In UBS AG London Branch v Glas Trust Corporation Ltd, a dispute arose as to whether the note trustee had properly incurred expenses under the terms of the transaction documents.
UBS AG, London branch brought a claim for declaratory relief against GLAS Trust Corporation Ltd (the note trustee) and Fairhold Securiirsation Ltd (the issuer of the notes) in relation to a securitisation transaction. An extraordinary resolution of noteholders authorised and directed the note trustee to meet certain legal and financial expenses of an ad hoc group of noteholders (the AHG expenses). The dispute arose as UBS argued that such expenses were not expenses that might be properly incurred by or reimbursed to the note trustee under the terms of the transaction documents. These AHG expenses fell to be paid in priority to UBS. The court held that UBS had made good its objections to the extraordinary resolution, and that, as conceded by the note trustee, the adoption of the AHG expenses could not proceed as it had originally proposed.
What are the practical implications of this case?
This case emphasises the importance for a trustee of ensuring that they follow the terms of the trust deed very carefully and ensure that when incurring any expenses, to ensure that they are incurred properly and in line with the transaction docmentation. The case also highlights the importance of a trustee maintaining its independence and ensuring that it does not act blindly on another party’s instructions.
What was this case about?
UBS AG sought declaratory relief against GLAS Trust Corporation Ltd and Fairhold Securitisation Ltd in relation to legal and other expenses incurred by GLAS Trust Corporation Ltd referable to the work of an ad hoc group of Noteholders.
Parties to the case
GLAS Trust Corporation Ltd was the Note Trustee in a securitisation and Fairhold Securitisation Ltd was the issuer of the Notes (the Issuer). The Issuer is an offshore SPV registered in the Cayman Islands. UBS AG, London Branch (along with HBoS Treasury Services plc) was an Issuer Swap Counterparty.
What is the background to this case?
The Issuer issued two classes of Notes due October 2017, with an aggregate face value in excess of £440m.
The Issuer’s obligations were backed by a portfolio of sheltered housing assets situated in England and Wales. The cashflows generated by these assets are designed to be used to repay the Issuer’s debts to the Noteholders and to the Issuer Swap Counterparties.
In 2006 and 2007, UBS and HBoS entered into a number of swaps which were intended to hedge the Issuer’s obligations under the Notes.
The securitisation did not prosper and was unable to support both the Issuer’s liabilities to the Noteholders and to the Issuer Swap Counterparties.
In March 2015, an ad hoc group of Noteholders (AHG) was formed which comprised of sophisticated financial institutions.
On 2 October 2015, UBS notified the Issuer that it was exercising its right of Optional Early Termination under the swaps, which, according to UBS, meant that certain amounts were payable by the Issuer, with default interest continuing to accrue.
On 6 October 2015, AHG, pursuant to the documents, replaced the original Note Trustee with GLAS Trust Corporation Ltd.
On 15 October 2015, a potential event of default occurred when the Issuer failed to pay the interest due on the Notes.
On 21 October 2015, the Cash Manager informed UBS that the Note Trustee had directed it not to make any payments under the swaps and to hold amounts otherwise payable to the bank. This was on the basis that alleged fraudulent misrepresentations had been made by the banks in relation to the swaps, and that these misrepresentations entitled the Issuer to rescind those swaps.
On 4 August 2016, the Issuer rescinded the swaps. UBS denies that any such misrepresentations were made and therefore that the Issuer had no right to rescind the swaps.
No proceedings were brought by the Issuer in relation to the allegations of misrepresentations and so for the purposes of this case, it is deemed that the swaps were valid.
Since 2015, the parties have been negotiating about a potential restructuring but the Note Trustee is not a party to those negotiations.
On 31 March 2016, an Extraordinary Resolution of Noteholders authorised and directed the Note Trustee to meet certain legal and financial expenses of AHG. The dispute is whether the Note Trustee is entitled to do so. This depends on whether the AHG expenses constitute ‘expenses properly incurred by the Note Trustee’ pursuant to the Issuer Deed of Charge and Note Trustee Deed. If they do, under the pre-enforcement priority of payment waterfall, the expenses of the Note Trustee fall to be paid first, in priority to the Issuer Swap Counterparties.
What were the main legal arguments arising?
The key question was whether the Note Trustee was entitled to pay AHG’s expenses and be reimbursed for them as a priority claim in the waterfall. This depended on whether such expenses were ‘properly incurred by the Note Trustee’.
It was agreed by the parties that the pre-enforcement waterfall set out that the Note Trustee had first-ranking priority (above the Issuer Swap Counterparties) in the payment of its costs, charges, liabilities, indemnity claims and expenses. Therefore the question was whether or not such expenses were entitled to be incurred and claimed. The Issuer held the Securitisation Funds in its Issuer Accounts on trust for the Issuer Secured Creditors (which included UBS and the Noteholders) and such funds had to be distributed in line with the pre-enforcement waterfall.
What are the AHG expenses?
The Noteholders retained financial and legal advisors because of the possible litigation by the Issuer to rescind the swaps. On 31 March 2016, they passed an extraordinary resolution to authorise and direct the Note Trustee to execute a fee letter with their advisors, in which the Note Trustee would agree to pay the advisors’ fees, costs and expenses.
The Note Trustee claimed that the costs would have to be incurred in any case and was of benefit to all parties (including UBS) as analysis and advice was required in relation to both enforcement rights and strategy as well as restructuring alternatives.
What did the parties contend?
UBS contended that the Note Trustee did not have the power or authority to pay the expenses for a number of reasons, including that:
- the expenses were not properly incurred pursuant to the definition in the relevant transaction documents
- there was a lack of transparency as to how the expenses had been incurred
- the advice could not be relied upon by the Note Trustee as it was shared with the Note Trustee on a ‘non-reliance’ basis
- the Class A and Class B Noteholders did not have power to pass the resolution and so the resolution was not validly passed and was therefore invalid and of no effect
The Note Trustee contended that:
- it had incurred the expenses by agreeing to pay them pursuant to the fee letters
- it had formed the view that it was appropriate to incur the AHG expenses
- the services provided by AHG’s advisors were beneficial to the Note Trustee
- the Note Trust Deed was drafted to give the Note Trustee broad powers to incur expenses
What did the judge decide?
The key question for the judge was whether or not paying the AHG expenses was within the Note Trustee’s powers. This led to a question of construction of the trust documentation and whether or not the Note Trustee acted properly.
The Note Trustee changed its position during the course of the trial and acknowledged that it no longer maintained that it was entitled to incur and claim reimbursement of the AHG expenses without determining on a case-by-base basis whether such expenses properly fell within the relevant provisions of the transaction document. The judge was pleased that the Note Trustee had taken this decision and commented that agreeing en bloc to the costs and expenses of an ad hoc group of Noteholders past and future meant that the Trustee could not maintain its independence and properly determine whether or not the expenses were properly incurred. The Note Trustee should exercise a degree of careful scrutiny to ensure that the expenses were properly incurred.
The Note Trustee submitted a draft order setting out certain order which it suggested that the court made and which the judge welcomed. The judge hoped that this order could be used by the parties involved to move forward without further recourse to the court.
To what extent is the judgment helpful?
The judgment confirms that while a trustee can of course adopt expenses incurred by third parties, such as noteholders, when it does so, it must ensure that such expenses have been properly incurred and that it would be appropriate for the Trustee to make such payments, in line with the pre-enforcement payment waterfall. A trustee must also ensure that it maintains its independence in forming opinions and must not surrender this discretion.
Court: Royal Courts of Justice
Judge: Mr Justice Blair
Date of judgment: 13 July 2017