Securitisation dispute should remind trustees of their duty of impartiality, says expert

Out-Law Analysis | 24 Jul 2017 | 10:20 am | 4 min. read

ANALYSIS: The High Court has issued a timely reminder to trustees on securitisation transactions of their duty of impartiality, in a recent ruling preventing the trustee from automatically paying out almost £2.5 million of actual and ongoing fees incurred by some of the noteholders in connection with the possible restructuring of £440m worth of defaulted debt securities.

The judgment reinforces the fact that a trustee is not just a fiduciary for some of the noteholders, but rather a guardian of the underlying trust as a whole. Its role is to exercise its powers in accordance with the documentation for the benefit of all beneficiaries of the trust on an impartial and independent basis and not to simply implement the wishes of some of them.

The case is particularly interesting because the trustee, GLAS Trust Corp, was appointed on the basis that it would be more 'proactive' in its role on behalf of the noteholders than its predecessor. The trustee also reversed its position just before the court hearing, accepting that legal and banking fees incurred by some noteholders could not be paid as trustee expenses without the trustee determining, on a case-by-case basis, whether paying such expenses properly fell within the trust's powers and/or were excessive.


The parties entered into a securitisation transaction on 30 March 2006. Cayman-registered Fairhold Securitisation Ltd, the issuer, issued two classes of notes backed by the income receivables from a complex portfolio of sheltered housing properties in England and Wales. The notes are due to mature in October 2017.

By 2015, the transaction was in trouble. Cash flow from the properties was insufficient to support both Fairhold's liability to the noteholders, and its liability to two issuer swap counterparties, UBS and HBOS. Fairhold had entered into swaps with the banks to hedge its obligations under the notes.

On Friday 2 October 2015 UBS exercised its right to early termination, triggering a payment of £311m.  By the following Tuesday GLAS had replaced Deutsche Trustee Company Ltd. This was followed within days by a potential default event, when the issuer failed to pay the interest due on the notes.  Fairhold then claimed to be entitled to rescind the swaps on the grounds that the banks had made fraudulent misrepresentations.

At the same time, the parties had been discussing a possible restructuring, in the course of which the same group of noteholders incurred the £2.5m professional fees at the centre of the dispute. Following an extraordinary meeting of the noteholders which resolved to direct the trustee to pay these fees, the trustee entered into an agreement to pay them as if they were 'trustee costs and expenses'.  As trustee expenses, the fees had first priority under the payment waterfall at the expense of UBS. UBS therefore challenged the trustee's rights to pay the fees as a matter of interpretation of the trust deed and associated charge over the Fairhold's assets.

Pending resolution of the dispute, no fees had been paid.

The rival arguments

GLAS' position was simple.  It had committed to pay the expenses in good faith  because they were "expenses properly incurred by the note trustee". This was on the basis that:

  • the work represented by the fees was in the interests of all relevant parties, including the noteholders as a whole and the counterparty banks;
  • it would otherwise have had to instruct its own advisers and have incurred those costs, so by agreeing to pay them it was avoiding duplication of work or the need to "reinvent the wheel".

UBS unsurprisingly did not agree. 

  • the expenses were not "incurred" by GLAS, they were incurred by some of the noteholders, alternatively they had not been "properly incurred" under the contractual documents;
  • the noteholder resolution directing GLAS to pay the expenses was ultra vires and a breach of the transaction documents;
  • GLAS was not a client of the noteholders' advisers and any advice shared with GLAS was shared on a 'non-reliance' basis, meaning that it would potentially have had to instruct its own advisers in any event.  

Prior to the hearing, GLAS was clear in its intention to adopt the expenses as the group of noteholders directed. However, in written submissions for the hearing, it changed its position. Although it still maintained that it had the right to pay the expenses as a matter of principle, it now accepted that it would have to scrutinise each element of the claim to determine whether it should properly be paid and that the fees were not excessive.  It pointed out that the advisors had themselves reviewed the expenses "to determine what they view as costs relating to the note trustee’s powers and duties, as opposed to costs relating to other matters”.


Mr Justice Blair found that it was legitimate in principle for a trustee to adopt expenses incurred by third parties, such as noteholders, on the basis that it would be duplicative for the trustee and its advisers to effectively repeat the same work.  The inability to rely on that advice was not, on its own, determinative, neither was the fact that restructuring advice primarily affected the interests between creditors, not the trustee.  However, in this case, by adopting the noteholders' costs and expenses "en bloc", the trustee effectively "surrendered [its] duty to form an independent view as to whether the expenses were ones which it could properly incur".

The judge also found that there was also a "lack of transparency as to what the expenses related to, doubts as to what parts of the material the note trustee had actually seen ... and at least a possible issue as to the extent to which the note trustee could pay for advice on which it was expressly excluded from relying".

Notwithstanding the trustee's change of position during the proceedings, the judge was fairly critical of its previous actions. He ruled that it was "sensible" that the trustee changed its position, "albeit late", rather than "continue to defend a position that was not readily defensible".

"It is evident that the adoption of the expenses in such circumstances required a degree of careful scrutiny by the note trustee in order to form the opinion that the expenses were properly incurred, which it is now accepted needs to happen," he said.

A draft order submitted by the trustee identified four categories of expenses which in principle would be proper expenses for it to adopt. These related to the exercise of its powers concerning security enforcement, asset valuation or negotiation on the same.  There was a further dispute over a mechanism for determining which expenses could be adopted by the trustee contained in the draft order, but the judge left the final wording for the parties to agree.

Stuart McNeill and Danielle Williamson are financial services litigation experts at Pinsent Masons, the law firm behind