High Court grants bank access to customer documentation relating to receivables in securitisation transaction

The High Court has granted an application made by a bank acting for Senior Noteholders in a securitisation structure, for production of underlying customer documents relating to the securitised receivables. The application was made against the Note Issuer and Collection Agent in respect of the receivables, to enable the bank to value the Notes in accordance with its regulatory obligations to its clients: Banca Generali SPA v CFE (Suisse) SA & Anor [2022] EWHC 1450 (Ch).

This is a useful judgment for financial institutions fulfilling a similar role in securitisation structures, where there are concerns about the information provided in relation to the underlying assets which have been securitised. The decision highlights the importance of having a broad and clear contractual right for the bank to obtain any relevant underlying documents to enable its own assessment of valuation. The regulatory disclosure regimes applicable to securitisation transactions under the EU and UK Securitisation Regulations provide for investors to have access to the contractual documentation relating to the securitisation itself, but do not explicitly provide for the customer documentation or contracts relating to the underlying receivables to be made available.

The decision is considered in more detail below.

Background

The parties were involved in three securitisation structures (the Structures) pursuant to which trade finance receivables relating to export transactions from Europe to emerging markets were securitised.

The defendant Issuer (the Issuer) had acquired the receivables and issued different tranches of notes for each of the Structures (the Notes). The Bank acted as the Senior Notes Initial Subscriber and/or Placing Agent. The Notes relating to the Structures were not publicly traded, and the vast majority were acquired by clients of the Bank, who were the Senior Noteholders. The Bank also had a significant ongoing role as a party to the transaction documents in relation to the securitisation and was able to exercise rights on behalf of the Senior Noteholders. The second defendant acted as Collection Agent and was the holder of the Junior Notes (accounting for 5% of all the Notes in issue).

In 2021, the Bank became concerned that inaccurate information had been provided in respect of the underlying exposures in the securitisation Structures, in particular that some of the receivables were common to more than one portfolio. There were material changes in the description of the nature of the instruments/security provided. There were also actual/expected failures to redeem Senior Notes in full and what appeared to be an increasing pattern of receivables in arrears.

The changes, together with what the Bank considered to be material discrepancies with previous reports, led to complaints from the Bank that it was unable to calculate a fair value for the Senior Notes in accordance with its regulatory obligations, and ultimately to the issue of these proceedings. The Bank brought an application for an order that the Issuer and Collection Agent provide copies of the "transactional documents" constituting the receivables such as loan agreements, guarantees and security documents, for each of the three Structures.

The Bank asserted that it had a contractual right to request the documents under Clause 12 of the relevant Fiscal and Calculation Agreement or Intercreditor Agreement (depending on the Structure, referred to collectively as the Agreements), in order to satisfy itself that the information provided by the defendants was accurate. Clause 12 of the Agreements provided as follows (emphasis added):

"Each Party shall, within ten Business Days of a written request by another Party, supply to that other Party such forms, documentation and other information relating to it, its operations, or the Notes as that other Party reasonably requests for the purposes of that other Party's compliance with Applicable Law..."

The Bank said it was entitled to the transactional documents relating to receivables to comply with its regulatory obligations under Articles 60 and 63 of the Commission Delegated Regulation (EU) 2017/565 (Regulation 565) as understood in light of Article 24(1) of MIFID II, which were subject to expert evidence in relation to the same, to report on the value of the Senior Notes to its clients.

Each of the Structures was subject to EU Regulation 2017/2402 (the Securitisation Regulation) and Commission Delegated Regulation (EU) 2020/1224 (the Disclosure Regulation), which required the Issuer and Collection Agent to provide certain information in relation to the underlying documents relating to the securitisation to any holder with exposure to the securitisation. However, neither requires provision of any underlying documents relating to the underlying receivables which were part of the securitisation. This dispute therefore focused on the right contained in Clause 12 of the Agreements.

Decision

The court granted the Bank an order requiring the Issuer and Collection Agent to provide the relevant documents, subject to a proviso that the Bank could use the documents only for the purpose of complying with its regulatory requirements.

The court applied the relevant principles in respect of a mandatory injunction as per American Cyanamid v Ethicon Ltd [1975] AC 396 and Zockoll Group Ltd v Mercury Communications Ltd (No.1) [1998] FSR 354 at 366. While in form the application was for an interim injunction, in practice it comprised substantially all the relief that the Bank sought, and so required the court to have a high degree of assurance that the Bank would prevail on the issues at trial.

The court considered two key issues in granting the relief sought by the Bank.

1. Did the documents and information fall within the scope of Clause 12?

Firstly, the court considered whether the documents sought fell within the scope of Clause 12 of the Agreements.

The Issuer and Collection Agent contended that documents relating to the receivables were not documents or information "relating to…the Notes", and there was a distinction between documents relating to the Notes and those in relation to the underlying exposures, with the latter not falling within the scope of Clause 12. In addition, the Issuer and the Collection Agent suggested that Clause 12 ought to be interpreted in light of the relevant regulatory provisions, which did not provide for such documents or information to be provided, and that Clause 12 needed to be interpreted in the manner contended by the Issuer and Calculation Agent, otherwise it would be a broad investigatory right of imprecise scope.

The court rejected the Issuer and Collection Agent's submissions finding that the documents fell within the scope of Clause 12. As a matter of construction, the Agreements clearly demonstrated that the concept of "relating to the Notes" was intended to capture information relating to the underlying exposures and the Notes themselves, which also made business sense. The court commented that it would have been very strange if the parties had agreed something to the contrary, otherwise the Bank would not have been able to obtain the information necessary to complete its valuation of the Senior Notes. The fact that the regulatory provisions did not require such documents or information to be provided was not to the point; it was open to the parties to agree as a matter of contract that such documents or information ought to be provided. Clause 12 was limited by purpose and the requirement of reasonableness: (a) in that the requesting party must act reasonably; and (b) only documents or information that are reasonably available or can be obtained using reasonable efforts, needed to be provided, so it was not an open-ended right of investigation.

The court also found that the Bank was required to carry out a valuation exercise to comply with Articles 60 and 63 of Regulation 565, and that Clause 12 did not establish an objective "necessity" test (i.e. meaning only documents which were necessary to enable the Bank to carry out the valuation could be requested), but instead provided that the requesting party's actual purpose in seeking the documents needed to be established. Further, Clause 12 was not to be interpreted narrowly so as to mean that the Bank could obtain documents to verify information which had already been provided by the Issuer and the Collection Agent.

2. Was the request reasonable?

Secondly, the court considered whether the request for documents made by the Bank was reasonable.

The Bank contended that it was reasonable. The documents must have been collated by the Issuer and the Collection Agent to provide the information which had been provided already, and was needed to carry out the valuation exercise which was required in relation to one of the Structures. The need to review confidentiality provisions would fall on external lawyers rather than the Issuer and Collection Agent's employees, and ought not to be afforded much weight in circumstances where material information in relation to the receivables had already been reported in the context of the securitisation structure.

However, the Issuer and Collection Agent suggested that the request was far from reasonable. Information had been provided to the Bank, which had been thoroughly checked, and there was no reason to doubt the accuracy of that information. The documents would be difficult to gather and disclose, requiring a small cohort of employees to be diverted from their day job for a period of approximately two to three months. A significant number of the documents were likely to contain confidentiality provisions and likely to be governed by foreign law, requiring foreign counsel to be engaged which would be time consuming and expensive.

The court outlined that, in the particular circumstances, the Bank's request was reasonable for two key reasons:

• The Bank's request was for transactional documents constituting the receivables (i.e. loan agreements and related security documents). This was a proportionate request, in light of the specific concerns raised as to the quality of the information provided to it already, to enable the Bank to assess the nature of the instruments and security available, which were fundamental to valuation. For instance, receivables that are in arrears or risk being non-performing, would affect valuation.
• Other provisions in the transactional documents required the Collection Agent to gather/keep documents, and in one case to make documents available to the Issuer within two business days, meant that the court was concerned by submissions that the documents could not be gathered and disclosed easily; in fact, these provisions suggested they either had not been or could not be complied with, or that the information provided to the Bank had not been cross-checked (or else, the documents would have been available to the Issuer and the Calculation Agent).

Outcome

As a result, the court found in favour of the Bank on the substantive issues in the application. The court accepted that damages would not be an adequate remedy for the Bank, because it could face concern from regulators and clients about a persistent failure to report on value; however, damages were adequate for the Issuer and the Collection Agent, because the cost of collation was quantifiable (and the Bank was offering the usual cross-undertaking on damages). There was nothing else in the balance of convenience which altered the court's position. Following the judgment, the parties engaged with one another in relation to the timetable for provision of the documents, and the use of a confidentiality agreement which would apply to the documents.