BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc and Others
Jurisdiction | England & Wales |
Judge | Lord Justice Toulson,Lord Justice Wilson |
Judgment Date | 07 March 2011 |
Neutral Citation | [2011] EWCA Civ 227 |
Docket Number | Case No: A3/2010/2046 |
Court | Court of Appeal (Civil Division) |
Date | 07 March 2011 |
[2011] EWCA Civ 227
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Chancellor of the High Court
Before: the Master of the Rolls
Lord Justice Wilson
and
Lord Justice Toulson
Case No: A3/2010/2046
Case No: HC10C01541
Mr R Sheldon QC and Mr R Fisher (instructed by Sidley Austin LLP) for the 2 nd to 6 th Defendants, the Appellants
Mr R Dicker QC and Mr J Goldring (instructed by Berwin Leighton Paisner LLP) for the 1st Defendant, a Respondent and Cross-Appellant
Mr R Snowden QC and Mr D Bayfield (instructed by Brown Rudnick LLP) for the 7 th and 8 th Defendants, Respondents and Cross-Appellants
Mr W Trower QC and Mr D Allison (instructed by Allen & Overy LLP) for the Claimant, a Respondent
Hearing dates: 25 th, 26 th and 28 th January 2011
Lord Neuberger MR:
This is an appeal and a cross-appeal from a decision of the Chancellor of the High Court given on 30 July 2010 – [2010] Bus LR 1731; [2010] EWHC 2005 (Ch). Both the appeal and the cross-appeal involve questions of interpretation of the terms of interest-bearing notes ("the Notes"), which were issued by Eurosail-UK 2007–3BL PLC ("the Issuer"), a special purpose vehicle formed to hold income-producing assets, consisting of mortgage loans, to be used to meet the liabilities on the Notes.
The factual and contractual background and the issues
The basic nature of the transaction
Although the documentation supporting the issue of the Notes is regrettably and forbiddingly voluminous, neither the basic contractual and financial concepts underlying the Notes nor the nature of the problems which have arisen is particularly complex. The relevant factual background is as follows.
In July 2007, in accordance with the purpose for which it was formed, the Issuer acquired, for just under £646m a portfolio of about £650m sterling denominated mortgage-backed loans ("the mortgages") all relating to UK residential properties. These mortgages were in the main so-called non-conforming residential mortgages, i.e. the borrowers did not satisfy the requirements of building societies and banks.
The mortgages were at varying rates of interest, and had different final redemption dates (although most, possibly all, were redeemable early at the option of the mortgagor). In order to fund the acquisition, the Issuer sold investors various instruments. The total amount raised on the sale of different classes of interest bearing Notes was £659.75m. £9.75m of this amount was raised by way of different classes of interest bearing Notes. The balance of £9.75m was raised through the sale of so called ETc Notes which have been repaid, and which, although referred to in argument, do not appear to me to have any bearing on the issues on this appeal.
The balance of £13.75m, being the difference between the cost of the mortgages and the amount raised, was devoted to the expenses of the issue, which were some £2.46m, and two reserve funds, amounting to some £11.3m in aggregate.
The Notes were marketed in the usual way by means of a detailed Prospectus, and the arrangements governing the issue of the Notes were set out in a number of documents referred to as the "Transaction Documents". The most significant of these were the "Terms and Conditions of the Notes", a Trust Deed, a Deed of Charge, a "Securitisation Agreement" and a "Post Enforcement Call Option Agreement" (a "PECO").
Pursuant to the Trust Deed, the claimant, BNY Corporate Trustee Services Ltd ("the Trustee"), was effectively constituted the trustee of the rights of the holders of the Notes against the Issuer, including the right to enforce rights contained in the Trust Deed. Under the Deed of Charge, the Issuer granted to the Trustee, for the benefit of the Noteholders, security ("the Security") for the performance of its obligations, and a major aspect of the security was the grant of rights over the mortgages.
Some of the Notes were denominated in euros, some in US dollars, and some in sterling: the denomination of the Note determined the currency in which both the capital was repaid and interest was paid in the meantime. The Notes were in five Classes, Class A to Class E, with descending priority rights; the A Class had three subclasses 1, 2 and 3 (also with descending priority rights as to principal payments prior to enforcement), and Classes B to E only had a subclass 1. Many of the subclasses had more than one group, identified by a lower case letter identifying that group's currency denomination ("a" for euros, "b" for dollars, "c" for sterling), and every group within a subclass ranked pari passu.
The rate of interest payable on the Notes was linked to LIBOR, an inter-bank floating rate, and was lowest for the Class A1 Notes and highest for the Class E1 Notes. Each Class of Notes had a final maturity date (June 2045, except for the Class A1 Notes, for which the date was September 2027). The Class A Notes represented the majority in value of the Notes and were divided into three subclasses, A1b and A1c (a mixture of sterling and dollar Notes), A2b and A2c (also a mixture of sterling and dollar Notes), and A3a and A3c (mostly euro Notes, but some sterling Notes).
The evidence establishes that it was vital to the success of the issue that all the Class A Notes were accorded a AAA rating (or the equivalent) from the rating agencies. This was duly achieved, as was prominently recorded in the Prospectus, which also recorded that Notes in the Classes B1, C1, D1, and E1 ("the junior" Classes) were respectively accorded AA, A, BBB, and BB ratings (or their equivalents).
The rights of the Noteholders
For the purpose of the present proceedings, the effect of the Terms and Conditions can be summarised as follows, although it is right to emphasise that what follows is a considerable simplification, which concentrates on what are the essential aspects of the transaction for present purposes.
The interest received under the mortgages is used to pay the interest due under the Notes. At least until a contractual "Enforcement Notice" (as explained below) is served, interest is paid quarterly to the Noteholders, and if the interest is insufficient, the junior Noteholders become at risk of having their rights to receive interest deferred to the date on which the relevant Notes are redeemed. There is no such provision for deferment in respect of the interest due on the Class A Notes. If the aggregate of the interest paid under the mortgages is greater than the interest which the Issuer has to pay out to holders of the Notes, this produces what is known as "excess spread".
As the mortgages are redeemed, the proceeds are to be used to pay off the Notes, on the quarterly dates on which interest is payable. The order in which principal amounts outstanding on the Notes are to be paid off, in the absence of enforcement, was A1, A2, A3, B1, C1, D1, E1, so A2 Noteholders received no repayment of principal until the A1 Noteholders had all been paid off, and so on down to the E1 Noteholders.
Some of the mortgages may result in a loss (typically where the mortgagor defaults and the proceeds of sale of the security are insufficient to repay the sum secured by the mortgage). In that event the "Principal Deficiency", i.e. the book loss created thereby, is, in effect, debited to the accounts of the junior Noteholders. However, the excess spread, as described above, may be used to extinguish this book loss.
In the event of the service of an Enforcement Notice, much of the above arrangements would change. First, the principal on the Notes would become repayable immediately, so the long stop dates of 2027 and 2045 would become irrelevant. Secondly, the priorities for repayment of principal and payment of interest would change: (i) the three sub-classes of Class A Notes would be collapsed into a single Class, so that they would rank pari passu for the repayment of capital, and (ii) until all the Class A Noteholders had been paid interest and capital in full, the junior Noteholders would not be entitled to receive anything. Thirdly, the Trustee would be entitled to enforce its "Security" over the mortgages – e.g. by selling them.
Condition 2(h) of the Terms and Conditions, after setting out (in considerably more detail than I have summarised them) the "Priority of Payments Post-Enforcement", stated that
"The Noteholders have full recourse to the Issuer in respect of the payments described above, and are accordingly entitled to bring a claim under English law, subject to the Trust Deed, for the full amount of such payments in accordance with Condition 10."
Condition 10 empowers the Trustee to "take such proceedings against the Issuer … as it may think fit to enforce the provisions of the Notes or the Trust Deed", but it is not bound to do so unless a specified proportion of the outstanding Noteholders request it.
By virtue of Condition 9 of the Terms and Conditions, an Enforcement Notice can only be served by the Trustee on the Issuer if, inter alia, two conditions are satisfied. The first is that one of the specified "Events of Default" has occurred; the second is that the Trustee certifies that the event in question is "materially prejudicial to the interests of...
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