High Court Rejects Attempt By Noteholders To Remove And Replace Trustee Against Wishes Of Issuer

Court grants declaratory relief on construction of loan participation note transaction documents to the effect that only the Issuer had the right to appoint a new Trustee

Following an expedited Part 8 trial, the High Court rejected an attempt by Noteholders to remove and replace the Trustee under two series of notes against the wishes of the Issuer: EMIS Finance BV v ICU Trading Ltd & Ors [2025] EWHC 3232 (Comm).

The context for the action taken by the Noteholders was the Issuer's failure to make payments under the notes and the Trustee's inability to take steps due to sanctions prohibitions. The court found that the proper construction of the relevant contractual documentation: (i) granted the power to appoint a Trustee exclusively to the Issuer and therefore the Noteholders did not have the power to appoint a Trustee by extraordinary resolution, independently of any action or approval by the Issuer; and (ii) while Noteholders had the power to remove a Trustee, such a removal only becomes effective upon the appointment of a new Trustee by the Issuer or the court.

There is an increasing trend of Noteholders/Bondholderstaking a more proactive and litigious stance, driven by current economic uncertainty and an increase in distressed debt situations. This is the latest decision concerning the balance of contractual rights and powers between Issuers and Noteholders.

We examine the decision in more detail below.

Background

EMIS Finance B.V. (EMIS), issued two series of loan participation notes (the Notes) to finance loans to third party borrowers. ICU Trading Ltd (ICU), a British Virgin Islands investment firm specialising in distressed debt, acquired significant holdings (42% and 52% respectively) in both series of Notes.

The ultimate borrower for the funds raised via the Notes, defaulted on its loan obligations to EMIS and EMIS ceased making payments under the Notes, which have been in default since 2022. The Trustee of the Notes, BNY Mellon Corporate Trustee Services Limited (BNY Trustees), indicated it could not take steps in relation to the Notes due to sanctions concerns related to the borrower's parent company, whose beneficial owners include Russian businessmen who are subject to UK and other sanctions.

Following a failed restructuring of the Notes by EMIS, ICU commenced its own Consent Solicitation process as a requesting noteholder seeking a set of extraordinary resolutions. ICU sought to replace: (i) BNY Trustees with GLAS Trustees Limited (GLAS Trustees) as Trustee; and (ii) BNY with GLAS Trust Company LLC as Principal Paying Agent.

EMIS applied for a prohibitory injunction restraining ICU from taking further action in relation to the purported appointments and commenced proceedings seeking declaratory relief as to the proper construction and effect of the relevant contractual documents. ICU agreed not to take any further actions concerning the appointments until the validity of the resolutions could be considered by the court.

Decision

By the time of trial, it was common ground that the purported replacement of the Principal Paying Agent was ineffective. Accordingly, the only matter to be determined by the court concerned the validity of BNY Trustees' removal and GLAS Trustees' appointment as Trustee. EMIS contended that only it, as the Issuer, had the power to appoint or remove the Trustee under the contractual terms. ICU argued that Noteholders were entitled to exercise powers of removal and appointment of a new Trustee to protect their interests.

Principally, the Court had to reconcile competing interpretations of two key provisions of the transaction documents of which the key extracts in issue are set out below:

• Clause 18 of the Master Trust Terms: "Appointment, Retirement and Removal of Trustee: The power of appointing a new Trustee in respect of the LPNs shall be vested in the Issuer."
• Schedule 1 to Master Trust Terms: "Provisions regarding Meetings of Noteholders: A meeting of the Noteholders shall, in addition to the power hereinbefore given, but without prejudice to any powers conferred on other persons by these Master Trust Terms, have the following powers exercising by Extraordinary Resolution, namely:- ... (d) power to approve a person proposed to be appointed as a new Trustee under the Trust Deed and power to remove any Trustee or Trustees for the time being thereof..."

ICU submitted that it would be extraordinary if the Notes gave the Issuer the exclusive power to remove and appoint the Trustee in circumstances where the Trustee's main function is to protect the interests of Noteholders. The court however disagreed, noting that: (i) the Trustee is subject to duties such that professional and legal constraints can be expected to bear on the Trustee's exercise of its powers; and (ii) the transaction documents themselves provide for the ways in which the Trustee is to exercise its duties, which cuts against the view that only a Trustee appointed by the Noteholders can be expected to adequately protect their interests.

The court held that on its express terms, Clause 18 of the Master Trust Terms was to be interpreted as:

• Enabling the Issuer to (a) appoint a Trustee in substitution for an existing Trustee, (b) appoint a Trustee in addition to any existing Trustee and (c) appoint a Trustee where there is a vacancy; and
• Providing that the Issuer alone is vested with the power to appoint a new Trustee.

The court noted that this view is reinforced by the language of s.41 of the Trustee Act 1925 (expressly referred to in the contract documentation) and similarly contains a section on the power to appoint trustees. The term "appointing a new trustee" is used in the Act, and the same phrase was likely to mean the same thing as Clause 18 in this case, including the substitution of one Trustee for another.

With respect to the terms of Schedule 1, the court considered the Noteholders' powers to "approve a person proposed to be appointed as a new Trustee". It held that ICU's suggestion, that it meant a power to appoint a Trustee proposed by Noteholders themselves, involved a strained construction. The language fit more naturally with the power being limited to Noteholders approving a Trustee appointment made by someone else. The court agreed with ICU that the express terms of Schedule 1 grants Noteholders the power to remove a Trustee. However, it considered that removal would not become effective until the Issuer appointed a new Trustee, in the exercise of its powers under Clause 18. Moreover, since the Master Trust Terms do not positively oblige the Issuer to appoint a Trustee in such circumstances, it may be necessary for an application to be made to the court to appoint a new Trustee in the event of deadlock.

The court confirmed that, in its view, an interpretation that (a) Clause 18 empowers the Issuer both to appoint and to remove the Trustee; and (b) a Trustee removal by Noteholders takes effect only on appointment of a new Trustee by the Issuer or the court, gave effect to the language of both sets of provisions (Clause 18 and Schedule 1), avoided direct inconsistency, and best reflected the parties' intentions and the commercial purpose of the transaction.

Accordingly, the purported appointment of GLAS Trustees in July 2025 was ineffective, and the extraordinary resolutions passed by ICU and other Noteholders did not validly remove or appoint a Trustee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.