Mortgage Developments

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...