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

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.