Actions taken to seize control of a securitisation structure and the underlying loan portfolio declared void and of no effect.


Two recent High Court cases, Business Mortgage Finance 6 Plc v Greencoat Investments Limited and others [2019] EWHC 2128 (Ch) (the Greencoat Case) and Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd [2019] EWHC 2917 (Ch) (the Roundstone Case) (together, the Business Mortgage Cases), have affirmed a number of principles relating to securities held through the clearing systems and the powersof receivers, including the following:

  • The ability of noteholders to direct the trustee to act is set out in the terms of the transaction documents.
  • The question of who has the ability to direct the trustee should be construed by reference to the specific terms of the transaction documents and how the notes are held within the clearing systems.
  • Where noteholders wish to instruct the trustee, they must establish their entitlement to do so by delivering proof of holding satisfactory to the trustee. A trustee is not bound to act until it has received satisfactory proof of holding (and indemnification, if required).
  • Typically the powers of a receiver are restricted to dealing with the assets over which the issuer has granted security to the trustee and do not extend to control over specific corporate matters, such as the ability to appoint and remove directors of the issuer.

The Business Mortgage Cases follow a number of recent cases which have concerned the validity of actions taken by parties purporting to be noteholders, who have sought to take control of securitisation transactions. The Business Mortgage Cases will be of interest to trustees, issuers and investors in providing greater clarity on the ability (or otherwise) of investors to direct a trustee. They also provide useful guidance as to the construction of "protection of third party" clauses in security documents and provisions governing the appointment of new trustees in trust deeds.

Facts and background

The Greencoat Case

In 2007, Business Mortgage Finance 6 PLC (BMF6) issued six classes of notes backed by a portfolio of commercial mortgages relating to property in the UK. BNY Mellon Corporate Trustee Services Limited (BNY Mellon) was appointed as trustee. In January 2019, Greencoat Investments Limited (GIL) launched a tender offer to purchase notes with an initial settlement date of February 28 2019 (subsequently postponed to July 10 2019). On March 18 2019, GIL announced it would make an initial cash payment to each of the holders of the notes equal to 1% of the purchase price in return for the immediate transfer of their rights under the notes. Although there was no evidence that such payment had been made or that any noteholders had transferred any of their rights in the notes prior to the proposed settlement date (or since), GIL purported to take certain steps to seize control of the securitisation. These purported steps included (i) appointing a trustee, (ii) directing BNY Mellon to declare an event of default, accelerate the notes and declare that the security was enforceable, (iii) appointing a receiver, (iv) removing BNY Mellon as note trustee, (v) replacing the directors of BMF6, and (vi) directing the sale of the underlying loan portfolio.

BMF6 sought declaratory relief against GIL and a number of other parties in relation to these arrangements. Judge Zacaroli held that there was no evidence that GIL was a noteholder within the meaning of the transaction documents when it purported to take the steps described above. The judge decided that the steps taken by the defendants to take control of the securitisation structure were invalid and of no effect.

The Roundstone Case

The Roundstone Case concerned declaratory relief sought by BMF6 against Roundstone Technologies Ltd (Roundstone), the purported purchaser of the underlying loan portfolio. Roundstone asserted that it was a bona fide purchaser without notice when it acquired the rights to the receivables comprising BMF6's loan portfolio and the cash standing to the credit of BMF6's bank accounts. The sale and purchase agreement was executed by a receiver (appointed by GIL when it claimed to be the noteholder) in favour of Roundstone. Judge Nugee supported the judgment in the Greencoat Case that GIL was not a noteholder and that the receiver appointed by GIL had not been validly appointed. As a result, Judge Nugee decided that the purported receiver had no actual or ostensible authority to execute the sale. The court held that the sale was invalid and that Roundstone was not a bona fide purchaser without notice.

The issues

The meaning of a "Noteholder" and the importance of proof of holdings

The key issue in the Business Mortgage Cases was whether GIL was a 'noteholder' and therefore able to instruct the trustee. As the notes were in global form, the holder of legal title to the notes was the holder of the global note, i.e. the common depositary. In order to instruct the trustee by a written resolution, it was necessary for GIL to be a holder of the beneficial interest in the notes which it had sought to acquire through the tender offer. Judge Zacaroli held that a holder of the beneficial interests in the notes meant "only those persons in whose name the Notes are held in the records of the clearing systems".

He supported this conclusion with reference to the definition of "Instrumentholder". He also relied on provisions of the trust deed and the global note to the effect that the trustee was entitled to rely on information provided by the clearing systems as to whether a particular person has an interest in the global note. The judge commented that, when ascertaining the beneficial owner of the notes, wherever the transaction documents envisage looking beyond the actual bearer of the global note, "it goes no further than someone recorded as the holder... in the books of Euroclear or Clearstream." As there was no evidence from the clearing systems that the positions had been transferred to GIL, GIL was not a holder of beneficial interests in the notes and did not have standing to instruct the trustee.

The judgment confirms that the meaning of 'noteholder' is a matter of contractual interpretation, properly informed by an understanding of how interests in global notes are recorded by the clearing systems. The judgment supports the view that any language which "cuts‑through" to beneficial holders (i.e. the persons shown in the records of the clearing systems as the holder of a particular amount of the debt) is a practical matter. The court recognized that, as the ultimate beneficial interest in the notes can subsist through a chain of intermediaries, it is possible that "neither the clearing systems themselves, nor their account holders, would have knowledge of the ultimate beneficiary."

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