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

Two different solutions to this problem have been suggested.These are:The use of a security trust deedThe first approach treats the problem as stemming from investorsbeing unsecured creditors of the trust and needing to rely on thetrustee’s right of indemnity in order to have recourse to the trustassets. The solution, therefore, is to elevate investors fromunsecured to secured status. Under this approach, the trusteecharges the trust assets as security for the debt securities andthis charge is held for investors by a security trustee (almostalways a company within the same group as the first trustee). Inthis way, investors do not need to be concerned about the stateof the trustee’s right of indemnity. Instead, they have a directsecurity interest (through the security trustee) over the trustassets for the full amount owed to them by the trustee. If thetrustee’s right of indemnity is in some way diminished, investorscan still have recourse to the trust assets through the charge tomeet the amount owing to them.Enhance the contractual right of indemnityThe second approach is to strengthen the trustee’s right ofindemnity in the trust deed to make it clear that it will not beaffected by unrelated breaches of trust by the trustee. Theadvantage of this approach is that it is simple and does notrequire an appointment of a security trustee. However, there arereal reservations whether at law it is possible to achieve thisresult. Accordingly, for the time being, until the efficacy of thesecond alternative is clarified (by case law or statute), thegeneral market approach is to use the first of the two solutions(ie. security trust deeds) to overcome the perceived problem forunsecured trust creditors with the trustee’s right of indemnity.While this alternative involves increased cost (ie. the preparationof a security trust deed and the appointment for the time beingof a security trustee), it has greater legal integrity than thesecond solution. This explains, therefore, the reason why alltrust securitisations in Australia are accompanied by a securitytrust deed.10.3 Limitations on the trustee’s liabilityOne of the results of the analysis in section 10.2.2 is that wherea trustee issues debt securities, its personal assets can beexposed to the claims of investors. However, a trustee can avoidthis result if the investors agree to this. This is the basis of thelimitation of liability clause that is inevitably found in trustsecuritisation structures. Usually, there are three elements tothis:Trustee does not issue debt securities personallyTypically, a clause will be found stating that the trustee does notissue the debt securities personally but only in its capacity astrustee. Strictly speaking, this statement does not correctlyreflect the legal position for it is clear that the trustee ispersonally liable on the debt securities (see section 10.2.2).However, it is probably best to approach these words not from astrict legal perspective but instead as describing in a generalsense the trustee’s role in issuing the debt securities. However,sometimes a variation on these words is found in the trust deed.It is stated that the trustee enters into the trust deed as trusteeof the trust constituted by the trust deed and not in its personalcapacity. However, most (if not all) of the covenants by thetrustee under the trust deed are in fact incurred by it personally.This is inherent in the very nature of a trust, whereby a personagrees to hold certain property, on particular terms, for thebenefit of another (the beneficiary). It is likely, therefore, that acourt would ignore these words if used in a trust deed.Trustee’s liability on the debt securities limited to the trust assetsA trustee’s limitation of liability clause typically also providesthat the trustee’s liability on the debt securities is limited tothose amounts which are available to be applied on the debtsecurities in accordance with the trust deed. These are thecritical words from the trustee’s perspective (and that ofinvestors). They have the effect of ensuring that the trustee’spersonal assets are not exposed to the risks of the securitisationand that investors only have rights against the trusteecommensurate with the trustee’s own ability to debit the trustassets for these amounts.A trustee’s limitation of liability clause is also important in thecontext of section 197 of the Corporations Act. The sectionprovides that a person who is a director of a corporation when itincurs a liability while acting as trustee is liable to discharge thatliability if the corporation has not and cannot discharge thatliability, and is not entitled to be fully indemnified against theliability out of trust assets. The section also provides that “this isso even if the trust does not have enough assets to indemnify thetrustee.” These words have been the subject of judicial debate asto their meaning and effect.One view is that if there are no assets comprising the trust fund,then there is no entitlement to be indemnified and so thedirectors are personally liable for the outstanding trust debts.This view has been criticised on the basis that it could potentiallylead to a situation where a director, who acted properly at thetime a liability was incurred (because the right to a sufficient59