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

In segregated issues a similar result is aimed for by way oflimiting the powers of the corporate issuer in its constitution.However, such limitations are not as effective as the equivalentrestrictions in the trust deed of a trust issuer. This is becausepersons are entitled to assume that the company is acting withinits powers unless they knew or suspected that this is not the case(sections 128 and 129 of the Corporations Act).9.7.4 Tax liabilityAn unexpected liability for tax constitutes a risk for bothcorporate and trust issuers, as this may trigger the enforcementof the security in a securitisation program. This is because the taxauthorities will never be subject to the limited recourseprovisions, the transactions in a securitisation program involvedealings in large amounts of money and tax law is both highlycomplex and continually changing.There is little risk that a liability of an issuer for tax could takepriority over a liability to investors or other secured creditors. TheFederal Commissioner of Taxation is an unsecured creditor in awinding-up of a company. It is possible for the Commissioner toeffectively take priority over a floating charge by issuing a noticeto a third party debtor of a taxpayer to pay amounts due to thetaxpayer directly to the Commissioner. However, automaticcrystallisation clauses in floating charges effectively preserve thepriority of the chargee in such circumstances.Nevertheless, an unexpected tax liability of an issuer can causethe issuer to become insolvent and make it necessary to enforcethe security held for the investors and other secured creditorsand thus result in the early termination of a program. Where theissuer is a trust issuer, the tax liability is likely to be limited to theparticular trust and will thus only trigger enforcement of thesecurity over the assets of that trust. Where the issuer is asegregated corporate issuer, however, the tax liability is apersonal liability of the issuer and may require the enforcementof the security for all of the segregated series of securities issuedby the issuer.It is consequently important for all issuers, but in particularsegregated corporate issuers, that the taxation consequences ofthe securitisation program have been carefully considered andthat the issuer will either have no tax liability or that there willbe sufficient funds to meet any tax liability. A legal opinion as tothe liability to taxation of the issuer is invariably a requirement ofthe rating agencies.9.7.5 Limited recourse of creditorsFinally, as discussed above, it is essential that all creditors of asegregated corporate issuer have agreed to limit the liability ofthe issuer to them to the amounts which they are entitled toreceive upon enforcement of the security for the relevant series.A failure to properly limit the liability of a creditor will not resultin the assets of other series being available to that creditor. Itmay, however, require the enforcement of the security for thoseseries in order to protect the assets of those series from thatcreditor.From the rating agencies point of view, limiting the recourse ofcreditors of trustee issuers is not such a significant issue sincethe insolvency of the trustee should not of itself result in thetermination of a securitisation program. However, it is naturallya significant issue from the trustee’s perspective and the rightsof creditors against trust issuers are invariably limited asdescribed above.9.8 ConclusionTo date in Australia, there has not been a failure of asecuritisation vehicle (although one or two have experienceddifficulties, none have been placed under the externaladministration of a receiver or a liquidator). Nevertheless, thestructuring of securitisation programs is very much influenced bythe insolvency provisions of the Corporations Act. A rating of asecuritised instrument, if it says nothing else, indicates that thesecuritised assets will be dealt with upon the insolvency of theissuer as intended by the underlying transaction documents.The next section of this publication considers a number of issuesthat arise when debt securities are issued by trustees.57