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

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To the extent that the charge is a floating charge, certain claimsof preferred creditors (such as employees) will take priority overthe charge as set out above. In order to minimise the risk of thisoccurring, the rating agencies which rate securities will normallyrequire that the issuer is restricted from engaging in activities(such as having employees) which could give rise to preferredclaims (this is discussed in section 9.7).9.5 Transactions void or voidable due to insolvencyUnder Part 5.7B of the Corporations Act, certain transactionsmay be void or voidable upon the winding up of a company.These provisions will be relevant in a securitisation program uponthe winding-up of: the issuer; any seller of assets to the issuer; orany other person who provides rights to the issuer as part of theprogram (such as a liquidity facility or swap provider). Althoughthe whole of Part 5.7B must be considered in relation to asecuritisation program, the provisions most likely to be of concernare those relating to unfair loans and uncommercial transactions.9.5.1 Unfair loansA transaction may be set aside under Part 5.7B of theCorporations Act if it is an unfair loan within the meaning ofsection 588FD(1).A loan will only be unfair if either the interest or charges payablein respect of the loan are “extortionate” or become“extortionate” as a result of a variation. There have been noreported decisions of the courts that have considered themeaning of the term “extortionate”. It is usually the case,however, that interest rates on bonds issued, or on fundsborrowed under a liquidity facility, in a securitisation program aredetermined with reference to prevailing market rates. It isunlikely that interest rates determined in this manner would beregarded by the courts as extortionate.9.5.2 Uncommercial transactionsA transaction may be set aside under Part 5.7B of theCorporations Act if it is an uncommercial transaction within themeaning of section 588FB(1) and is also an insolvent transactionwithin the meaning of section 588FC.A transaction is an uncommercial transaction of the company:“if, and only if, it may be expected that a reasonable person inthe company’s circumstances would not have entered into thetransaction, having regard to:(a) the benefits (if any) to the company of entering into thetransaction; and(b) the detriment to the company of entering into thetransaction; and(c) the respective benefits to other parties to the transaction ofentering into it; and(d) any other relevant matter.”A transaction of the company is an insolvent transaction:“if, and only if, it is ... an uncommercial transaction of thecompany, and:(a) any of the following happens at a time when the company isinsolvent:(i) the transaction is entered into; or(ii) an act is done, or an omission is made, for the purpose ofgiving effect to the transaction; or(b) the company becomes insolvent because of, or because ofmatters including:(i) entering into the transaction; or(ii) a person doing an act, or making an omission, for thepurpose of giving effect to the transaction.”As noted above, in addition to being relevant upon the insolvencyof the issuer, these provisions may apply in the event of theinsolvency of other parties involved in the program (such as theseller of assets to the issuer or liquidity facility or swapproviders). This could result in the sale of such assets being setaside by a court.However, even if a transaction is an uncommercial transactionand an insolvent transaction, section 588FG(2) prevents a courtfrom making an order:“... materially prejudicing a right or interest of a person if thetransaction is not an unfair loan to the company and it is provedthat:(a) the person became a party to the transaction in good faith; and(b) at the time when the person became such a party;(i) the person had no reasonable grounds for suspecting thatthe company was insolvent at that time or would becomeinsolvent ...; and(ii) a reasonable person in the person’s circumstances wouldhave had no such grounds for suspecting; and(c) the person has provided valuable consideration under thetransaction or has changed his, her or its position in relianceon the transaction.”55
Section 588FG provides a measure of protection to investorsagainst the subsequent winding-up of any party to a transactionin a securitisation program. However, the rating agencies arenevertheless concerned to ensure that the transactions in asecuritisation program are commercial and, in particular, that anysale of assets to the issuer is a true sale for full value (asdiscussed below).9.6 Segregated issuersSegregated issuers are issuers who are able to issue separateseries of securities which are backed by different assets andwhich are rated independently by the rating agencies (and whichmay have different ratings). In order to be considered asegregated issuer by the rating agencies it is necessary, amongstother things, that:• a default by the issuer in respect of one series andenforcement of the security must not of itself cause a defaultor enforcement of security in respect of another series;• creditors in respect of one series must not have access to theassets held in relation to any other series; and• there must be only a very remote likelihood of the issuerbeing wound up during the program. This must be the casenotwithstanding that in a winding up of the issuer, investorsof a series will retain their rights in relation to the relevantsecuritised assets of that series. This is because the windingupof the issuer will inevitably require the enforcement of thesecurity held for all series and a resulting early termination ofthe program.Segregation criteria are relatively easy to satisfy in relation totrust issuers. Segregation is achieved simply by creating a newtrust for each segregated series.Segregation for corporate issuers, however, is more difficult toachieve. It can be done effectively by:• creating separate security over different assets for eachseries;• limiting the default provisions in the documentation for eachseries to defaults by the issuer in relation to that series orevents that occur in relation to the assets of that series;• limiting the rights of each person who enters into atransaction with the issuer in relation to a series (includinginvestors) to their share of the proceeds of realisation of theassets of that series upon enforcement of the security forthat series; and• limiting the rights of the issuer so that the issuer is unable todo anything other than act as the issuer in the securitisationprogram and, in particular, is not permitted to incur anyliability other than a liability which is limited as described inthe previous paragraph.9.7 Rating agencies criteriaThe rating agencies impose a number of restrictions andrequirements upon issuers as a condition of rating their securitiesin order to minimise the risk to investors of the insolvency orwinding-up of the issuer or of any other party to the transactionsthat make up the securitisation program. The following is asummary of the most significant of these and the reasons fortheir imposition.9.7.1 Commercial sale of assetsWhere the securitised assets are not originally the assets of theissuer, the issuer must acquire the assets in a transaction whichis not, from the point of view of either party, an uncommercialtransaction. A failure to acquire assets for the proper value couldresult in the purchase being set aside under Part 5.7B of theCorporations Act (as discussed above).9.7.2 No mixing of assetsWhere the issuer is a trust issuer, it is important that the assetsof the trust are distinguishable from, and are not mixed with, anyother assets of the issuer or the assets of any other trust ofwhich the issuer is trustee. If assets are mixed they may losetheir characterisation as property of the trust and consequentlytheir protection from claims by any general creditors of thetrustee. Where the issuer is a corporate issuer, issuingsegregated series of securities, the assets backing each seriesmust similarly be kept separate so that the security for one seriesmay be enforced without impacting on the continued operation ofanother series.9.7.3 Limited powers of issuersBy limiting the powers of trust issuers it is possible to limit thepotential for creditors to exist who have access, throughsubrogation to the trustee’s right of indemnity, to the assets ofthe trust. So, for instance, if a trustee is prohibited by the termsof the trust deed from engaging employees in its capacity astrustee then if, in breach of the trust deed, the trustee purportsto engage employees in its capacity as trustee neither the trusteenor those employees through it will be entitled to be indemnifiedfrom the trust assets against the costs of the employment.56
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 and 54: 9 Insolvency and securitisation529.
Page 55: 54• if the trustee has not limite
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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