Factual background
Essity had issued three series of euro-denominated bearer notes, each represented by a permanent global note held through Euroclear or Clearstream. Title to the notes under the terms of the agency agreements was strictly recorded at two tiers: first, the clearing systems as legal bearer; and second, their Custodians as the noteholders for all purposes other than payment.1 The Custodians, in turn, held rights in the note on behalf of the ultimate beneficiaries of the notes, who had accounts with the Custodians.
The eight claimant funds (together, Caxton) alleged that they were ultimate beneficial owners of approximately €110 million nominal amount spread across the 2029, 2030 and 2031 Essity notes. Caxton contended that Essity’s disposal of its entire stake in a subsidiary, Vinda International, amounted to a “cessation of a substantial part” [3] of Essity’s business, which triggered an Event of Default as defined in Condition 9 of each series.
Between 16 and 24 October 2024, five Custodians served acceleration notices on behalf of the Claimants. Essity disputed both the occurrence of any default and the Custodians’ entitlement to accelerate, maintaining that only the clearing systems could do so on the basis that the clearing systems were the legal holders of the notes. When the Custodians took no further steps, Caxton issued a Part 8 claim solely for declaratory relief, including:
- A declaration that the Vinda disposal constituted an Event of Default and that the default is continuing; and
- A declaration that, upon such default, the noteholder shown on the clearing-system records (here, the respective Custodian) is entitled to accelerate.
As Essity is domiciled in Sweden, Caxton obtained permission to serve outside the jurisdiction. Essity applied to set aside that order, arguing that the claim included no serious issue given that declaratory relief would never be granted to parties without contractual rights under the notes.
Legal analysis
1. Test on a set-aside application
The court treated Essity’s challenge as analogous to a reverse-summary-judgment application [25]. Caxton, therefore, had to show a real (not fanciful) prospect of success. The ‘gateways’ for service out of the jurisdiction (as set out in Practice Direction 6B of the English procedural rules) and forum appropriateness had already been followed and accepted; the sole contest was whether declaratory relief was realistically obtainable.
2. Standing and evidence of beneficial ownership
Essity first argued that Caxton lacked any proprietary stake. In support of this point, Essity relied on the fact that Caxton provided only “custodian confirmation letters” rather than the underlying custody agreements [28]. Fancourt J held that, although the evidential record could be fuller, the confirmations and clearing-system account statements were enough, at this interlocutory stage, to show a realistic prospect of proving a chain of trusts by which Caxton enjoyed an equitable proprietary interest in the notes that is to say, Caxton was the ultimate beneficial owner.
3. Principles governing declaratory relief
Relying on Aikens LJ’s restatement in Rolls-Royce plc v. Unite the Union [39] and subsequent authorities such as Milebush Properties [41] and JP Morgan [50], the court distilled the key principles, including:
- There must generally be a “real and present” dispute as to legal rights.
- A non-party to the contract may obtain a declaration if directly affected.
- Relief must serve a useful purpose and be the most effective way to resolve the issue.
- All sides of the argument must be before the court, though not necessarily all parties with an economic interest.
4. Application of principles
(a) Sufficient interest: Although Caxton had no direct contractual rights, their equitable interests and potential exposure to diminished value gave them a legitimate interest in knowing whether acceleration was valid.
(b) ‘No-look-through’ argument: Essity relied on Secure Capital SA v. Credit Suisse AG, contending that permitting a claim by beneficial owners would undermine market infrastructure. Fancourt J distinguished Secure Capital as a claim for damages, whereas Caxton sought only clarificatory relief [59-61]. The absence of an express prohibition on such claims in the notes (for instance, a ‘no action clause’) was telling.
(c) Utility and joinder of custodians: The declarations would clarify whether existing notices were valid and guide future conduct. The Custodians and clearing systems were not strictly necessary parties; their role was largely ministerial [67; 77]. Nonetheless, the judge acknowledged that joinder of Custodians might enhance the practical efficacy of the relief, leaving open the prospect that the trial judge could invite or direct their participation [80].
(d) Risk of advisory declarations: Following Nexus v. RMT [69], the court stressed that declarations should not prejudice absent parties’ rights. Here, the binary nature of the issues (default/no default and entitlement/no entitlement [73]) and the parties’ thorough submissions mitigated that risk.
5. Judgment in favour of Caxton
Mr Justice Fancourt dismissed Essity’s application. Caxton had crossed the threshold: it could establish beneficial ownership, it possessed a legitimate interest, and the declaratory relief sought was potentially useful. Whether those declarations would ultimately be granted would depend on the substantive merits at trial, but the claim could not be summarily extinguished at this stage without further consideration. Therefore, the application failed, and the claim was allowed to proceed.
In relation to other issues
Caxton v. Essity is not yet the last word on whether beneficial owners can compel acceleration of intermediated notes, but the court’s refusal to strike out the claim is a significant marker. The judgment confirms that the Rolls-Royce principles on declaratory relief are flexible enough to accommodate modern securities-holding structures, granting ultimate investors a voice where contractual language is silent. The decision also delineates the evidential and procedural hurdles such claimants must clear: credible proof of beneficial ownership, a demonstrable interest in the outcome and a cogent explanation of why declaratory relief is useful, notwithstanding the absence of traditional counterparties.
For issuers, the message is clear: covenant compliance and transaction structuring will be scrutinised not just by clearing systems and trustees but by a sophisticated investor base ready to litigate. For investors, the judgment provides a blueprint for asserting rights in an intermediated environment. As capital markets grapple with increasingly intricate holding models and activist strategies, this interim decision of the court stands as an example of how English law will balance market efficiency against equitable investor protection.
Commercial implications of the judgment
Given that this claim is being allowed to proceed, the ultimate outcomes could have a number of wider commercial implications.
- Expanded litigation exposure for issuers: There has traditionally been an understanding that only the registered noteholders can litigate default questions or, indeed, take any direct action. The decision suggests that there is increasingly a pathway for funds and other ultimate investors holding book-entry interests through custodians to obtain judicial clarification or take other formal legal action where intermediaries remain passive.
- Pressure on custodians and clearing systems: Although Caxton proceeded without them, the reasoning will encourage custodians to consider and articulate their position promptly when confronted with instructions from their account holders to take action. Failure to do so may invite their beneficial owners to bypass them, potentially dragging custodians into proceedings later or having to live with the prejudicial outcomes of proceedings in which they were not involved.
- Drafting and structuring considerations: Programme documentation frequently contains no-look-through provisions and a lack of express powers for ultimate holders to take action, but often omits explicit language barring actions by beneficial owners. Issuers may now wish to revisit ‘no action’ provisions, covenants, third-party-rights clauses and exchange-event mechanics to clarify who can take certain steps, for example, following Events of Default.
- Strategies for investor activism: Funds holding minority positions may potentially claim declaratory relief to create leverage in restructuring or redemption negotiations, particularly where the governing law is English and the forum is receptive. Market participants should anticipate earlier and more sophisticated legal manoeuvring around corporate transactions that might trigger covenant breaches.
- Forum and jurisdiction strategy: The judgment underscores that English courts remain willing to entertain complex capital-markets disputes even for parties two or three rungs down the holding chain, provided the governing law is English and the dispute is live.
- Under paragraph 9 of Schedule 2 of the agency agreement (applicable to the 2029 notes), the Custodian is treated as the noteholder when an event of default has taken place. As established by Mr Justice Fancourt at [13], “[T]he Noteholder who may give notice of acceleration upon an Event of Default is the Custodian unless it is held that giving an acceleration notice and causing the Early Redemption Amount to become due and payable is "with respect to the payment of principal and interest".” All references in square brackets refer to the specific paragraphs of Mr Justice Fancourt’s judgment.
Client Alert 2025-157
