Citibank NA v MBIA Assurance SA
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Dyson,The Master of the Rolls |
| Judgment Date | 22 January 2007 |
| Neutral Citation | [2007] EWCA Civ 11 |
| Docket Number | Case No: A3/2006/2654 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 January 2007 |
[2007] EWCA Civ 11
Court of Appeal (Civil Division).
Sir Anthony Clarke MR, Arden and Dyson L JJ..
Andrew Popplewell QC and Jasbir Dhillon (instructed by Reynolds Porter Chamberlain LLP) for the appellant.
Richard Adkins QC (instructed by Denton Wilde Sapte LLP) for the first respondent.
Mark Barnes QC and Andrew Lenon QC (instructed by Cadwalader Wickersham & Taft LLP) for the second respondent.
The following cases were referred to in the judgments:
Armitage v NurseELR [1998] Ch 241.
Garner's Motors Ltd, ReELR [1937] 1 Ch 594.
Law Society v ShanksFLR [1988] 1 FLR 504.
Nelson v HannamELR [1943] 1 Ch 59.
R (on the application of Daly) v Secretary of State for the Home DepartmentELR [2001] 2 AC 532.
Square Mile Partnership Ltd v Fitzmaurice McCall LtdUNK [2006] EWCA Civ 1690.
Wise v LandsellELR [1921] 1 Ch 420.
Contract — Securitisation — Restructuring of Eurotunnel debt — Deed of trust — Deed of charge — Exercise of option — Negative pledge — Eurotunnel debt to be assigned in restructuring in return for notes with option to take cash — Note controlling party directed trustee for noteholders to exercise cash option — Application to court by trustee for noteholders for directions — Trustee had power to exercise cash option — Trustee obliged to exercise power at direction of note controlling party — Exercise of option not disposal for purposes of negative pledge clauses.
This was an appeal by a noteholder (QVT) against the decision of Mann J ([2006] EWHC 3215 (Ch)) deciding the true construction of the trust deed and a deed of charge relating to the notes, on the application of the trustee of the security for the notes, Citibank NA.
The debt in question was Eurotunnel tier 3 junior debt held by a special purpose vehicle (FLF). Some of the notes were secured by a guarantee issued by the second respondent, MBIA. Those held by QVT were not so secured. The Commercial Court of Paris had approved a safeguard plan for Eurotunnel which provided for the assignment of the Eurotunnel tier 3 junior debt to a Eurotunnel company in consideration of the issue of certain notes redeemable as shares in Eurotunnel plus cash. The plan provided that the holder of Eurotunnel tier 3 debt could elect to receive cash instead of redeemable notes and an amount of cash.
MBIA, in its capacity as “note controlling party” as defined in the trust deed, directed the trustee to exercise the tier 3 cash option at the earliest available opportunity. QVT intimated to Citibank it that it would be contrary to Citibank's position as trustee to exercise or consent to the exercise of the tier 3 cash option. Citibank applied in its capacity as trustee for directions from the court.
The judge declared that on the true construction of the trust deed and deed of charge Citibank was obliged to comply with MBIA's letter of instruction and that the exercise of the option did not require the consent of Citibank under the negative pledges contained in the deed of charge and conditions attached to the notes.
QVT appealed arguing that the trustee had no power to exercise the tier 3 cash option and that therefore it could not be instructed to do so by MBIA. QVT submitted that the trustee could only exercise its powers under the deed of charge for the preservation of the secured property and that the exercise of the cash option would not be a preservation of the secured property. QVT further argued that the exercise of the option by FLF required the consent of Citibank under the negative pledge clauses in the deed of charge or notes and MBIA had no right to direct the giving of their consent; alternatively that Citibank's right to exercise the option was not within the rights which MBIA could direct Citibank to exercise.
Held, dismissing the appeal:
1. The trustee did have power to cause the exercise of the tier 3 cash option. The tier 3 cash option was security substituted by the safeguard plan for the Eurotunnel tier 3 junior debt. It was a question of the true interpretation of the trust deed and deed of charge whether in the period prior to enforcement the trustee was to have any right to intervene in the exercise by FLF of its rights in respect of the Eurotunnel tier 3 junior debt. While in the normal way the holder of security would not be expected to take steps in relation to the charged property before the security became enforceable, unless it could show that the sufficiency of the security was threatened, there was nothing which prevented the parties from agreeing that the holder should have rights to intervene before the security became enforceable. (Nelson v HannamELR[1943] 1 Ch 59 applied.)
2. Clause 8.1 of the deed of charge imposed on FLF the duty to do all such other acts or things or execute any other document as might in the opinion of Citibank or MBIA be necessary or desirable to enforce any rights under the participation documents, which included the safeguard plan because that was a document replacing or supplementing the credit agreement. In the circumstances, Citibank had power to cause the exercise by FLF of the tier 3 cash option.
3. It made no difference that the effect of the exercise of the option was to turn property into cash. The exercise of the option was not inconsistent with FLF's right of redemption because when the option proceeds were received, they would be held by way of security. To say that the option ceased to exist was to look at part only of the operation. The true position was that the tier 3 cash option and the rights to the notes redeemable for shares were translated into a sum of money.
4. On the true construction of the trust deed and deed of charge the trustee was bound to give a direction to FLF if so required by MBIA. Moreover the negative pledge clauses did not apply where the action taken by FLF was being taken at the direction of the trustee and, so long as it was the note controlling party, MBIA. The negative pledge clauses made no sense if the consent of those parties had already been given because the purpose of the clauses was to prevent transactions without their consent. The word “dispose” in the negative pledges had to be construed in the context of those clauses to exclude disposals at the direction of the trustee and MBIA. Even if there had been no direction from MBIA and the trustee, there was no act constituted by the exercise of the tier 3 cash option which could be said to be a disposal for the purposes of the negative pledge clauses.
Arden LJ: Introduction
1. This appeal concerns the rights of parties to a securitisation of debt owed by the Eurotunnel group, the operator of the Channel Tunnel. The debt in question is known as “Eurotunnel tier 3 junior debt”. Securitisation is a method of finance which has only been developed comparatively recently. It now accounts for a very considerable volume of the finance raised in the market. It is said to have had considerable effect on banking systems, and to be of economic importance. As it did in this case, securitisation often takes the form of the dedication of a particular source of cash due to be received from a third party to particular securities issued by a special purpose vehicle, or “SPV”, which will often be incorporated in a low tax jurisdiction and which will acquire the cash stream with the proceeds of notes or other securities issued by it. This cash stream is then used to service the payment of income and capital on those securities and, as here, those securities are often issued on the basis that recourse is limited to the assets which are the source of the cash.
2. Securitisation may be achieved in many different ways but in this case it is achieved by a declaration of trust of those assets. The holders of securities are insulated from the effect of insolvency of the company or person producing the source of cash but they can, as this case shows, still be affected in some way by the insolvency or reconstruction of that party. The securitisation process enables a person who has the right to receive the cash flow stream to diversify the risk attached thereto and to raise money for other purposes of its own.
3. The securities which an SPV issues may (as here) be issued in tranches, often carrying different credit risk and maturity dates. This variety can attract a range of investors with different requirements. There is said to be a cash flow “waterfall” to investors in the order in which they take that credit risk. The securities can be wholly or partially “enhanced” by the grant of security, including third party security. In this case, some of the notes issued by the SPV are secured by a guarantee issued by one of the respondents, MBI Assurance SA (“MBIA”). However, those held by the appellant, QVT Financial LP (“QVT”), one of the noteholders, are not so enhanced and QVT is thus at the bottom of the cash “waterfall”. The other respondent to the appeal is the trustee of the security for the notes, Citibank NA (“Citi”).
4. This may be the first case in which the courts have had to consider the rights of the parties to a securitisation. The appeal has had to be heard and this judgment prepared as a matter of urgency because the dispute turns on whether an option can or should be exercised, and the period for exercise of that option expires fifteen days from 15 January 2007.
5. By its claim form dated 20 November 2006, Citi applied for directions from the court in its capacity as trustee of a trust constituted by a trust deed dated 20 February 2001 (“the trust deed”) between Citi, MBIA and Fixed-Link Finance BV (“FLF”) and a deed of charge dated the same date (“the deed of charge”). The subject-matter of the trust is predominantly Eurotunnel tier 3 junior debt owned by FLF. The nominal amount of the debt is denominated in sterling and euros, and FLF holds £506m and €918m of such debt. This has been used to secure some...
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