UK: Disposal Of Collateral By A Security Trustee

Last Updated: 11 November 2008
Article by Edward Davis and Sue Millar

In Bank of New York v Montana Board of Investments [2008] EWHC 1594 (Ch), the Court found, in relation to the disposal of assets following the default of a structured investment vehicle, that a security trustee was required to exercise prudence in the way in which it dealt with such assets and that the senior class of noteholders did not have the right to direct the trustee as to the time, manner and place of disposal of those assets.

Orion Finance Corporation ("Orion") was a structured investment vehicle whose assets consisted of residential mortgage asset-backed securities. It funded its investment in these assets by issuing various classes of debt securities, including senior notes, senior subordinated notes and capital subordinated notes. Orion's senior and subordinate note obligations were accelerated as a result of the downgrading of certain securities held by Orion, which in turn resulted in control of Orion's assets vesting in Bank of New York, which was acting as security trustee (the "Trustee").

The senior noteholders had directed that a disposal of assets should occur "as soon as reasonably practicable", not least because the proceeds of the disposal would, at their current market value, have been sufficient to pay the senior notes in full. However, the proceeds would not have been sufficient to pay the subordinate noteholders. The subordinated noteholders directed the Trustee not to liquidate any collateral, hoping that its value would rise in due course. Accordingly, the Trustee applied to Court for directions. The first defendant, a holder of senior notes, was a representative defendant on behalf of the holders of all the senior notes. The second and third defendants represented the subordinated creditors.

The Court was asked to consider the following questions:

1 Whether the security agreements gave the senior noteholders the right to direct the Trustee with respect to the time, date and manner of disposal of Orion's assets;

2 Whether, if such a right existed, such a direction by the senior noteholders, accompanied by a reasonable indemnity was:

(a) a mandatory contractual obligation; or

(b) subject to a discretion; and

3 Whether the security agreements mandated any specific timing for the disposal of the assets following default in circumstances where not all of the noteholders' interests could be redeemed.

The security agreements considered by the Court were subject to New York law, but the case was heard in the Chancery Division of the High Court because it was an urgent matter and it was perceived by the parties that the English Courts would move faster than their New York counterparts.

The Court found, on the facts, that the security agreements gave the Trustee "exclusive" discretion as to when to dispose of the assets of Orion. The relevant provisions of the security agreement provided that the Trustee "shall have the exclusive right to exercise any and all rights with respect to the Collateral and, in connection therewith, may elect to preserve all or any part of the Collateral and/or collect and convert into cash all or any part of the Collateral". The agreement also provided that if the Trustee collected the Collateral and converted it into cash it "shall sell, assign and deliver the whole or any part of the Collateral at such place or places as the Security Trustee deems best, and for cash, at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required by law and cannot be waived)".

Accordingly, while the senior noteholders were entitled to direct the Trustee to enforce the security arrangements in relation to the assets, they did not have the right to give more detailed directions. The collateral was held for the benefit of all the secured parties, and so one particular class did not have the right to dictate the time, place or manner of a sale, and in particular to direct the Trustee to make an immediate disposal.

The Court also found that the Trustee could exercise its discretion to wait to sell the assets, provided that, in doing so, it acted in accordance with the security documents, which provided for any sale to be conducted in a "commercially reasonable manner". The Judge made it clear however, that the Trustee did not have an unfettered discretion in this regard. The documentation required that the security should be enforced promptly in order to ensure the prompt payment of the notes and this should be done in a way that was consistent with the subordination of rights set out in the documents. It was clear that a disposal could not be put off indefinitely, but a delay to see, for example, whether market conditions improved, might well be a legitimate exercise of the Trustee's discretion.

Practical implications

Although it turned on the provisions of the security arrangements, which were themselves governed by New York law, the decision gives an indication of how the English Courts will interpret security documents which set out the scope of a trustee's discretion, and is a good example of the Court taking a common sense approach to these matters.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

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

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

In association with
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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