Court of Appeal Ruling: Banca Generali SPA v (1) Sovereign Credit Opportunities SA and (2) CFE Advisory Services [2024] EWCA Civ 886

The Court of Appeal upheld the decision of the High Court[1], affirming the rights of Senior Noteholders to act independently under specific circumstances following a default.

The decision adds to our understanding of the extent of Senior Noteholder authority in default scenarios. It also offers a convenient practice point when drafting specific contractual mechanisms while also bestowing broader powers elsewhere in the agreement.

Background

The appeal arose from an order made by Deputy High Court Judge Simon Gleeson, who ruled that Senior Noteholders, represented by Banca Generali SPA (the Claimant), had the authority to remove the Fiscal Agent in three securitisation transactions known as TFI, TFII, and TFIII. The Issuer, Sovereign Credit Opportunities SA, and the existing Fiscal Agent, CFE Advisory Services (the Defendants), contested the High Court's interpretation of the securitisation agreements. They argued that such a power could only be exercised with the Issuer’s consent.

The case centred around complex contractual arrangements governing trade finance receivables, with the assets primarily consisting of claims under payment instruments or export credit insurance policies. Upon the default and non-redemption of the Notes by the final maturity date, the Senior Noteholders sought to exercise their rights under the securitisation contracts.

Legal Issues

The primary legal question in the appeal was whether the contractual provisions allowed the Senior Noteholders to remove and replace the Fiscal Agent without requiring the Issuer's consent after a default, or "Trigger Event." The Defendants argued that the removal of the Fiscal Agent was governed solely by Clause 9 of the Fiscal and Calculation Agreement, which required the consent of the Issuer except in cases of the Fiscal Agent's misconduct or insolvency.

However, the Senior Noteholders contended that after a Trigger Notice, under Clause 14.1 of the agreement they had broader powers to manage the receivables and that this included the power to remove the Fiscal Agent.

The Court of Appeal's Analysis

The Court of Appeal, led by Lord Justice Arnold, upheld the High Court's decision. The judgment highlighted two key points:

1. Interpretation of Contractual Provisions: The Court held that Clause 9 of the Fiscal and Calculation Agreement was not intended to be an exhaustive mechanism governing the removal of the Fiscal Agent. Rather, following the service of a Trigger Notice, Clause 14.1 provided Senior Noteholders with a more comprehensive set of powers for the management and administration of the receivables. These powers included the ability to remove and replace the Fiscal Agent, which became more central to the operation of the schemes post-default.
2. Role of the Fiscal Agent Post-Trigger: The Court emphasised that the Fiscal Agent’s role shifted significantly after the Trigger Notice was served, taking on more proactive functions such as controlling accounts and taking legal action in relation to the receivables. As such, it was reasonable to allow the Senior Noteholders to have a say in appointing a Fiscal Agent who would act in their interests in these critical post-default scenarios.

Dismissal of the Appeal

The Court rejected the Defendants' argument that the Senior Noteholders’ powers were limited to directions regarding the receivables themselves, such as selling or disposing of them. It found that the scope of the power extended to appointing and removing the agents responsible for managing those receivables, including the Fiscal Agent. Furthermore, the potential overlap of responsibilities between the Fiscal Agent and the Collection Agent was deemed acceptable within the structure of the agreements.

Lord Justice Arnold, along with Lady Justice Asplin and Lord Justice Phillips, concluded that the Senior Noteholders' interests were sufficiently protected under the existing framework and that the Claimant’s position was commercially justified.

Conclusion

The Court of Appeal’s ruling solidifies the authority of Senior Noteholders in securitisation transactions, particularly in situations where a default has occurred.

It also reinforces the notion that in the post-default phase, Senior Noteholders have the right to take proactive steps in managing the assets, including replacing key agents like the Fiscal Agent, even without the consent of the Issuer.

From a drafting perspective the judgment highlights that it might be reasonable to assume that a clause that deals specifically with a particular scenario will take precedence over a general provision that may be drafted more widely to cover that scenario, among others.

However if a provision on a specific matter is intended to be exhaustive, the agreement should make it clear that a particular clause is intended to be the sole contractual mechanism dealing with the point, to the exclusion of a broader provision that may also potentially apply.