Court rejects Anglo move on bondholders
THE IRISH Bank Resolution Corporation’s decision to impose major losses on Anglo-Irish bondholders has been rejected by the High Court in England as “unfair oppression” and “a coercive threat”.
The ruling from Mr Justice Briggs, which is be appealed by the IBRC to the Court of Appeal in London, is regarded as hugely significant and could threaten efforts throughout the European Union to impose losses on bondholders.
In November 2010, the IBRC offered the holders of €700 million worth of Anglo-Irish Bank bonds 20 cents in the euro, making it clear that any of them who did not accept the offer would get just 0.01 cent per €1,000.
Bondholders were asked to accept the 20 per cent offer and to vote for an emergency resolution that gave IBRC the power to expropriate any remaining bonds for the lesser sum.
Assenagon Asset Investment refused to accept the 20 per cent offer and eventually found that its €170 million bond holding was forcibly bought out by the IBRC for just €170.
However, Mr Justice Briggs rejected the IBRC’s action, saying that it could not be lawful for “the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority’s rights under their bonds for a nominal consideration”.
Known as “an exit consent”, the majority’s approval for expropriation of the rest is “quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less.
“Its only function is the intimidation of a potential minority, based upon the fear of any individual member of the class that, by rejecting the exchange and voting against the resolution, he [or it] will be left out in the cold,” said the judge.
“Putting it as succinctly as I can, oppression of a minority is of the essence of exit consents of this kind, and it is precisely that at which the principles restraining the abusive exercise of powers to bind minorities are aimed,” he went on.
During the trial, lawyers for Assenagon argued that the case has “profound implications” for UK debt and equity markets, because if IBRC’s action were declared lawful then every company, would “feel free to coerce” creditors into selling debt for a fraction.
Assenagon argued that the payment of a 20 per cent offer for bonds to those bondholders who voted for the resolution authorising the expropriation of the bond held by others was “unlawful” and “in the nature of a bribe, and a fraud on those noteholders who were not paid”.
Agreeing, Mr Justice Briggs said: “This form of coercion is in my judgment entirely at variance with the purposes for which majorities in a class are given power to bind minorities, and it is no answer for them to say that it is the issuer which has required or invited them to do so.
“True it is that, at the moment when any individual member of the class is required [by the imposition of the pre-meeting deadline] to make up his mind, there is at that point in time no defined minority against which the exit consent is aimed.
“But it is inevitable that there will be a defined [if any] minority by the time when the exit consent is implemented by being voted upon, and its only purpose is to prey upon the apprehension of each member of the class [aggravated by his relative inability to find out the views of his fellow class members in advance] that he will, if he decides to vote against, be part of that expropriated minority if the scheme goes ahead,” the ruling goes on.
Last night legal sources in London said this “third limb” of Mr Justice Briggs’s judgment could prove in time to be the most significant since it could affect other banks, both in Ireland and elsewhere in the EU.
Allied Irish Bank and Bank of Ireland used the same form of exit consents when they imposed losses on bondholders, while the technique was part of Greece’s strategy earlier this year.
Steven Friel, a partner at London law firm Brown Rudnick said: “The judgment has widespread significance. Many bondholders who suffered losses from the use of exit consents by the Irish banks may now seek compensation. The judgement may also have an effect on the legality of exit consents in other jurisdictions, including in respect of the recent Greek sovereign debt exchange.”
Last night IBRC said it had been granted leave to appeal to the Court of Appeal in London and it was considering its options with its legal advisers. The case is likely to end in the Supreme Court in London.