The company whose bonds the reader holds has misled him. Relying on Albert’s presumed ignorance, it is trying to talk him out of making the request to which in the situation described here he is entitled under the law. But first things first.

Both the Bonds Act of 1995 (applying to debt securities issued until 30 June 2015) and the new legal act of 2015 (applying to bonds issued after 1 July 2015) provides that in the event of the company defaulting on its interest payment the bond holder is entitled to request their early redemption. In other words, the interested party does not have to wait for the planned completion of the investment and may demand immediate repayment.

The positive scenario is that the issuer meets the request. As a result of the default the issuer not only repays the overdue interest but also the entire obligation contracted in the form of the bonds. However, one should rather prepare for the negative scenario. Since the company has failed to pay the interest on time it usually means that it has liquidity problems and is unable to redeem the bonds. In such case it will be necessary to take recourse to the law, launching judicial proceedings followed by enforcement proceedings to enforce the amounts due from the company.

The scenario described by the reader is a third possible version of events. However, it should be clearly stressed that the payment by the company of the overdue interest does not extinguish the request of the bond holder regarding early redemption of debt securities (see expert opinion). This is logical. The right of the investor to request redemption is designed to play a disciplining role for the issuers. If the company does not pay interest on time, thus exposing the persons who entrusted their savings to it, to a loss, it cannot have an easy way of escaping the aforesaid request. It must reckon with the consequences of its own unreliability. The mechanism is similar to the one existing in the case of bank credits. A failure to pay credit instalments on time may lead to the bank terminating the credit agreement and the need to immediately repay the entire principal. 

 

If, following the investor’s request to immediately redeem the bonds, the issuer pays the overdue interest, the non-payment of which led to this request, the bond holder may still request that the debt securities be redeemed. This right arose as a result of the investor’s request. This situation may be compared to agreement termination which, if made in compliance with the law and the agreement, creates legal consequences for its fate. In connection with the foregoing, in order to pursue claims the bond holder may file a court action against the issuer for payment (e.g. for issuing a payment order).

It is worth mentioning that quashing the early redemption obligation would require an agreement between the issuer and the bond holder, and the investor is not obligated to agree to this.

As regards immediate redemption of bonds due to a failure to make timely payments of the interest there is a small difference between the 1995 Act and the new Act of 2015. Under the former law the investor was entitled to make an immediate redemption request in a situation where the issuer had failed to meet the obligations resulting from the bonds in whole or in part. The new law regulates issuer’s default (i.e. culpable delay) in the same way and without exceptions, while in the event of a delay (i.e. a situation not attributable to the issuer) the rigour has been lessened somewhat and a three-day grace period is now permitted (only after the lapse of three days the bond holder may request that the bonds be redeemed). However, in order to ensure that issuers reckon with

investors, more rigorous issue conditions have been allowed, reducing the period of acceptable delay (it cannot be extended). One may presume the capital markets to quickly develop a standard expected by investors which may differ depending on the issuer’s risk assessment.