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

It is said that the limitation on the trustee’s liability to the assetsof the trust constitutes an order to pay out of a particular fund.Section 8(3) of the Bills of Exchange Act deems such an ordernot to be unconditional as the fund may be insufficient to pay theamount on the face of the instrument. It is also argued that theeffect of the limitation on the trustee’s liability is that theinstrument cannot be for a sum certain as the amount that theholder will be entitled to on maturity depends upon assets of thetrust being available at that time.The alternative view is that when a trustee of a trust signs apromissory note containing a limitation on its liability, it does soin a representative character which is authorised by section 31(1)of the Bills of Exchange Act. Although there is case law tosupport this proposition, it is very old and predates the statutorycodification of the rules relating to promissory notes in the Billsof Exchange Act (and its English predecessor).The reasoning in these cases is also not particularly clear andthere is no certainty whether they would be followed if thesituation was examined by the courts today. While there aregrounds for concluding that trustees can issue promissory notescontaining a limitation on their liability, this issue attractsconsiderable attention where it is proposed. In order to avoidthis, unless it is essential, it is probably better to structure atransaction on the basis that the instruments to be issued by thetrustee are not, for legal purposes, promissory notes. Most of theadvantages in using promissory notes can be achieved in otherways, avoiding undue legal attention on the integrity of aproposal based on the purported issue of promissory notes by atrustee.10.5 Can trustees purchase their own securities?With the enormous growth of managed and superannuationfunds over the last few years, these are becoming an increasinglyimportant market as purchasers of securitised instruments.However, in Australia we have a very concentrated professionaltrustee company industry. Often, the same trustee company willwish to acquire in the open market for a managed fund the debtsecurities it issued as trustee of a securitisation trust. This thenraises the issue of what are the consequences (if any) if thisoccurs?The position of a company which acquires its own debt securities,and then subsequently transfers these to another, was consideredin Re George Routledge & Sons Limited [1904] 2 Ch. 474.The facts of the decision were as follows: A company issued aseries of first mortgage debentures. From time to time some ofthese came into the market and 16 were purchased back by thecompany. They were transferred from the sellers to the companyand the company’s name was entered upon the register ofdebenture holders. Subsequently, the company transferred thedebentures that it had acquired to various third parties.The issue before the court was whether the purchasers wereentitled to be treated as holders of the debentures acquired fromthe company. The court held that the purchasers had not acquiredthe debentures.The reasoning of the court was that the debentures, when theywere acquired by the company, ceased to exist. The companycould not at the same time be both a debtor and creditor to itself.As the debentures had ceased to exist, they could not bepurchased by the third parties. The purchasers acquired nothing(except an unsecured claim against the company for breach of thecontract of purchase).The decision in Re George Routledge & Sons Limited raises theprospect that when a trustee purchases its own debt securities,these are extinguished. If this is the case, then it would strictlyseem that the trustee, in its capacity as trustee of the purchasingtrust, is not entitled to payment of any principal or interest or tothe benefit of any other rights accruing under the debt security. Inaddition, it cannot sell the debt security to a third party for, asindicated above, the purchasers are at law acquiring nothing.This in turn would expose the trustee for an action in damagesfrom the purchaser for failing to deliver the debt security.It is quite conceivable given fluctuations in interest rates, andperhaps the addition of interest at the relevant Supreme Courtrate, that the amount of damages owed by the trustee couldexceed the purported sale price of the debt security. This thenraises the issue of from which trust would the trustee be entitledto obtain recoupment, the original securitisation trust or thepurchasing (and selling) trust?It would be no overstatement to state that these consequencesdiverge from the expected commercial consequence that thetrustee should be able to hold the debt security and receiveinterest and principal on it from the securitisation trust and thetrustee should be able to validly assign the debt security to athird party.61