Citibank NA v MBIA Assurance SA & Ors

A security trustee’s powers are determined primarily by the proper construction of the security documents. The law of mortgages does not impose a universal rule preventing a mortgagee from exercising rights before enforcement or default where the mortgage instrument permits that course. A right to elect the form of consideration arising under a restructuring plan may fall within rights relating to the underlying debt and may be subject to the controlling party’s contractual directions. Exercising such an option does not necessarily constitute a disposal of charged property. Where the option merely selects between alternative forms of consideration, and no property passes to another person or is destroyed, the act may be characterised as an exercise of rights rather than a disposal.

Citibank, acting as trustee for noteholders of Fixed-Link Finance BV, sought directions concerning its obligations under a trust deed and deed of charge governing Eurotunnel-related debt. MBIA, as Note Controlling Party under its guarantee arrangements, directed Citibank to procure the exercise of an option under the proposed French Safeguard Plan. The option enabled the holder of Tier 3 debt to receive cash instead of hybrid notes.

QVT contended that exercising the option would be a disposal under the negative pledge in the deed of charge and that Citibank had to exercise an independent judgment. The issues were whether the option was a disposal and whether MBIA could direct Citibank or FLF in relation to its exercise.

1. Power to exercise and direct exercise. The rights assigned under the deed of charge included rights under documents replacing or supplementing the Credit Agreement, together with rights to vote and exercise decision-making powers. The Safeguard Plan and the Tier 3 Cash Option fell within that description. Citibank therefore had power to exercise the option or, where necessary, to direct FLF to exercise it.
2. Scope of MBIA’s contractual control. The expression “in respect of” the Financing Agreements in clause 12.2 of the trust deed had a broad meaning. It included a right to determine the form of consideration payable on the substitution of the underlying debt. Schedule 4 consequently entitled MBIA, while it was the Note Controlling Party, to direct Citibank to exercise the option or to require FLF to do so.
3. Mortgage principles. The suggested rule that a mortgagee cannot dispose of mortgaged property before default or enforcement was rejected as too broad. The relevant question was whether the security documents permitted the act. The deed contained no express or implied restriction confining the power to enforcement or default.
4. Irreducible core of a trust. The extensive control given to MBIA did not destroy the trust structure. Citibank retained functions as trustee, the trust property remained held on identifiable trusts, and the contractual allocation of powers was commercially agreed. The principle stated in Armitage v Nurse [1998] Ch 241 did not assist QVT.
5. Negative pledge. Exercising the option was not a disposal for the purposes of clause 19.4 of the deed of charge. The option selected cash rather than notes as the form of consideration. The notes were never received, no property passed from FLF, and nothing was destroyed. The formal question concerning consent under clause 19.4 was therefore answered in the negative. The court indicated that declaratory relief would be formulated after submissions.