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

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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
60indemnity existed) and had no hand in subsequent events whichrendered the trustee incapable of meeting the liability, isnevertheless held liable for the debt.In all trust securitisations, as a general rule, the trust deed willprovide that the trustee will only be liable to the extent of theassets available to meet the relevant liability. Such a limitationensures that section 197 will not apply to the transaction andavoids the rule that the directors will be liable if thesecuritisation trust becomes insolvent.That being the case, if the trust is liable to third parties who arenot bound by the limitation of liability (for example, theCommissioner of Taxation under an outstanding tax liability) thensection 197 may apply to the liability and cause the directors tobe bound to discharge it if the trust becomes insolvent.Trustee only personally liable for fraud, negligence or wilful defaultTypically, a trustee’s limitation of liability clause also providesthat the trustee will only be personally liable for any losssuffered by an investor as a result of the trustee’s fraud,negligence or wilful default (or similar). This is a standardrequirement of the trustee companies, however, it has interestingimplications which are perhaps not fully appreciated.By requiring these words trustees place themselves in a specialcategory. In order to be personally liable not only must thetrustee breach the terms of the relevant transaction document,but an additional quality must be shown, that is, in committingthe breach the trustee was fraudulent, negligent or in wilfuldefault. Normally, though, if a person breaches a term of acontract, nothing more needs to be demonstrated for the personto be personally liable to compensate those who have the benefitof the term for their loss. For example, it is not necessary to showthat the breach was wilful; an inadvertent or accidental breach issufficient as a party to a contract is expected to put in placeprocedures to ensure that it complies with its terms.Also, the words “negligence” and “fraud” introduce otherdoctrines of law that are not usually relevant to contract or trustlaw. Negligence for example, is founded on a separate legalprinciple and is usually associated with personal, financial orproperty injury cases (motor vehicle accidents, occupier’s liabilityand the like). Also, it is unclear whether fraud in this contextmeans criminal fraud or the much lesser notion of equitable fraudwhich turns on the proper exercise of a power for unintendedpurposes or taking into account irrelevant matters in consideringwhether or not to exercise a power.The reply of the trustee companies to this issue is that their roleis equivalent to custodians only and that it is the manager whohas the day-to-day responsibility for the conduct of thesecuritisation program. In this context, various duties, powersand discretions are accorded to the trustee (often in very generalterms). Given their limited role, it is appropriate that a trusteeought to have additional protection against a claim that it should(or should not) have exercised a particular duty, power ordiscretion.However, this reasoning is less convincing where the trusteecovenants that it will (or will not) do a particular act or thing.Investors and counterparties are entitled to expect that thetrustee will perform the covenant and they should be entitled tocompensation for any loss they suffer if the trustee fails to do so.For the time being, wording of this nature is deeply ingrained intotrustee thinking and is well accepted by the securitisation marketin Australia. It is likely that as the market develops, howeverthere will be a greater focus on whether a more sophisticatedformulation is appropriate to better balance the legitimateinterests of trustees (on the one hand) and investors andcounterparties (on the other).10.4 Promissory notes issued by trusteesSometimes the structurers of a securitisation program may wishfor a trustee to issue short-term debt instruments. There are anumber of benefits if these can be structured as promissorynotes. Promissory notes are not subject to the Corporations Act(see section 2) and their issue and transfer does not attractstamp duty. In addition, certain benefits regarding negotiabilityand title are conferred on promissory notes by the Bills ofExchange Act which are not available to other types of debtsecurities.This therefore raises the issue of whether a trustee can issue adebt security which qualifies as a promissory note for legalpurposes.A promissory note is defined in section 89(1) of the Bills ofExchange Act as “an unconditional promise in writing made byone person to another, signed by the maker, engaging to pay, ondemand or at a fixed or determinable future time, a sum certainin money, to or to the order of a specified person, or to bearer”.A requirement of the definition is that for an instrument toqualify as a promissory note it must contain an unconditionalorder or promise to pay a sum certain in money. It is with this inmind that some doubt has been expressed on two groundswhether or not a promissory note issued by a trustee, with itsliability limited to the assets of the particular securitisation trust,qualifies as a promissory note.
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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 and 58: Section 588FG provides a measure of
Page 59: 10 Issues relating to debt securiti
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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