The Role And Importance Of Security Trusts And Security Trustees Under Maltese Law

In a well-functioning financial market, especially one that includes the issuance of publicly traded debt instruments such as bonds, the ability to safeguard the interests of investors is a foundational requirement.

The Maltese legal system, through the mechanism of the security  trust as regulated under Article 2095E of the Maltese Civil Code, provides an elegant and robust solution for protecting creditors—particularly in the context of bond issues listed on the Malta Stock Exchange (MSE).

What is a Security Trust?

A security trust is a legal mechanism whereby security is created in favour of a trustee, referred to as a security trustee, for the benefit of creditors. These creditors may be present or future, or they may belong to a particular class or group. The trustee holds the security rights not for personal benefit but to safeguard the interests of the creditors, in accordance with clearly defined trust terms.

According to Article 2095E of the Civil Code:

Security trusts serve both a legal and a commercial function. Legally, they offer a structured framework in which security can be held by a trustee for the benefit of one or more creditors. Commercially, they provide an efficient and practical means for managing security rights and enforcing them when necessary. This is particularly significant in capital markets transactions, where the number of creditors, namely, bondholders, can be large and dispersed, and where streamlined enforcement mechanisms are critical to maintaining market confidence.

Legal Framework under Article 2095E of the Maltese Civil Code 

The law governing security trusts was introduced in 2004 and later amended in 2010 to adapt to the evolving needs of financial markets. Article 2095E of the Civil Code lays out the conditions under which security may be created in favour of a trustee, referred to as a security trustee, who holds such security not for personal benefit but for the collective benefit of creditors.  These creditors may be current or future, and they may belong to specific categories or classes.

Under Maltese law, security may be created in favour of a trustee in two principal ways. It can either be constituted directly, using traditional security instruments such as pledges, hypothecs, or privileges; or it can be settled through the establishment of a trust under a written instrument, with terms specifically designed to serve the purpose of securing obligations. In both cases, the trustee is treated as a creditor for the purposes of registration and enforcement, which allows the security to be perfected in the trustee's name, with the appropriate indication of its status as trustee.

An essential feature of this provision is the way it consolidates enforcement powers. Even where the trustee is not the actual creditor of the principal obligation, Maltese law confers upon the trustee the legal interest necessary to initiate legal proceedings for enforcement. This means that, in a bond issue, the trustee can act swiftly and decisively on behalf of bondholders in the event of a default, without the need for collective action or prior authorisation from each individual investor.

Another noteworthy element is the broad definition of "security" under this provision. It encompasses a wide range of legal arrangements and instruments, including guarantees, undertakings, mandates, title transfers, and even the placement of assets under the control of the trustee with accompanying rights of retention and sale. This flexibility allows the trust structure to be tailored to suit various types of bond issues—whether secured against immovable property, receivables, shares, or other forms of collateral.

Key Functions of the Security Trustee:

1. Holding Security Rights: The trustee legally holds the security on trust for the benefit of bondholders. This ensures that security interests are centralized in one entity, rather than being fragmented among numerous bondholders.
2. Monitoring Compliance: The trustee monitors the issuer's compliance with bond terms and covenants. If there is a breach or default, the trustee is empowered to act decisively.
3. Enforcement of Security: Should the bond issuer default, the security trustee has the authority to enforce the security rights (e.g., sell the secured asset) and distribute the proceeds to bondholders in accordance with the trust deed and applicable law.
4. Streamlined Communication: With one entity representing bondholders' interests, communication and decision-making in case of restructuring, default, or enforcement becomes significantly more efficient.

Regulatory and Legal Oversight

The Malta Financial Services Authority (MFSA) plays a supervisory role in the approval of bond issues and the entities involved, including trustees. The trust deed and the role of the security trustee must be clearly articulated in the bond prospectus, and the trust must comply with the Trusts and Trustees Act and applicable financial services laws.

Practical Importance in Bond Issuance

When a company issues bonds on the Malta Stock Exchange, particularly where those bonds are secured, the use of a security trust is considered best practice and at times it is also recommend and/or mandated by the MFSA. In such scenarios, a security trustee is typically appointed to hold the collateral on behalf of the bondholders. This arrangement not only simplifies the process of constituting security, since it is made in favour of a single trustee rather than dozens or hundreds of individual bondholders, but it also centralises enforcement, making it more efficient and less susceptible to delay or inconsistency.

In practice, the trustee also performs monitoring functions to ensure that the issuer complies with the terms of the trust deed and the bond covenants. In case of a breach or a triggering event under the terms of the bond, the trustee has the authority to enforce the security without having to seek the individual consent of all beneficiaries. This ensures that bondholders are adequately protected while also maintaining the commercial workability of the bond programme.

Moreover, Article 2095E includes important provisions that cater to more sophisticated financing arrangements. For instance, where a hypothec is granted in favour of a trustee who is a licensed bank or similar authorised entity, the law allows that hypothec to secure future debts, provided the deed expressly states this intention and identifies a maximum secured amount. This facilitates the use of security trusts in programme-based issuances, where multiple tranches of debt may be issued over time under the same framework.

The law also anticipates the practical need for flexibility and continuity. It allows trustees to be substituted or to resign, without affecting the validity of the security or requiring the reconstitution of the trust arrangement. Likewise, where the underlying debt is assigned by one bondholder to another, the trust structure accommodates the new creditor as a beneficiary automatically upon notice to the trustee, without the need for further formalities. This provision greatly enhances the transferability and tradability of bonds on the secondary market, reinforcing investor confidence in the system.

Another significant safeguard included in Article 2095E is the separation of liabilities. The trustee is not subject to the obligations of the creditors unless this has been explicitly agreed in writing. This ensures that the trustee remains a neutral, professional party acting solely in the interest of securing and enforcing the relevant obligations.

Furthermore, the law permits the trustee to act also as a mandatary or agent for the creditors, allowing for additional contractual flexibility. However, in all cases, whether acting as a trustee, agent, or both, the trustee is bound by the rules governing the enforcement of the specific type of security in question. Where no specific enforcement rules apply, the trustee is nonetheless obliged to act in a fair and reasonable manner toward the debtor, preserving the integrity of the enforcement process.

Advantages of a Security Trust in MSE Bond Issuances

1. Investor Protection: Security trusts provide an additional layer of protection and assurance to investors, thereby increasing the attractiveness of the bonds.
2. Efficiency in Enforcement: In the absence of a security trustee, each bondholder would need to enforce their rights individually. A trustee can act collectively, ensuring efficient and unified enforcement.
3. Legal Certainty and Creditor Confidence: The formal structure provided by Maltese law gives investors confidence that their interests are safeguarded within a well-regulated legal framework.
4. Flexibility of Structure: Under Maltese law, a security trust can be created either by direct constitution of security in the trustee's favour or by settling property in trust. This flexibility makes it easier to tailor security arrangements to the needs of specific transactions.

Conclusion

The institution of the security trust, as articulated in Article 2095E of the Maltese Civil Code, is a sophisticated and practical tool that underpins many types of secured financing transactions in Malta, particularly bond issues listed on the Malta Stock Exchange. By providing a clear and flexible legal structure, it ensures that investors are protected, enforcement is centralised and efficient, and that the integrity of the capital market is upheld.

In a jurisdiction that is increasingly recognised as a financial services hub, the security trust regime enhances Malta's credibility and competitiveness. It aligns the country's legal infrastructure with international standards while retaining the distinct benefits of the civil law tradition. For issuers and investors alike, this framework delivers the legal certainty and operational efficiency required to support complex financing transactions, fostering greater participation and confidence in Malta's debt capital markets.

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.