Who Can Sue For Breach Of The Non-Payment Terms Of A Bearer Note?

Secure Capital SA (SC) was the owner of the entire beneficial interest in a series of notes issued by Credit Suisse (the Notes). The Notes were governed by English law and issued in bearer form. SC held its interest in the Notes through Clearstream. It argued that a provision of Luxembourg law (under which Clearstream operates) gave it the right to assert a claim directly against Credit Suisse for breach of the terms of the Notes. In this judgment, the Court of Appeal rejected that argument, upholding the decision at first instance that Credit Suisse should be granted summary judgment on the claim. The Court of Appeal's conclusion is unsurprising, and reinforces the very limited rights of those having a beneficial interest in bearer notes to enforce their terms.

The Notes

The Notes were linked to life insurance policies, and payment on them was contingent on mortality rates amongst a set of "reference lives". Shortly after the Notes were issued, a change in the mortality tables used to generate estimated life expectancies rendered the Notes effectively worthless. SC argued that Credit Suisse knew or ought to have known of the imminent change, but failed to disclose it, in breach of a term contained in the Pricing Supplement to the Notes. The relevant term was to the effect that Credit Suisse had taken all reasonable care to ensure that information was correct, and that there were no omissions that would make the information provided misleading. The claim was therefore a contractual claim in relation to alleged misleading statements.

The Notes were issued subject to the terms contained in various documents. They were issued in bearer form, each one represented by a single Permanent Global Security which was held by Bank of New York Mellon (BNYM) as common depositary. Interests in the Notes were traded through Clearstream, between accounts held by its members (Account Holders), including, in this case, RBS Global Banking Luxembourg SA (RBSL). Payments due under the Notes would be made by Credit Suisse to Clearstream, and from Clearstream to the Account Holders, who would distribute any sums as appropriate to those of its clients who had an interest in the Notes (the Account Owners). Ultimately, and prior to the issue of these proceedings, RBSL held the whole interest in the Notes for the account of SC as Account Owner.

The Court of Appeal noted the "no look through" principle, under which this system operates. In other words, each link in the...