The English Court of Appeal found it lawful for cash payments to be offered to bondholders, in return for support of a financial restructuring

In Azevedo and another v Imcopa Importacao Exportcao E Industria de Oleos Ltd and Other companies [2013] EWCA Civ 364 (Imcopa case), the Court of Appeal determined that solicitation and procurement of votes in support of a financial restructuring, by way of offering cash payments to voting bondholders, is both legal and permissible.

The practice of offering "solicitation payments" or "consent payments" to bondholders is common practice in the United States.  The Imcopa case, however, was the first time that the practice has come under the microscope in England.  While the question of the lawfulness of solicitation payments in Australia remains open for debate, it may be expected that Australian Courts will follow the English approach.

The facts

In the Imcopa case, the issuer, Imcopa Cayman, had issued $100 million in notes, which were guaranteed by its parent company, Imcopa Brazil (the Notes).  The issue of the Notes was governed by a Trust Deed, entered into between Imcopa (as issuer), Imcopa Brazil (as guarantor) and the Bank of New York Mellon (as Trustee) (BNY). The Trust Deed was governed by English law.

In October 2010, Imcopa proposed resolutions that, in essence, permitted it to postpone the payment of interest that was then due by it under the Notes.  In the documentation accompanying the proposed resolutions, Imcopa offered members in the Notes a cash payment if they supported Imcopa's resolutions (the solicitation).

The payment was said to be payable only in the event that the resolution passed, which, as special resolutions, required a 75% majority.  Subsequently, the resolutions were passed by an overwhelming majority; the cash payments promised by the solicitation were then made to supportive bondholders.

The claimants' arguments

The claimants before the Court of Appeal had voted against the Imcopa resolutions and therefore had not received the Imcopa cash payment.  They contended that the solicitation and associated payments were unlawful, stating that the payments offered by Imcopa, in support of the resolutions, were:

  • in breach of the pari passu principles under the Trust Deed (a provision under the Trust Deed which states that all investors must be treated equally); or
  • in the nature of a bribe and, thus unlawful under English law.

At first instance, those contentions were not accepted.  On appeal, the Court of Appeal also rejected the claimants' contentions.  In rejecting these contentions, the Court of Appeal concluded that:

  • the pari passu obligations were limited to moneys received by the Trustee (BNY) or moneys paid under the Trust Deed.  The consent payments in this case were direct payments by Imcopa, and, accordingly, were not caught by the provisions of the Trust Deed.
  • there is nothing wrong in principle with the idea of a company taking part in a voting process, including by way of encouraging favour of a vote by offering an incentive for voter support, so long as the offer was made to all voters and the incentive was open and above board.

The appeal was dismissed accordingly.

Conclusions

This is the first time that an English court has considered the legality of solicitation payments in the context of a bond restructuring.  The Imcopa case confirms that a wider variety of tools, coercive as they appear, are now at an issuer's disposal to incentivise bondholder support for restructurings. 

For Australian issuers, it may be expected that issuers will pursue similar strategies in securing bondholder support. The response by Australian regulators to solicitation payments in this jurisdiction is difficult to predict, but it is most likely that the Australian Courts will follow the English Courts in accepting the lawfulness of those payments.