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CHAPTER 3 A COMPARATIVE OVERVIEW OF THE LAWS OF BOND TRUST IN COMMON LAW AND CIVIL LAW COUNTRIES
Introduction
“The law ought not [to] make trusteeship so hazardous that responsible individuals and corporations will shy away from it.”1
Most non-financial corporate bonds are issued under a trust structure. While the concept of the trust is no stranger to the common law jurisdictions, it was not recognised in most civil law countries until recently. The aims of this chapter are to offer a selective overview of the laws of bond trusts across eight jurisdictions, and to draw some useful insights.
The United Kingdom and the United States have arguably the most mature systems of financial law. 2 In addition to the domestic bonds issued in these two countries, many international bond issues are also governed by English law or US law. Parts 3.2 and 3.3 examine the law of bond trusts in the United Kingdom and the United States respectively. Part 3.4 introduces the bond trust law of Australia and New Zealand. In contrast to the « light-handed » approach to regulating bond trusts in the UK and the US, Australia and New Zealand impose onerous monitoring duties on bond trustees for publicly issued bonds. Part 3.5 offers a brief overview of the laws of bond trusts in four civil law countries, namely Germany, Japan, The Republic of Korea, and China. Part 3.6 concludes with comparisons and insights.
Bond trusts under English law
In general
English law neither requires the appointment of a trustee, nor comprehensively regulates the terms of bond trust deeds. The main sources of the powers and duties of a bond trustee derive from the bond trust deed and case law.
The general view is that the relationship between the bond trustee and the bondholders is a trust.3 Accordingly, the bond trustee is subject to the general fiduciary duties of a normal trustee, such as the duty of loyalty and the duty to avoid conflict of interest.4 In addition, bond trustees are also subject to a common law duty of care.5
Under the standard bond trust deed, the trustee is given wide-ranging powers, such as the power to agree to certain modifications of the trust deed or the terms of the bonds, the power to waive the issuer’s breaches if the trustee is of the view that such waiver will not be materially prejudicial to the interests of the bondholders, and the power to prescribe further regulations in relation to bondholders’ meetings.6 Most importantly, upon the occurrence of an event of default, the trustee has the power to take enforcement actions against the issuer.
The trustee is generally given a very broad (sometimes absolute and uncontrolled) discretion as to the exercise of its powers. As long as the trustee “has asked itself the correc question, has adopted a correct interpretation of the [c]onditions [of the bonds], has taken into account all the relevant factors and ignored irrelevant factors”,7 the decision itself cannot be challenged unless it is “so outrageous in its defiance of reason that it can properly be categorised as perverse”.8 However, the trustee must at least consider whether to exercise its powers.9 For example, if the trustee has actual knowledge of the occurrence of an event of default, it will be required to properly consider whether to exercise its powers (such as serving a notice of event of default). It will not be able to “bury its head in the sand” by relying on the certificate signed by the issuer’s directors stating that no such event has occurred.10
In terms of the bond trustee’s duties, the key duty is that, upon the occurrence of an event of default,11 the trustee must take enforcement actions against the issuer if it has been instructed to do so by an extraordinary resolution of the bondholder or requested to do so by the bondholders of a certain percentage (usually 20%) in nominal amount of the bonds. The bond trustee does not have any other substantive duties. In particular, it has no duty to monitor or supervise the functions of the issuer;12 it is not obliged to notify the bondholders of the occurrence of an event of default, or disclose information given to the trustee by the issuer if it is confidential or price-sensitive;13 and, apart from in respect of issue of enforcement, it has no duty to consult the bondholders before exercising its discretion.14 The bond trustee is, however, subject to a duty of care under the common law.15
Standard bond trust deeds usually contain extensive protective clauses.16 For example, a commonly seen protective provision is that the trustee, in the absence of actual knowledge to the contrary, is entitled to assume that there is no event of default if the directors of the issuer give a certificate confirming no such event has occurred. Other protective provisions include: that trustee may act on advice from lawyers, bankers or other experts, and shall not be liable for doing so even though the advice contains some error; that the trustee has no obligation to monitor the functions of the issuer and is entitled to assume that no default has occurred until and unless it has actual knowledge of such event; that the trustee has full power to determine all questions arising in relation to any provisions of the trust deed, and such determinations shall be conclusive and binding on the bondholders; and that the trustee shall have absolute and uncontrolled discretion as to the exercise or non-exercise of all of its powers, authorities, and discretions.
Chapter 1 Introduction
1.1 Preliminary
1.2 Literature review
1.3 Need for academic research on bond trusts
1.4 Thesis structure
Chapter 2 Bonds and Bond Trusts
2.1 Bond markets
2.2 Types of bonds
2.3 Form of bonds
2.4 Documentation
2.5 Reasons for a trust structure
2.6 Bonds without a trustee
2.7 Use of trust in finance in general
Chapter 3 A comparative Overview of the Laws of Bond Trust in common law and civil law countries
3.1 Introduction
3.2 Bond trusts under English law
3.3 Bond trusts under US law
3.4 The Australia-New Zealand model
3.5 Bond trusts in civil law jurisdictions
3.6 Conclusion
Chapter 4 From “Bond Trustee” to “Supervisor”: A Critical Review of the Bond Trust Regime under the Financial Markets Conduct Act 2013
4.1 Introduction
4.2 The previous bond trust regime
4.3 The new bond trust regime
4.4 A closer examination of the bond trust regime in New Zealand
4.5 A proposed monitoring model
4.6 Conclusion
Chapter 5 The Contractual Nature of Bond Trusts and Security Trusts
5.1 Introduction
5.2 Bond trusts and security trusts – current law and practice
5.3 Comparing bond trust and security trusts with other express trusts
5.4 The contractual nature of bond trusts and security trusts
5.5 Conclusion
Chapter 6 No-action Clause in Bond Trust
6.1 Introduction
6.2 No-action clauses
6.3 Scope and efficacy of the no-action clause
6.4 Objections to the no-action clause
6.5 Conclusion
Chapter 7 Exit Consents in Debt Restructurings
7.1 Introduction
7.2. Section 316(b)
7.3 Bondholders’ duties
7.4. Duty of the bond issuer
7.5 Conclusion
Chapter 8 Conclusions
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BONDS AND BOND TRUSTS
