Part 1 - AL-Tax
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Part 1 - AL-Tax

Part 1 - AL-Tax Part 1 - AL-Tax

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Chapter 55.3 Bankruptcy remoteness of the securitization vehicleBankruptcy remoteness means, in essence, that the solvency of the securitizationvehicle and its ability to meet its obligations in respect of the securities issued byit will not be impaired by the insolvency of the originator. This can ordinarily beachieved by ensuring that the securitization vehicle is independent of the originator,thus insulating the former against the risk that persons with claims againstthe latter will be able to pierce the corporate veil between the two entities, leadingto the pooling of the entities’ assets. This requires an assessment of the law ofjurisdictions in which the originator and securitization vehicle are located. Ininternational securitizations, the jurisdictions may be identical (with only thesecuritized assets being located in a different jurisdiction) or different (particularlywhere the securitization vehicle is located in an offshore jurisdiction). Incommon-law jurisdictions such as Australia, this entails taking the following steps(Kravitt, 1996; Ali and de Vries Robbe, 2003):1. The originator does not own the securitization vehicle (often the entireshare capital of the securitization vehicle is placed in a charitable or noncharitablepurpose trust and the trustee of the trust is independent of theoriginator).2. The directors (and any other officers) of the securitization vehicle areindependent of the originator (at the very least, they must not be employeesof the originator).3. The securitization vehicle reports its assets and liabilities separately fromthe originator and files separate tax returns.4. The securitization vehicle’s assets are not commingled with the originator’sassets.5. Dealings (including the transfer of the assets to be securitized) between theoriginator and the securitization vehicle are undertaken on commerciallydefensible terms.5.4 True sale of the securitized assetsIf the dealings between the originator and the securitization vehicle are notundertaken on commercially defensible grounds, they may be taken by a court tobe evidence of the influence wielded by the originator, leading to the erosion ofthe corporate veil between the two entities and thus undermining bankruptcyremoteness. In addition, dealings which are not on commercially defensible101

International Taxation Handbookterms are at risk of being characterized by a court as fraudulent conveyances orvoidable preferences and therefore the subject matter of those dealings can beappropriated by the originator’s creditors on its insolvency. To avoid either ofthese findings, the transfer of assets from the originator to the securitization vehiclemust be priced fairly. The pricing of the assets may also have taxation consequences,particularly as regards over-collateralization, where the assets are effectivelybeing transferred for less than their aggregate face value.Furthermore, to also ensure bankruptcy remoteness and to avoid the poolingof assets between the two entities, the transfer of assets from the originator to thesecuritization vehicle must constitute an absolute assignment or true sale of thoseassets. This means, as a matter of law, the originator must divest itself of all of therisks and the entire benefit of the assets to be securitized. This requires an assessmentof the law not only of the jurisdictions in which the originator and securitizationvehicle are located, but also of the law of the jurisdiction in which theassets are located. In a purely domestic securitization, these jurisdictions will beidentical, but an international securitization may involve, as a minimum, anexamination of two (for example, where the securitization vehicle is located in anoffshore jurisdiction) or three jurisdictions (for example, where the securitizationvehicle and the assets are located in different jurisdictions to that of the originator).In practice, the number of jurisdictions to be examined will often be considerablyhigher in the case of securitized assets that have been diversified bygeographic region (for example, where a bank is securitizing a multi-jurisdictionloan portfolio). While the law of the jurisdiction in which the assets are locatedwill, as a general rule, determine the efficacy of the sale itself (that is, whether theassets can be sold), an examination of the law of the jurisdictions of the originatorand issuer is also necessary to determine whether those parties have the necessarylegal capacity to consummate any such sale and whether such a sale is atrisk of invalidation by the insolvency laws of those jurisdictions.In determining whether there has been a true sale of the assets under the lawof jurisdiction in which the assets are located, two factors are decisive (Schwarcz,1993):1. Can the securitization vehicle recover any fall in value of the securitizedassets from the originator?2. Has the originator retained any rights to the benefit of any increase invalue of the securitized assets?Both of the questions posed above must be answered in the negative if the transferof the assets is to be accorded the status of a true sale. In contrast, answering102

Chapter 55.3 Bankruptcy remoteness of the securitization vehicleBankruptcy remoteness means, in essence, that the solvency of the securitizationvehicle and its ability to meet its obligations in respect of the securities issued byit will not be impaired by the insolvency of the originator. This can ordinarily beachieved by ensuring that the securitization vehicle is independent of the originator,thus insulating the former against the risk that persons with claims againstthe latter will be able to pierce the corporate veil between the two entities, leadingto the pooling of the entities’ assets. This requires an assessment of the law ofjurisdictions in which the originator and securitization vehicle are located. Ininternational securitizations, the jurisdictions may be identical (with only thesecuritized assets being located in a different jurisdiction) or different (particularlywhere the securitization vehicle is located in an offshore jurisdiction). Incommon-law jurisdictions such as Australia, this entails taking the following steps(Kravitt, 1996; Ali and de Vries Robbe, 2003):1. The originator does not own the securitization vehicle (often the entireshare capital of the securitization vehicle is placed in a charitable or noncharitablepurpose trust and the trustee of the trust is independent of theoriginator).2. The directors (and any other officers) of the securitization vehicle areindependent of the originator (at the very least, they must not be employeesof the originator).3. The securitization vehicle reports its assets and liabilities separately fromthe originator and files separate tax returns.4. The securitization vehicle’s assets are not commingled with the originator’sassets.5. Dealings (including the transfer of the assets to be securitized) between theoriginator and the securitization vehicle are undertaken on commerciallydefensible terms.5.4 True sale of the securitized assetsIf the dealings between the originator and the securitization vehicle are notundertaken on commercially defensible grounds, they may be taken by a court tobe evidence of the influence wielded by the originator, leading to the erosion ofthe corporate veil between the two entities and thus undermining bankruptcyremoteness. In addition, dealings which are not on commercially defensible101

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