A Guide to the Law of Securitisation in Australia - Clayton Utz

An investor in turn receives an acknowledgement in writing fromthe person maintaining the register, confirming that the investorappears in the register as the holder of particular securities.Under this type of arrangement, the investor does not hold a true.debt instrument. However, little (if any) legal importance turns onthe distinction. It is simply another accepted method of issuingdebt securities. A transfer of a registered security occurs by thetransferor and the transferee executing a Transfer andAcceptance Form and then lodging this with the registrar.Sometimes (depending on the requirements of the underlyingdocuments), this must be accompanied by the originalconfirmation. Although this is not strictly necessary, it is adesirable practice to avoid fraud.The transfer is effective as between the transferor and thetransferee upon the execution of the Transfer and AcceptanceForm and payment by the transferee of the purchase price (andupon performance of any other conditions precedent that may bestipulated by the parties as part of the transfer). But, as far asthe issuer is concerned, the transfer does not become effectiveuntil the transferee is noted in the register as the holder of thesecurities. Until this occurs, the issuer is entitled to onlyrecognise the transferor as the holder and all payments, notices,etc. are made in the interim to the transferor.In Australia, almost all securitised instruments are structured asregistered securities. As most securities are held and tradedthrough Austraclear, typically the register of an issuing vehiclewill show Austraclear as the only holder of its securities.Austraclear then keeps its own record of those on whose behalfit is holding those securities in the Austraclear System.1.3.4 The enforceability of registered securitiesAt general law, there is a principle known as privity of contract.This means that only the parties to a contract can enforce it.With registered securities, investors are not a party to theinstrument creating the debt obligation represented by theirsecurities. This then raises the issue of how do they enforce theissuer’s promise to pay interest and principal, when they cannotsatisfy the privity of contract rule?Where the issuer is a special purpose corporation, a note trustdeed or a deed poll is usually used. Both of these employexceptions to the privity rule. Under a note trust deed, the issuercovenants in favour of a note trustee that it will pay interest andprincipal on its debt securities. This covenant is held on trust bythe note trustee for the benefit of the holders of the registeredsecurities from time to time.Although the holders of the securities are not parties to the notetrust deed and so cannot directly enforce the issuer’s covenant,they are beneficiaries of the trust and can require the notetrustee to do so.Under a deed poll, the issuer’s covenants are made in favour ofthe registered security holders from time to time. The exact legalnature of a deed poll has been the subject of much legal debatebut, notwithstanding this, deeds poll are frequently used in themarket.The position is more interesting where the issuer is a trustee. Inalmost all Australian securitisations, the trustee’s promise to payinterest and principal on its debt securities is contained in thetrust deed. However, the trustee’s obligations in a trust deedusually can only be enforced by the beneficiary (or beneficiaries)of the relevant trust. How then do the holders of the securitieshave the benefit of the trustee’s promise to pay interest andprincipal on their securities?The answer lies in the fact that with these structures there isalways a security trust deed. Under the security trust deed, theissuing trustee covenants in favour of a security trustee that itwill pay interest and principal on the registered securities inaccordance with the trust deed. As with a note trust deedarrangement, the security trustee holds the benefit of thiscovenant on trust for the security holders. They can enforce theterms of their debt securities through the security trust deed.If in the future there is ever a proposal for a trustee to issueunsecured registered securities, the legal basis for theirenforceability will need to be examined at that time in greaterdetail. In particular, it may be necessary to put in place a deedpoll or a note trust deed to address this issue.1.4 ConclusionThe securities held by investors in the Australian securitisedmarket tend to be exclusively debt securities rather than equitysecurities. The former are issued either by special purposecorporations or by trustees. Where a special purpose vehicleissues debt securities, traditional legal forms are used. However,the issue of debt securities by trustees, which is largely confinedto the Australian market place, raises a number of unique issues.These are canvassed in section 10.The next section of this publication examines the classificationand regulation of debt and equity securities under theCorporations Act.9