The court found that sums held by a settlement agent following a bond issuance were held on trust for bondholders
The High Court has dismissed an interim mandatory injunction application made by a bond issuer, seeking to compel an investment bank to instruct the settlement agent to release funds received from the bond issuance: Eraaya Lifespaces Ltd v Elara Capital plc & Ors [2025] EWHC 1506 (Comm). The dispute centred on whether the investment bank, which acted as the claimant issuer's financial advisor on the issuance, was contractually required to instruct the settlement agent to release the funds to the claimant.
Applying the principles for granting interim mandatory injunctive relief (which are the same as for prohibitory injunctions per National Commercial Bank Jamaica Ltd v Olint Corp Ltd (Jamaica) [2009] UKPC 16), the court acknowledged that there was a "serious issue to be tried" in this case. However, a court is "far more reluctant" to grant a mandatory injunction, and in the court's view the claimant's case was confused and far from strong. The court held that the combined factors on balance of convenience tipped decisively away from the grant of an injunction.
A key issue considered by the court was the proprietary interest in the funds held by the settlement agent. In the present case, there was evidence that a clause was incorporated in the bond documentation to specifically require the investment bank's confirmation in order for the settlement agent to release funds to the issuer, as an alternative to a formal escrow process. In these circumstances, the court found that it was arguable that the settlement agent held the funds on trust for the bondholders on either an express trust or a Quistclose trust.
We consider the decision in more detail below.
Background
The case involved a dispute arising from the claimant's attempt to acquire Ebix Inc. (a Delaware-based software and e-commerce company undergoing Chapter 11 bankruptcy proceedings in the United States). The claimant sought to finance this acquisition through the issuance of bonds and engaged the defendant investment bank (the Investment Bank) as its financial advisor to assist.
The claimant issued bonds in two tranches. The first tranche of bonds was successfully issued and the acquisition of 97.58% of Ebix was completed. However, the second tranche of bonds (issued to repay bridging finance to complete the purchase of Ebix), led to complications. The Investment Bank failed to transfer the remaining USD 40 million from the second bond issuance, which was held by Glas Specialist Services Ltd (GLAS), the settlement agent. The claimant sought an interim mandatory injunction to compel the Investment Bank to instruct GLAS to release these funds.
The Bondholders, who were investment funds, raised concerns about the claimant's compliance with the bond terms, particularly the failure to pledge shares of Ebix as collateral. They argued that the claimant had already drawn down USD 80 million without providing the required security and sought to prevent the release of the remaining funds. The Bondholders also applied to join the proceedings and sought declarations that they had not breached collateral use restrictions.
Decision
The court dismissed the interim mandatory injunction application, which is considered further below. The court also granted the joinder application and granted retrospective permission for collateral use.
Legal principles applicable to mandatory relief
The court noted that the underlying principles for granting interim mandatory injunctions are the same as for prohibitory injunctions (per Olint). In both cases, the court should take whichever course seems likely to cause the least "irremediable prejudice" to one party or the other (considered as part of the balance of convenience test from American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1). However, the court emphasised that:
- A court is "far more reluctant" to grant a mandatory injunction than it would be to grant a comparable prohibitory injunction;
- The court must feel "a high degree of assurance" that at the trial it will appear that the injunction was rightly granted;
- A court will only grant a mandatory injunction if the case is "unusually strong and clear", even if it is sought to enforce a contractual obligation.
Taking these factors into account, the court proceeded to consider the merits of the claim, proprietary issues as to the beneficial ownership of the remaining funds held by GLAS and the balance of convenience test.
Merits of the claim
The court acknowledged that technically the threshold jurisdictional test was whether there was a "serious issue to be tried" and accepted this was plainly satisfied in this case. However, it noted that the merits would come into the equation when considering the balance of convenience test and the question of where the lesser risk of irremediable harm lies.
On a preliminary assessment of the merits based on the material available, the court concluded that the claimant's case was confused and far from strong. In particular, this was because the claimant's argument focused almost entirely on a particular clause of the second Settlement Agency Agreement as the basis for saying that the Investment Bank was bound to give the confirmation required for GLAS to release the remaining funds. However, this argument was flawed because the Investment Bank was not a party to the second Settlement Agency Agreement. Indeed, in the court's view, a specific obligation requiring the Investment Bank provide a confirmation to GLAS to "was not readily discernible" from the second Settlement Agency Agreement or elsewhere.
Proprietary issues
The claimant asserted that once the subscribers to the second bond issue paid money over to GLAS, the claimant became the beneficial owner of the funds and had the right to direct the money. In the court's view, it was well arguable that GLAS (as settlement agent) held the remaining funds on trust for someone unless and until the Investment Bank gave the required confirmation – but that this was for either the benefit of the claimant or the Bondholders.
In its analysis of whether the claimant or the Bondholders were the beneficial owners of the remaining funds, the court considered evidence (said by the claimant to be inadmissible) of discussions between the Bondholders and the Investment Bank which led to a change to the drafting of the second Settlement Agency Agreement. In essence, there was evidence that prospective bondholders were concerned about the lack of any apparent progress towards providing the pledge which was part of the deal. This led to the inclusion of the clause requiring the Investment Bank's confirmation for GLAS to release funds being included in the agreement, as an alternative to a formal escrow process.
In the court's view, it was arguable that all of the parties understood that the remaining funds were not freely disposable by GLAS. The court found it was arguable that GLAS was holding those funds on trust for the bondholders on either an express trust or a Quistclose trust.
Balance of convenience
The court found that the combined factors on balance of convenience tipped decisively away from the grant of mandatory injunctive relief.
Considering whether damages would be an adequate remedy for the Investment Bank and Bondholders, the court said it was clear from the evidence that the claimant could not satisfy any damages award made against it. Further, if the Bondholders succeeded at trial in establishing that they had a proprietary right to the remaining funds, they would be forced to seek damages from the claimant because they would be very likely unable to recover their equitable property, assuming it was used by the claimant to pay the lender of the bridging finance (an Indian-based company).
On the other hand, the court ruled that the prejudice relied on by the claimant (namely the cost of borrowing in relation to the USD 40 million) was plainly compensable in damages.
The application for an interim mandatory injunction therefore failed.
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