Part 1 - AL-Tax

Chapter 5either or both of the above questions in the positive will lead to recharacterizationof the transfer by a court as a conditional assignment or an assignment byway of security. The originator will, in the latter situation, be taken not to haverelinquished the entire benefit of, and the risks associated with, the assets, andthe relationship between the two entities will not be one of seller and buyer (asin the case of an absolute assignment or true sale) but of mortgagor and mortgagee(as in the case of an assignment by way of security or mortgage).A true sale, in common-law jurisdictions such as Australia, requires, as a minimum,a divestiture in favor of the securitization vehicle of the originator’s entirebeneficial interest in or equitable title to the securitization vehicle. This can beeffected as an absolute assignment either at law (where legal title to the assets ispassed to the securitization vehicle and the entire equitable title to the assets whichhas not been severed from the legal title passes also with the legal title) or in equity(where the entire equitable title is severed from the legal title and passed on to thesecuritization vehicle with legal title being retained by the originator) (Worthington,1996; Ali, 2002). The transfer in its entirety of the equitable title to the assets,whether as part of the legal title to the assets or following its severance from thelegal title, is sufficient to effect a transfer of the entire benefit and risks of the securitizedassets from the originator to the securitization vehicle.However, should the originator retain a right to share in the profits of the securitizedassets or remain liable to make good, either in whole or in part, any lossesincurred by the securitization vehicle on the assets, the originator will be viewedby a court as not having passed the entirety of its beneficial interest in the securitizedassets on to the securitization vehicle (Ali and de Vries Robbe, 2003). Thisretention of a beneficial interest in the securitized receivables means that thetransfer does not have the character of an absolute assignment but will rather becharacterized as an assignment by way of security (Ali, 2002). The use of the proceedsfrom the issue of the securities by the securitization vehicle to acquire thesecuritized assets will be seen not as the payment of the purchase price for thesale of the assets, but, instead, as the extension of a loan by the securitizationvehicle to the originator secured over the securitized assets.The dealing between the two entities is thus in the nature of a mortgage. Thesecuritization vehicle can be treated as having a fixed claim against the originatorfor the payment of an amount equivalent to the quantum of the proceeds exchangedby it for its interest in the securitized assets and, like any other mortgagee, can,should there be a shortfall between the value of the assets and the amountadvanced by it to the originator, claim that shortfall from the originator. In addition,the originator (like any other mortgagor), not the securitization vehicle, will103