UK: Mortgage Developments

Last Updated: 25 July 2007
Article by Nicholas Pike

Citibank NA and MBI Assurance SA v QVT Financial LP

(2007) EWCA Civ 11

The Court of Appeal was asked to decide on the rights of various parties following a securitisation of debt owed by the Euro Tunnel Group, which operated the Channel Tunnel. Whilst these rights depended partly on the interpretation of highly complex finance documents, various general points emerged on the rights of a mortgagee and the duties of a trustee.

Citibank NA had applied for directions in its capacity as trustee under the terms of a trust deed dated 20 February 2001 made between Citibank, MBI Assurance SA and Fixed-Link Finance BV. These parties had entered into a deed of charge on the same date. The trust related to what was described as "Euro Tunnel tier 3 Junior Debt" of £506 million and e918 million owned by Fixed- Link Finance, which was a special purpose vehicle. This debt was used to secure seven tranches of notes, having aggregate nominal amounts of £432,050,000 and e745 million.

By August 2006 the Euro Tunnel Group had started proceedings in the French courts for approval of a restructuring Safeguard Plan. The Commercial Code of Paris had approved the Safeguard Plan, which (so far as the appeal is concerned) provided for the assignment of the Euro Tunnel tier 3 Junior debt by Fixed-Link Finance to a Euro Tunnel company in return for the issue of further notes redeemable as shares in Euro Tunnel together with some cash. The holder of the Euro Tunnel tier 3 debts had an option to receive cash instead of shares in Euro Tunnel, but only at 61.9% of the par value of the notes.

On 22 November 2006, MBI Assurance, which was the "Note Controlling Party" under the trust deed, directed Citibank (as trustee) to exercise the cash option as soon as possible. QVT Financial, who instigated this Appeal, had notes which were not secured and argued that Citibank (as trustee) should not exercise the cash option. Citibank sought directions and on 30 December 2006 the High Court, having interpreted the trust deed and deed of charge, held that MBI Assurance was entitled to direct Citibank to exercise the cash option and that Citibank was obliged to comply with that instruction. QVT Financial appealed on two issues.

Issue 1: Does Citibank NA (as trustee) have power to cause Fixed-Link Finance (being a special purpose vehicle) to exercise the cash option?

QVT Financial argued that the trustee has no power to exercise the cash option because unless and until the security becomes enforceable (which it had not), the powers of the trustee (as with any mortgagee) are limited to stepping in if necessary because of a threat that the security will be impaired and it is necessary to protect and preserve the charged assets.

MBI Assurance disagreed and argued that whether the trustee could exercise the cash option was a matter of contract law. It submitted the finance documents empowered Citibank NA to cause Fixed-Link Finance to exercise the option.

Lady Justice Arden agreed with MBI Assurance and said it was a question of interpretation of the trust deed and the deed of charge as to whether, at a time when the security had not been enforced, the charge holder had the right to intervene. Clause 8.1 of the deed of charge imposed on Fixed-Link Finance the duty to "do all such other acts or things or execute any other document as may in the opinion of Citibank NA or MBI Assurance be necessary or desirable to& enforce any rights under the [finance documents]." The Safeguard Plan approved by the French courts was held to be a "document" therefore, on the Court of Appeals' interpretation of the finance documents, Citibank NA had the power to cause Fixed-Link Finance to exercise the option.

Thus the Court of Appeal confirmed that whilst a mortgagee cannot normally take steps in relation to charged assets before its security becomes enforceable unless it can show the value of the security was threatened, the parties to the transaction can contract in the security documents to waive this constraint and, taking this example, enable the charge holder to exercise a cash option before the security has been enforced.

Issue 2: Is the trustee obliged to exercise the option or must it exercise its own independent judgment in performing its duties as trustee?

Trustees have a duty to act in good faith and to the benefit of beneficiaries under the trust. This duty also applies to security trustees. QVT Financial argued that if MBI Assurance can direct the security trustee to exercise the option, this would cause the trustee to be in breach of that duty. Its point was that if MBI Assurance can direct the trustee to exercise the option (which may also have involved consenting under the negative pledge clause) the trustee will actually cease to be a trustee of the security. Instead it would be a nominee, unaccountable to the note holders and not even having a duty to act in good faith.

For its part, MBI Assurance argued again that it was a question of contract, and that the finance documents required the trustee to exercise its rights in accordance with MBI Assurance's direction.

The Court of Appeal held that the trustee was obliged to give the direction to Fixed- Link-Finance to exercise the option. The first reason was that the finance documents had to be interpreted accordingly. The second reason of more general application is that in giving effect to the provisions of the finance documents, the trustee continued to have an obligation of good faith, and the point had not in this case been reached where the trustee's powers were so reduced that in fact it ceased to be a trustee at all.


In addition to offering some clarification on the role of the security trustee, this case emphasises both the scope parties have to negotiate their financial transactions and the importance Courts attach to these contractual terms. This case also suggests that if the transaction documents are drafted appropriately, a charge holder may be entitled to step in before its security has actually become enforceable.

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.

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