Citibank NA & Anor v QVT Financial LP

This appeal concerns the rights of parties to a securitisation of debt owed by the Eurotunnel group, the operator of the Channel Tunnel. The debt in question is known as “Eurotunnel tier 3 junior debt”. Securitisation is a method of finance which has only been developed comparatively recently. It now accounts for a very considerable volume of the finance raised in the market. It is said to have had considerable effect on banking systems, and to be of economic importance. As it did in this case, securitisation often takes the form of the dedication of a particular source of cash due to be received from a third party to particular securities issued by a special purpose vehicle, or “SPV”, which will often be incorporated in a low tax jurisdiction and which will acquire the cash stream with the proceeds of notes or other securities issued by it. This cash stream is then used to service the payment of income and capital on those securities and, as here, those securities are often issued on the basis that recourse is limited to the assets which are the source of the cash.

Securitisation may be achieved in many different ways but in this case it is achieved by a declaration of trust of those assets. The holders of securities are insulated from the effect of insolvency of the company or person producing the source of cash but they can, as this case shows, still be affected in some way by the insolvency or reconstruction of that party. The securitisation process enables a person who has the right to receive the cash flow stream to diversify the risk attached thereto and to raise money for other purposes of its own.

The securities which an SPV issues may (as here) be issued in tranches, often carrying different credit risk and maturity dates. This variety can attract a range of investors with different requirements. There is said to be a cash flow “waterfall" to investors in the order in which they take that credit risk. The securities can be wholly or partially “enhanced” by the grant of security, including third party security. In this case, some of the notes issued by the SPV are secured by a guarantee issued by one of the respondents, MBI Assurance SA (“MBIA”). However, those held by the appellant, QVT Financial LP (“QVT”), one of the noteholders, are not so enhanced and QVT is thus at the bottom of the cash “waterfall”. The other respondent to the appeal is the trustee of the security for the notes, Citibank NA (“Citi”).

This may be the first case in which the courts have had to consider the rights of the parties to a securitisation. The appeal has had to be heard and this judgment prepared as a matter of urgency because the dispute turns on whether an option can or should be exercised, and the period for exercise of that option expires fifteen days from 15 January 2007.

By its claim form dated 20 November 2006, Citi applied for directions from the court in its capacity as trustee of a trust constituted by a trust deed dated 20 February 2001 (“the trust deed”) between Citi, MBIA and Fixed-Link Finance BV (“ FLF”) and a deed of charge dated the same date (“the deed of charge”). The subject-matter of the trust is predominantly Eurotunnel tier 3 junior debt owned by FLF. The nominal amount of the debt is denominated in sterling and euros, and FLF holds £506m and €918m of such debt. This has been used to secure some seven tranches of notes, referred to below as “the notes”, having aggregate nominal amounts of £432,050,000 and €745m. It is not clear whether the Eurotunnel tier 3 junior debt owned by FLF has been formally assigned to the trustee and notice given to the Eurotunnel group, and these proceedings have been conducted on the basis that FLF is the legal holder of this debt.

In August 2006, the Eurotunnel group, having encountered financial difficulties, started proceedings in the French courts for approval by the court of a restructuring plan, called the Safeguard Plan (“SP”). Immediately prior to the hearing of this appeal on 15 January 2007, the Commercial Court of Paris approved the SP pursuant to provisions of the French Commercial Code. So far as relevant, that plan provides for the assignment of the Eurotunnel tier 3 junior debt by FLF to a Eurotunnel company in consideration of the issue of certain notes redeemable as shares in Eurotunnel (“the NRS”) plus cash. The plan provides that the holder of Eurotunnel tier 3 debt may elect to receive cash instead of NRS and an amount of cash. I refer to that option as the “tier 3 cash option". This option does not give noteholders the par value of their notes but only some 61.9% of the par value of their notes.

By a letter dated 22 November 2006, MBIA, in its capacity as "note controlling party" as defined in the trust deed, directed the trustee to exercise the tier 3 cash option at the earliest available opportunity. QVT intimated to Citi it that it would be contrary to the Citi’s position as trustee to exercise or consent to the exercise of the tier 3 cash option. In those circumstances, Citi sought directions from the court. This appeal raises questions of interpretation. It is not concerned with the question of the propriety of the exercise by the trustee or MBIA of any power or with the question whether MBIA would be acting in breach of any implied term of the trust deed or deed of charge.

The matter came before Mann J and the judge gave judgment on 13 December 2006, and by his order declared that on the true construction of the trust deed and deed of charge Citi was obliged to comply with the instruction in the letter dated the 22 November 2006 and in particular that Citi had power to exercise the tier 3 cash option or to instruct FLF to exercise it, that MBIA had power pursuant to the trust deed and deed of charge to direct or instruct Citi to exercise that option and that the exercise of that option did not require the consent of Citi under the negative pledges contained in the deed of charge and conditions attached to the notes.

The judge's judgment contains a clear and useful summary of the underlying facts on this matter, and it is common ground that paragraphs 1 to 24 of his judgment, which I need not repeat, accurately set out the background to this case. I need now only set out those parts of the document which were critical to the argument on this appeal.

Clause 4 of the deed of charge sets out the security which FLF gave over the Eurotunnel tier 3 junior debt in favour of Citi. It is sufficient to set out the following extract:

“ 4.1 As continuing security for the payment and discharge of the Secured Obligations but always subject to clause 9, the Issuer with full title guarantee, in favour of the Trustee for the Trustee itself and on trust for the Issuer Secured Creditors, hereby assigns by way of security all of its right, title, interest and benefit present and future under or in respect of:

4.1.1

The Participation Documents… (including… any shares, bonds or other debt obligations of securities issued in exchange, conversion or substitution therefore…) all proceeds thereof…

including… all rights to vote and exercise any other decision -- making rights pursuant to the Participation Documents… ”

For this purpose, “Participation Documents” include an agreement called the Credit Agreement "and any document or agreement amending, replacing or supplementing" the Credit Agreement. The Credit Agreement is the document under which Eurotunnel tier 3 junior debt is repayable.

Clause 8 of the deed of charge is headed “ Perfection of the trustee's security" and it in material part provides:

“8.

PERFECTION OF THE TRUSTEE’S SECURITY

8.1

The Issuer will from time to time at the request of the Trustee (at the direction of MBIA, if it is the Note Controlling Party) execute and deliver all such supplements and amendments hereto and all such legal assignments, transfers, mortgages, legal or other charges or securities or do all such other acts or things or execute any other documents as may in the opinion of the Trustee or MBIA be necessary or advisable to:

8.1.1

effectively provide security or to perfect any security provided to the Trustee, on behalf of itself and on behalf of the Issuer Secured Creditors, over the Issuer’s estate or interest in any property or assets of whatsoever nature or tenure and wheresoever situate for the payment or discharge of the Secured Obligations;

8.1.2

take all such actions as are necessary to perfect or protect the validity of any security made or to be made by or pursuant to this Deed;

8.1.3

enforce any rights under any of the Transaction Documents or Participation Documents to which the Issuer is a party or under which the Issuer has any rights …”

The negative pledge clause (clause 19.4) in the deed of charge provides so far as material as follows:

“The Issuer… will not at any time… without the prior written consent of the trustee and MBIA (for so long as it is the Note Controlling Party):

….

19.4.2

sell, convey, transfer, lease or lend otherwise dispose of (or attempt to sell, convey, transfer or lease, lend otherwise dispose of), whether by means of one or a number of transactions related or not and whether at one time or over a period of time, the whole or any part of the Issuer’s undertaking, property or assets, or enter into any agreement (otherwise than an agreement conditional upon the consent or agreement of the Trustee) for any such sale, conveyance, transfer, lease, loan or other disposal.”

The negative pledge clause in the conditions attached to the notes is in similar, but not identical, form. It provides that

“So long as any of the Notes … remain outstanding, the Issuer shall not, without the prior written consent of the Trustee and MBIA …(for so long as it is the Note Controlling Party)…

4.1.1

create or permit to subsist any security interest whatsoever over any of its assets or sell, lend, part with or otherwise dispose of all or any part of its assets, including any uncalled capital or its undertaking present or future."

The "Note Controlling Party" is defined to mean MBIA, unless it is in default or has ceased to be liable on its guarantee of the notes.

Clause 12.2 of the trust deed provides for FLF’s rights under the “Financing Agreements”, which include the Credit Agreement, to be exercisable by the trustee but the trustee is bound to exercise those rights in accordance with part 1 of schedule 4 to the trust deed:

“12.2

Proceedings relating to the Financing Agreements

Subject to Clause 14.1.7, all the Issuer’s rights in respect of the Financing Agreements (including, without limitation, its rights to vote as a Lender (as defined in the Financing Agreements)) which have been assigned to the Trustee pursuant to the Deed of Charge shall, unless and until the Secured Obligations have been discharged in full, be exercised by the Trustee in accordance with Part 1, Schedule 4.”

Part I of schedule 4 provides so far as material:

“Provisions for Meetings of Noteholders and Provisions relating to the Financing Agreements

Part 1

Provisions for votes in relation to the Financing Agreements

If MBIA is the Note Controlling Party

So long as MBIA is the Note Controlling Party, all the Issuer’s rights in respect of the Financing Agreements (including, without limitation, its right to vote as a Lender (as defined in the Financing Agreements)) which have been assigned to the Trustee pursuant to the Deed of Charge shall be exercised by the Trustee acting solely and in all circumstances, in accordance with the prior written instructions of MBIA (subject as aforesaid).”

The trust deed and deed of charge both contain provisions enabling the trustee to waive or consent to actions by FLF. In the case of the trust deed the relevant provision is clause 8, which provides in material part as follows:

“ The Trustee shall, only if directed by MBIA (while MBIA is the Note Controlling Party) and otherwise may…authorise or waive, on such terms and conditions (if any) as shall seem expedient to it or MBIA (whilst the Note Controlling Party), any proposed breach or breach of any of the covenants or provisions contained in these presents, the Notes or any of the other Transaction Documents…; any such authorisation, waiver … shall be binding on the Noteholders… provided that (i) the Trustee shall not exercise any powers conferred upon it by this clause 8.1… so as to authorise or waive any such proposed breach or breach relating to any of the matters the subject of the Basic Terms Modifications…”

The Transaction Documents include the deed of charge.

There is a lengthy definition of "Basic Terms Modification" in part 2 of schedule 4 to the trust deed. The definition includes any proposal:

“any proposal

(a)

to change any date fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal or interest payable on any date in respect of the Notes or to alter the method of calculating the amount of any payment in respect of the Notes on redemption or maturity or the date of such payment…

(b)

to effect the exchange, conversion or substitution of the Notes for, or the conversion of the Notes into, shares, bonds or other obligations or securities of the Issuer, MBIA or any other person or body corporate formed or to be formed…”

The relevant provision in the deed of charge is clause 31.2 which provides in material part as follows:

“Any waiver and any consent by the Trustee and MBIA under this Deed must be in writing and may be given subject to any conditions thought fit by the Trustee (acting on the instructions of MBIA for as long as it is the Note Controlling Party).”

The Commercial Court of Paris gave its approval to the SP on 15 January 2007 subject to an addendum which is not material to this appeal. The provisions of the SP which are material are as follows:

“2.2.3.2 Tier 3 Debt

2.2.3.2.1 The following provisions relate to the Tier 3 Debt:

(a)

the holders of the Tier 3 Debt shall assign the debt corresponding to the Tier 3 Debt to GET SA or to a subsidiary designated by GET SA, in exchange of [sic] the consideration described in paragraph 2.2.3.2.1(b);

(b)

each of the assignors of the Tier 3 Debt shall be offered a pro rata share:

(i)

of 75.69% of the nominal amount of the NRS (being an aggregate amount of £965 million divided into a nominal amount of £430,523,751 (being 631,298,502 euros) and of 783,729,248 euros (being £534,476,249)) (the Tier 3 Consideration) allocated as follows:….

(ii)

a cash payment in the amount of £66,920,790 (being 98,129,300 euros) and of 121,823,199 euros (being £83,079,210).

……

(c)

the terms of the Tier 3 Debt will be amended so that it is payable upon first demand by the creditor;

……

2.2.3.2.2 During a period of 15 calendar days from the date of the court decision approving the Safeguard Plan, each holder of the Tier 3 Debt other than the Tier 3 Cash Option Arrangers (as defined in Annex 4 – paragraph 1 to this Proposal) will have an option to receive cash rather than all or part of the NRS constituting the Tier 3 Consideration referred to in (i) of paragraph 2.2.3.2.1(b) above (the Tier 3 CashOption). Once exercised, this election shall be irrevocable. For the avoidance of doubt, if a holder of Tier 3 Debt does not notify its election to receive cash consideration within the 15 calendar day period referred to above, it will be deemed to have elected to receive NRS.

Certain holders of the Tier 3 Debt have indicated to Eurotunnel their intention to exercise the Tier 3 Cash Option for an overall principal amount of Tier 3 Debt of approximately 570 million pounds sterling (being approximately 835.8 million euros) if this Proposal is approved.

….

The judge dealt first with the power of the trustee to exercise the tier 3 cash option. He held that the security rights under clause 4 extended to the Participation Documents and that the rights conferred by the SP were rights conferred by a document amending replacing or supplementing those documents (specifically the credit agreement) within the definition of Participation Documents to which I have referred. He further held that the right to exercise the option was a “voting or other decision-making right within clause 4". Alternatively, in his judgment, the trustee could require FLF to exercise the tier 3 cash option under clause 8.1.3 of the deed of charge. This empowered the trustee to require FLF to do all such other acts or things as in the opinion of the trustee or MBIA may be necessary or advisable “to enforce any rights under any of the…Participation Documents..”.

The judge held that the fact that the tier 3 cash option was charged to the trustee meant that the trustee could require its exercise at any time:

“40.

Since it is clear that the security rights give such extensive rights to Citibank, and that those rights cover the right to exercise the Tier 3 Option if it can exercise those rights itself, then in my view it follows that Citibank has the right to direct FLF to exercise it if necessary. That must at the very least be implicit in the security provisions. There is no commercial reason to distinguish between cases in which Citibank can technically vote or elect itself from those where, for technical reasons, it cannot do so but FLF could. Through that route, therefore, Citibank has the power to direct FLF as to how they should be exercised. The right to exercise the Tier 3 Option would fall within that.”

The judge then dealt with the question whether MBIA had power to give directions to the trustee to exercise the tier 3 cash option. This depended on clause 12 .2 of the trust deed, read with part I of schedule 4.

The judge next rejected the argument that no such power arose prior to enforcement of the security:-

“43.

Mr Popplewell’s main point on this related to timing and the purpose of the exercise. He sought to say that exercising the option was an act of disposal which was not the sort of thing that a mortgagee was entitled to do under a mortgage before the time for enforcement has arisen. His case depends on an analysis of mortgages and the nature of a mortgagee’s rights; I have outlined his arguments above. I find that this argument fails. Assuming for present purposes that the exercise of the option could be characterised as a disposal, it does not follow that the mortgagee cannot exercise it. Just what a mortgagee is entitled to do before a default will depend on the terms of the mortgage, not on the label that one chooses to apply to the act. There are few hard and fast rules. Mr Popplewell submitted that it is trite law that a mortgagee has no power to dispose of mortgaged property while the mortgagor is performing its obligation. That does not seem to me to be right - there are many cases in which there is technically a power to dispose of mortgaged property from the outset because the statutory power is made exercisable from the date of the mortgage. But in any event that does not help in the present case. The real question is whether, on the true construction of the deed of charge, Citibank can exercise this right. An exercise by a mortgagee of his rights at any time might be regarded as “enforcing” his mortgage, but the real question is whether the act can be done at that time in question. Acts to preserve the security can be done without the further “enforcement” of the obligation to repay. There is no express bar in the deed of charge itself which would prevent the exercise of the Tier 3 Option, and no reason for implying one either. There are all sorts of good reasons why it might be desirable to do it pre-enforcement (in the sense of enforcing payment of the bonds), not the least of which is the fact that it only lasts 15 days. Whether or not it can be done depends on the terms of the mortgage, not on some entrenched principle of the law of mortgages. This mortgage, in my view, entitles Citibank to give directions as to FLF to execute the option, for the reasons given above. Since there is no express or implied limitation confining such a direction to circumstances of enforcement (in the sense of enforcing the primary payment obligations) or even default, the right can be exercised by Citibank if and when the Tier 3 Option comes into existence.

44.

Mr Popplewell also submitted that to exercise the option would destroy the commercial nature of the bond. It turned it from a securitisation of Channel Tunnel investments into a cash investment. The words of the document are plain. I have seen nothing in the documentation which requires Citibank and FLF in all circumstances to maintain something which amounts to an investment in the Eurotunnel financing. On the other hand there is wording which, in my view, plainly covers the right to exercise, or direct the exercise of, the option. This argument therefore also fails.”

The next question was whether or not MBIA’s power extended to directing Citi to exercise the tier 3 cash option. The judge held that the right to exercise the option was a right “in respect of” the credit agreement.

The judge next dealt with a submission that this interpretation resulted in an impossible diminution of the “irreducible core" of the trustee's obligations, an expression used by Millett LJ in Armitage v Nurse [1998] Ch 248. The judge held:

“48.

It is not clear to me whether Mr Popplewell utilises the “irreducible core” principle as a principle of construction (so as to cut down what the words might otherwise mean) or as a principle of validity. Millett LJ was probably using it in the latter way, though it is no doubt capable of operating in the former. But however it is sought to be deployed, the principle does not assist in the present case. There is no doubt that while MBIA is the Note Controlling Party it is given a very large degree of control over the subject matter of the trust. It can give directions as to the taking or non-taking of enforcement action; it can direct the substitution of another debtor on the Notes; it can direct certain modifications of the Notes; and it can do a lot of other things, some of which one would expect that a trustee might decide to do, and others which would be more in the realm of matters for the beneficiaries to decide. However, even taken together, they do not contravene Millett LJ’s principle. The trust regime as a regime remains intact. The trust property is still held on identifiable trusts; Citibank still has functions as trustee; if MBIA does not give directions when entitled to, or when MBIA ceases to be the Note Controlling Party, Citibank will have even more functions. What has happened is that various powers have been surrendered to MBIA for the time being, but that was done as a matter of commerce. The position would look less unusual if the directions were to come from the G Noteholders (who are likely to have similar interests to MBIA), but would still be in substance the same. The Noteholders all take their commercial interests on terms that, and knowing that, MBIA wields the power that it wields. Whether or not this is good business, it is certainly not inimical to a trust structure. It is what the Noteholders have agreed should be the case. Clause 10.4 of the trust deed and Condition 15 of the Notes make the position clear. I do not think that there is anything in this point of Mr Popplewell.”

Lastly the judge dealt with the question whether or not the exercise of the option would result in a breach of the negative pledge clauses. He held as follows:

“52.

I do not consider that it would be such a disposal. The option does not come into existence until the Safeguard Plan comes into effect. At that point the Eurotunnel debt formerly vested in FLF goes. The plan is equivocal as to whether it is assigned to GET SA or whether it is extinguished by a deemed repayment, but that probably does not matter. In its place is a new bundle of rights – rights to cash and to the hybrid notes, with a cash option for the latter. If that state of affairs had arisen consensually there would almost certainly have been a disposal at that point (but no-one has suggested that there was one). What is left is the consideration. The Option gives the right to take the consideration in an alternative form. At the point of election the property rights in respect of the Plan rights are a bundle of rights to take certain property. They should in my view be viewed as a bundle. There is no proposal that FLF should dispose of those rights in the sense of parting with them in favour of another. The proposal is that FLF should exercise one of the rights in a certain way so as to receive its consideration in form B (cash) when otherwise it would have received it in form A (notes). While the right to notes disappears on the election to receive cash, there is not, in my view, a disposal for the purposes of clause 19.4. The notes will never have been received, so it cannot be they that have been disposed of. It seems to me to be artificial or unduly formalistic to regard that as a disposal of the right to the notes. It is more realistic to regard what has happened as an exercise of rights, and no more. No property passes from FLF; nothing is destroyed; there is no transferor or transferee. All those are possible badges of a disposal. None occurs. There is therefore no disposal for the purposes of clause 19.4.

53.

If it be thought that that is a strange conclusion because it might leave FLF with an uncontrolled right to make an election in which Citibank could be interested, I would add (although the point was not argued before me) that that is not the inevitable consequence of my decision. I have identified above Citibank’s formal interest in the exercise of the option and its rights in respect of it. Its proprietary rights in the benefits of the Safeguard Plan carry with them the right to vote or direct the voting, and it must follow that it could restrain FLF from making an election that it did not wish to have made. That would be a necessary adjunct to its own rights as mortgagee (by assignment) of the benefits of the plan. This produces a commercially sensible regime in relation to the exercise of such rights in a case like this.”

QVT’s case under this issue is that the trustee has no power to exercise the tier 3 cash option and that therefore it cannot be instructed to do so by MBIA. Mr Andrew Popplewell QC on its behalf submits that the trustee can only exercise its powers under the deed of charge for the preservation of the secured property and that the exercise of the cash option would not be a preservation of the secured property. The basic law on the right to preserve mortgaged property is summarised in these terms in Fisher and Lightwood’s Law ofMortgage (11th ed) (2002):

“ Right to preserve the mortgaged property

16.4

In order to preserve the sufficiency of his security, the mortgagee is entitled, from the time of the mortgage, to have the mortgaged property preserved from deterioration or diminution in value, either at the hands of the mortgagor, or of any other person whose interest is inferior to that of the mortgagee. That applies whether he is in or out of possession. When in possession, the mortgagor may also, in some circumstances, be liable as tenant of the mortgagee. However, the mortgagee is under no duty to preserve his security unless and until he takes possession of it. ”

MBIA does not rely on this principle in any way. It does not, for example, seek to say that it is entitled to cause FLF to exercise the tier 3 cash option simply because it otherwise would expire and cease to exist, or because the value of the security is insufficient.

Mr Popplewell prefaces his submissions on this issue by submitting that the underlying Eurotunnel debt which is security for the notes is fundamental to the commercial purpose of the notes. He submits that it is not just the value of the security which matters but the nature of that security. He submits that that is central to the structure because it is the performance of the underlying debt, the Eurotunnel tier 3 junior debt, and its predicted performance which will determine the value of the notes and the price at which they will be bought and sold on the market. Indeed, unusually, under the terms of issue of the notes Eurotunnel will benefit if the credit rating from the debt improves so that when they come to be repaid they are either repaid in full or refinanced at a higher value than they were priced for the purposes of the issue of the notes. QVT submits that it follows that it is not open to MBIA or Citi to decide that the notes or Eurotunnel debt are overvalued and that the security would be better invested in other investments.

Mr Popplewell submits that unless and until the security becomes enforceable the powers of the trustee are limited to the powers which the law always affords to the mortgagee to step in if it is necessary to do so because there is a threat of impairment to the security and it is necessary to protect the security by way of preservation. For the purposes of this submission, Mr Popplewell relies on clause 11 of the deed of charge which enables FLF to make payments out of accounts charged as part of the security. He further relies on clause 16 of the deed of charge which provides for the trustee to exercise the power of sale and other powers conferred by section 101 of the Law of Property Act 1925 in the event the security becomes enforceable. Mr Popplewell contrasts the effect of the exercise of the option. He submits that the exercise of the tier 3 cash option would result in the extinction of the right to NRS. He submits that the effect of the approval by the Commercial Court of Paris of the SP is that (although the SP is unclear as to the exact date when the NRS are issued) holders of Eurotunnel tier 3 junior debt become immediately entitled to rights to the NRS. He further submits that it is common ground that one way or another the NRS are part of the security charged by clause 4 of the deed of charge. He does not accept that the judge was right in saying that the rights under the SP fall within the definition of Participation Documents, because he submits that the order of the Commercial Court of Paris is not a “document” for the purpose of that definition.

Mr Popplewell submits that the exercise of the tier 3 cash option would amount to destruction and not preservation. Only if the security was being impaired could the trustee step in and exercise the option. He submits that this ties in with his commercial argument that, so far as investors of the notes are concerned, the security is a Eurotunnel debt instrument and the trustee cannot simply decide to sell that instrument because it considers that there is a more attractive investment. Mr Popplewell submits that the trustee's obligation is to retain the security in specie as a Eurotunnel instrument and that accordingly, only in the rare situation where the value of that is threatened, can the trustee exchange that instrument for other security. It would follow from Mr Popplewell's submission that if from the outset an asset had been charged with an option to sell it at a particular price to a particular person, the mortgagee could not exercise that option unless his security was threatened.

Alternatively, Mr Popplewell submits that the trustee cannot rely on the powers of the mortgagee to take steps to preserve the security unless it is able to establish and justify that the right to the NRS was an inadequate and inferior security. Mr Popplewell submits that this follows from the limited powers of the mortgagee to intervene in relation to the security prior to the security becoming enforceable. Mr Popplewell submits that the proposition for which he contends is deducible from the fact that the trust deed confers limited powers on the trustee prior to the security becoming enforceable.

Mr Popplewell submits that the judge was wrong to rely in the alternative on clause 8 of the deed of charge. He submits that this is limited to taking steps for the perfection of security. He relies on the cross heading to that effect. To give it wider effect would cut across the limitation on the trustee's powers prior to enforcement of the security. It would also on his submission be contrary to the right of redemption and the commercial purpose of the deed of charge. Mr Popplewell submits that the whole of clause 8 has to be read in the context of preservation of the security. For example, if the charge is an equitable charge, the trustee may need to ask FLF to perform certain acts even though as a matter of substance the right to those acts is vested in the trustee. The purpose of clause 8 is to assist the trustee to do that which it is otherwise entitled to do but which it requires FLF's assistance in doing. Were it otherwise, then on his submission the width of clause 8.1.3 would render most of the rest of the document otiose.

Mr Mark Barnes QC, for MBIA, effectively meets these arguments by submitting that it is all a matter of contract. He submits that under the terms of the trust deed and deed of charge the right to exercise the tier 3 cash option is part of the security for the notes and that the trustee can require its exercise on behalf of the noteholders at any time, whether the mortgage is legal or equitable. He submits that as the charge was fixed FLF could not deal with the option without the consent of the trustee in any event. He relies on the decision of this Court in Nelson v Hannam [1943] 1 Ch 59, to which I refer below.

In the alternative Mr Barnes seeks to uphold the decision of the judge on issue 1 on the basis of clause 8 of the deed of charge. He submits that the SP is a “document” which replaces the credit agreement for the purpose of the definition of “participation document".

Mr Barnes further submits that Mr Popplewell's argument that the commercial purpose of the securitisation was that the retention of the security in the form of a Eurotunnel debt is beside the point because there has had to be a restructuring of the Eurotunnel group. Furthermore, MBIA does not contend that the trustee has wide powers to vary the security, but only that it has power to deal with the situation with which it has been faced. In any event, cash was closer to the form of investment which the noteholders had originally made than debt convertible into equities (such as the NRS).

In my judgment, the judge was right in his conclusion on this issue. The tier 3 cash option was security substituted by the SP for the Eurotunnel tier 3 junior debt. It is a question of the true interpretation of the trust deed and deed of charge whether in the period prior to enforcement the trustee is to have any right to intervene in the exercise by FLF of its rights in respect of the Eurotunnel tier 3 junior debt. While in the normal way the holder of security would not be expected to take steps in relation to the charged property before the security becomes enforceable, unless it could show that the sufficiency of the security was threatened, there is nothing in my judgment which prevents the parties from agreeing that the holder should have rights to intervene before the security becomes enforceable. Moreover, in my judgment, Nelsonv Hannam is authority for this proposition, and it is to that case that I now turn.

In Nelson v Hannam, the mortgagor of a building lease assigned the lease by way of security to the mortgagee, together with an option conferred on the mortgagor by the lessors of the property to purchase the reversion on completion of the buildings. The mortgagee exercised this option, shortly after a summons for foreclosure had been taken out against the mortgagor, and a dispute then arose between the parties as to whether the mortgagor could require the mortgagee to convey to him the freehold reversion on redemption of the mortgaged property and on payment of the purchase price of the freehold reversion. This court held that the mortgagor was so entitled, but it is not that point with which this court is concerned on this appeal. The court also held in the course of its judgment that the option was part of the security and that the mortgagee could exercise the option during the currency of the mortgage because that is what the agreement between the parties had provided. Thus, at page 61, Lord Greene MR held:

“The option was part of the security and it was clearly contemplated by the parties that the mortgagee might exercise the option during the currency of the mortgage and so improve the security…”

Again at page 62 he held that he was “unmoved” by the argument that the exercise of the option could cause serious hardship to the mortgagor if the option price was a large sum. Lord Greene MR held:

“Any such result is one which necessarily flows from a mortgage of such a peculiar piece of property as an option, and, if a mortgagor mortgages an option to a mortgagee and the option is only exercisable on payment of a sum of money, the mortgagor enters into the transaction on the footing that, if the mortgagee chooses to do so, he is entitled to improve or perfect his security by making that expenditure, and he knows from the beginning that, if the mortgagee does so, he, the mortgagor, will only be entitled to redeem if he reimburses the mortgagee what he has spent.”

Again at page 64, Lord Greene MR held:

“The answer clearly is that, if a mortgagor gives to a mortgagee a security of that character, he must abide by the consequences. It may be unfortunate for him to find that the mortgagee has exercised the option at what may turn out to be an extravagant price and that he can only get back his mortgaged property, on payment of the price in addition to the mortgage money, but that is a necessary result of the security which he has chosen to give.”

The other member of the court was Du Parcq LJ who agreed with Lord Greene and gave a judgment of his own on a further point in the case.

Mr Popplewell submits that this case is distinguishable because the mortgagee had commenced proceedings for foreclosure before he exercised the option. Moreover the option was an option to acquire property rather than an option to convert the mortgaged property into cash. He also submits that it is possible that what had happened was that the mortgagee chose to exercise the option because the security was inadequate, and therefore in peril, but there is nothing in the report which indicates that this was the basis on which the mortgagee was held to be entitled to have exercised the option. If there was any peril, it was that the valuable option to acquire the freehold reversion would expire without its being exercised. In my judgment, the fact that the mortgagee had commenced foreclosure proceedings does not affect the fundamental proposition that the parties could by contract agree to a situation in which the mortgagee had the right to exercise the option before the security became enforceable. That that was the proposition accepted by the court is apparent from the passages I have cited above from the judgment of Lord Greene MR. If further authority were needed, I note that Astbury J. seems also to have been of the view that parties to a charge could by contract confer rights on the chargee to exercise rights conferred by the mortgaged property before enforcement of the mortgage: see Wise v Landsell [1921] 1 Ch 420,430, a case dealing with the voting rights attached to shares which had been charged by the registered holder.

In Nelson v Hannam, this court was able to come to the conclusion that the parties had vested the right to exercise the option in the mortgagee. It would appear that the legal title to the option had been assigned to the mortgagee, and it may be that the court felt able to come to its conclusion as to the true interpretation of the parties’ arrangements from this fact. It was a striking conclusion to reach as potentially the liability thrown on to the mortgagor could have been very considerable and could have rendered it impossible for him to redeem the mortgaged property. The same type of liability could arise if there was a mortgage of shares and the company issuing the shares decided to make a substantial rights issue, but in practice it is likely that that eventuality would be covered by the terms of the mortgage documentation. Moreover, it appears that there is little precedent in the reported cases for a mortgagee to be entitled to step in to exercise rights assigned to it prior to the security becoming enforceable except in the case where there is a risk that security will prove to be insufficient, and the right to preserve the mortgaged property arises. It may be that the reason for this is the potential unfairness to the mortgagor. Whether the mortgagee can step in must depend on the interpretation of the security documentation. It may well be that in another case the court would be reluctant to come to the same conclusion.

In the present case, it would appear that there is only an equitable assignment of the Eurotunnel tier 3 debt to the trustee. However, this makes no difference to the principle. The court must look to find the intentions of the parties from the provisions in the agreement as a whole. In my judgment, clause 8.1.3 of the deed of charge read with clause 4 contains a clear indication for this purpose. In my judgment, clause 8.1 goes beyond the preservation of security, and that is apparent from the fact that clause 8.1.1 refers to steps to be taken to perfect the security, whereas the rest of clause 8.1 goes on to deal with further matters. Those include the power to require FLF to enforce the rights conferred by the Participation Documents. I accept (although Mr Popplewell did not make this point) that clause 8.1.3 appears to enable the trustee to require FLF to act without any reimbursement of any cost that may be involved, but that objection would apply to other forms of action as well as to the exercise of an option requiring the payment of cash. I express no view about the contractual rights of parties in that situation. The power to require FLF to enforce any rights conferred by the Participation Documents must in my judgment include the right to require the exercise of the tier 3 option which is a necessary step to the enforcement of the rights which that option confers. Because of the risk of unfairness to the mortgagor, I would not agree with the judge’s conclusion in paragraph 40 of his judgment that Citi was entitled to require the exercise of the tier 3 cash option prior to enforcement and in the absence of insufficiency simply because it was part of the charged property. But I would reach the same conclusion as the judge reading clauses 4 and 8 of the Deed of Charge together.

For the purpose of reaching this conclusion on clause 8.1 of the deed of charge, it is necessary to consider whether the SP constituted a “document", replacing (in whole or part) the credit agreement. Mr Popplewell submits that this word refers only to a private law agreement. However, the word “document" would naturally include a court order and it should have been within the reasonable contemplation of the parties that their rights might be altered by some form of composition sanctioned by the court under its statutory powers. There is a separate argument as to whether an alteration of rights which is brought about by such an order derives its force and legitimacy, not from any form of agreement or unilateral documents such as a deed poll executed by the issuer of the securities, but from the authority of the court acting under statutory powers. Mr Barnes submits that this court cannot reach any conclusion as to the effect of the order of the Commercial Court of Paris approving the SP because that is a matter of French law. There is no evidence of French law. He points out that not even the provisions of the Commercial Code, under which the SP was approved, are in evidence. I proceed on the basis that this court can in the usual way decide the matter by applying the presumption that French law is the same as English law. However, in my judgment, even if this issue as to the effect of the French court’s order were decided in QVT’s favour, it does not prevent the order from being a “document” within the meaning of the definition of Participation Documents.

Thus the position as I see it can be summarised in this way. Clause 8.1 of the deed imposes on FLF the duty to “do all such other acts or things or execute any other document as may in the opinion of Citi or MBIA be necessary or desirable to…8.1.3 enforce any rights under the Participation Documents, which include the SP because the SP is a “document replacing or supplementing” the credit agreement. In these circumstances, Citi has power to cause the exercise by FLF of the tier 3 cash option.

In my judgment, it can make no difference that the effect of the exercise of the option was to turn property into cash. There is an acquisition of property (cash) even in this situation. The exercise of the option is not inconsistent with FLF’s right of redemption because when the option proceeds are received, they will be held by way of security, just as tier 3 cash option the NRS would have been held. To say that the option ceases to exist is to look at part only of the operation. The true position is that the tier 3 cash option and the rights to the NRS are translated into a sum of money.

Mr Popplewell argues that the effect of the exercise of the tier 3 cash option will be to convert what was thought to be an investment in Eurotunnel junior debt into an investment of some other kind. He submits that this is contrary to what the party is expected when they invested in FLF notes. In other words he relies on the commercial background to the acquisition of notes. As this Court recently said in The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690 at [5]:

“In the case of a commercial contract, the factual matrix includes the commercial context in which the contract was made. Moreover, as Lord Steyn said in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771: “in determining the meaning of the language of a commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible approach. The reason for this is that a commercial construction is more likely to give effect to the intention of the parties.” The language must of course be capable of bearing that meaning.”

In this case, the language is not capable of giving effect to the commercial expectations as described by Mr Popplewell and in any event, as Mr Barnes submits, the circumstances have changed from those envisaged at the time of the original subscription of the notes.

I therefore reject QVT’s arguments on issue 1. Accordingly, issue 2 arises and I must now turn to that.

There is a preliminary point to make here. If QVT is not right on the first issue, and MBIA can give a direction to the trustee to exercise the option, clause 10.4 of the trust deed applies and that provides that when acting on an instruction of MBIA as the note controlling party the trustee is not required to have regard to the interests of the noteholders. In other cases, the trustee is required to have regard solely to the interests of the noteholders and not the interests of any other class of creditor (clause 14.1.6. of the trust deed).

On this issue, Mr Popplewell puts his case in three ways. First (route A), he submits that if it is said by MBIA that the tier 3 cash option is to be exercised for the purpose of preserving the security, it must be shown that the tier 3 cash option is superior to the NRS. It is not so said and so I need not deal further with the route A. Secondly (route B), Mr Popplewell submits that the exercise of the option by FLF requires the consent of Citi under clause 19.4 of the deed of charge or condition 4 of the notes and MBIA has no right to direct the giving of their consent. Thirdly (route C), Mr Popplewell submits that Citi's right to exercise the option is not within the rights which MBIA can direct Citi to exercise. In particular he submits it is not within clause 12 .2 of the trust deed, on which MBIA relies.

As to route B, Mr Popplewell submits that there are two issues: (1) whether the exercise of the option requires consent and (2) whether MBIA has power to direct Citi to give consent. The judge did not deal with the second point. On the first point Mr Popplewell submits that the negative pledge should be construed as widely as possible in order to give effect to its purpose. Its purpose is to support the assignment to the trustee of the security. On his submission, it would, as a commercial matter, be odd if the negative pledge clause did not stop FLF from exercising the option on its own. He submits that it does not involve any distortion of the language to treat the exercise the option as within the concept of “disposing” or parting with the assets, namely the right to the NRS. He further submits that the effect of exercising the option is to confer the benefit of the NRS down the chain of the noteholders to more junior holders of debt and bondholders. He submits that, as a commercial matter, is what will happen and that that should be within the concept of disposal in the negative pledge clause. He submits that the judge's reasoning is artificial. It is not necessary to have a disponor and disponee. What is happening in fact is that the existing right to the NRS is foregone and extinguished. As a matter of the ordinary use of language, that involves the disposal of the rights. Mr Popplewell does not accept that non-exercise of the tier 3 cash option would involve the disposal although it would lead to the expiration of the option right. Mr Popplewell submits that authorities taken from other contexts, such as freezing injunctions or section 127 of the Insolvency Act 1986, relied on by MBIA, provided no assistance.

Mr Popplewell also submits that it would be odd if MBIA could direct the trustee to give its consent to a disposal of FLF’s assets, particularly if MBIA was using the power of direction for the purpose of promoting its own extraneous interests rather than those of the noteholders. He submits that the power of direction must equally be exercisable in these circumstances as in any other. He submits that it has also to be recalled that FLF is merely a special purpose vehicle, and that it is unlikely to have a controlling mind independent of that of MBIA and the Eurotunnel Group.

It is in this context that Mr Popplewell invokes the proposition that if MBIA can direct the trustee to exercise the power of consent in clause 19.4, this would be inconsistent with the irreducible core of the trust, which is that a trustee must act in good faith and to the benefit of beneficiaries in relation to the trust property and be accountable as such. Mr Popplewell relies on a passage from the judgment of Millett LJ in Armitage v Nurse [1998] Ch 248 at 253H:

“I accept the submission made on behalf of Paula that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.”

Mr Popplewell points out that, although the trustee is liable in negligence under the trust deed, its liability is subject to the all important provision in clause 10.4 which precludes it from taking account of the interest of noteholders when it acts on the instructions of MBIA as the note controlling party. If MBIA can give a direction to the trustee to give its consent under the negative pledge clauses, then on Mr Popplewell's submission, the trustee in reality ceases to be a trustee of the security. He becomes a nominee, unaccountable to the noteholders, and knowing no duty to act even in good faith. MBIA could even give a direction to the trustee to give its consent to the disposal by FLF of all its assets for £1. Against that background, MBIA’s powers to give directions should be narrowly construed.

Mr Popplewell submits that the reference to the consent of both the trustee and MBIA is an indication that both were required to consent separately and independently. If the consent of the trustee was simply the direction of MBIA, clause 19.4 could have been more simply worded to refer only to the consent of MBIA so long as it was the note controlling party. Mr Popplewell submits that there are other provisions in the trust deed providing for double consent. He further submits that clause 31.2 of the deed of charge is not inconsistent with this requirement since on its true interpretation it provides for the consent of both the trustee and MBIA, with the additional requirement that MBIA can impose conditions where the trustee consents.

Mr Popplewell further submits that clause 8 of the trust deed also provides for the trustee to exercise its discretion independently. In fact Mr Popplewell submits that under this clause the trustee cannot give its consent at all because (a) the effect of the SP will be to reduce the amount of principal and interest payable in respect of the notes and (b) the exercise the option will on QVT's case results in a lower realisation from the notes then if the NRS had been retained. Mr Popplewell submits that the question whether MBIA has power to direct the trustee to give its consent depends on whether the trustee has power to consent at all. In his submission it would not have that power if QVT were right at the end of the day that the exercise the option resulted in a diminution in value. He submits that, since QVT has raised an issue about whether the exercise by the trustee of the option would result in undervalue, it was not possible from the court to make the declaration that the judge made.

Mr Popplewell submits, in my judgment correctly, that the power to give consent to a disposal under the negative pledge is not within clause 12.2 of the trust deed. That clause is concerned with the rights of FLF, whereas the negative pledges create new self-standing rights in the trustee to give its consent.

Mr Popplewell refers to MBIA’s argument that MBIA can direct the trustee to give its consent to FLF under the negative pledges by virtue of clause 12.3 of the trust deed. This sets out the circumstances in which the trustee can be compelled to take any “action or proceedings". It is not necessary for me to express a view on this point, but provisionally it seems to be unlikely that in the context of this clause the word “action" means "act", as opposed to the making of an application to the court.

As to route C, Mr Popplewell submits that there is nothing in the trust deed which enables MBIA to direct the trustee to cause the tier 3 cash option to be exercised. He submits that clause 12.2 should be given a narrow construction and should be confined to rights exercised for the purpose of preserving the security in the period prior to enforcement.

Mr Barnes submits that the negative pledges are not engaged. He relies on the fact that there is neither a disponor nor a disponee. In any event, on his submission it is highly artificial to say that the negative pledges are engaged where two forms of consideration offered. It is not wholly clear under the SP whether the holder of Eurotunnel tier 3 junior debt obtains, in substitution for his debt, rights to NRS and cash with an alternative in the form of the tier 3 cash option or whether he obtains the right to take either NRS and cash or the tier 3 cash option.

Mr Barnes's essential answer to Mr Popplewell’s submissions is that it was again a question of contract and that clause 12.2 is clear. The trustee had to exercise its rights over FLF’s rights in accordance with the directions of MBIA. There was no basis on which clause 12.2 could be read down so as to apply only where the trustee was directing the issuer to exercise a right with a view to the preservation of the security. In the alternative, he relied on clause 12.3.

Mr Richard Adkins QC, for the trustee, maintains a neutral position. He pointed out that on one interpretation of clause 31.2 the trustee had no discretion in the giving of a consent or waiver, though he accepted that in other provisions of the deed of charge and trust deed, the trustee had an independent discretion.

In my judgment, the trustee is bound to give a direction to FLF if so required by MBIA on two bases. The first is if MBIA forms the opinion that it is necessary or advisable that FLF should exercise the option for the purposes of clause 8.1.3 (see the express terms of clause 8.1). Secondly, clause 12.2 of the trust deed must be interpreted according to its tenor. There is nothing on the face of it to limit it, where security has not become enforceable, to a case where the trustee is seeking to invoke FLF’s right to exercise the tier 3 cash option in order to preserve the sufficiency of the security. In my judgment, having regard to the rights conferred by clause 8.1 of the deed of charge, no such limitation can be implied.

Moreover, in my judgment, the negative pledge clauses do not on their true interpretation apply where the action taken by FLF is being taken at the direction of the trustee and (so long as it is the note controlling party) MBIA. The negative pledge clauses make no sense if the consent of those parties has already been given because the purpose of the clauses is to prevent transactions without the consent.

I would like to add a little more on this last point. The judge held in paragraph 52 of his judgment:

“While the right to notes disappears on the election to receive cash, there is not, in my view, a disposal for the purposes of clause 19.4. The notes will never have been received, so it cannot be they that have been disposed of. It seems to me to be artificial or unduly formalistic to regard that as a disposal of the right to the notes. It is more realistic to regard what has happened as an exercise of rights, and no more. No property passes from FLF; nothing is destroyed; there is no transferor or transferee. All those are possible badges of a disposal. None occurs. There is therefore no disposal for the purposes of clause 19.4.”

In my judgment, the critical question is the meaning of the word “dispose” in the context of these negative pledge clauses. As Lord Steyn said in R (Daly) v Home Secretary [2001] 2 AC 532 at 548: “In the law, context is everything". In my judgment it is clear from the negative pledges that destruction of an asset is not required. Both negative pledge clauses refer to loans. Clause 19.4 also refers to leases. Condition 4 attached to the notes referred to a parting with property. Thus both negative pledges envisage a temporary disposal of property and do not require the destruction of property. This point is important because the judge's interpretation narrowed the protection conferred by the negative pledge clauses, which are of considerable practical importance to the parties. In the interpretation of documents the court must always be careful to construe words in their context. It is for that reason that I do not accept that the decisions under section 127 of the Insolvency Act 1986 necessarily afford the court with much assistance. The proposition may be illustrated by reference to the example given in a famous legal debate about a notice in a public park saying “No vehicles are permitted in the park” (see HLA Hart (1958) 71 Harv. Law Review 593 at 607, Fuller, ibid, 630 at 662 to 664). In the context of such a notice, it is unlikely that the prohibition would extend to such vehicles as prams or children’s tricycles. A similar point can be derived from one of the authorities relied on by Mr Barnes, namely Law Society v Shanks [1988] 1 FLR 504 where this court held that the prohibition in a freezing injunction on a disposition of assets by a person holding assets for a person subject to such an order does not prevent the person from disposing of the assets to that person. Likewise the word “dispose" in the negative pledges must be construed in the context of those clauses and so construed in my judgment exclude disposals at the direction of the trustee and MBIA. It is also clear from the context of the negative pledge clauses that the transactions which fall within those clauses are defined by reference to their legal form and not by reference to their economic substance and accordingly I would reject Mr Popplewell's argument that there would be a breach of the negative pledge clauses because the effect of the exercise of the Eurotunnel tier 3 cash option on QVT's case is to shift value from noteholders further down the chain to bondholders and others.

On the basis of these conclusions, in my judgment it is unnecessary to decide the question whether, even if the exercise of the tier 3 cash option was not directed by the trustee and MBIA, there is under the SP a disposal of any asset for the purpose of the negative pledge clauses. I propose nonetheless to set out my judgment on this issue. The issue is not whether the assignment of the Eurotunnel tier 3 junior debt under the SP or the mere exercise of the tier 3 cash option amounts to a disposal of any asset, but whether the exercise of the option involves a release of the NRS or an exchange of NRS for cash within the negative pledge clauses. This issue would appear to involve at least one question of French law (the interpretation of the SP) as well as an issue of English law (the interpretation of the negative pledge clauses). The former question would also require the interpretation of a document of which we have only a part and that is in translation from the authoritative version in French. The difficulty about the issue is, as I explain below, that it depends on a proper appreciation of the entire reorganisation of the Eurotunnel tier 3 debt involved in the SP, and we have not had full submissions on that matter. Nor do we have all the documents. We are not told for instance whether there is any form of the notice of exercise of the tier 3 cash option which Eurotunnel tier 3 debt holders wishing to exercise the tier 3 cash option must use. Such a document (if it exists) might well throw light on the question whether there is a disposal, as Mr Popplewell submits, of the rights to the NRS.

Putting aside those possible difficulties, I would accept that on the way that the SP is drafted it is arguable that, by exercising the tier 3 cash option, FLF gives up its rights under the SP to receive NRS and that this is an exchange caught by the negative pledge clauses. These transactions would as a commercial matter need to be simultaneous to facilitate trading in the notes (or the NRS) and to ensure that the position of the Eurotunnel tier 3 debt holders was not at any stage at risk, and so it is unlikely that those promoting the SP intended there to be any gap between the two events. It is not suggested by Mr Popplewell that the assignment of Eurotunnel tier 3 debt was a disposal within the meaning of the negative pledge clauses, perhaps because this was not voluntary but was required by the mandatory terms of the scheme (see generally Re Garner’s Motors [1937] I Ch 594). In contrast there is no such obligation to exercise the tier 3 cash option.

Those are some of the arguments in favour of QVT’s approach. On the other hand, there are indications in the SP which militate against an analytical approach of this kind, for example the sentence beginning “For the avoidance of doubt,” in para. 2.2.3.2.2 of the SP. The SP must of course be read as a whole.

More compelling in my judgment is an analysis of the arrangements surrounding the tier 3 cash option. Quite clearly the Eurotunnel group does not have the cash resources necessary to meet the entitlements of the debt holders exercising the tier 3 cash option. So it has had to enter into arrangements for the underwriting of the tier 3 cash option. That means that it had to arrange for the allocation to underwriters of the NRS to which electing debt holders are entitled. It is important to note that this is an underwriting and not a placing.

Although we do not have all the documents, it appears from annex 4 to the SP that what has been agreed is that those tier 3 debt holders who do not exercise the tier 3 cash option can elect to take up some of the entitlement of NRS which those electing to take the tier 3 cash option do not take. This will provide at least some of the cash necessary to meet the claims of the Eurotunnel debt holders electing to exercise the tier 3 cash option. If there is still some NRS left, it will be taken up by the tier 3 cash option arrangers pursuant to the underwriting undertaking set out in annex 4. We are not told who the cash arrangers are save that it would appear that they are the bondholders and others referred to at the end of paragraph 71 of this judgment, to whom, on Mr Popplewell's argument, value is shifted as a result of the tier 3 cash option arrangements.

The issue then is whether what happens is that NRS is allocated to all Eurotunnel tier 3 junior debt holders, on the basis that those who accept the tier 3 cash option renounce their allocation in favour of those who underwrite the cash option, or whether what happens is that the NRS which is not taken up by those electing debt holders is allocated directly to the underwriters in accordance with all the arrangements described in annex 4. In annex 4, the rights of the underwriters are described as by way of “subscription”, not renunciation or transfer. In addition it would appear under the timetable that the NRS are not created and issued until some 120 days after the approval of the SP (see page 24). In those circumstances, I interpret the SP as meaning that NRS is not allocated to Eurotunnel tier 3 junior debt holders if they elect to exercise the tier 3 cash option. The most that they can be said to get is rights to NRS. Indeed it is the rights to the NRS which, on Mr Popplewell’s submission, form the subject of a disposal contrary to the negative pledge clauses.

It is on those rights which I next focus. In my judgment, those rights are not absolute rights to an allocation of NRS because they are always subject to the possibility that the Eurotunnel tier 3 junior debt holder will not accept, or be deemed to accept, its allocation of NRS because it has exercised the tier 3 cash option.

In those circumstances, the correct analysis in my judgment is that the right which a Eurotunnel tier 3 debt holder obtains to NRS is always subject to inherent defeasance if it exercises the tier 3 cash option. On that basis it cannot be said that there is any disposal of the NRS.

Accordingly, if it had been necessary to decide the question of disposal for the purposes of the negative pledge clauses, in my judgment on the true interpretation of the SP there is no act constituted by the exercise of the tier 3 cash option which could be said to be a disposal for the purposes of the negative pledge clauses, even if there had been no direction from MBIA and the trustee. In substance, (and for simplicity ignoring the cash which is allocated with the NRS) under the terms of the SP and the Eurotunnel tier 3 junior debt holder was given the right to take either cash or NRS. When he exercises the right to take cash he does not give up his right to obtain NRS. He never obtained the right to NRS in that situation.

In the light of the conclusions reached above, it is also, in my judgment, unnecessary to ask whether MBIA can direct the trustee to give its consent under the negative pledge clauses. However, any such instruction would in my judgment in any event be within clause 8 of the trust deed. In my judgment, the argument that the option is capable of reducing the amount of the notes for the purpose of the Basic Terms Requirements is unsound, because it is clear that in that context the reduction referred to is a reduction in nominal amount. The SP does not affect the terms of the Eurotunnel tier 3 junior debt which is simply assigned to a Eurotunnel company under the SP. The NRS are not securities of FLF, which is the issuer of the notes, and accordingly para. (b) of the definition of Basic Terms Requirement (set out above) does not apply. On that basis, it seems to me that MBIA was able to give a direction to the trustee to give consent under the negative pledges by virtue of clause 8 of the trust deed, and the question of whether a waiver could be directed under clause 31.2 of the deed of charge would not then arise. Accordingly, even if contrary to the conclusions reached above, the exercise of the tier 3 cash option was a “disposal” of property within the meaning of the negative pledge clauses, MBIA could direct the trustee to give its consent under clause 8.1 of the trust deed.

Mr Popplewell submits that the effect of the structure which enables a direction to be given to the trustee by MBIA is to reduce the trustee’s obligations below the irreducible minimum identified by Millet LJ in Armitage v Nurse. In my judgment this is not correct. The trustee continues at all times to have an obligation of good faith, and in addition, as Mr Adkins submits, there are other clauses in the trust deed where the trustee has a real discretion to exercise, for example in clause 8 of the trust deed which also confers a discretion on the trustee to give authorisations or waivers. In my judgment, while it is correct that it would be a surprising interpretation of the documentation, against which the court should lean, if the powers of the trustee were so reduced that it ceases to be a trustee at all, that point has not been reached in the present case and therefore there is no risk of recharacterising the office of trustee as something else.

For the reasons given above, I would reject QVT's arguments on the second issue.

For the reasons given above, I would dismiss this appeal

I agree that this appeal should be dismissed, but in view of the complexity of the issues raised, I would like to add a few words of my own.

The starting point is that it is common ground that the rights to the hybrid notes and to exercise the cash option were within the scope of clause 4 of the deed of charge and formed part of the security that, by operation of the Safeguard Plan, was substituted for the Eurotunnel Tier 3 junior dept.

Mr Popplewell QC advances a number of arguments in support of the proposition that Citi cannot instruct FLF to exercise the cash option. They have been set out in some detail by Arden LJ. The premise on which the arguments are based is that the entitlement to exercise the cash option is analogous to the entitlement to sell the Tier 3 Debt that existed prior to the Safeguard Plan.

In my judgment, this is not an apt analogy. As Mr Barnes QC pointed out, there is a fundamental difference between the sale of property and the exercise of rights that are part of the property secured. The relevance of the decision of this court in Nelson v Hannam [1943] 1Ch 59 is that it shows that, once an option becomes an essential part of a mortgage transaction, the mortgagee may exercise the option during the currency of the mortgage in accordance with its terms, and is entitled thereby to “improve or perfect his security”: per Lord Greene MR p 62. I agree with Arden LJ’s reasons at para 43 for rejecting Mr Popplewell’s attempts to distinguish this decision. There is no hint in the judgment of Lord Greene that his reasoning was based on or influenced by the possibility that the mortgagee exercised the option to purchase the freehold reversion in order to preserve his security. In the passage at p 62 cited by Arden LJ at para 40 above, Lord Greene was describing the legal effect of a mortgage of an option. Hence his reference to the result “which necessarily flows from a mortgage of such a peculiar piece of property as an option” and “[the mortgagor] knows from the beginning that…” (my emphasis in both cases).

For my part, I would be inclined to hold that, subject to the questions of consent arising under the second issue, Citi could require FLF to exercise the cash option in the absence of the Event of Default even if there was no need to do so in order to preserve the security, and could do so simply because the option is part of the charged property. Mr Popplewell does not point to any provisions in the deed of charge which prohibit the exercise of the option in such circumstances. The entitlement to exercise the cash option is not analogous to the entitlement that existed prior to the Safeguard Plan to sell the Tier 3 debt. As Mr Barnes points out, this is not a case of a sale by the chargee, but a compulsory reconstruction, under which FLF’s rights in relation to the Tier 3 debt have been replaced with consideration comprising a right to cash and hybrid notes, the notes being subject to the cash option.

But it is not necessary to decide the first issue on the basis that the option can be exercised simply on the ground that it forms part of the security. I agree with Arden LJ (para 47) that clause 8.1 of the deed of charge gives the chargee the right to exercise the cash option. Mr Popplewell submits that, on its true construction, clause 8.1 is limited to requiring FLF to take steps for the purpose of perfecting the existing security rights granted by clauses 3 to 5 of the deed of charge, and that it does not confer any additional free-standing right to exercise the Tier 3 cash option prior to an Event of Default. But clause 8.1.3 gives Citi the power to require FLF to do what is necessary or advisable to enforce rights under any of the Participation Documents. These documents include the Credit Agreement and “any document of agreement amending, replacing or supplementing it”. I agree with the judge that the Safeguard Plan, which extinguished the Credit Agreement and replaced it with something else, falls within these words of extension. I see no warrant for construing the word “document” in the definition of “Participation Documents” as being limited to a private law agreement. I agree with what Arden LJ says about this at para 48 above.

The effect of Mr Popplewell’s argument is that the cash option cannot be exercised at all, and the choice between cash and shares offered by the Safeguard Plan must go by default. That would be a most surprising result to which I would arrive only if compelled to do so. Far from being compelled to such a conclusion, I would hold that the deed of charge, properly construed, gives Citi the right to require FLF to exercise the cash option.

Mr Popplewell submits that (i) the exercise by FLF of the cash option is a “disposal” or a “parting with” FLF’s accrued rights within the meaning of the negative pledge in clause 19.4 of the deed of charge and/or condition 4 of the FLF notes, (ii) this can only be done with the written consent of both Citi and MBIA and (iii) this requires in addition to MBIA’s consent the independent consent of Citi to the exercise.

The first question is whether the exercise of the cash option involves a disposal of or parting with FLF’s property. Mr Popplewell submits that it does, since the exercise of the option involves the disposal or parting with FLF’s existing rights to NRS under the Safeguard Plan. I incline to the view that the judge was right to reject this submission for the reasons that he gave at para 52 of his judgment. It is true that the form of the Plan is that the holders of the Tier 3 debt “shall be offered” a share of the NRS with an option to receive cash, the default position being that, unless the cash option is exercised within 15 calendar days, the holder will be deemed to have elected to receive NRS. In substance, however, para 2.2.3.2.2 of the Safeguard Plan gives the holders of the debt the right to choose between two forms of alternative consideration, NRS and cash. I do not consider that clause 19.4 is intended to prevent the debt holder from choosing between two forms of security. In my view, it is artificial and formalistic to say that, in exercising the cash option, FLF would be disposing of its right to receive NRS. I recognise that the proper interpretation of the Safeguard Plan is a matter of French Law as to which we have been give no information. The true construction of the deed of charge and the FLF notes, however, is a matter of English law. Had it been necessary to do so, I would have held that the exercise of the cash option would not be a disposal within the meaning of clause 19.4 of the deed of charge or a parting with property within the meaning of condition 4 of the FLF notes.

But even if the exercise of the cash option were a disposal of or parting with FLF’s right to receive NRS, clause 19.4 does not require that, in addition to MBIA’s consent, Citi should give its own consent based on an application of its independent judgment. For the reasons that I shall summarise briefly, MBIA can direct Citi to require FLF to exercise the cash option and Citi is obliged to comply with such a direction. I agree with the judge (para 50) that, once it is decided that MBIA has the right to give such a direction to Citi, it makes no sense to say that clause 19.4 should be construed so as to require Citi then to consider the point itself.

I agree with Arden LJ that MBIA can direct Citi to require FLF to exercise the cash option pursuant to (i) clause 12.2 and Schedule 4 Part 1 of the trust deed and/or (ii) clause 8.1 of the deed of charge. As regards (i), the right to exercise the cash option is a right “in respect of” the Credit Agreement, which is one of the Financing Agreements. I agree with the judge that the words “in respect of” are wider than “under” and I do not accept Mr Popplewell’s submission that they should be construed narrowly. They are wide enough to apply to a right in respect of the consideration payable upon a forced substitution of the Credit Agreement. Schedule 4 Part 1 includes among the FLF rights which are to be exercised by Citi in accordance with MBIA’s instructions its right to vote as a lender. It is difficult to see why it should have been intended that MBIA should be able to instruct Citi how to vote (eg on a reconstruction), but not on the choice of consideration following a scheme such as the Safeguard Plan.

As regards (ii), for the reasons already given, clause 8.1 of the deed of charge gives the chargee the right to exercise the cash option. The obligation undertaken by FLF under clause 8.1 is to carry out the activities there described “at the request of the Trustee (at the direction of MBIA, if it is the Note Controlling Party)”. It follows that, if the exercise of the cash option is one of those activities, Citi is obliged to exercise the option if directed to do so by MBIA.

For my part, I would also accept Mr Barnes’ alternative submission that, if MBIA did not have the right to direct the exercise of the option pursuant to clause 12.2 and Schedule 4 Part 1 of the trust deed, MBIA would be entitled to direct Citi to exercise the option pursuant to clause 12.3 of the trust deed. Clause 12.3 provides that “The Trustee shall not be bound [to act]…unless directed to do so by MBIA”. Specifically, it is bound “…to take…any other action…pursuant to or in connection with…the Transaction Documents” (which include the deed of charge). This clearly means that, if directed by MBIA, it is so bound.

There is a yet further route to the same conclusion on the second issue. If the exercise of the cash option in the absence of Citi’s consent would be a disposal in breach of clause 19.4 of the trust deed or a parting with property in breach of condition 4 of the FLF notes, Citi would be obliged by clause 8.1 of the trust deed to waive the breach (or proposed breach) if directed to do so by MBIA. The breach (or proposed breach) would be of one of “the covenants or provisions contained in…the Notes or any of the other Transaction Documents”. In my judgment, the proviso to clause 8.1 would not apply.

For these brief reasons, which I do not believe to be in substance different from those of Arden LJ, I would dismiss the appeal.

I agree with both judgments.