England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/12/2006

Mr Justice Mann :

Introduction

1. This is an application by Citibank NA ("Citibank") as trustee for certain noteholders in a company called Fixed-Link Finance BV ("FLF"), a Dutch special purpose vehicle set up in the circumstances appearing below. By it Citibank and the other parties seek the determination of questions arising out of the current proposals for the restructuring of Eurotunnel debt. The essential question is whether the first defendant, MBIA Assurance SA ("MBIA"), is entitled to direct Citibank as to how to act in relation to an option arising under that restructuring. It has been dealt with as a matter of urgency because of the timetable of the present proposed restructuring. These proceedings were started on 20^th November, so their determination has taken place within a month of their commencement.

Historical background and the current structure of the FLF debt

2. The history and details of Eurotunnel's funding are immensely detailed and complicated. What follows is a simplified version of the elements which are germane to this application.
3. In 2000 the Eurotunnel debt was refinanced. Part of its junior debt was acquired by FLF. Various parts of the debt are held on varying terms, including terms as to subordination. This application concerns a part of that which is described as Tier 3 debt. FLF holds the Tier 3 debt in two currencies – £304m and €395m.
4. In order to fund its acquisition of this debt FLF issued a series of notes which it was intended should be serviced and repaid from its participation in the Eurotunnel instruments. There is a series of notes with varying degrees of subordination. They, and their amounts, are as follows:

Guaranteed G1	£232m
Guaranteed G2	€365m
Senior A1	£200m
Senior A2	€103m
Senior subordinated B1	£50,000
Senior subordinated B2	€135m
Subordinated C2	€142m

All notes are due in 2025. The letters A to C reflect the degree of subordination of the notes. The numbers denote currency (1 is sterling, 2 is euros). The G series are a combination of some A and B series which have the benefit of a guarantee by MBIA. The notes are currently listed on the Luxembourg stock exchange. The second defendant, QVT Financial LP ("QVT") is a hedge fund which also manages investments of others. It holds C2 notes; that is the capacity in which it participates in these proceedings, though it also holds direct debt in Eurotunnel.

5. The notes are secured by a trust deed and security arrangement. Citibank is the trustee for these purposes. It has the benefit of direct covenants from FLF by virtue of a trust deed dated 28^th February 2001 ("the trust deed"), and a charge over FLF's assets of the same date ("the deed of charge"). These documents form part of a very elaborate structure of documents and there are many cross-references to other documents by virtue of extensive definitions in the trust deed and a separate agreed master definition document running to 24 pages. For ease of understanding I shall from time to time read in the relevant effect of those definitions rather than setting out the defined terms and their full meaning. Both the trust deed and the deed of charge, and the notes that they secure, are governed by English law.
6. It will be useful to set out the general tenor and purpose of the trust deed before setting out the specific provisions on which this application turns, because it contains one feature which is central to this application. The deed contains a covenant from FLF to pay the notes when due and provides for that and the benefit of other covenants to be held on trust for the noteholders. It provides for MBIA to be able to give directions and exercise a lot of control over what would otherwise be Citibank's duties and discretions as a trustee. It is that power of MBIA that lies at the heart of the second of the questions that I am asked to decide. That power is expressed to be exercisable while MBIA is the "Note Controlling Party", which essentially means while it is liable under its guarantee of the G series notes, which it still is.
7. The parties to the deed of trust are Citibank (as trustee) MBIA and FLF (as issuer of the notes). The relevant provisions of the trust deed are as follows:

a) Clause 2.1 contains a covenant by FLF to pay the sums due under the Notes when those sums become due. Payment to various agents is taken to be compliance with this obligation; the trust deed reflects a complex structure of various managers, agents and others which is not material to this application.

b) At the end of clause 2.1, in an un-numbered paragraph, there are the following words:

"The Trustee [ie Citibank] will hold the benefit of this covenant and the covenant in Clause 5 … on trust for the Noteholders."

c) Clause 2.2 provides that on an Event of Default Citibank shall or may do certain acts. The acts are unimportant for these purposes. What is important is that Citibank has to do those acts ("shall") if instructed by MBIA while MBIA is the Note Controlling Party; otherwise it "may" do them. In other words, it must comply with MBIA's instructions if MBIA is still potentially liable under its guarantee. This is a familiar pattern thereafter in this document.

d) Clause 5 contains a covenant by FLF with Citibank to comply with the provisions of the deed, the Conditions of the notes and the other "Transaction Documents", which latter expression includes the deed of charge. The Notes are expressed to be subject to the provisions of the deed.

e) Clause 6 contains further detailed covenants by FLF, which I do not need to describe.

f) Clause 8.1 gives the trustee power to authorise or waive breaches by FLF without the consent of the Noteholders. It "shall, only if directed by MBIA (whilst MBIA is the Note Controlling Party) and otherwise may" waive or authorise. In other words, this is another clause that gives MBIA a power to direct how Citibank shall act while MBIA remains liable under its guarantee.

g) Clause 8.2 gives the trustee a power to modify certain documents, but again subject to the right of control and direction in favour of MBIA while MBIA is the Note Controlling Party.

h) Clause 10 deals with the relationship between the trustee and MBIA. Clause 10.1 provides:

"10.1 Extent of Trustee's Obligations

The Trustee shall not be obliged to comply with any direction or request of MBIA to do any act or thing which would or may, in the opinion of the Trustee, be illegal, contrary to any requirement or request of any fiscal or monetary or other governmental authority or in breach of any contract, treaty or agreement the terms of which bind the Trustee but shall notify MBIA promptly if it does not intend to comply with any such direction or request, stating the reasons therefor."

i) Clause 10.4 provides:

"10.4 Interests of the Noteholders and the other Issuer Secured Creditors

When acting in accordance with the instructions of MBIA while it is the Note Controlling Party pursuant to these presents and the other Transaction Documents, the Trustee shall not (subject to Clause 14.1.7) be required to have regard to the interests of the Noteholders and the other Issuer Secured Creditors and shall have no liability to the Noteholders or the other Issuer Secured Creditors as a consequence of so acting. When giving any instructions, consents or waivers under the Transaction Documents, MBIA (if MBIA is the Note Controlling Party) need have no regard to the interests of the Noteholders, the Trustee or any other Issuer Secured Creditors, but without prejudice to Clause 14.1.7. The parties hereto acknowledge and agree that MBIA shall assume no duty or obligation whatsoever (whether fiduciary or otherwise) and shall incur no liability whatsoever to the Noteholders, the Issuer or the Issuer Secured Creditors or any other person (other than the Trustee, in its capacity as Trustee, in accordance with the provisions of these presents) by reason of giving any instruction or direction, granting any consent, exercising any discretion or otherwise exercising any of its rights under these presents other than in the case of its wilful default or negligence."

j) Clause 12 is headed "Enforcement" but clause 1 provides that headings are to facilitate use and are not to affect the construction of the deed. Clause 12.1 deals with legal proceedings after the occurrence of default (giving MBIA the now familiar rights of control). Clause 12.2 is heavily relied on by MBIA. It reads:

"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."

"Financing Agreements" is defined by reference to the definition contained in a co-operation document called the "Agreement among Lenders". It includes the "Credit Agreement"; the Credit Agreement is the document constituting the Eurotunnel debt, including the Tier 3 debt now owned by FLF.

k) The cross-reference to Schedule 4 is important. The relevant part of that schedule reads:

"Schedule 4

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)."

l) Clause 14.1.5 provides that where the trustee is required to have regard to the interests of Noteholders, it shall have regard to those interests as a class.

m) Clause 14.1.6 provides that the trustees shall give priority to the Noteholders over the interests of the rest of the class of Issuer Secured Creditors (a number of people including paying agents and others) "subject to the rights of MBIA hereunder in accordance with these presents". It also provides for resolving conflicts of interests between the various classes of noteholders, giving priority to the more senior noteholders.

n) Clause 14.1.7 (referred to a number of times in prior clauses) provides limits to any power to waive, modify or amend certain formal documents so as to affect Noteholders and others.

o) Clause 14.2.3 deals with the trustee's discretion and its liability where MBIA has a right to control. It provides:

"14.2.3 Trustee's discretion: subject to the provision of these presents the Trustee shall (save as expressly otherwise provided herein or in the other Transaction Documents) as regards all the trusts, powers, authorities and discretions vested in it by these presents, the other Transaction Documents or by operation of law, have absolute and uncontrolled discretion as to the exercise or non-exercise thereof and the Trustee shall not be responsible for any Liability that may result from the exercise or non-exercise thereof but whenever the Trustee is, under the provisions of these presents, bound to act at the request or direction of MBIA (if MBIA is then the Note Controlling Party) or the Noteholders, the Trustee shall nevertheless not be so bound unless first indemnified and/or provided with security to its satisfaction against all Liabilities which it may incur by so doing."

p) Clause 14.2.4 deals with consent.

"Trustee's consent: any consent given by the Trustee for the purposes of these presents, the Notes and the other Transaction Documents may be given on such terms and subject to such conditions (if any) as the Trustee may (with the consent of MBIA (if MBIA is then the Note Controlling Party) where such consent or approval is to be given at the direction of MBIA as Note Controlling Party) require and (notwithstanding any provision to the contrary) may be given retrospectively."

q) Clause 14.2.30 preserves the rights of MBIA under the deed. It provides:

"Trustee's rights and powers: any rights, powers, authorities and discretions of the Trustee vested in it by these presents and the other Transaction Documents shall be exercised subject to the rights of MBIA pursuant to these presents and the other Transaction Documents and in accordance with the provisions of these presents and the other Transaction documents, provided always that, subject to the provisions of Clause 14.4, the Trustee shall have an unfettered power to exercise the Excluded Rights but provided always that notwithstanding anything in these presents to the contrary neither the Trustee nor MBIA shall be entitled to make any amendment to, or grant any waiver in respect of or permit any breach of Clause 14.1.7 and provided further that the Trustee will only be entitled to make amendments to or grant any waiver in respect of it permit any breach of clause 14.1.7 where the prior written consent of all of the Issuer Secured Creditors (other than the Seller in the circumstances specified in the proviso to Clause 14.1.7) has been obtained."

8. The most significant feature of all this is the ability of MBIA to give directions. Its position as Note Controlling Party gives it that power, and that power is extensive. Presumably that is in connection with its guarantee liability. I shall have to return to how the positions of Citibank as trustee and MBIA interact when considering the submissions of QVT.
9. The other significant document is the deed of charge. The formal questions raised before me turn on a provision of this charge, though that provision assumed less importance in argument. Its relevant provisions are as follows:

a) Its parties are FLF, MBIA and Citibank.

b) Its recitals record that it is supplemental to the deed of trust.

c) Clause 2.1 contains a covenant to pay to the trustee (ie Citibank) the Secured Obligations. Those obligations include the liability under the Notes.

d) Clause 2.2 contains a declaration of trust by Citibank in these terms:

"The Trustee, by the execution and delivery of this Deed, acknowledges and agrees that it shall hold the Charged Property and the benefit of all covenants, agreements, representations, warranties and other obligations of the Issuer hereunder and under the Transaction Documents on trust for the benefit of all Issuer Secured Creditors [which expression includes the Noteholders] on and subject to the provisions of this Deed and the Trust Deed."

e) The expression "Transaction Documents" includes the deed of trust.

f) Clause 3 creates fixed charges over property which are irrelevant for present purposes.

g) Clause 4 assigns rights by way of security, including the rights in respect of the Eurotunnel Tier 3 debt. It reads:

"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 (other than the Global Letter of Guarantee and the French Franc Participations) and the Invitation to Tender and all sums of money now or in the future received by or payable to the Issuer in relation to any Participation or any Participation Document (other than the Global Letter of Guarantee and the French Franc Participations)(including, without limitation, amounts of principal, interest and other amounts and any shares, bonds, or other debt obligations or securities issued in exchange, conversion or substitution therefor (including, without limitation, Stabilisation Advances and Stabilisation Notes)), all proceeds thereof and all debts represented thereby (unless otherwise charged or secured by way of fixed security as provided for in Clause 3 herein); and

4.1.2 the Transaction Documents and any other agreement or document which the Issuer is a party to, or to which it is, or may at any time be, expressed to have the benefit of or have any rights under or to or have any rights or interest in;

including … all rights to receive notices, reports and any other information whatsoever pursuant to the Participation Documents (other than the Global Letter of Guarantee and the French Franc Participations) and the Invitation to Tender and all rights to vote and to exercise any other decision-making rights pursuant to the Participation Documents …"

h) Clause 5 creates a floating charge; its terms do not matter.

i) Clause 8 contains a provision for "Perfection of Security". It reads:

"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: …

8.1.3 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 …"

j) Clause 9 contains a provision for reassignment and release of the charged property when the Secured Obligations have been fulfilled.

k) The document contains familiar clauses governing enforcement and extending the realisation powers of the chargee.

l) Clause 19.4 contains the negative pledge which originally lay at the heart of the present application. It reads:

"19.4 Negative pledge

The Issuer covenants with and undertakes to the Trustee for the Trustee itself and on trust for the other Issuer Secured Creditors that it will not at any time (except where otherwise provided for or envisaged in the Transaction Documents) without the prior written consent of the Trustee and MBIA (for so long as it is the Note Controlling Party):

19.4.1 create (or attempt to create), extend or permit to subsist any encumbrance or other Security Interest whatsoever whether ranking in priority to or pari passu with or subordinated to the assignments and fixed and floating charges created by the Issuer under Clauses 3, 4 and 5 herein or any other security of the Trustee or any or all of the Issuer Secured Creditors created pursuant to this Deed; or

19.4.2 sell, convey, transfer, lease, lend or otherwise dispose of (or attempt to sell, convey, transfer, lease, lend or 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 an 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 current restructuring proposals

10. For a little while there have been negotiations to restructure Eurotunnel debt. MBIA seem to have been active in promoting that restructuring. A proposal put forward earlier this year, known as the PRA, was not fully propounded in the end, but some of its principles have survived into the current proposals, including the present proposals for the Tier 3 debt.
11. On 2^nd August 2006 various Eurotunnel companies, including those liable for the Tier 3 debt, went into a French form of insolvency proceedings called (in translation) safeguard proceedings. Judicial administrators have been appointed. They have now propounded a scheme under French insolvency law (the Safeguard Plan). I have not been provided with details of the operation of the relevant French law but it is common ground that if the plan is agreed by the requisite majority of creditors and bondholders at their respective meetings, and then by the French court, it will become binding on all creditors. The first of those stages took place on 27^th November. The bondholder meeting is apparently to be held on 14^th December. There is no fixed date for the French court to deliver its decision on the scheme, but there is an indication in the plan that it will not be before the end of 2006. It may, however, be very shortly thereafter. The date for exercising the option in respect of Tier 3 debt, which is the option critical to this case, expires 15 days after the court approval date.
12. The Safeguard Plan has been provided to me in translation. The French version is the governing version in the event of conflict. The relevant terms, taken from that translation, are as follows.
13. Section 2.1.3 identifies the type of debt which the Eurotunnel companies (France-Manche SA and Eurotunnel Finance Ltd) contracted. The Tier 3 debt was due under a document called the Credit Agreement, and part way through the paragraph the plan provides:

"By operation of the terms of this Proposal, all the debt due under the Credit Agreement … shall, without the requirement for any party to any agreement to take any further steps, be repaid upon the terms set out in paragraph 2.2.3 of this Proposal as if such debt had been declared immediately due and payable in accordance with [a provision of another agreement]"

Clause 2.2 goes on to describe in fairly general terms how the scheme is to operate. A new company, GET SA, is to enter into a Term Loan in which certain lenders will participate. It is designed to achieve the following:

"(a) the refinancing of all the Debt down to Tier 2;

(b) the payment of £66,920,790 … and 121,823,199 euros in cash to the holders of the Tier 3 Debt;

…

the issue by an English subsidiary of GET SA, Eurotunnel Group UK, or by GET SA, of NRS, the principal terms of which are set out in Annex 5 to this Proposal, to certain creditors of the Companies. The issuer of the NRS will be able to redeem up to 61.73% of the NRS in cash pursuant to the terms set out in Annex 5;

the holders of the Tier 3 debt will be given the opportunity to receive cash rather than NRS. In this respect, certain holders of the Tier 3 debt will underwrite the subscription of the NRS in order to finance the cash payment to those holders of the Tier 3 debt electing to receive cash".

14. Clause 2.2.3 contains more specific provisions in relation to what is to happen to the Tier 3 debt

"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 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:

[the document sets out an allocation between levels of NRS notes which is irrelevant to this application]

(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 Cash Option). 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.

…

2.2.3.2.5 The payment of the Tier 3 Consideration or of the amount payable in respect of the exercise of the Tier 3 Cash Option, as the case may be and the payment in cash referred to in paragraph 2.2.3.2.1(b)(ii) above, as well as the payment of the interest referred to in paragraph 2.2.3.2.4 above will satisfy alone all the debts of the holders of Tier 3 Debt in respect to the Companies under the Tier 3 Debt."

15. The reference to "certain holders" of the Tier 3 debt who have indicated their intention to exercise the option rights is, it is common ground, a reference to the FLF holding. MBIA have apparently given that indication.
16. Section 4 of the proposals sets out a timetable. Among the preliminary steps which have to be carried out before the end of 2006 is achieving the signature or near-final draft of certain documents, including the Term Loan agreement and the terms and conditions of the NRS. Apparently some further documentation is therefore necessary. However, it is common ground that no further documentation is necessary for the exercise of the Tier 3 option. It is exercisable under and by virtue of the proposals. Annex 5 provides "Indicative Terms of the Notes redeemable in shares…" (ie the NRS). The detail of this annex does not matter. It is sufficient to note that they are what the full name suggests – loan notes which can be redeemed for shares at various points in time.

The commencement of these proceedings

17. The Eurotunnel companies entered the French safeguard proceedings on 2^nd August 2006 and the Safeguard Plan was developed by negotiation between creditors and others (including MBIA) over the 2½ months. QVT got wind of the fact that it might contain a proposal that Tier 3 debt would be replaced by hybrid notes, and that MBIA would cause FLF to dispose of those notes. It had already expressed its objections to the similar proposals under the previous PRA. It took the point that clause 19.4 of the deed of charge required the trustee (Citibank) to consent to that disposal, and that that consent could not properly be given, inter alia because the terms represented an undervalue. Its response was premised on the proposition that Citibank had an independent discretion to exercise in relation to the consent. That view was not accepted by MBIA.
18. On 6^th November MBIA's solicitors informed Citibank that MBIA intended to direct Citibank to vote in favour of the Safeguard Plan, and by a letter dated 22^nd November did so. The letter said:

"Pursuant to clause 12.2 and Part 1 of Schedule 4 of the Trust Deed …and all other powers in that behalf, MBIA … hereby directs [Citibank] to exercise the rights of [FLF] to vote as a Lender… in favour of the Safeguard Plan … on 27 November 2006, and to exercise at the earliest available opportunity the [Tier 3 cash option] … and to grant, procure that [FLF] grants, or consent to [FLF] granting one or more powers of attorney in favour of Mâitre Gabriel Sonier or Mâitre Caroline Texier of Soner & Associés in the form attached hereto…".

19. The power of attorney, which was subsequently granted, appointed Gabriel Sonier or Caroline Texier to inter alia:

"Exercise or accept any option, right or power provided for in the safeguard plan, in particular relating to the Tier 3 Cash Option as that term is defined in the safeguard plan".

20. Meanwhile, because of QVT's attitude, Citibank had become concerned as to whether it could safely accept the direction of MBIA. It commenced the present proceedings on 20^th November as trustee under the deed of charge and trust deed seeking a direction as to whether it had to comply with MBIA's direction to vote in favour of the Safeguard Plan. It soon transpired that that was apparently not the problem. QVT did not oppose the Safeguard Plan and did not seek to say that there should be no vote in favour of it. It did, however, make clear that it considered that Citibank should not accept a direction to exercise the Tier 3 option, or give consent under the negative pledge in the deed of charge to what it saw as a disposal if it were exercised. Citibank was concerned to know whether it had to accept that direction or whether it was required to exercise its own judgment on the matter, and these proceedings were therefore amended to deal with those issues.
21. It will be apparent from the above that it was intended that Citibank should vote on the Safeguard Plan. It presumably thought it could do so as assignee of the benefit of the loan under the deed of charge. However, consultations in France revealed that technically it might be viewed as not having the right to do so, so it was procured that FLF exercise the vote instead, acting by the attorneys appointed under the power of attorney referred to above. The Safeguard Plan was approved by creditors on 27^th November. It is similarly anticipated that it will be FLF (if it is anyone) who will exercise the Tier 3 option. I am invited to read MBIA's direction of 22^nd November as one to exercise the Tier 3 option or to procure that FLF exercise it.
22. On 14^th December there is to be a vote of bondholders on the Safeguard Plan. Apparently that vote may be influenced by a decision as to whether or not MBIA's direction has to be complied with. If approved by the bondholders the Plan will be considered by the French court for approval. It is not known when that will happen – whether before the end of the year or in January. If it is approved the Tier 3 option has to be exercised within 15 days, if it is to be exercised at all.
23. When the matter was last before the court it was understood that QVT's argument turned around the effect of clause 19.4 of the deed of charge (the negative pledge). It contended that the exercise of the Tier 3 option would be a disposal within that clause, that Citibank's consent to that disposal was required and that Citibank was not obliged to accept a direction from MBIA as to whether to give that consent but had to exercise an independent judgment as trustee. Accordingly the issues for this court to decide, as a matter of urgency, were specified as follows:

1. Whether the exercise of the Tier 3 Cash Option would constitute a disposal for the purposes of Clause 19.4 of the Deed of Charge such as to require Citibank's consent. If so,

2. Whether:

(a) Citibank is precluded by virtue of Clause 19.4 of the Deed of Charge (having regard to the provisions of the Trust Deed) from accepting the direction dated 22^nd November 2006 of MBIA, or any similar direction, to exercise that option; or

(b) Citibank is obliged to exercise its own discretion as trustee in connection with the matters that are the subject of such a direction.

24. At the hearing it became apparent that QVT's case had developed beyond a case on clause 19.4 and now involved wider considerations of the power of MBIA to give directions to Citibank in the matter of the exercise of the option. Those points need deciding, and no objection was taken to their being run. This judgment is intended to take account of those additional points.

Citibank's position

25. Citibank applies as a trustee seeking directions, having joined those advancing opposing cases. It adopted a "broadly neutral" stance, but firmly took the point that when acting in accordance with directions of Citibank (which the trust deed from time to time required it to do) it did not need to have any regard to the interests of Noteholders, and it firmly relied on Condition 15 of the Notes which provided:

"When exercising any right, power or discretions relating to or contained in the Transaction Documents [which included the trust deed and the deed of charge] in accordance with the instructions of MBIA (for so long as MBIA is the Note Controlling Party), the Trustee shall not be required to have regard to the interests of the Noteholders in relation to the exercise of such rights, powers or discretions and shall have no liabilities to any Noteholders as a consequence of so acting."

Clause 10.4 of the deed of charge contains identical wording other than a reference to a qualification introduced by clause 14.1.7.

Having professed to be broadly neutral, Citibank in its skeleton argument indicated that it favoured a construction which did not preclude it from accepting the direction in the letter of 22^nd November so that it was not obliged to exercise its own discretion as trustee in connection with the matters directed in that letter.

MBIA's position

26. MBIA's position on the express questions referred to above was as follows.
27. So far as the question of a disposal is concerned, it submitted that the exercise of the Tier 3 option was not a disposal. It submitted that a "disposal" involved an alienation of property, and that that meaning was supported by an eiusdem generis construction of clause 19.4 of the deed of charge. It supported this position by reference to Hollicourt (Contracts) Ltd v Bank of Ireland [2001] BCLC 233 and Re Mal Bower's Macquarie Electrical Centre (1974) 1 NSWLR 254. The Tier 3 option is said to involve no such transaction. The Safeguard Plan involves a mandatory plan which is not itself a disposal, in exchange for consideration. The choice of part of the consideration does not involve the alienation of anything in favour of anyone – there is no alienation of property, and no-one receives any property. There is the exercise of a right, not a disposal of property.
28. It maintains that its right to give directions to exercise the option falls within clause 12.2 of the trust deed, in combination with Schedule 4. The right to vote on the Safeguard Plan and the option to take cash in lieu of the NRS is a right "in respect of" the Credit Agreement which gives the right of participation in the plan in the first place. It is a right which was vested in FLF as Issuer, and is now vested in Citibank via clause 4.1 of the deed of charge and can be exercised by Citibank under the trust deed. Schedule 4 (see above) entitles MBIA to give directions as to this, and Citibank is obliged to accept the directions. If the question turns on Citibank's consenting to a disposal then he says that MBIA has the power to direct that consent be given under clause 12.3 of the trust deed.

QVT's position

29. Having originally approached this matter on the footing that the key to the problem lay in clause 19.4, by the time of the hearing before me QVT approached the problem from the other end, as it were, and considered the question of whether MBIA was entitled to direct Citibank to exercise the option or to direct Citibank to require FLF to exercise it. Mr Popplewell QC, for QVT, argued that while Citibank had the right to exercise the Tier 3 option, it had no right to exercise it at present because that would be a disposal of property, and a mortgagee was only entitled to take steps to preserve property, not to dispose of it, unless there was a default and the mortgagee was enforcing the security (which was not the case here). So as mortgagee Citibank had no right to exercise the option, or even direct it, because that would be a step beyond preservation and would in fact be a disposal. The key to understanding and construing the relationship between the parties was that this was a securitisation of Channel tunnel indebtedness, with the security as provided by FLF over the debt. It was not open to Citibank (or MBIA) to change the nature of the investment by (for example) turning the Eurotunnel participation into cash and investing in a portfolio of gilts. The trustee had to preserve the security for the bondholders, and if MBIA were right in its claims to be able to direct Citibank then this would destroy the commercial purpose of the bond and cut into the "irreducible minimum" of obligations that a trustee has (see Armitage v Nurse [1998] Ch 241). Accordingly, Citibank could not exercise, or give an instruction for the exercise of, the Tier 3 option.
30. Mr Popplewell says next that MBIA cannot direct Citibank to exercise the option. He disputes that clause 12.2 and Schedule 4 of the trust deed entitles MBIA to give that direction, and embarked an a detailed analysis of that and other documents in order to seek to demonstrate that clause 12.2 relates to the preservation of security, not enforcement. It is said to relate to a pre-enforcement time. The exercise of the Tier 3 option would be a disposal, not preservation, and so would not be within the ambit of the clause. Furthermore, the wording of clause 12.2 was not sufficient to apply to any rights other than those expressly conferred by the Financing Agreements and rights "which the law would attach because of FLFs' status as a party to those agreements". The Safeguard Plan is not something which is made pursuant to, or under, the Financing Agreements; it is a new set of obligations in substitution for some of them.
31. So far as clause 19.4 of the deed of charge is concerned, Mr Popplewell submitted that the exercise of the Tier 3 option would be a disposal within that clause. FLF is giving up valuable rights in the hybrid notes, albeit receiving something in its place, and that is obviously a disposal. He says that a transfer is not necessary for there to be a disposal, and relies on the parallel of the destruction of property which is the subject of a freezing order, which he suggests would be a disposal. In support of this he relies on a similar negative pledge in the conditions to the Notes which provides that FLF will not

"sell, lend part with or otherwise dispose of all or any part of its assets …"

and relies on the expression "part with" as demonstrating a wide meaning of the concept "dispose" there which is a guide to construction in the deed of charge.

32. Turning then to the power of MBIA to direct a consent to the disposal (for the purposes of clause 19.4 of the deed of charge), Mr Popplewell says that Citibank's power to consent is not a right within clause 12.2 of the trust deed; it is more in the nature of a liberty. So MBIA has no power to direct the giving of the consent. Clause 12.3 is said not to assist MBIA because that is a clause which presupposes an already existing right to direct as opposed to a clause which confers a new one.
33. By way of tying his points together, Mr Popplewell says that his submissions on clause 19.4 support his submissions on the power to direct because if one cannot find a power to direct consent then it would be odd to find a power to direct. But he says that in any event clause 19.4 is still something that has to come into play and the requirement for consent is a self-standing requirement.

Authorities

34. QVT and MBIA each cited authorities which I have not referred to in this judgment. It will be apparent that I have cited very few of them. Many of them were authorities for straightforward propositions that I do not need to repeat here. The need to produce this judgment speedily means that I have not dealt with the authorities in this judgment in the manner which more time would have allowed. I have, however, taken them into account (and indeed most of them were uncontentious). In truth this is not a case turning on authorities. It turns on the effect of particular provisions of particular documents, and authority is of little assistance.

Citibank's and MBIA's power to direct

35. The questions formulated for the court to decide do not start from this point, but it seems to me that legal and commercial realities require me to do so. What has happened in this case is that Citibank has received a direction. It seems that so far as the vote on the Safeguard Plan was concerned, it complied with the direction by getting FLF to vote, but it received the direction itself. It also seems to me to be unrealistic to break the matter into directions and consents as Mr Popplewell's submissions seem to require me to do. If Citibank has a power to direct FLF as to the exercise of the Tier 3 option then in my judgment it is implicit in any direction given by it that it consents to that exercise unless there is something in the documentation which requires Citibank to conduct two exercises – instructing FLF and then considering whether to consent to the disposal. Accordingly it is necessary to start a consideration of this case from the power to give directions end rather than the power to consent end.
36. Before going further with this point, however, I need to dispose of one submission made by Mr Popplewell as to the factual assumptions on which I should approach the point. I have referred above to QVT's assertions that the cash which will be yielded as a result of the exercise of the option will be an undervalue. This assertion is made by comparing the cash that will result with a valuation derived from a recent auction of Tier 3 stock. I am not invited to make any finding as to whether there will be an undervalue, and indeed Mr Popplewell's skeleton argument accepts that I cannot decide it because the relevant time will be the time when (if ever) the option is exercised. However Mr Popplewell submits that I should assume an undervalue for the purposes of testing the case of MBIA because such an assumption would enable the submissions of his opponents to be tested on the footing that the exercise of the option would not be in the interests of the Noteholders as a class, and is being exercised in MBIA's sole interest. That, he says, helps to inform the questions that arise as to the scope of MBIA's power to direct, and other issues.
37. I should make it clear that I intend to make no such assumption. The undervalue is not a fact assumed by either of the other parties, and it may or may not turn out to be a real fact. I have to decide the questions of construction that arise by reference to the relevant factual matrix (facts existing at the time of the execution of the documents), and I do not see how the true construction of the documents can be affected by facts which exist at the date of the hearing. The actual facts at the date of the hearing form the context of the hearing, and may provide the reasons for the dispute, but they do not inform the construction of the contractual documents. The exercise of the Tier 3 option is, or is not, a disposal within clause 19.4 of the deed of charge whether or not there is an undervalue. MBIA's powers are what they are irrespective of whether or not there is an (assumed) undervalue. I am not invited to find the direction is an improper one because of an undervalue. Accordingly I make no assumptions about undervalue for the purposes of this judgment.

What powers does Citibank have?

38. Although Mr Popplewell did not seem to contest that Citibank had the right to exercise the Tier 3 Option, it is a useful to ascertain the source and nature of that power as a starting point for a consideration of the other issues that arise.
39. Citibank's powers vis-à-vis the Safeguard Plan come essentially through two documents – the trust deed and the deed of charge. The actual rights under the Plan are directly attributable to the Credit Agreement under which the debt is owed to FLF, but under clause 4.1 of the deed of charge the benefit of FLF's rights in the underlying Eurotunnel debt document has been assigned to Citibank, subject to the proviso for reconveyance in clause 9. If notice has been given to the debtor then the assignment will be a legal one, making Citibank the legal owner. I have not been told whether or not notice was given; Mr Popplewell has invited me to assume it was, and it was apparently anticipated that it was, but I do not know. Mr Barnes has said that FLF is still the registered owner of the Tier 3 debt. At the very least, Citibank is the equitable assignee of the benefit of the agreement under which the debt arose. However, Citibank's rights are expressly extended even further in a number of respects, and two are central to this case.

i. It is expressly agreed that it is to take not only the benefit of the debt instrument, but also "any document or agreement amending, replacing or supplementing" it. This follows from the fact that what is assigned under clause 4 are the "Participation Documents", and that expression is defined so as to include (inter alia) the Credit Agreement (under which the debt arises) with the addition of the words just quoted. It seems to me that the Safeguard Plan, which extinguishes the Eurotunnel debt and replaces it with something else, falls within that extension. It is therefore quite plain that if the Safeguard Plan is approved then it will fall within this security. Nobody contends otherwise.

ii. The closing words of clause 4 make it plain that Citibank is to have the right to "vote and exercise any other decision-making rights pursuant to the Participation Documents …". There was no debate before me as to whether a right to vote can be the subject of an assignment by itself, and I would have thought it could not (it is not an item of property) but what those words make clear (if there were otherwise any doubt about it) is that Citibank was intended as part of its security to have the benefit (in a loose sense) of the opportunity of voting and deciding things where the mortgaged property carried those opportunities. That gives it the right to exercise the right to vote or decide or, if there is a problem about its doing so, it implicitly gives it the right to direct FLF how to vote (or as to decisions that have to be made). If it gives the right to vote, it must even more clearly give the right to make an election under an option which is of the nature of a property right. It is implicit in these words that Citibank is entitled to have a great degree of control in respect of the mortgaged property (not surprisingly). In his skeleton argument Mr Popplewell accepted that the right to exercise the Tier 3 Option was vested in Citibank.

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.
41. There is also another route through which, in my view, FLF can be required by Citibank to exercise the option, albeit not one relied on by MBIA. Clause 8 deals with the perfection of security. I have set out the relevant parts of it above. Citibank has the right (and the obligation, if directed by MBIA) to request FLF to do what is necessary to enforce rights under the Participation Documents to which the Issuer is a party or under which the Issuer has any rights. That class of documents includes the Credit Agreement, and by virtue of the extending words referred to above it will also include the Safeguard Plan as being within the expression "document or agreement amending, replacing or supplementing it". The option seems to me to be a right under that extended class of documents. By that route too, therefore, it seems to me that Citibank has a right to direct FLF to exercise the option.
42. Mr Mark Barnes QC, for MBIA, put virtually the whole of his case on the question of the power to give directions on clause 12.2 of the trust deed, though that was mainly at the level of MBIA's powers to direct rather than Citibank's. That clause clearly presupposes that Citibank has acquired "rights to vote" under the deed of charge (which is expressed in its recitals to be supplemental to the trust deed). The rights expressly referred to in clause 12.2 are not the rights to exercise the option because they are rights to "vote as Lender (as defined in the Financing Agreements)", but it shows the breadth of what it is that is intended to pass under the deed of charge.
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.

MBIA's power to direct Citibank in the matter of the option

45. The power to direct relied on by Mr Barnes is said to be found in paragraph 12.2 in conjunction with the opening words of Schedule 4. If the right to exercise the option, or compel its exercise was vested in Citibank, then Schedule 4 meant that MBIA could require its exercise. In my view, on a natural construction of those provisions it seems to me that he is right. The right to exercise the option is a right "in respect of" the Credit Agreement (which, it will be remembered, is one of the Financing Agreements). The words "in respect of" are wider than "under". Mr Popplewell submitted they should be construed narrowly. I disagree. I consider that they are of reasonably wide effect. They are certainly wide enough to catch a right which is essentially a right in respect of consideration payable for a forced substitution of the Credit Agreement debt (which is what the Tier 3 Option is). This question of construction is probably not capable of a lot of elaboration. I find that the exercise of the option falls within the subject matter of clause 12.2.
46. As I have indicated above, Mr Popplewell sought to argue against this conclusion by saying that clause 12.2 was intended for something different. He said that it was designed to achieve pre-enforcement preservation of the security; it dealt with preservation rights. He took me on a short trip through two very long documents - the Credit Agreement and into another document called the Agreement Among Lenders (which is what its name suggests) - and pointed out various events which might happen under those documents, including restructuring the debt. He said that that is the sort of thing referred to in clause 12.2, and the exercise of the option was not within them. He is doubtless right in saying that the various possibilities that might arise under those documents are within clause 12.2 and Schedule 4 and are contemplated by it; but it does not follow that they are the only things capable of falling within it. The relevant words are "in respect of", not "under". As I have said, those words are capable of bearing, and in my view do bear, a wider meaning. I do not need to decide their width, but I do decide that the Tier 3 Option comes within them. A right to decide on the form and amount of the consideration for an acquisition of the Tier 3 Debt is clearly something "in respect of" the agreement which constitutes the debt. Nor is there anything in the rest of the wording of Schedule 4 which assists him to narrow the scope of the wording. That wording is too long to be set out here. Suffice it to say that it deals in detail with votes and meetings of Noteholders at a time when MBIA is not a Note Controlling Party. It deals with a variety of situations, but does not assist Mr Popplewell at all in his argument. It is dealing with something entirely different.
47. At this point I should deal with Mr Popplewell's arguments that the rights contended for by MBIA are so wide as to intrude upon the "irreducible core" of trustee obligations. This submission has its roots in Millett LJ's judgment in Armitage v Nurse [1998] Ch 241 at 253. In the context of considering a trustee exemption clause Millett LJ said:

"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."

Mr Popplewell's case was that if the documents operate as MBIA says they operate, and MBIA is entitled to take decisions in its own interest, then it cuts across the whole idea of the trust structure. MBIA therefore cannot have the right claimed.

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.
49. I therefore conclude that MBIA has the power to direct Citibank to exercise the Tier 3 Option, or to direct it to require FLF to exercise it. I would add that if I am right about the effect of clause 8 as giving Citibank a power to require FLF to exercise it, then that very clause also gives MBIA the right to direct Citibank to do it (see the words in brackets in the above citation).

Would the exercise of the option be a disposal within clause 19.4 of the deed of charge to which Citibank's consent is required; and if so can MBIA direct that that consent be given?

50. I have to confess that it seems to me that at this point the debate takes on an air of unreality. There is no question in this case of FLF taking an independent decision to exercise the option and asking Citibank for its consent. The option is only going to be exercised because MBIA has directed Citibank to procure it, and Citibank has passed on, or will pass on, that requirement as it is entitled to do. Whether or not the exercise will be a disposal, it seems to me to be an inevitable consequence that the direction imports a consent. Unless there is something very odd about the structure which obliges Citibank to require something to be done with one hat on, and then anxiously to consider a request for (or need for) consent to that which it has directed with another, the consent is either implicit or otiose in the light of my decisions and reasoning appearing above. I cannot see anything in the structure or wording of the documents which would require the two hats consideration. However, as currently formulated the questions before me raise the point, and I will deal with it shortly. I shall not deal with the questions at length because the debate before me moved on and the matter was approached differently. It is anticipated that as a result the final form of relief will involve a formal answer to different questions.
51. The first question which has to be decided is whether or not the exercise of the option will be a disposal within the meaning of clause 19.4 of the deed of charge. I have set out the rival contentions above.
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.
54. Since I have answered the first of the formal questions before me in the negative, the other two points do not arise for decision.

The relief to be granted

55. I have referred more than once above to the fact that the debate has moved on since the formal questions were formulated, and I have indicated my answer to the formal questions. It will doubtless be useful to encapsulate my determinations in a further form, probably declaratory. I will hear counsel on the appropriate form of relief when they have had an opportunity to consider this judgment.