In Citicorp Trustee Co Limited v Barclays Bank Plc and Others, the High Court has confirmed that there are no special principles of construction which apply to securitisation contracts, the terms of which fall to be decided “in accordance with the general principles of construction applied by the courts in respect of any document it is asked to construe”. Further, the Court took steps to ensure that all interested parties to a securitisation transaction would be bound by the decision of the Court even where an interested party took no part in the proceedings.


The facts of this case are complex.  Citicorp Trustee Co Limited (the “Trustee”) was the Trustee under two issues of commercial mortgage backed floating rate notes (the “Notes”) of which Barclays Bank Plc (“Barclays”) and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) were noteholders. The securitisation transaction proceeded as follows:

• Initially a group of banks (including Barclays) advanced monies to a group of borrowers; these loans were subsequently split into senior and junior loans. The senior loans were further divided, with the majority of the lending banks’ interest being acquired from the banks (including Barclays) (the “Sellers”) by the issuers.
• The Notes were issued by the Second and Third Defendants (the “Issuers”) in order to raise the purchase monies for the majority portion of the senior loans being acquired from the Sellers.
• Under the terms of the Notes, the Issuers were prohibited from purchasing any Notes and the Trustee was entitled to assume that no Notes were held by or on behalf of the Issuers or the Sellers.
The Issuers did not intend to take a position in the proceedings and were only represented so as to assist the Court if necessary; the junior noteholders did not appear or participate in the proceedings.

Disenfranchised Noteholders

The Court was required to determine whether, under the terms of the Trust Deed, certain Notes held by Barclays and Rabobank (the “Disputed Notes”) were “disenfranchised” (i.e. they no longer carried an entitlement to vote) upon any noteholder vote or direction to the Trustee; the Court examined the Trust Deed along with the Master Definitions Schedules for the sale of the Seller’s interest in the senior loans to the Issuers (the “Relevant Documents”) for the purposes of the construction exercise.

Following a review of the Relevant Documents, the Court held that “there are no particular special rules applicable to these kinds of contracts” as regards construction, and the construction fell to be determined in accordance with the general principles of construction.

Consequently, upon a true construction of the Relevant Documents and the note disenfranchisement provisions, the Court held that the Disputed Notes held by Barclays were not disenfranchised as Barclays did not hold the Disputed Notes in its capacity as a Seller, despite its other roles in the securitisation transaction.
Similarly, in respect of the Disputed Notes held by Rabobank, the Court concluded that Rabobank was neither an Issuer nor a Seller and therefore held the Disputed Notes legally and beneficially; the Court did not agree that the credit protection provided under the Credit Default Swaps and guarantees entered into with Barclays allowed Barclays to acquire a beneficial interest in the Disputed Notes held by Rabobank as a proprietary interest in the Notes was required, as opposed to an ‘economic interest’.

Non-Participating Parties

An interesting point which came out of the Court’s decision concerned the non-participation of the junior noteholders.

The Court referred to a decision given by Sir Andrew Morritt, as Chancellor of the High Court in the case of State Street Bank & Trust Company v Sompo Japan Insurance Inc & Ors [2010] EWHC 1461 (Ch). It was held in State Street Bank that in the absence of any noteholders prepared to participate, the Trustee was expected to advance any arguments reasonably available to the noteholders as a class and assist the Court by bringing to the Court’s attention any relevant legal proposition or argument affecting the position of unrepresented beneficiaries or parties. This follows on from the application of the general duty of particular fiduciaries, as laid down in the case of Glebe Sugar Refining Company Limited v Trustees of the Port and Harbours of Greenock [1921] WN 85.

Upon a consideration of the State Street Bank decision, the Court agreed that arguments of people who were absent from the proceedings can be put forward by a trustee.

However, whilst arguments can be submitted on behalf of such persons by the Trustee, and the Court can determine those arguments, the Court could not see how any decision would then bind the non-participating junior noteholders unless they were party to the proceedings. As such, the Court set out the following procedure to ensure that the non-participating junior noteholders would be bound by the Court’s decision:
1. the special servicer was to be joined as a party to the proceedings;
2. the special servicer was then required to identify a junior noteholder to the other parties’ lawyers on a confidential basis (following preliminary steps, including advertisements, a number of junior noteholders were identified); and
3. the Court would then designate that junior noteholder as “Defendant XY” and join them into proceedings, in order to represent all junior noteholders in such a class.
The Court was of the opinion that by doing this, every conceivable person that could be affected by the Court’s decision was joined as a party to the proceedings and therefore would be bound by the judgment.


Given the volume, and complexity, of securitisations taking place during the boom years, it was inevitable that the financial crisis would result in a huge rise in litigation arising out of such transactions. It is clear from the latest case to come before the Courts that judges are not prepared to apply any special rules to these complex transactions; Courts will continue to adopt usual principles of interpretation when reviewing securitisation contracts.

This case also provides useful guidance as to the approach the Courts are likely to take in respect of non-participating noteholders, confirming that a trustee can submit arguments on behalf of those noteholders who are not represented or participating in the proceedings. Further, the approach taken by the Court to join “Defendant XY” to the proceedings will ensure that all classes or noteholders are represented and bound by a judgment and acts to remove the possibility of a non-participating class of noteholders from simply waiting to assess the outcome of any proceedings before deciding to pursue their own course of action should they disagree with the outcome.

For further information, please contact James Walton or the Partner with whom you usually deal.