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

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– claims in respect of moneys advanced by a person to thecompany for the purposes set out in the previousparagraph; and– certain auditor’s fees.(c) claims secured by a floating charge to the extent that theymay be paid by realisation of the property subject to thefloating charge;(d) claims in respect of which the company has receivedinsurance proceeds to the extent of those proceeds;(e) certain costs in the winding-up and administration of thecompany;(f) certain claims by employees or in respect of injurycompensation which were not paid under items (b) and (d);and(g) claims of all creditors proportionally in relation to the amountof their claim.9.2.3 The role of an administratorThe provisions in the Corporations Act in relation to theappointment of administrators to companies are also relevant inrespect of the insolvency of a special purpose corporation. Theseprovisions allow an administrator to be appointed to a companyfor a period of 28 days (or 35 days over the Christmas or Easterperiods). The administrator takes control of the company’s affairsand investigates whether it is in the interests of creditors of thecompany to enter into a deed of company arrangement toovercome the company’s financial difficulties.An administrator may be appointed by the company, a liquidatoror a provisional liquidator of the company or a chargee who isentitled to enforce a charge over the whole, or substantially thewhole, of the company’s property.For present purposes the following two aspects of administrationare significant:• During the period of the administration, a proceeding in acourt against the company or in relation to any of its propertycannot be begun or proceeded with, the owner or lessor ofproperty that is used or occupied by or is in the possession ofthe company cannot take possession of the property orotherwise recover it, no enforcement process in relation tothe property of the company can be begun or proceeded withand a person cannot enforce a charge on the property of thecompany except, in each case, with the administrator’swritten consent or with the leave of a court.• Despite the rules in the previous paragraph, a chargee whichhas a charge over the whole, or substantially the whole, ofthe property of the company may enforce the charge inrelation to all property subject to the charge provided that itdoes so within 10 business days of the date that the chargeereceives notice of the appointment of the administrator.9.3 Insolvent trusts and trusteesWhere an issuer in a securitisation program is the trustee of atrust, the insolvency of the trust and that of the trustee must bedistinguished.9.3.1 Insolvency of the trustStrictly speaking a trust cannot be insolvent. This is becausetrusts do not have any legal capacity. A trust cannot sue or besued and neither can it have a liquidator or administratorappointed to it.When a trust is said to incur a liability (for instance, when a bondis issued by a trustee in a securitisation program) the followingin fact occurs:• the trustee itself incurs the liability;• the trustee by virtue of incurring the liability, provided that itwas incurred for the purposes of the trust and in accordancewith the provisions of the relevant trust deed, will be entitledto be indemnified from the assets of the trust against theliability and will have a lien over the assets of the trust tosecure its rights under the indemnity; and• unless otherwise agreed, the trustee must meet its liabilitieswith respect to the trust from its own assets if its indemnityfrom the assets of trust is insufficient.In securitisation programs which have trustee issuers, theobligations of the trustee to investors and other creditors willinvariably be limited to the assets of the trust out of which thetrustee is indemnified for the liability (in the absence of fraud,negligence or wilful default on the part of the trustee). Howeverthis limitation does not affect the nature of the liability. Theliability is the trustee’s liability – albeit one which is limited byreference to the trustee’s indemnity from the assets of the trust.Thus, a reference to a trust being insolvent is really a shorthandway of saying that the obligations which the trustee has properlyincurred as trustee of the trust cannot be met from the proceedsof the trustee’s indemnity from the assets of the trust. Theconsequences of this include:53
54• if the trustee has not limited its liability, the trustee mustmeet those obligations from its own assets and, if it is unableto do so, the trustee will itself be insolvent;• if the trustee has limited its liability in the manner describedabove, the trustee’s liability in respect of the obligations willbe reduced to the amount available to meet those obligationsfrom the assets of the trust and neither the trust nor thetrustee will be insolvent; and• the directors of the trustee will need to consider thepossibility of being called upon to meet the shortfall. This isdiscussed in the next section of this publication.However, in the circumstances described in the second pointabove, and notwithstanding that the trustee’s liability has beenreduced, the trustee’s failure to meet the obligations in full mayhave other consequences, such as the accelerated repayment ofprincipal to investors and the triggering of the enforcement ofsecurity given by the trustee.9.3.2 Insolvency of trusteeIf the liability of the trustee issuer has been properly limited in asecuritisation program, then losses or liabilities incurred inrespect of the trust should not cause the trustee to be personallyliable or at risk of becoming insolvent. An exception to this willbe if the losses or liabilities were incurred due to a failure by thetrustee to properly perform its duties as trustee. If these lossesor liabilities were sufficiently large they could cause the trusteeto become insolvent. Also, a trustee could become insolvent as aresult of being unable to meet liabilities unconnected with thetrust or the securitisation program. Typically, trustee companieswho act as issuers in securitisation programs are also trustees ofmany other trusts. A failure by the trustee company to performits obligations in relation to any of these other trusts could leadto the trustee company incurring personal liability and,conceivably, to the insolvency of the trustee company.In general, however, the insolvency of the issuing trustee doesnot present a serious risk to securitisation programs. This isbecause:• the assets of the trust will not be available to meet thetrustee’s obligations to its general creditors or the creditorsof any other trust; the trustee will only be entitled to beindemnified from the assets of the trust for liabilitiesincurred with respect to the trust; and• the trust deed will invariably provide for the trustee to bereplaced upon its insolvency and for all the assets of the trustto vest in a new trustee (usually appointed by the manager ofthe securitisation program).9.4 Secured obligationsAs can been seen from the general order of priority that appliesunder the Corporations Act (as set out in section 9.2) in theabsence of any security for investors upon the insolvency of acorporate issuer, claims of the investors will be satisfied aftervarious preferred claims (such as claims by employees and thecosts of administrators and liquidators) and proportionally withthe claims of all other unsecured creditors.The same is not the case in relation to claims by investors againsttrust issuers. As discussed above, a trust cannot strictly speakingbecome insolvent. In the event that the assets of the trust are notsufficient to meet the liabilities incurred by the trustee in relationto the trust:• the documentation giving rise to the liabilities will providethat the liabilities will be reduced, usually to the extent ofthe trustee’s indemnity in respect of the liabilities (and if thisis not the case the trustee will be personally liable); and• the trust deed will usually provide an order of priority inwhich the liabilities are to be met.However, for both corporate and trust issuers, it is invariably thecase that investors have the benefit of security from the issuer(usually shared with other creditors such as liquidity facility andswap providers).The security is usually a charge over all of the assets of thecompany (in the case of a corporate issuer) or all the assets ofthe trust (in the case of a trustee issuer) in favour of a securitytrustee. In the case of a corporate issuer, it should be noted thatone of the effects of the charge being over all the assets of thecompany is that it may be enforced notwithstanding anadministrator being appointed to the company.The charge will often be a floating charge over all or some of theassets. This is because the courts will not recognise a fixedcharge over assets that the chargor (the issuer) is entitled to dealwith in the ordinary course of its business. In the case of certainsecuritised assets it would be impractical to have a fixed chargebecause of the need for ongoing dealings with the assets.Mortgage loans (the most commonly securitised asset inAustralia) must, for instance, allow for variations, redraws andsubstitutions of the security property in order to satisfy consumerdemand.
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45 and 46: 7 The regulation of the participati
Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53: 9 Insolvency and securitisation529.
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72: have been completed in relation to
Page 73 and 74: Some CMBS transactions allow the is
Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te

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

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