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

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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
10 Issues relating to debt securitiesissued by trustees5810.1 IntroductionAs indicated in Section 1, many securitisations in Australiaproceed by way of the relevant assets being held in a trust withthe trustee issuing debt securities. The use of trusts in this roleraises a number of legal issues. These include the followingwhich are reviewed in this section:• the role and function of security trust deeds in thesecircumstances;• the nature of the trustee’s liability on its debt securities;• the trustee’s right of indemnification;• whether trustees can issue promissory notes; and• the effect at law if the trustee purchases debt securitiesissued by it in a different capacity.10.2 Security trust deeds to secure trustee debt securities10.2.1 BackgroundIf a trustee issues equity securities, the obligations under thesecannot be secured by a charge over the trust’s assets in favour ofa security trustee. The reason for this is that equity, by its nature,cannot be the subject of a security. However, when a trusteeissues debt securities, the rating agency requires this.Given that debt always ranks in priority to equity on a windingup,this raises the issue of the relevance of security trust deedsfor trustee debt securities. If they are not required for equity, whyare they necessary for higher ranking debt securities?The response of the rating agency to this question has beentwofold. The first response is that this is consistent with theirusual (though not uniform) requirements for debt securitiesissued by corporations. This though does not really answer thequestion. The second response is that a security trust deed isnecessary to overcome perceived shortcomings with the trustee’sright of indemnification from trust assets to meet liabilities onthe debt securities. This second explanation is much more cogentand the legal basis for it is explained in the next section. (There isalso a third response, which comes from lawyers, that securitytrust deeds are necessary for the enforceability of trustee debtsecurities: see section 1.3.3.)10.2.2 The nature of the trustee’s liability under its debtsecuritiesIt is a fundamental legal principle that obligations, such as owedunder a debt security, can only be incurred by an entityrecognised by the law as having legal existence. Such entitiesinclude individuals, corporations or a combination of theforegoing in partnership. A trust, on the other hand, is not aseparate legal entity. Rather, the term “trust” describes the basisupon which a person holds property.When a trustee issues a debt security, it is not the trust itselfthat is liable to meet the obligations under this. Instead, it is thetrustee that is liable for the debt security as if it had issued itpersonally.The result is that when a trustee of a securitisation trust issues adebt security, at law the trustee is personally liable on thesecurity. It is the party to whom an investor has recourse and maysue if there is a default (subject to any limitations on liabilityapplying to that debt security, which is considered in section10.3).A trustee, however, is not expected to bear the liabilities of itstrust without compensation. It has a right of recoupment againstthe trust assets for properly incurred trust liabilities.This right of recoupment springs from three sources: the generallaw, statute (the Trustee Acts) and usually the relevant trustdeed.10.2.3 Shortcomings with the trustee’s right ofindemnificationThe right of a trustee for indemnification from the trust assets issubject to an important limitation. The actual quantum of theright is not calculated simply on the amount of the properlyincurred trust debts. Instead, it is determined after taking intoconsideration all of the trustee’s liabilities to the trust for othermatters. Thus, if the trustee commits a breach of trust so that itis personally liable to recoup the trust for this, the indemnity inrespect of the properly incurred trust debts is accordinglyreduced. In other words, a running account exists between whatis due by way of compensation to the trust for breaches of trustby the trustee and what is due to the trustee by way of itsindemnity for properly incurred trust debts. Only if that balance isin favour of the trustee can it recover from the trust and thenonly to the extent of that balance.This has led to a concern, articulated particularly by the ratingagency, that if the trustee properly issues unsecured debtsecurities (with its liability limited thereunder to the trustassets), but subsequently engages in an unrelated breach oftrust, the trustee may not be entitled to recourse to the trustassets to meet the amount payable on the debt securities.This then could lead holders of the debt securities to incur a loss,even though there are trust assets available to meet the amountdue on their debt securities.
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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 and 56: 54• if the trustee has not limite
Page 57: Section 588FG provides a measure of
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
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A Guide to the Law of Securitisation in Australia - Clayton Utz

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