Supreme Court

BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 plc and another

[2016] UKSC 29; [2016] WLR (D) 310

2016 March 21; June 16

Lord Neuberger of Abbotsbury PSC, Lord Mance, Lord Clarke of Stone-cum-Ebony, Lord Sumption, Lord Toulson JJSC

Contract — Construction — Trust deed — Banking group issuing enhanced capital notes — Notes redeemable before maturity date if capital disqualification event occurring — Disqualification event deemed to have occurred if notes ceasing to be taken into account in stress test applied by regulatory authority to group’s core tier 1 capital — Regulatory changes replacing core tier 1 capital with common equity tier 1 capital — Stress test carried out and notes not taken into account — Whether capital disqualification event occurring


In March 2009, the financial services regulatory authority conducted a stress test of a banking group against the then applicable benchmark of a ratio of core tier 1 (“CT1”) capital to risk-weighted assets. The test demonstrated a shortage of capital. As a result, the defendants, two wholly-owned subsidiaries of the group, issued contingent convertible securities, described as enhanced capital notes. The notes, which carried a relatively high rate of interest, were not redeemable until specified maturity dates between 2019 and 2032 unless they were converted into shares on the occurrence of a conversion trigger, being any time when the group’s CT1 ratio fell below 5%, or they were redeemed early by the group on the occurrence of a capital disqualification event. Under clause 19 of the notes’ terms and conditions, contained in the trust deed, a capital disqualification event was deemed to have occurred if the notes ceased to be taken into account for the purposes of any stress test applied by the regulatory authority in respect of the group’s “consolidated CT1 ratio”. In 2013 regulatory changes replaced CT1 capital with a more restrictive category, common equity tier 1 (“CET1”) capital. The regulatory authority announced that the notes would now need to have a trigger for conversion higher than 5.125% CET1 in order to count as core capital but, under the terms of the notes, conversion would only be triggered if the group’s CET1 ratio fell to 1%. In December 2014 the regulatory authority carried out a stress test which did not take into account the notes and, as a result, the group announced that a capital disqualification event had occurred and that it was entitled to redeem the notes. The claimant trustee, on behalf of the note holders, sought a declaration that a capital disqualification event had not occurred, contending that the December 2014 stress test was not relevant for the purposes of clause 19 because it had been conducted by reference to a CET1 ratio rather than a consolidated CT1 ratio and that, alternatively, the fact that the notes had not been taken into account in the December 2014 stress test was not enough to trigger a capital disqualification event, rather the notes had to have been disallowed in principle from being taken into account for the purposes of the tier 1 ratio. The judge rejected the trustee’s first argument but accepted the second argument and declared that a capital disqualification event had not occurred. On the defendants’ appeal, the Court of Appeal, in construing the trust deed, took into account statements in the exchange offer memorandum, a letter from the group’s chairman and documents issued by the regulatory authority at and before the time at which the notes had been issued, and it allowed the appeal, holding that a capital disqualification event had occurred and that, therefore, the defendants were entitled to redeem the notes.

On the trustee’s appeal—


Held, appeal dismissed (Lord Clarke of Stone-cum-Ebony and Lord Sumption JJSC dissenting).

(1) When construing a contract or trust deed which governed the terms upon which a negotiable instrument was held, very considerable circumspection was appropriate before the contents of other documents were taken into account. The trust deed, and in particular those parts of the terms and conditions which fell to be construed, could not be understood without some appreciation of the policy of the regulatory authority at the relevant time. Therefore the general thrust and effect of the regulatory material published at that time could be taken into account when interpreting the terms and conditions. Such an approach accorded with good sense since, while the individual purchasers of the notes might not all have been sophisticated investors, it was appropriate to assume that most of them would have had advice from reasonably sophisticated and informed advisers before they purchased such moderately complex financial products. There was no evidence as to whether the exchange offer memorandum and the chairman’s letter would have been known about or in the minds of purchasers of the notes and, on the facts, those documents did not take matters any further. Accordingly, once one had in mind the general thrust and effect of the regulatory approach at the time, coupled with the commercial purpose of the notes, it was unhelpful, on the facts, to look further than the terms and conditions contained in the trust deed (paras 30–34).

In re Sigma Finance Corpn [2010] 1 All ER 571, SC(E) applied.

(2) In construing the reference in clause 19 of the terms and conditions to consolidated CT1, it was relevant to take into account that (i) it was notorious at the time of the issue of the notes that financial institutions’ capital regulatory requirements would be strengthened and changed, (ii) it was envisaged in the trust deed’s terms and conditions, in particular in clause 19, that expressions such as CT1 capital could change their meaning, (iii) it was inherent in the terms of the definition of a capital disqualification event that that was so, (iv) it was obvious that changes of substance might lead to changes of nomenclature, and (v) one of the essential features of the notes was that, if necessary, they could be converted into core capital, whatever expression was used to define it. Given those points, coupled with the existence of the notes’ maturity dates, it made no commercial sense to limit the reference to consolidated CT1 ratio in the definition of a capital disqualification event to CT1 capital, as opposed to holding that it could, in the events which had happened, apply to its then regulatory equivalent, CET1 capital (paras 36–38).

(3) Given that after the 2013 regulatory changes the notes could no longer be taken into account so as to do the very job for which their convertability was designed, namely to enable them to be converted before the regulatory minimum tier 1 ratio was reached, and that, in any event, the regulatory authority had not in any way relied on the notes when conducting the 2014 stress test, the defendants were entitled to say that a capital disqualification event within clause 19 of the terms and conditions had occurred (paras 43, 45–54).

Appellate History

Decision of the Court of Appeal [2015] EWCA Civ 1257 affirmed.


Robin Dicker QC and Stephen Robins (instructed by Allen & Overy LLP) for the claimant trustee.

Mark Howard QC, Robert Miles QC, Andrew de Mestre and Gregory Denton-Cox (instructed by Norton Rose Fulbright LLP) for the defendants.

Reported by: Jill Sutherland, Barrister

© 2016. The Incorporated Council of Law Reporting for England and Wales.