Secure Capital SA v. Credit Suisse AG [2017] EWCA Civ 1486

Secure Capital SA (SC) was the owner of the entire beneficial interest in a series of notes issued by Credit Suisse (the Notes). The Notes were governed by English law and issued in bearer form. SC held its interest in the Notes through Clearstream. It argued that a provision of Luxembourg law (under which Clearstream operates) gave it the right to assert a claim directly against Credit Suisse for breach of a term of the Notes, to the effect that Credit Suisse had taken all reasonable care to ensure that information it provided in relation to the Notes was correct, and that there were no omissions that would make the information misleading. Please click here for a link to our summary of the first instance decision.

The Notes were issued in bearer form, each one represented by a single Permanent Global Security which was held by Bank of New York Mellon (BNYM) as common depositary. Interests in the Notes were traded through Clearstream, between accounts held by its members (Account Holders), including, in this case, RBS Global Banking Luxembourg SA (RBSL). Payments due under the Notes would be made by Credit Suisse to Clearstream, and from Clearstream to the Account Holders, who would distribute any sums as appropriate to those of their clients who had an interest in the Notes (the Account Owners). Ultimately, and prior to the issue of these proceedings, RBSL held the whole interest in the Notes for the account of SC as Account Owner.

The Court of Appeal noted the "no look through" principle, under which this system operates. In other words, each link in the chain only has recourse against its immediate counterparty. On this basis, English law gives SC no right to sue Credit Suisse for a breach of the terms of the Notes. SC, however, relied on a provision of Luxembourg law, as the law applying to settlements under the Clearstream system. In particular, it relied on Article 8(1) of Luxembourg law dated August 2001 on the circulation of securities. That provision stated that "the investor may exercise or arrange to exercise corporate rights attached to the securities and the rights attaching to the holding of 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".

SC did not argue that it was entitled to assert the rights of the bearer of the Notes (accepting that BNYM retained those rights), but said that it was entitled to assert a "parallel but independent right of action" that did not fit existing categorisations (such as contractual or proprietary) and should be treated sui generis. SC argued, in summary, that English law governed the question of whether there had been a breach of the Notes, but that the question of who was entitled to sue was for Luxembourg law as the law of the settlement system. Further, it argued that the relevant aspect of Luxembourg law was incorporated by reference into the terms of the Notes (an argument that the Court of Appeal rejected on the facts).

Lord Justice David Richards, giving the Court of Appeal's judgment, dismissed SC's appeal. He said: "Under English conflicts of law principles, the identification of the parties entitled to sue on a contract is governed by the proper law of the contract." In this case, that was English law and, on that basis, the only person entitled to sue Credit Suisse on the terms of the Notes was their holder, BNYM. He also rejected the argument that the "no look through" principle applied only to payment obligations. The Court of Appeal also stated that SC's approach could lead to a potentially "incoherent, if not chaotic" result. Clearstream is governed by the laws of Luxembourg, but there are other settlement systems governed by other laws, e.g. Euroclear (subject to Belgian law) and the DTC (subject to US law). On that basis, the issue of whether or not an issuer would be subject to direct claims from those having an interest in securities would depend on the system through which those interests were held.

One of the interesting aspects of the judgment is the pragmatic (and quite robust) approach of the Court of Appeal. It found that parties like SC knew that they were, in fact, trading in interests in securities, not the securities themselves. The limitations on direct action were part of an overall package of rights that a party in the position of SC chose to trade.

This decision is unsurprising, in that SC's arguments were somewhat ambitious set against the language of the Notes. However, the judgment is also welcome, in that any decision to the contrary would have opened the way for the chaotic result the Court of Appeal identified.