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

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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
The effect of the decision has been partly mitigated by section563AAA of the Corporations Act. This provides that “debenturesof a company under a trust deed that are issued in place ofdebentures under that deed that have been redeemed have thepriority that the redeemed debentures would have had if theyhad never been redeemed”.Section 563AAA does not seem to have been drafted with theposition of trustees in mind. Literally, it would seem if section563AAA applies, the debt securities, while being held by thetrustee in its capacity as trustee of the purchasing trust, areregarded as cancelled (and so the purchasing trust does not havean entitlement to receive interest or principal from thesecuritisation trust). If a subsequent sale by the trustee can beconstrued as a reissue of the debt security, it is then brought backinto existence with the same priority as the original debtsecurities. This then raises the question of from which trust’sassets does the trustee have a right of recoupment on the debtsecurity – is it the original securitisation trust or is it the trustthat sells the debt securities?It is also important to appreciate that section 563AAA is limitedto debentures and many of the debt securities that are traded inthe market may not satisfy the statutory definition of this term(eg. promissory notes).The decision in Re George Routledge & Sons Limited and section563AAA contemplate that the company when issuingdebentures, and when repurchasing the debentures, is doing soin the same capacity. This raises the issue of whether the lawwill recognise that the trustee, when issuing debt securities astrustee of a securitisation trust, is acting in a different capacitywhen it purchases the debt securities as trustee of another trust.There are a number of references in the texts and the casessuggesting that a person has the capacity to contract withhimself, but in a different capacity. Unfortunately, these dealwith fact situations different from debt securities (althoughperhaps the same principles should apply) and the results inthose decisions can be explained on other grounds which are notrelevant here.Based upon the foregoing, there is considerable doubt regardingthe consequences where a trustee of a trust purchases debtsecurities issued by it as trustee of a securitisation trust. Ifissuers of securitised instruments are to tap into the potentialmarket presented by funds under management in Australia, itwould seem necessary for this issue to be clarified by anamendment to the Corporations Act.10.6 ConclusionThe development in Australia of trust structures issuing debtsecurities raises many interesting and unique issues, both from adrafting and a legislative perspective. Most of these have nowbeen resolved to the satisfaction of all interested parties. Thenext section reviews the listing requirements for securitisedinstruments on the Australian Stock Exchange.62
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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 and 60: 10 Issues relating to debt securiti
Page 61: 60indemnity existed) and had no han
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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