Declaration of Trust – Legal & Tech Blog

25/08/2015

Trustees rights on removal (indemnification and exoneration)

Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677

If a corporate trustee is removed as trustee by the operation of a disqualification clause in the trust deed, the position is as follows:

(i)          notwithstanding the appointment of a new trustee, as the former trustee, it retains its right of indemnity and/or exoneration (described above). These rights may be enforced by its liquidator against the trust assets, although it is not clear how, as the former trustee, its liquidator would proceed to enforce them (at [18] and [20]);

(ii)         there is conflicting authority (Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99 per King CJ and Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd[2008] NSWSC 1344 per Brereton J) as to whether, as the former trustee, it has the right to retain trust assets as security for any accrued right of indemnity as against any new or replacement trustee (at [19] and [21]–[25]);

(iii)        the position will be different where there has not been, and will not be, a new or replacement trustee appointed. In that event, as the former trustee, it continues as bare trustee of the trust assets and retains its right of indemnity and/or exoneration and its lien over the trust assets ([26]); and

(iv)         however, as a bare trustee, its duties, powers and rights are limited to protecting the trust assets and that does not include any power of sale of the trust assets (at [26] and [28]);

25/08/2015

Trustees rights on liquidation (indemnification and exoneration)

Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677

A corporate trustee enters liquidation, its position is as follows:

(i)          its right of indemnity, or exoneration, is retained (at [16]);

(ii)         it continues to have the right to meet creditors’ claims related to any liabilities incurred by it in its capacity as trustee, out of the trust assets (at [15]–[16]); and

(iii)        in addition, its liquidator has the right to claim costs and expenses incurred in winding up the corporate trustee insofar as that relates to its role as trustee and its liquidator has a right of indemnity against the trust assets in respect thereof and a right of exoneration against the trust assets in respect of any prospective liability (at [17]).

25/08/2015

Trustees rights generally (indemnification and exoneration)

Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677

A corporate trustee is acting properly in its capacity as trustee, it has the following rights (at [14]):

(i)          when a corporate trustee incurs a liability on behalf of the trust, it has a right of indemnity out of the trust assets and retains an equitable lien or equitable charge over the trust assets to secure that right of indemnity;

(ii)         it also has a right of exoneration out of the trust assets in respect of any prospective liability; and

(iii)        it has a right to deal with the trust assets, in accordance with the terms of the trust, to satisfy any liabilities in respect of which the right of indemnity or right of exoneration attaches, including the power to sell trust assets.

15/08/2015

22 Exercise – transfer of financial assets in transactions

Draw a structure diagram showing the parties and legal obligations for an
- Assignment
- Novation
- Declaration of trust
- Participation
- Risk participation
Now draw another diagram showing how the party who now receives the benefit (from the modes above) would take legal action to enforce the debt against the debtor and whether it would have to join any other party?

15/08/2015

16 Exercise – declaration of trust

Could a trust be created over the rights of the Lender based on the following clause?

“Subject to this Clause [•], a Lender (the Existing Lender) may:

(a) assign any of its rights; or

(b) transfer by novation any of its rights and obligations,

to another bank or financial institution or to a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets (the New Lender).”

Would your answer be any different if the clause said this instead?

“Subject to this Clause [•], a Lender (the Existing Lender) shall not assign, deal with, or otherwise dispose of or transfer its rights/obligations under the loan agreement.”

15/08/2015

Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; [2007] 1 Lloyd’s Rep 495

The issue of trusts and no-assignment clauses formed much of the discussion in the case of Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; [2007] 1 Lloyd’s Rep 495. The case involved an oil import facility agreement the terms of which are as follows:

An assignment was made by the lender of record (Masstock) without the consent of the Bank of Zambia to another bank (Bank of America) who sold the debt of Bank of Zambia to a vulture fund (Barbados).
The anti-assignment clause prohibited assignment other than to ‘banks or other financial institutions’.
Barbados was not a bank or a financial institution. Instead of using the language of assignment provided by the anti-assignment clause, the Bank of America declared itself trustee of the debt for Barbados. The consent of Bank of Zambia to this declaration of trust was not obtained.
Initially the first assignor (Masstock) sought the consent of Bank of Zambia, which did not respond to the request although the time permitted by the anti-assignment clause for Bank of Zambia to respond to the request had not expired. Ultimately Bank of Zambia did not repay the loan and the ultimate assignee (Barbados) brought proceedings to recover the money.
Barbados then operated the Vandepitt procedure, suing the Bank of Zambia and joining Bank of America (as trustee) as a defendant in the usual course. The question for the English Court of Appeal was whether the declaration of trust succeeded in evading the anti-assignment clause.
Waller and Rix LJJ of the English Court of Appeal both held the view was that since a declaration of trust does not bring the beneficiary, Barbados, into direct contractual relations with the underlying debtor, Bank of Zambia, but only creates an encumbrance on the trustee’s, Bank of America, own rights, an anti-assignment clause would not prohibit the declaration unless expressly worded.
They construed the anti-assignment clause as not to impose a prohibition on a declaration of trust. In this way, Bank of America could have sued to recover the debt owing by Bank of Zambia, with a view to paying the proceeds over to its beneficiary, Barbados. If that was permissible, and if the beneficiary Barbados could have compelled Bank of America to bring that claim against Bank of Zambia, then why should both steps not be compressed into a single Vandepitt proceeding?
Hooper LJ disagreed on this point. He considered that the claimant’s stratagem cut directly across the anti-assignment clause: the Bank of Zambia found itself facing a vulture fund across the court notwithstanding that it had stipulated that the debt could only be assigned to a bank or other financial institution.
That restriction would have achieved very little if it could be evaded by a declaration of trust. Hooper LJ did not think that special drafting should be required to prevent the claimant’s stratagem. On this view, the anti-assignment clause did not prohibit the declaration of trust but it did prevent the claimant from then operating the Vandepitt procedure (joining the trustee as a co-defendant where trustee declines to sue)

15/08/2015

15 Declaration of Trust

We now come to one of the more interesting and challenging aspects of the topic of transfer of property in financing transactions.
Declarations of trust are commonly used as the mechanism of transferring assets in financing transactions.
It is a declaration by an originator of property that it holds that property on trust. In a financing transaction the property will usually be held on trust for a special purpose vehicle (SPV) as beneficiary.
The legal effect of a declaration of trust is that the SPV becomes the equitable owner of the property.
As a general rule a declaration of trust will be used to transfer property when there is a prohibition on either assignment or novation in the underlying agreement.
There are good reasons for this mechanism of transfer should not be the default mechanism as we will discuss in detail below but the cases referred to below provide authority for the proposition that absent a prohibition on the declaration of trust notwithstanding that there may be a prohibition on assignment, a declaration of trust is a means by which property can be transferred.