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Beyond the ‘no look through’ principle: Caxton v Essity and the rights of ultimate beneficial owners in noteholder disputes
Introduction
The question of who has standing to enforce rights under notes issued in the debt capital markets has long been a vexed one - particularly for ultimate investors holding their securities through complex intermediated chains. As confirmed by the Court of Appeal in Secure Capital SA v Credit Suisse AG1, the so-called “no look through” principle means that in typical intermediated securities structures, each party has rights only against its immediate counterparty - not against parties further up or down the chain.
Caxton International Ltd v Essity Aktiebolag (Publ) [2025] EWHC 1477 (Ch) marks a shift in this area. In Caxton the High Court refused to set aside permission for service out of the jurisdiction in a claim brought by ultimate beneficial owners of notes. The Court held that, even where beneficial owners are not direct contractual counterparties, they may have standing to seek declaratory relief concerning events of default and acceleration rights, provided certain conditions are met.
The Caxton decision, though at an interim stage, signals a potentially significant development for investors in intermediated capital markets structures.
However, in common with Secure Capital, the structure of the note issue in Caxton did not include a note trustee, who would hold the benefit of the issuer covenants on trust, and through whom enforcement action would usually be taken.
Key takeaways
- “No look through” does not bar declaratory relief: While the “no look through” principle precludes direct enforcement by a beneficial holder, it does not automatically prevent beneficial owners who are not direct contractual counterparties from seeking declarations - especially where their economic interests (which can be evidenced) are directly affected and there is a genuine dispute.
- Discretionary relief: The grant of declaratory relief is discretionary. The Court will consider whether the declarations serve a useful purpose, whether all relevant parties are before the court and whether non-parties’ interests are protected.
- Evidence and joinder: Beneficial owners must robustly evidence their proprietary or economic interest. While custodians and intermediaries are not strictly necessary parties at the outset, their joinder may enhance the effectiveness of any relief granted, particularly where there may be conflicting interests.
- Market impact: The decision highlights a potential route for ultimate investors to obtain judicial clarification of their rights, even where custodians or clearing systems are unwilling or unable to act.
- No trustee in the structure: In Caxton it is notable that there was no note trustee in the transaction structure. In a structure involving a trustee, the note trustee would have had clear standing to enforce the terms of the notes, including serving acceleration notices. Furthermore, the beneficial owners could look to the trustee to act on behalf of the noteholders as a class, rather than needing to bring proceedings themselves.
Background
The dispute arose from three series of notes issued by the Essity Group under its Euro Medium Term Note Programme2 (the "Notes"). The claimants, eight investment funds, claimed to be the ultimate beneficial owners of significant portions of the Notes, with their aggregate holdings amounting to nearly €10 million in nominal value.
The Notes were held through a standard intermediated structure: the global notes were immobilised and held by Euroclear and Clearstream (the clearing systems), with the claimants’ interests recorded through a chain of custodians and account holders. The claimants did not appear as “Noteholders” in the records of the clearing systems; instead, their custodians were the registered account holders. The structure did not include a note trustee or a security trustee.
The dispute was triggered by Essity Group’s disposal of its stake in a subsidiary, Vinda. The claimants alleged that this disposal constituted the cessation of a substantial part of Essity’s business or that of a material subsidiary, triggering the cessation of business event of default under the terms of the Notes. Five different custodians, acting on instructions from the claimants and others, then served acceleration notices on the issuer, seeking immediate repayment of the Notes.
Essity, however, denied that an event of default had occurred and further argued that only the clearing systems, not the custodians, were entitled to serve acceleration notices. This left the claimants, as beneficial owners, unable to act directly and reliant on their custodians to enforce their rights.
Faced with this impasse, the claimants sought declaratory relief from the High Court:
- that the Vinda disposal did amount to an event of default; and
- that the custodians were entitled to serve acceleration notices.
The defendants challenged this, arguing the claimants had no standing and that the declarations would be ineffective, since neither the custodians nor the clearing systems were parties to the proceedings.
The Court’s decision
Standing and interest
The Court considered whether the claimants had a real prospect of proving beneficial ownership of the Notes at trial. While the defendants challenged the sufficiency of the evidence and the legal nature of the claimants’ interests, the Court found that the evidence, including custodian confirmation letters and account statements, was sufficient at this stage to support a real prospect of establishing a proprietary interest in the Notes. The Court noted that the claimants may need to provide further evidence before a final hearing.
Crucially, the Court held that, even though the claimants were not parties to the contractual documents governing the Notes, they had a legitimate interest in the declarations sought. The Court rejected the argument that only contractual rights would suffice, emphasising that a sufficient and legitimate interest could be enough to justify declaratory relief. For example, in insolvency scenarios, ultimate beneficial owners are recognised as the true economic creditors.
Declaratory relief and the “no look through” principle
The defendants relied on the “no look through” principle, arguing that only direct counterparties could seek relief under the Notes, and that allowing beneficial owners to do so would undermine market structure and practice. The Court rejected this as an absolute bar, distinguishing between the enforcement of contractual rights (which remains the preserve of counterparties) and the ability to seek declaratory relief where the beneficial owner’s interests are directly affected and there is a genuine dispute. The Court made clear that the claimants were not seeking to enforce the contract directly, but rather to clarify the existence and effect of rights under the Notes, which could then be acted upon by the custodians.
The Court reviewed the relevant authorities, including Rolls-Royce plc v Unite the Union3, Milebush Properties Ltd v Tameside MBC4 and Secure Capital5, and concluded that the absence of direct contractual rights does not necessarily preclude declaratory relief, provided the claimant has a sufficient and legitimate interest and the relief would serve a useful purpose.
Useful purpose
A key consideration was whether the declarations sought would serve a useful purpose, particularly in the absence of the custodians and clearing systems as parties to the proceedings. The Court acknowledged that the effectiveness of any declarations could be enhanced by the joinder of custodians, who may have their own interests or be subject to conflicting instructions from different account holders.
However, the Court was not persuaded that the absence of custodians was fatal at this stage, noting that all relevant arguments could be presented by the parties before the court and that non-parties could be notified and given the opportunity to participate if necessary. The Court also recognised that the declarations would not bind non-parties, leaving open the possibility of further litigation, but considered that this did not preclude the claimants from proceeding.
Conclusion
The High Court’s decision in Caxton marks a significant development for beneficial owners of notes held through intermediated structures. While the “no look through” principle continues to underpin the operation of capital markets, the judgment makes clear that it does not categorically prevent beneficial owners from seeking declaratory relief where their economic interests are directly affected and a genuine dispute exists.
However, if the note issue in Caxton had been structured with a note trustee, the situation may have been different. The note trustee acts as the legal creditor and holds the issuer’s covenant to pay (along with the issuer’s other obligations) on trust for the noteholders. As a result, it is the note trustee who has the authority to accelerate the notes and enforce the issuer’s obligations. Although the trustee has inherent discretion to act, it will invariably act on the instructions of the noteholders in accordance with the processes and procedures dictated in the trust deed. Generally, noteholders only gain direct rights against the issuer if the trustee has been instructed to act and has fails to do so within a reasonable time.
1 [2017] EWCA Civ 1486; [2017] 2 Lloyd’s Rep 599
2 €300 million 0.5% notes due 2030, €700 million 0.25% notes due 2031 (both issued by Essity Aktiebolag), and €600 million 0.25% notes due 2029 (issued by Essity Capital B.V. and guaranteed by Essity)
3 [2009] EWCA Civ 387; [2010] 1 WLR 31
4 [2011] EWCA Civ 270; [2011] PTSR 1654
5 [2017] EWCA Civ 1486; [2017] 2 Lloyd’s Rep 599