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Issuer of loan notes allowed to solicit votes for a financial restructuring by offering 'consent payment'

June 2013

In Sergio Barreiros Azevedo & anr v Imcopa Impotaçoa, Exportação e Indústria de Olėos LTDA [2013] EWCA Civ 364, 22 April 2013, upholding the first instance decision, the Court of Appeal has found that it is not unlawful under English law for an issuer to offer a "consent payment" to noteholders who vote in favour of a resolution proposed for their consideration as a class.

The appellant noteholders had tried to argue that is was not lawful under English law for a company to undertake a process which, in effect, "buys" the votes of the holders of notes and other securities issued by a company. The issuer in this case (Incompa U) had solicited and procured votes in support of a financial restructuring proposal by offering and making cash payments to those members of the relevant class (noteholders) who voted in favour of the proposal but excluded from the payment those who voted against it or who did not vote at all. This type of process is known as "consent solicitation" and the payments as "consent payments".

The notes in question were governed by English law. In 2013 as part of the Imcopa group’s restructuring a proposal was put forward to postpone a payment of interest due under the notes. The notice of the meeting explained that a payment would be made to those voting in favour of the resolution but not to other noteholders. The vote was passed by an overwhelming majority and the payments duly made. The appellants asserted that the making of the consent payment only to those voting in favour was unlawful, either because it was in breach of the pari passu principle or because, although not secret, it was in the nature of a bribe and as such not permitted under English company law.

These arguments were rejected by Hamblen J (covered in the August/September 2012 Litigation Review) and by the Court of Appeal, who found that it was not unlawful under English law, or contrary to the terms of notes, for an issuer to offer a consent payment to noteholders who vote in favour of a resolution proposed for their consideration as a class, where the payment is available to all members of the class and the basis of the payment is made clear in the documents relating to the resolution, the meeting and the vote. The payment was available to all noteholders, conditionally only on them doing that which was within their own power, namely exercising their right to vote in a particular way. There was therefore no pre-ordained discrimination between a majority and a minority. The contractual pari passu clause in the notes only applied to monies in the hands of the Trustee and the funds in question (ie the payments made to the noteholders) did not pass through the Trustee’s hands.


Although allegations were made in this case that the solicitation and payment of consent payments in circumstances such as these is a longstanding and widely known practise in the debt market, the Court of Appeal did not make any findings of fact in this regard.

Another case from last year (Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch)) shows that not all incentives for noteholders will be allowed by the courts. In that case Briggs J held that a process whereby bondholders had been asked to vote in favour of a proposal which involved the exchange of their bonds for the issue of new bonds, had not been undertaken validly. Those who did not vote in favour of the proposal had their bonds cancelled for a nominal consideration. 

These types of "exit consents" are an important feature of bond restructurings and Assenagon was the first time such a process had been considered by the English courts. Briggs J concluded that the exit consent in this case was oppression of the minority as they were given effectively no value for their notes. The appeal in the Assenagon case was due to be heard with the above appeal in Azevedo but the issuer went into special liquidation and the liquidators decided not to pursue the appeal. Accordingly the issues raised in Assenagon, which attracted much academic and professional interest, remain open to be tested at appellate level.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey, or tel +44 (0)20 3088 3710.
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