QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Rolls Building, Fetter Lane, London, EC4A 1NL |
||
B e f o r e :
____________________
Secure Capital SA |
Claimant/ Respondent |
|
- and - |
||
Credit Suisse AG |
Defendant/ Applicant |
____________________
Raymond Cox QC and Liisa Lahti (instructed by Collyer Bristow LLP) for the Respondent
Hearing dates: 9 and 10 February 2015
____________________
Crown Copyright ©
Mr Justice Hamblen:
Introduction
Background
General outline
The Notes
The Programme Memorandum
(1) The PGS would be deposited with a common depository for Clearstream, Euroclear or another agreed clearing system. In this case Clearstream was the relevant clearing and settlement system for the Notes. Clearstream would credit each purchaser of the Notes with a nominal amount of the Notes.
(2) The securities were fungible.
(3) Title would pass by delivery to the bearer of a bearer security, and the holder would "be deemed to be and may be treated as its absolute owner for all purposes".
(4) It was provided that "the Securities are governed by, and shall be construed in accordance with, English law", and the English court had jurisdiction.
(5) Each person shown in the records of Clearstream must look solely to Clearstream "for his share of each payment made by the Bank and in relation to all other rights arising under the Global Securities, subject to and in accordance with the respective rules and procedures of ... Clearstream". This provision is sometimes called the "no look through" provision. It was subject to the rules and procedures of Clearstream.
(6) So long as Clearstream's rules permitted, the notes were tradable only in amounts equal to a specified amount. If Clearstream was closed for a continuous period of 14 days, or closed down, the PGS would be exchangeable in the form which could be enforced (definitive security). The Notes contemplated that the interests in the Notes would be settled through Clearstream.
(7) The PGS could also be exchanged for a definitive security if principal in respect of any notes was not paid when due by the holder (in this case RBSL) giving notice to the fiscal agent for such exchange.
The Pricing Supplement
The Agency Agreement
The Deed of Covenant
Clearstream
(1) Rights in relation to securities are traded electronically between members who have accounts with Clearstream, rather than the securities themselves.(2) Members could act for themselves. Commonly they will hold interests for their customers who may hold for themselves or for customers of theirs. So in this case RBSL was the member of Clearstream and Secure Capital was its customer.
(3) In relation to an issue of bearer notes represented by a PGS, the issuer will deposit the PGS with the common depository for Clearstream (as provided in the Agency Agreement and the Notes themselves) in order that security interests in the note can be dealt with on the system. In normal circumstances, the physical PGS remains at all times with the common depository, that is, it is immobilised.
(4) Payments by the issuer under such a note are made to Clearstream which pays the members, and payments by members are made to Clearstream which pays the issuer.
(5) A purchaser of a security interest in the notes will have an account with Clearstream directly or indirectly with a member. The member's account is governed by Clearstream's General Terms and Conditions, and the Clearstream Handbook. Clearstream treated all securities received as fungible (article 7). A transfer of an interest in a security to and from a member would be affected by a book entry only on the account of the member (article 12). Members would not have a right to specific securities themselves, but would have a right to require Clearstream to deliver securities equivalent to the book entry (article 11). Luxembourg law applied (article 61).
(6) The role of the common depository was essentially to receive the deposit of the PGS and hold it in safe custody for Clearstream, and to provide asset servicing through the life of the security.
(7) The Notes in this case were classic global notes ("CGN"). It is also possible to have a new global note ("NGN"), in which case there will be an issuer-ICSD agreement between the issuer and Clearstream. The NGN structure is mandatory for issues of for issues of securities that are intended to be recognised as eligible collateral for Eurosystem monetary policy and intra-day credit operations.
Luxembourg law
i) The purpose of the 2001 Law was that if securities were immobilised, the security interest holder should not be in a worse position because he only holds an interest in the securities rather than being the holder of the securities. The 2001 Law is part of a comprehensive scheme under Luxembourg law dealing with the rights of security interest holders, as appears from the answers to the Legal Certainty Group.
ii) Section 3 contains a provision relating to account owners that is those with a security interest under Clearstream. The law provides for an account owner (in this case Secure Capital) to have an intangible right in rem in relation to securities of the same type held by the account holder:
"Art 3(1) The account owner has, up to the number of securities registered in his custody account, an intangible right in rem to all of the securities of the same type held in an account by the relevant account holder… the rights attached to the securities, and the rights stipulated in this law. Subject to any legal provisions to the contrary, he may only assert his rights with the relevant account holder".
iii) That right is only exercisable against the person providing the account to the account owner (the account holder – in this case RBSL). Each account owner could exercise the same right against the person providing his account, and so on up the chain up to Clearstream. The basic principle is "no look through" to a direct claim against the issuer.
iv) There were provisions to protect the rights of the account holder in the event of liquidation of the account owner or holder (Article 4(2)).
v) Section 4 deals with the integrity of the system, and provides protection against seizure of securities, and third party claims.
vi) Section 5 deals with the obligations of the account holder. Essentially the account holder's obligation was to ensure that it held a security interest up to at least the number of securities in which a customer account owner held a security interest.
vii) Section 6 deals with the obligations of Clearstream, including keeping securities held by them separate, and provides protection from enforcement measures against accounts.
"Art 8(1) the investor may exercise or arrange to exercise corporate rights attached to the securities and the rights attaching to the holding of the securities linked to the possession of the securities by producing a certificate drawn up by the relevant account holder attesting to the number of securities registered in its custody account."
i) It is important to note, as explained by Mr Thieltgen, and as appears from the Parliamentary texts he exhibits, that Article 8 is not concerned with payment by the issuer of sums due under the notes by way of principal or interest. Those rights may only be exercised by the security interest holder against the account holder not the issuer. The "no look through" principle applies to the principal claims which may be made in respect of the notes.
ii) Article 8 is only concerned with "residual" situations in which the ultimate investor may need to exercise rights which would be available to the holder against the issuer but which apart from Article 8 would not be exercisable by the ultimate investor.
iii) It provides for the exercise of voting rights attached to securities by the ultimate investor even though it is not the holder of the securities.
iv) It also provides for the ultimate investor to exercise rights attaching to the holding of securities and linked to possession of them on production of a certificate by the relevant account holder. The parliamentary works exhibited by Mr Thieltgen make plain that these rights were intended to include legal proceedings which might be brought against the issuer or third parties: See, for example:
"… As regards the issuer and third-parties which are under obligations in accordance with the security, the depositor holds the rights relating to the security and a right of action in the event of failure or other similar events. The rights relating to the security essentially include all the prerogatives allowing the owners of the security to participate in the corporate life of the issuer. These include, for example, the right to vote and subscription and conversion rights and the right to bring an action in liability against the bodies of the issuer"
"… on the other hand rights attaching to the securities and financial instruments such as the rights of the shareholder or the creditor... The former rights are exercisable with regard to the depository who holds these assets, the latter, such as the voting right, the right to involvement in any bankruptcy and the right to bring proceedings for recovery, are exercisable directly against the issuer or, if appropriate a co-obligor or guarantor."
(emphasis added)
v) Article 8 is consistent with the objective of the law that the position of the security interest holder should not be worse than it would be if he were the holder of the securities in which he has an interest.
vi) The purpose of the requirement in Article 8(1) that the relevant account holder certify the number of securities in which the investor had an interest was clearly to evidence to the issuer that the investor had such an interest because the issuer would otherwise not have that information.
The pleaded claim
"3. ….In breach of the express terms of the Notes, Credit Suisse failed to ensure that it had disclosed material facts. As a result Secure Capital is entitled to damages.
….
22. ….Secure Capital believes that the common depository, and hence the bearer of the Coupon Notes, is The Bank of New York Mellon. The bearer of the Coupon Notes is a party to a contract with Credit Suisse under the terms of the Coupon Notes.
….
38. Secure Capital is in possession of a certificate drawn up by RBSL which attests to the number of securities, including the Coupon Note Securities, registered in its custody account.
39. In the premises, Secure Capital is entitled, pursuant to Article 8 of the 2001 Law, to exercise the rights linked to the possession of the Coupon Notes. This includes an entitlement to exercise the right of the bearer to bring an action for a breach of a term of the Coupon Notes.
….
52. The terms of the Notes were misleading because of the omission of material facts…
….
57. In the premises, in breach of the misleading statements term the Defendant failed to take reasonable care to ensure that the statements in the notes were not misleading because of the omission of material facts.
Loss and damage
58. If the Bank had not acted in breach of the misleading statements term, as set out above, the Claimant would not have purchased the Coupon Note Securities or the Zero Note Securities.
59. By reason of the matters aforesaid, Secure Capital suffered loss and damage…"
The applicable law
"…at common law, the identification of the appropriate law may be viewed as involving a three-stage process: (1) characterisation of the relevant issue; (2) selection of the rule of conflict of laws which lays down a connecting factor for that issue; and (3) identification of the system of law which is tied by that connecting factor to that issue: see Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 , 391-392 per Staughton LJ. The process falls to be undertaken in a broad internationalist spirit in accordance with the principles of conflict of laws of the forum, here England.
While it is convenient to identify this three-stage process, it does not follow that courts, at the first stage, can or should ignore the effect at the second stage of characterising an issue in a particular way. The overall aim is to identify the most appropriate law to govern a particular issue. The classes or categories of issue which the law recognises at the first stage are man-made, not natural. They have no inherent value, beyond their purpose in assisting to select the most appropriate law. A mechanistic application, without regard to the consequences, would conflict with the purpose for which they were conceived. They may require redefinition or modification, or new categories may have to be recognised accompanied by new rules at stage 2, if this is necessary to achieve the overall aim of identifying the most appropriate law (cf also Dicey & Morris, The Conflict of Laws , 13th ed (2000), vol 1, p 34, para 2-005). That is implicit in the discussion in academic texts of the appropriate law by which to judge the validity of voluntary assignment: see e g Dicey & Morris , vol 2, p 979, para 24-049, Cheshire & North's Private International Law , 13th ed (1999), pp 957-958 and articles by P J Rogerson, "The Situs of Debts in the Conflict of Laws—Illogical, Unnecessary and Misleading" [1990] CLJ 441 and Mark Moshinsky, "The Assignment of Debts in the Conflict of Laws" (1992) 108 LQR 591 . So also, Professor Sir Roy Goode QC, while generally favouring as the appropriate law the lex situs of the debt assigned, prefers the law of the assignor's place of business in the context of global assignments of receivables, e g by factoring or discounting: cf Commercial Law , 2nd ed (1995), p 1128.
The three-stage process identified by Staughton LJ cannot therefore be pursued by taking each step in turn and in isolation. As Auld LJ said in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 , 407:
"the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence. This requires a parallel exercise in classification of the relevant rule of law . However, classification of an issue and rule of law for this purpose, the underlying principle of which is to strive for comity between competing legal systems, should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law, which may have no counterpart in the other's system. Nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system ..." (Emphasis added.)
There is in effect an element of interplay or even circularity in the three-stage process identified by Staughton LJ. But the conflict of laws does not depend (like a game or even an election) upon the application of rigid rules, but upon a search for appropriate principles to meet particular situations."
"Among the rights which are ordinarily created by such instruments is the right of suing upon the contract therein contained."
"(1) Its security interest in the Notes (the Coupon Note Securities and Zero Note Securities, as defined at paragraphs 32 and 45 of the Particulars of Claim) is a property right which is situated in Luxembourg, being the place where its custodian bank, RBS Global Banking (Luxembourg) S.A. ("RBS;"), is situated. The lex situs of the security interest is therefore Luxembourg law and Luxembourg law governs the nature and effect of our client's property interest. Further or alternatively;
(2) The situs of immobilised securities is or should be regarded as the place where they can be effectively dealt with which is, in this case, on the Clearstream system which operates in Luxembourg. On this analysis the applicable law is again Luxembourg law and Luxembourg law governs the nature and effect of our client's security interest in the Notes."
"Whether and how an instrument, wherever issued, in England or abroad, can be transferred by delivery or by endorsement and delivery so as to confer a good title upon a bona fide transferee for value are matters exclusively to be determined by the law of the country in which the instrument is transferred."
"… I confess to an initial impression that the case fits readily into a contractual, and less readily into a proprietary, slot… Parties are free to determine with whom they contract and on what terms… A simple issue whether a contractual claim exists or has arisen in these situations cannot be regarded as an issue about property, however much an acknowledged contractual right may be identified property in certain other contexts. An issue whether a contract has been novated appears to me essentially contractual. Under a contract which, from its outset, purports to confirm on a third party a right of action, an issue whether the third party may enforce that right appears to me again essentially contractual…
The cargo owners seek to redescribe the issue as being whether the title to the right of suit or cause of action which formerly vested in the assignor was vested in or was now owned by the assignee. In this way they seek to give the issue a proprietary aspect. However, it is unclear why it is necessary to talk of "title to the right", or to focus on its transfer from assignor to assignee, rather than upon the simple question: who was in the circumstances entitled to claim as against the debtor?"
"the question whether a 'bearer bond' is capable of carrying with it the right to claim payments of principal and interest from the issuer should ultimately be determined, not by the law of place where the bearer instrument was situated at the time of its negotiation, but by reference to the law governing those rights and the issuer's corresponding obligations…a choice of law expressed in the instrument itself should be determinative".
"… a person's (proprietary) entitlement to be treated as a "holder" as against other claimants, will normally be determined in accordance with the lex situs, but the question whether the instrument carries with it rights against the issuer (and questions concerning the exercise of those rights) will, ultimately, be matters for the law governing the instrument."
"the better view would appear to be that the relationship between the issuer and the original holder is "contractual" in nature with the consequence that the Rome I Regulation would apply to determine the law applicable, subject to the exclusion in Art.1(2)(d)…".
(1) Goode, The Nature and Transfer of Rights in Dematerialised and Immobilised Securities, (1996) JIBL 167, 168 says that the immobilisation of tangible securities by depositing them with custodians is a widely used measure which operates to "prevent a direct link between issuer and investor…so that the custodian is substituted for the investor as the holder of record and the investor's entitlement is thereafter against the custodian, not the issuer" (at p168), "the effect of immobilising a security is, in the case of a permanent global note, to shut out any direct link between issuer and investor" (at p172); "As under an ordinary trust, the account holders do not have direct rights against issuers of investments held by the custodian; their entitlements subsist purely against the custodian itself."(2) Benjamin, Determining the situs of interests in immobilised securities, (1998) ICLQ 923, 929, fn 22 says that: "Participants do not have direct rights of action against the issuer…The issuer agrees to pay principal and interest to the bearer of the Global…the participant has no direct recourse against the issuer or the Common Depositary…On issuer default the only direct rights against the issuer are held by the trustee or by the participant. However, these last rights do not arise under the immobilised securities but, rather, under the deed poll as a separate though ancillary document".
(3) Elias, Legal aspects of swaps and collateral [2001] JIFM 232. 242 says that: "in the context of indirect holding systems, commingling fungible property terminates the direct property rights of owners of the individual co-mingled items, with the following legal and practical consequences… Each participant does not have a direct right of action against the issuer of the securities, his right being "indirect", except when such direct right is given by way of a deed poll or a trust deed";
(4) Ooi, Shares and Other Securities in the Conflict of Laws (2003), at [6.28] states (using the example of shares held indirectly through a clearing system): "The only entity legally entitled as against the issuers is the operator with whom all these shares have been deposited. In other words, as regards the issuers, the operator is the only shareholder";
(5) Fuller, the Law & Practice of International Capital Markets (3rd edition, 2012) says that the account holder cannot enforce any of the issuer's obligations "as it has no privity of contract with the issuer (its rights being merely against the clearing system)" (at 1.129), with mechanisms such as deed polls being crafted to confer certain rights against issuers on third parties. Moreover, "invariably…the common depository…is the only person entitled to receive payment from the issuer" (at 1.132);
(6) Fuller (at 1.153) also notes that the standard approach in the market is (as happened in this case) to contract out of the Contracts (Rights of Third Parties) Act 1999, which was recommended by the International Capital Market Association "on the basis that the legal structure of the rights arising from the transaction documentation…is effective, certain and generally accepted in the market".
"This tiering of relationships…has several advantages. It creates a pyramid structure in which the issuer can deal with a relatively small number of large players, who in turn will hold accounts for a greater number of smaller participants, and so on down through the pyramid to the ultimate investor. The effect is substantially to reduce both the volume and the movement of paper involved in the issue and transfer of securities and the risk of loss or theft of negotiable securities. Moreover, the aggregation of holdings in undesignated pools of intangibles held by a securities intermediary in an omnibus account facilitates book entry transfers of those securities from one customer of the intermediary to another, thus enabling a substantial volume of transfers to be effected in house, as well as providing pools of collateral which can be lent to shadow banks and other financial institutions to use as collateral for funding purposes."
Conclusion