The Financial List has allowed the claim of certain ultimate beneficial owners (UBOs) of loan notes to continue against the issuer of the notes, where the UBOs are seeking a declaration that an event of default has occurred under the notes: Caxton International Ltd v & Ors v Essity Aktiebolag (Publ) & Anor [2025] EWHC 1477 (Ch). The decision arose in the context of a failed application by the issuer to set aside service of the claim form out of the jurisdiction, on the basis that the claim had no reasonable prospect of success.
The court examined whether the claimants, as UBOs, had sufficient standing to seek declaratory relief. Despite the issuer's argument that UBOs had no direct contractual rights under the notes, the court found it was arguable that the claimants had a sufficient interest in the determination of their rights, given their economic stake. The issuer also relied on the "no look-through" principle, which typically prevents UBOs from asserting rights under intermediated securities. However, the court distinguished this case from Secure Capital SA v Credit Suisse AG [2017] EWCA Civ 1486(see our blog post), noting that the claimants were not seeking to enforce contractual rights but rather to resolve a genuine dispute affecting their interests.
It is notable that the court was willing to consider granting declaratory relief to non-contractual parties in this case. These developments highlight the court's nuanced approach to balancing the formal legal structures governing intermediated securities with the practical realities of the claimants' economic interests. This decision will be of interest to financial institutions, asset managers and clearing and settlement participants as it provides some guidance as to the ability of ultimate beneficial holders of intermediated securities to obtain declaratory relief in respect of those securities.
The issuer has applied to the Court of Appeal for permission to appeal.
We consider the decision in further detail below.
Background
Essity Aktiebolag (publ) is a global hygiene and health company and Essity Capital B.V. is its investment arm, both located in Sweden (together, Essity). The Essity Group has a Euro Medium Term Note Programme (the Notes), which are admitted to trading on the Luxembourg stock exchange.
The claimants are various companies claiming to be the UBOs of three tranches of the Notes, with interests amounting in total to EUR 109,974,000 of nominal value. The Notes are held in bearer form by Euroclear or Clearstream. The account holders shown in the records of the clearing systems are various custodians (the Custodians). The claimants submitted that they hold the economic interest in the Notes and that the Custodians hold the Notes on their behalf.
The dispute was triggered by Essity's sale of a majority stake in a business held by one of its subsidiaries. The claimants claim that this constituted "cessation of a substantial part of Essity's business" and was therefore an occurrence of an event of default, which was continuing, pursuant to the Conditions of the Notes. Following the sale, five different Custodians served acceleration notices on behalf of certain of the claimants (and others). In correspondence, Essity claimed that the acceleration notices were void because they should have been served by the "Noteholder" as defined in the Conditions, which was Euroclear or Clearstream and not the Custodians.
Procedural history
The claimants sought declarations under CPR Part 8 to the effect that:
- The sale constituted a continuing event of default as claimed; and
- In the event of a continuing event of default, the "Noteholder" (as defined in the Conditions to the Notes), which is the party shown in the records of the clearing systems, is entitled to serve a notice of acceleration of the Notes; in other words, the acceleration notices can be served by the Custodians rather than the clearing systems.
The Custodians have not pursued legal action and were not joined to the proceedings.
On 21 February 2025, Essity brought an application to set aside permission to serve out of the jurisdiction, which was granted without notice on 19 December 2024. Essity's jurisdictional challenge was brought on the basis that there was no serious issue to be tried. The parties otherwise accepted that the jurisdiction of England and Wales was the proper forum.
Importantly - for the purposes of the application only - Essity did not dispute that there was a real prospect of the claimants establishing that acceleration notices could be served by the Custodians rather than the clearing systems, and that an event of default had occurred. Rather, Essity's challenge was brought on the sole basis that there was no real prospect of the declarations sought being granted at trial in favour of the claimants, and therefore no serious issue to be tried.
Decision
The court dismissed the application to set aside the order granting permission to serve out of the jurisdiction, finding that there was a serious issue to be tried.
The court noted that, on an application to set aside permission to serve out of the jurisdiction, the test for whether there is a serious issue to be tried is the same as the test that arises on a reverse summary judgment application: is there a real prospect (rather than a fanciful or theoretical prospect) of the claim succeeding? The burden of proof is on the applicant. The court considered each of Essity's submissions in turn.
The claimants' interest in the Notes
The court acknowledged the cogency of Essity's arguments that there was insufficient evidence to establish the claimants' proprietary interest under a sub-trust under the intermediated structure of holding the Notes. Essity noted that, as a Part 8 claim, all evidence that the claimants intended to rely on at trial had already been filed, so it could be inferred that the claimants' evidence was completed.
However, the court found that the evidence as it stood was sufficient to establish a real prospect of proving at trial that the claimants had a proprietary interest in the Notes. While the evidence was incomplete, in the court's view it was more consistent with a chain of trusts and sub-trusts than a different non-proprietary structure. The court thought it understandable that the claimants did not foresee Essity's argument against their standing as UBOs, and said it was not fair to criticise them for failing to include all the documentation which would prove beyond possible challenge their beneficial interests. In particular, the court was not prepared to make an adverse inference at this stage for the evidence being incomplete.
Insufficient interest to be granted declaratory relief
Essity argued that the claimants, as beneficial owners with no direct contractual relationship with the issuer, had no legal rights under the contract between the Essity and its counterparties to the Notes. On this basis, Essity submitted that the claimants lacked sufficient standing to justify the grant of declaratory relief.
In respect of the court's jurisdiction to grant declaratory relief in private cases, the court was referred to the partially dissenting judgment of Aikens LJ in Rolls-Royce plc v Unite the Union [2009] EWCA Civ 387, which has been consistently followed in recent cases. In Rolls-Royce, the Court of Appeal recognised that the court may (in an appropriate case) grant declaratory relief even though the rights or obligations which are the subject of the declaration are not vested in either party to the proceedings.
In the court's view, the claimants had a legitimate interest in the court making a determination in this case, because it would enable them to take appropriate steps to protect their rights derived from the Notes.
Essity argued that the court should be very reluctant to allow a non-party to seek declarations about rights under the contracts of others. It referred to the decision in Federal-Mogul Asbestos Personal Injury Trust v Federal-Mogul Ltd [2014] EWHC 2002 (Comm) as suggesting that in an ordinary commercial situation, a non-party generally has no locus to obtain a declaration in respect of the rights of other parties to the contract, "save in exceptional circumstances".
The court fully accepted that in most commercial cases it is unlikely that a non-party will have sufficient interest in a contract or its effect to justify seeking declaratory relief. However, it did not accept that, by using the words "save in exceptional circumstances", the court in Federal-Mogul meant to go further than the principles expounded in Rolls-Royce. On the present facts, the court found that there was at least a good arguable case that the claimants had sufficient interest in principle to justify seeking declaratory relief.
Infringement of "no look-through" principle
Essity relied on the "no look-through" principle of intermediated securities, whereby each party has rights only against their own counterparty. It objected to the declarations sought on the basis that to allow an UBO to seek determination of rights under the Notes would be wrong in principle and would subvert market practice, per Secure Capital.
However, the court distinguished the instant application from the decision in Secure Capital, where the claimant (which was an UBO) sought damages for breach of a term of the notes by the defendant. Secure Capital required the court to consider whether contractual rights existed and could be enforced by the claimants. In the court's view, the question raised in the present case was subtly different, as it was common ground that the claimants had no contractual rights. Rather, the question was whether the claimants could seek a declaration to determine a disagreement about rights under the Notes, in circumstances where that uncertainty affected the claimants' interests.
The court found it hard to see why a genuine dispute about rights under the Notes should not be determined at the instance of the claimants, provided they had a sufficient and legitimate interest and any other remaining considerations were satisfied (see below). Dealing with these final points, the court concluded:
- There was no contract precluding the claimants from seeking a determination.
- That to allow the claimants to seek declarations on Notes in respect of rights affecting their interests would not wrongly subvert a structure which is intended to prevent them from seeking a determination, in particular because "in substance but not in form, the Claimants are the real creditors".
- There was no evidence to support the assertion that allowing the claimants to seek declarations would be an abuse of process or cause disruption to the relevant capital market.
- The real question was whether the declarations sought would serve a useful purpose (see below).
Will the declarations serve a useful purpose?
In rejecting Essity's submission that the declarations sought would serve no useful purpose, the court noted that the issue arose from the fact that the Custodians were not parties to the claim and their views were unknown. In particular, they have numerous account holders, not all of whom will necessarily give the same instructions. Without evidence of the Custodians' contracts with the claimants, it was also unknown to what extent they had discretion or their duties were purely ministerial. This contrasted with the position of the clearing systems, which had no interests under the Notes.
The court recognised that persons interested could be indirectly prejudiced by a declaration made by the court in their absence, and that all interested persons should be made parties except in very special circumstances (see Tesla, Inc. v Interdigital Patent Holdings, Inc. [2025] EWCA Civ 193). However, in the court's view, this was not the type of case in which an absent party could sensibly object on the basis of denial of a right to be heard, provided all relevant arguments were advanced to the court. Here, those arguments were binary and would be advanced by the current parties. The only question where the Custodians might have a different approach was on the appropriateness of making declarations at all, given the possibility of their having conflicting interests.
The court emphasised that joining the Custodians would make it more likely that the declarations would have effect, and acknowledged that a trial judge might exercise their discretion to refuse the declarations sought in the absence of the Custodians or without clarity as to their position. However, the court was unable to conclude that this was bound to happen, so that the claimants had no real prospect of success.
The court therefore dismissed the application.
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