UK: When Can A Note Trustee Lawfully Adopt Expenses Incurred By Noteholders? UBS AG, London Branch v. GLAS Trust Corporation Ltd. And Another [2017] EWHC 1788 (Comm)

Last Updated: 10 August 2017
Article by David Cohen, Thomas Leyland, Matthew Sapte and Alexandra Doucas

The Commercial Court considered the extent to which it was lawful for a note trustee to adopt and pay expenses incurred by a group of noteholders in obtaining advice in relation to a securitisation. While the judgment deals with the specific wording of the agreements in this case, it raises issues that will be relevant to note trustees generally.

Background

A securitisation transaction took place in 2006, the subject of which was the cashflows generated by a portfolio of sheltered housing. Such cashflows were to be used by the issuer of the notes in this case (the Notes) to repay its debts to the holders of the Notes (the Noteholders). The cashflows were also to be used in order to meet any payments due to UBS and HBoS Treasury Services plc (together, the Issuer Swap Counterparties – HBoS does not appear to have participated in these proceedings). Such payments arose as a result of swaps entered into by UBS and the issuer as part of the overall transaction.

Cashflows generated by the portfolio became insufficient to pay both the Issuer Swap Counterparties and the Noteholders, who are now effectively competing creditors. UBS terminated the swaps in October 2015, the termination amount being almost £312 million, with (approximately) a further £275 million due to HBoS Treasury Services plc.

At around the same time:

  • an ad hoc group of the Noteholders (referred to throughout the judgment as the AHG) replaced the original note trustee with GLAS Trust Corporation Ltd. (the Note Trustee), apparently on the basis that it would be more "proactive";
  • the issuer failed to pay the interest due on the Notes; and
  • the Note Trustee directed the cash manager not to make payments under the swaps. 

In August 2016, the issuer purported to rescind the UBS swaps on the basis of alleged fraudulent misrepresentations (which UBS denies), but no proceedings have been started in that regard. The parties have also been considering a restructuring of the transaction since 2015.

The AHG, in the meantime, had instructed Freshfields and N.M. Rothschild & Sons Ltd (together the AHG Advisers). Their combined fees for the year March 2015 to March 2016 were approximately £2.5 million (the AHG expenses). In March 2016, the Noteholders passed an Extraordinary Resolution, to "authorise and direct the Note Trustee to execute a Fee Letter" with the AHG Advisers so as to pay the AHG expenses "as an expense of the Note Trustee which will be provided for and reimbursed by the Issuer to the Note Trustee..." As well as paying the fees already incurred, the Note Trustee proposed to pay the AHG Advisers for their work after March 2016 (which, in the case of Rothschild, included a £75,000 per month retainer and a £3.75 million transaction success fee). The AHG Advisers were not advising on the swaps dispute.

Issues

UBS argued that the Note Trustee had no power to incur and claim reimbursement of these costs. The practical significance for UBS was that, as would be expected, the transaction documents provided for a pre-enforcement payments waterfall. In that waterfall, UBS ranked above the Noteholders, but below the Note Trustee's right to recover its expenses. UBS took the view that the AHG was effectively trying to jump the queue, by getting the Note Trustee to pay for its advice.

The issue was one of construction – under the relevant clauses of the Issuer Deed of Charge (IDC) and the Note Trust Deed (NTD), the issuer was obliged to pay for certain costs properly incurred by the Note Trustee. The obligation arose in relation to all "legal fees" and "other costs, charges, liabilities, damages and expenses" which had properly been incurred by the Note Trustee in relation to four broadly described categories of activity by the Note Trustee. UBS disputed whether the fees of the AHG Advisers came within the scope of such clauses.

It is also clear from the judgment that:

  • the Note Trustee's position up until the hearing was that it was entitled and had decided to incur the AHG expenses, past and future;
  • the Note Trustee had seen at least some of the advice provided by the AHG Advisers to the AHG, but on a non-reliance basis;
  • the Note Trustee relied on the AHG Advisers having scrutinised the relevant expenses in order, in effect, to strip out costs that could not properly be claimed by the Note Trustee from the issuer under the IDC and NTD; and
  • crucially, at the hearing, the Note Trustee changed its position, such that it accepted that it should review whether the overall amount of the AHG expenses was excessive, and whether the specific costs comprised in the AHG expenses were within the scope of the IDC and NTD. 

Decision

The judge described clauses dealing with trustees' expenses as typically widely drafted, and to be given a "commercial and not artificially restricted meaning... This reflects the fact that the exercise of the trustee's powers may contain a substantial measure of judgement, may be controversial, and may have to be carried out speedily to enable resolution of the transaction. Of course, the position depends on the construction of the particular clause, but subject to that, the trustee should be able to fulfil its duties with confidence that if it acts in a commercially reasonable manner, it will be entitled to indemnification".

Having said that, the judge decided that the Note Trustee's position prior to the hearing (that it was entitled to adopt the past and future AHG expenses "en bloc") could not be sustained legally, and that its concession in this regard was rightly made. He noted that such position in effect surrendered the trustee's duty to form an independent view as to whether the costs were properly incurred. He also noted a continuing lack of transparency as to what the costs related to, and a doubt as to the extent to which the Note Trustee could pay for advice on which it expressly could not rely. He added that "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".

The judge did not, however, agree with UBS's position wholesale. He directed that the parties take account of some preliminary views he expressed as to what categories of expense should be deemed to be properly incurred, and sent them away to reach agreement. He identified the costs of four categories of work as being, in principle, properly incurred by the Note Trustee (advising on ways of enforcing the security, advising on the appropriateness of enforcement, advising on the valuation of secured assets, and participating in negotiations with any interested commercial party in relation to the other three categories). He broadly agreed with UBS that: (a) the Note Trustee could only adopt advice if it was permitted to rely on it; and (b) restructuring was a matter for the parties, not the Note Trustee, such that the costs of advising on restructuring were probably not properly incurred by the Note Trustee. However, he was not prepared to accept either of these propositions as absolutely correct, noting, for example, that it might be appropriate for the Note Trustee to obtain advice as to the relative costs of enforcement versus restructuring.

Conclusions

It seems likely that this particular claim is a skirmish that is part of a wider battle between competing creditors in this transaction. It illustrates some interesting points, however.

First, the judge's view that the Note Trustee's initial position was unsustainable is not surprising. The Note Trustee here was apparently too ready to elide its own position and judgment with that of the AHG. The concession it made at trial was, in substance, to accept that it must use its own judgment as to the advice it actually needed and ought properly to pay for. The judge's comments in this regard may have been something of a shot across the Note Trustee's bows, in advance of the exercise of deciding which of the AHG expenses to adopt.

Second, UBS was also reined back in this judgment to some extent, in that the judge was clearly not keen for unnecessary expense to be incurred in the Note Trustee and the AHG duplicating advice.

Finally, the outcome of the judgment leads to some practical difficulties, and it is worth considering how they might be avoided in another case. The Note Trustee will now have to deal with the minutiae of more than a year's worth of professional fees, and determine whether they were properly incurred. Experience says that undertaking such an exercise will itself involve a significant amount of time, cost and difficulty. This is particularly so in circumstances where the Note Trustee is not the AHG Advisers' client (and is therefore not entitled to see their files, or even have a full description of their contents), and was presumably not involved in instructing them at the relevant time. These issues argue in favour of finding a different way of dealing with similar situations, which avoids the trustee becoming too enmeshed in the partisan interests of noteholders. There seems no reason why trustees and noteholders should not liaise on what advice needs to be obtained and from whom, and this case illustrates the risks of not doing so. 

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
1 Sep 2017, Seminar, Amsterdam, Netherlands

The Master students from NSO Eques will visit our office in Amsterdam. NSO Eques is the association for the corporate law students of Radboud University Nijmegen.

7 Sep 2017, Business Breakfast, Frankfurt, Germany

We cordially invite you for the next regulatory breakfast – jointly organized by Capco and Dentons.

7 Sep 2017, Conference, Amsterdam, Netherlands

Dutch Partner Marc Elshof will participate as a lecturer at the “GDPR Masterclass: ready in one day for the new privacy legislation” conference.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.