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

9 Insolvency and securitisation529.1 IntroductionIn securitisations in Australia, issuers are either special purposecompanies acting in their own right or trustee companies actingas the trustee of a trust.In both cases the effect of the insolvency of the issuer on thesecuritisation program is crucial to an assessment of the risk forinvestors who acquire the program’s securities.In the case of a corporate issuer, the rating agencies need to beconfident that the assets of the company will be distributed uponits insolvency in the manner intended by the underlyingtransaction documents.Where the issuer is acting as the trustee of a trust two possibleinsolvencies are relevant – the insolvency of the trust and theinsolvency of the trustee. If the trust is insolvent the samequestion arises – that is, will the assets of the trust bedistributed in the manner intended by the underlying transactiondocuments? If the trustee, but not the trust, is insolvent it isimportant that the insolvency of the trustee has a minimal impacton the operation of the trust and on payments under the relevantsecurities. In particular, it must be possible to replace the trusteeand ensure that the assets of the trust are not available to thegeneral creditors of the insolvent trustee.The following sections consider the principles governing insolventcompanies, trusts and trustees; the position of secured creditors;the types of transactions which may be void or voidable due toinsolvency; and some special insolvency issues relating tosegregated issuers. The final section considers the requirementsof the rating agencies in light of these issues.Set-off is also relevant in insolvency and this is discussed insection 8 of this publication.9.2 Insolvent companies9.2.1 Definition of insolventSection 95A of the Corporations Act provides that “a person issolvent if, and only if, the person is able to pay all the person’sdebts, as and when they become due and payable” and goes onto state that “a person who is not solvent is insolvent.”If a company is insolvent a court may order that it be wound upupon the application of any of a number of persons including thecompany, a director of the company or a creditor of the company(even if the creditor is a secured creditor or is only a contingentor prospective creditor).The courts have considered the definition of insolvency (whichwas based on provisions in the previous Companies Code andcase law) on many occasions. For present purposes the followingshould be noted:• in order for a company to be solvent it must be able to pay itsdebts as and when they become due and payable. So, forinstance, if a company’s assets significantly outweigh itsliabilities but these assets are illiquid and are unable to beutilised to meet these liabilities as they fall due, the companywill nevertheless be insolvent;• however, a temporary lack of liquidity should not be equatedwith insolvency. It is necessary to consider not only thecompany’s cash on hand, but also the moneys that it canprocure by realisation by sale or by mortgage or pledge of itsassets within a relatively short time; and• insolvency may be established by a company failing to complywith, or dispute, within 21 days, a statutory demand servedon the company by a creditor.9.2.2 The role of a liquidatorA liquidator appointed upon a company’s insolvency must realisethe property of the company and apply it in accordance with theprovisions of the Corporations Act. Except as otherwise providedby the Corporations Act, all claims against the company proved inits winding-up rank equally and if the property of the company isinsufficient to meet such claims in full they must be paidproportionally. There are two important qualifications to theoperation of this principle. The first is that an unsecured creditorcan agree to be subordinated to other creditors of the company(section 563C). The second qualification is that the statutoryorder does not apply to secured creditors to the extent that theydo not participate in the winding-up and instead rely on theirsecurities.The following is a general summary of the order of payment ofclaims as affected by the Corporations Act:(a) claims which are secured to the extent that they may be metby realisation of the property subject to the security (unlessthe security is a floating charge);(b) certain claims that have priority over creditors who aresecured by a floating charge to the extent that they may bemet by realisation of the property subject to the floatingcharge (and will not be met under (g)). In summary these are:– certain claims in respect of wages, superannuation, leaveof absence and retrenchment payments due to employeesof the company;