appear in most capital markets trust deeds) provided that the Trustee shall not take steps to enforce performance of the Notes unless it was so directed by an Extraordinary Resolution of noteholders, and the Trustee was not obliged to act unless indemnified to its satisfaction. Only if the Trustee failed to act in those circumstances would a noteholder become contractually entitled to institute proceedings directly against the Issuer.

As such, with the benefit of an Extraordinary Resolution sanctioning the claim against the Issuer, the Trustee clearly had standing to bring the claim, with Mr Justice Marcus Smith adding the postscript comment that the Trustee would be the “only” person with standing to bring the claim.

Irrevocable appointment of process agent in Trust Deed binding on Issuer despite unilateral withdrawal of authority to accept service

Under the Trust Deed, the Issuer irrevocably appointed an English process agent to accept service of process in any proceedings in England. Upon receipt of the claim, however, the process agent notified the Trustee that the Issuer had previously terminated its appointment as process agent and that it was therefore unable to accept service.

The court found that service on the process agent was good and sufficient service. The irrevocable appointment of a process agent in the Trust Deed constituted a promise from the Issuer to the Trustee to accept service through that process agent. The agency relationship between the Issuer and the process agent was irrelevant for the purpose of that promise. The Issuer was therefore precluded from disputing service even though it may have withdrawn its authority from the process agent to accept service.

Court declined to make the “inappropriate” declarations sought

The Trustee only sought declaratory relief, specifically declarations as to the amounts due and payable under the Notes (just over USD31 million comprising outstanding principal and interest). The court's power to grant declaratory relief is discretionary. As such, the onus was on the Trustee to persuade the court that it was appropriate for the court to exercise that discretion. The court refused, because:

- Both sides of the argument would not be put before the court: although the Issuer had been properly served and appeared to have chosen not to engage in the case, the Issuer's arguments would not be heard by the court. This weighed against the granting of the declarations. The court should exercise great care and approach the request for a declaration with a conservative mindset.

- Potential effect on a third party (Indian insolvency professional) not represented in court: the claim had been commenced in England in light of the uncertainty regarding the Trustee's status in the Indian insolvency process. The legal effect of the English court making the declarations sought on the Indian process was unclear. There were two alternatives; either the declarations:

– would not have an impact on that process, in which case the utility of making declarations was questionable and weighed against the court doing so; or

– would have an impact on that process, also weighing against the court making declarations, as the Indian Insolvency Resolution Professional affected by the declarations was not represented in the English proceedings.

- Lack of a real and present dispute and the potential for interference in a foreign process: the court could not identify a real and present dispute between the Issuer and Trustee as to the terms of the Notes or the Issuer's obligations regarding payment under the Notes. The Issuer was simply unable to pay, as evidenced through the Indian insolvency process and the granting of a declaration would not alter or resolve that. If the court could not be certain whether or how the declarations would impact the Indian insolvency process, there was a risk that that the declarations would amount to an improper interference in those proceedings being conducted by a party not before the court.

As such, despite having no qualms about the substance of the declaration or the Issuer's obligation to pay, the court declined to make the declarations, concluding that any dispute which arose in the context of the Indian insolvency proceedings should be resolved in that proceeding.

Important lessons for corporate trustees and finance parties

The clear recognition of the Trustee's standing to bring a declaratory Part 8 claim is unsurprising, although Marcus Smith J’s postscript comment that the Trustee was the “only” party who could have brought such a claim under the Trust Deed may be limited to the facts of this case and the specific terms of the Trust Deed. Where only a declaration is being sought, rather than the commencement of active enforcement action, the position under other capital markets instruments may be different based on a narrower restriction. The specific drafting is key here.

Furthermore, the court robustly and helpfully confirmed that unilateral action taken by an issuer to de-authorise a service process agent is ineffective at avoiding valid service in England (following a number of similar findings, eg Cargill v Uttam). If the appointment of a process agent is described as irrevocable in a trust deed, financing document or any other commercial agreement governed by English law, proceedings will be validly served notwithstanding a party's unilateral action to revoke that appointment (although this could lead to difficulties in circumstances where there is a change in circumstances of the process agent, rather than an action of the finance party to attempt to alter the relationship).

However, the “conservative mindset” adopted by the court in refusing to grant the declarations sought is surprising. The decision should not be taken to stand for a broader proposition that the court will not grant declaratory relief to trustees unless the issuer (or its insolvency professional) is present, but rather as a reflection of the facts and evidence before the court in this particular case. Trustees and/or noteholders should, in contentious situations, be able to obtain declarations, even in the absence of an insolvent issuer, as a matter of English law from courts. The court's focus appeared to be more on the broader potential impact of the declarations on Indian proceedings, rather than the more limited question being put as a matter of English law (rather than Indian insolvency law) as to the amounts outstanding and to whom it was owed under English law-governed contracts. In any case, the decision should be considered carefully when shaping declarations to be sought from the courts in similar circumstances and the nature of the evidence to be put before the court as to the utility or impact of such declarations.