On March 7 2011 the Court of Appeal handed down judgment in BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3bl plc.(1) In the leading judgment, the master of the rolls provided helpful guidance on the extent to which trustees should participate in disputes arising from complex financial products.


The appeal concerned the interpretation of the terms of interest-bearing notes issued by Eurosail-UK 2007-3bl plc. The arrangements governing the issue of the notes were set out in the transaction documents, including:

  • the terms and conditions of the notes;
  • a trust deed;
  • a deed of charge;
  • a securitisation agreement; and
  • a post-enforcement call option agreement.

The notes were in five classes - Classes A to E - with descending priority rights. The Class A notes had three sub-classes while the Class B to E notes had only one sub-class.

The notes provided for payments of interest and principal. Interest was payable quarterly, but in the event of insufficient interest, the junior noteholders' right to receive interest was at risk of being deferred until the redemption of the relevant notes. As the mortgage-backed loans underlying the notes were redeemed, the proceeds would be used to pay off the notes on a quarterly basis in order of priority rights (ie, A1, A2, A3, B1, and so on).

In the event of service of an enforcement notice, the priorities for repayment of interest and principal would change. In particular, the three sub-classes of the Class A notes would be collapsed to form one class and rank pari passu (ie, equally).

Trustee's contractual position
Pursuant to the trust deed, BNY Corporate Trustee Services Limited was, among other things, the trustee of the rights of the noteholders to enforce rights contained in the trust deed against the issuer. The issuer granted the trustee, for the benefit of the noteholders, security for the performance of its obligations.

The terms and conditions of the notes provided that:

  • the noteholders were entitled to bring a claim against the issuer in accordance with Condition 10;
  • in turn, Condition 10 provided that the trustee was empowered to take such proceedings against the issuer as it thought fit; and
  • pursuant to Condition 9, the trustee could serve an enforcement notice on the issuer if an event of default had occurred and the trustee certified that the event in question was "materially prejudicial to the interests of the noteholders".

Event of default
The case concerned a dispute between the Class A2 and Class A3 noteholders over whether there had been an event of default as set out in Condition 9(a)(iii) of the terms and conditions of the notes:

"The Issuer… ceasing… to carry on business… or being unable to pay its debts as and when they fall due or, within the meaning of Section 123(1) or (2) (as if the words 'it is proved to the satisfaction of the court' did not appear in Section 123(2)) of the Insolvency Act 1986 (as that Section may be amended from time to time), being unable to pay its debts."

The issuer had entered into currency and interest-rate hedges with, and guaranteed by, Lehman Brothers companies. As a result of the Lehman Brothers companies entering into bankruptcy proceedings, there was a significant deficiency in the issuer's net asset position.

The Class A1 noteholders having been paid off, the Class A3 noteholders argued for an event of default in reliance on Condition 9(a)(iii); the Class A2 noteholders opposed the argument. This was the only issue before the Court of Appeal.


The court held that no such event of default had yet arisen. In his leading judgment, the master of the rolls also saw fit to address the trustee's role in the dispute.

Trustee's attendance at hearing
While the master of the rolls was careful to explain that he was not criticising the trustee (or its advisers) in relation to its involvement in the appeal, which he acknowledged was not unusual, he considered it appropriate to make certain observations "with an eye to saving costs in future cases". He was driven to make his observations by what he saw to be excessive representation on behalf of the trustee of leading and junior counsel, together with more than one instructing solicitor. This was despite the fact that no points of substance had been raised on behalf of the trustee, either in its brief skeleton argument or its very brief oral submissions. Given that a daily transcript of the hearing was available, he went as far as to say that not even a note-taking lawyer would appear to have been needed.

For future cases where, as in this case, the trustee's stance on the issues is neutral, the master of the rolls considered that it should be unnecessary for representations to be made on the trustee's behalf or for it to be represented at a hearing. The position would be different if the trustee has good reason to think that its actions will be subject to criticism or there is some other special reason.


The Court of Appeal's decision will no doubt be welcomed by investors. Disputes often arise when at least one of the parties is likely to be out of the money. Given that trustees will usually look to the underlying funds in seeking to recover its costs, it makes common sense that such costs should not be incurred unless strictly necessary. Time will tell whether trustees heed the recommendations in this case.

For further information on this topic please contact Andy McGregor at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).


(1) [2011] EWCA Civ 227.