The case involves Caxton International Limited and others’ claim for declaratory relief against Essity Aktiebolag and Essity Capital BV (collectively Essity), the Defendants, who are the issuers of three series of euro-denominated bearer notes. The notes are held through clearing systems as legal owners and custodians as “noteholders”. The Claimants are account holders with the custodians and ultimate beneficiaries of the notes.

Upon Essity’s disposal of the entire stake in one of its subsidiaries known as Vinda International, some of the custodians served acceleration notices on Essity on the basis that such disposal constituted “cessation of a substantial part” of Essity’s business and that an event of default under the notes has occurred. Essity disputed the occurrence of any event of default, and contended that only the clearing systems are entitled to serve acceleration notices as legal owners of the notes.

The High Court held that the Claimants, despite not being contractual counterparties to the notes, have a sufficient and legitimate interest to seek declaratory relief due to their equitable proprietary interest in the notes. The Court acknowledged that the Claimants are the real creditors, as recognised in insolvency situations, and went on to find that the Claimants have a good arguable case that their interests are sufficiently affected by Essity's contested legal rights which justify the declaratory relief.

Essity also relied on Secure Capital SA v Credit Suisse AG  to argue that allowing ultimate beneficial owners to seek declarations would disrupt the “no look through” structured chain of relationships that exists for such securities in the capital markets for good reason. However, the Court did not accept that the Claimants were subverting the structure, as there is no contractual term precluding them from seeking a determination of rights under the notes. The Court distinguished Secure Capital, in which the claim was to enforce payment directly, from the declaratory relief being sought in Caxton.

In respect of the utility of the declaratory relief, the Court took the view that the Claimants clearly have a legitimate interest in having the matters in dispute determined, including the validity of the acceleration notices already served. The declaratory relief sought could serve a useful purpose by clarifying the rights under the otes. The Court further noted that joining the custodians could enhance the effect of the declarations sought and reduce the possibility of further disputes, but the absence of such joinder may be justified for the purpose of saving unnecessary costs.

This English Court ruling has significant implications for both note issuers and investors. Whilst the claim in Caxton is still pending determination, the English Court has recognised ultimate beneficial owners’ rights to seek declaratory relief even if they lack direct contractual rights under such notes. Whilst notes issuers may face increased litigation risks, an avenue is opened for ultimate beneficial owners to bypass clearing systems and custodians to take legal action against note issuers directly in safeguarding their economic interests.