Abstract
This chapter is committed on discussing a number of bankruptcy concerns affecting the smooth functioning of a residential mortgage-backed securitisation programme. The initial focus of the chapter is on identifying the consequences of the originator’s bankruptcy on a residential mortgage-backed securitisation scheme in Australia. Then, the chapter moves on to investigate threats posed by the trustee-issuer’s insolvency. This discussion is two-fold. On the one hand, the discussion emphasises the trustee-issuer’s insolvency as the trustee and on the other hand the insolvency of the special purpose vehicle (SPV) in the capacity of the issuer. Finally, the chapter engages in a discussion on a number of means adopted by Australian securitisation programmes with the idea of minimising negatives on a securitisation programme imposed by the bankruptcy of its stakeholders.
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Notes
- 1.
The insolvency event is expressed throughout this chapter in the past subjunctive and modal auxiliary forms since, to the author’s knowledge at least, no bank, IMP, or trustee-issuer involved in an RMBS programme in Australia has as yet gone into insolvency. See P. Roberts, Understanding Grammar (N.Y.: Harper, 1954) 165, 169–170 and 176.
- 2.
Less usefully, section 95A goes on to state, that “A person who is not solvent is insolvent.”
- 3.
The relevant clauses are set out in the Master Information Memorandum, PUMA Fund—P 7, at paragraphs 6.2, 4.1 and 1.12 and PUMA Sub-Fund Series 2014, p 80. Also, refer to the discussion in Chap. 6 of the book.
- 4.
It means the composition of the portfolio in terms of “good mortgages”, in other words, mortgages where there is a stable cash flow and a relatively low risk and “poor mortgages”, where there is a substantial risk of default in respect of those mortgages. A bank would be better off disposing the poor mortgages, and retaining the good ones, in terms of maximising their overall returns.
- 5.
A company will be considered insolvent if, despite the fact that its assets significantly outweigh its liabilities, these assets are illiquid and are unable to be utilised to meet the company’s liabilities as and when they fall due and become payable. Insolvency may be established by a company failing to comply with, or dispute, within 21 days of a statutory demand being served on the company by a creditor: section 459C(2). Other evidence that have been considered to prove solvency of a company include failure to disclose assets: Garseabo Nominees Pty Ltd v Taub Pty Ltd (unreported, Supreme Court Qld, No. 2425, 1979, 9 June 1979), maintenance of cash flow: Molnar Engineering Pty Ltd v The Herald and Weekly Times Ltd and E J Burns (1984) 1 FCR 455, net asset position: Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 61 ALR 531: see S. Colbran, ‘Security for Costs against Corporations: section 1335 of the Corporations Law’ (1993) 11 (5) Company and Securities Law Journal 273, 276–277.
- 6.
Sections 436, 436A, 436B, and 436C of the Corporations Act.
- 7.
Section 439C of the Corporations Act.
- 8.
Nor is this a mere academic or hypothetical risk. Prudential regulation by APRA is generally very good by international standards, but as the recent high-profile case of HIH shows, APRA’s prudential regulation is by no means a guaranteed prophylactic against the risk of insolvency.
- 9.
See Pt. 5.7B, Division 2 of the Corporations Act.
- 10.
See sections 588FC and 588 FE respectively. Transactions may even become voidable up to two years after they are effected, if they fall within section 588FE(3) and the originator becomes insolvent within that time.
- 11.
See R. Tomasic et al., Corporations Law Principles, Policy and Process (Sydney: Butterworths, 2002) [15.43].
- 12.
See section 588FA.
- 13.
For example, section 588FJ of the Corporations Act provides that, in relation to a company being wound up in insolvency, a floating charge created on property of the company during the six months ending on the relation-back day (or between the relation-back day and the start of the winding-up) is, unless the court otherwise orders, void. The winding-up would be deemed to have commenced at the time of the presentation of the petition for winding-up: see section 9.
- 14.
While the voidable transactions provisions apply only where a company is winding up, an administrator must nevertheless make an estimate of the possible monies that could be “clawed back” under the voidable transactions provisions if the company were to be wound up. In this sense, the voidable transactions provisions relate to both the winding-up and administration stages of insolvency.
- 15.
[1987] BCLC 499.
- 16.
Taylors Industrial Flooring Ltd v M and H Plant Hire (Manchester) (1990) BCLC 216; Re DKG Contractors Ltd. [1990] BCC 903.
- 17.
See, for example, Master Information Memorandum, PUMA Fund P-7, paragraph 4.7.3.
- 18.
Re MC Bacon Ltd [1990] BCLC 324, 340.
- 19.
[1990] BCLC 324.
- 20.
D. Glennie and E. Bouter, Securitisation (London: Kluwer Law International, 1998) 5.
- 21.
Kothari, Vinod, Securitization: The Financial Instrument of the Future (John Wiley & Sons, 2006) 663.
- 22.
See, for instance, Master Information Memorandum, PUMA Fund—P-7, paragraphs 1.12, and 7.9 and PUMA Sub-Fund Series 2014, p 122.
- 23.
See generally, B. Taylor, ‘The Enforceability of Debt Securities Issued by Trustees in Securitisation Programs’ (1998) 26 Journal of Banking and Finance Law and Practice 261.
- 24.
Taylor above n 23 272–273. See generally, J. Chen, ‘Asset Securitisation and the Singapore Insolvency Regime’ (2001) 16 (8/9) Journal of International Banking Law 198.
- 25.
See, for instance, Master Information Memorandum, PUMA Fund—P-7, paragraph 7.1 and PUMA Sub-Fund Series 2014, p 101.
- 26.
It is assumed throughout the following discussion that the trustee-issuer has validly acquired the mortgages from the originator and that the transfer or assignment is not liable to be set aside or adjusted.
- 27.
Pelma Rajapakse, Richard Copp and J Gardner, ‘Insolvency Issues in Residential Mortgage Securitisation’ (2008) 34 Monash University Law Review 30.
- 28.
See, Master Information Memorandum, PUMA Fund—P 7, paragraph 6.2 and PUMA Sub-Fund Series 2014, p 108.
- 29.
Master Information Memorandum, PUMA Fund—P7, paragraph 4.6.
- 30.
Id, paragraph 6.2.; H. A. J. Ford, R. P. Austin and I. M. Ramsay, Ford’s Principles of Corporations Law (10th edition, Chatswood: Butterworths, 2001) [25.060].
- 31.
This may include the passing of a resolution or the making of an order for the winding-up of the issuer, the presentation of a petition for an administration order in respect of the issuer or the taking, by a third party, of significant enforcement proceedings against the issuer.
- 32.
Master Information Memorandum, PUMA Fund—P7, paragraph 6.2.
- 33.
See Re Brightlife Ltd [1987] Ch 200 [1986] 3 All ER 673, in which Hoffmann J held that the service of a notice of crystallisation was effective to cause a floating charge to crystallise into a fixed charge. See also Re Permanent House (Holding) Ltd (1989) 5 BCC 151.
- 34.
For example, an automatic crystallisation may occur without the knowledge of either the company or the secured bondholder. The result might be prejudicial to third parties, who have given credit to the company. Third party unsecured creditors might find that all the company’s assets, including goods that they have delivered on credit, had been swept up by the secured creditors. The public interest requires balancing of the advantages to the economy of facilitating the borrowing of money against the possibility of injustice to unsecured creditors: See R.M. Good, Legal Problems of Credit and Security (London: Sweet & Maxwell, 1982) 70–73; and R. Pennington, ‘Loans to Companies; the Development of the Law’ in B. G. Pettet (ed.), Company Law in Change (London: Stephens, 1987) 103–107. A. J. Boyle, ‘The Validity of Automatic Crystallisation Clauses’ (1979) Journal of Business Law 231. Boyle has suggested that automatic crystallisation should be prohibited on grounds of public policy.
- 35.
See, for example, Master Information Memorandum, PUMA Fund—P 7, paragraph. 6.2; Master Information Memorandum, PUMA Sub-Fund Series 2014, p 111.
- 36.
A receiver is broadly defined within the meaning of section 90 of the Act as a receiver and manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holder of a debenture secured by a charge. See P. Hanrahan et al., Commercial Applications of Company Law (Sydney: CCH, 2002) [23–100].
- 37.
Section 266 Corporations Act.
- 38.
This section deals with floating charges created within six months before the relation-back day.
- 39.
See Re Blackpool Motor Car Co Ltd, Hamilton v Blackpool Motor Car Co Ltd [1901] 1 Ch 77; Re MC Bacon Ltd (1990) BCLC 324; and Re Softley, ex parte Hodgkin (1875) LR 20 Eq 746; and Re F and E Stanton [1929] 1 Ch 160, 192 respectively. H. Saban, Corporate Debt Securitisation (Singapore: Butterworths, 1994) 71–72.
- 40.
(1990) BCLC 324.
- 41.
See, for example, R. Tomasic, (2002) [15.43]; [15.47].
- 42.
P. Lipton and A. Herzberg, Understanding Company Law (Sydney: Law Book Company, 2003) 703.
- 43.
See, for example, Master Information Memorandum, PUMA Fund P-7, paragraphs 2 and 4.4 and PUMA Sub-Fund Series 2014, pp 55–56. These bonds are still generally secured, in favour of the security trustee on behalf of the bondholders. Cf. the claims of the unsecured creditors of an insolvent entity rank equally, without preference (pari passu), and in the event of there being insufficient funds to pay all of them, they will be paid proportionately: section 555 of the Corporations Act. However, debts that are validly secured against the insolvent entity’s property are not subject to the above pari passu principle, and rank in priority in the event of a winding-up.
- 44.
See generally, V. Kothari, Securitisation, the Financial Instrument of the New Millennium, (Calcutta: Academy of Financial Services, 2003) Ch. 6; Standard and Poor’s, Structured Finance Australia and New Zealand (Melbourne, 2000) 92; R. B. True, ‘Risk and Insolvency Issues in Japanese Asset Securitization’ (1996) 28 New York University Journal of International Law and Politics 505.
- 45.
It might be thought that since the trustee-issuer is generally a company, it is not restricted in terms of its objects and powers: see sections 124–129 of the Corporations Act. However, the SPV is primarily a trust vehicle, albeit generally with a corporate trustee. In such a context, sections 124–129 of the Corporations Act are not really applicable.
- 46.
E.g. to hold the mortgage receivables; collect them, pass them on, reinvest them etc.
- 47.
See, for example, the multiple series of bonds issued by the PUMA Fund in Master Information Memorandum, P-7, paragraph 2.
- 48.
See, for example, Master Information Memorandum, PUMA Fund, P-7, paragraphs 3.3, 4.8.4 and 5.2.
- 49.
It should be noted, however, that even if they do execute such agreements, the legal efficacy of this “contracting out” procedure remains uncertain.
- 50.
A detailed discussion of this debate is beyond the scope of this book. For a summary of the debate, see L.C. Keong (ed.), Corporate Governance: An Asia-Pacific Critique (Hong Kong: Sweet & Maxwell Asia, 2002).
- 51.
See, for example, Standard and Poor’s, (2000) 93.
- 52.
See, for example, Master Information Memorandum, PUMA Fund, P-7, paragraphs 3.3, 4.8.4 and 5.2 and PUMA Sub-Fund Series 2014, pp 66–69.
- 53.
Recall the collapse in 2001 of HIH Insurance Limited, the largest collapse in Australian corporate history: see R. Baxt, ‘The HIH Litigation’ (2002) 30 Australian Business Law Review 145.
Bibliography
Books and Book Chapters
Boyle, A. J., ‘The Validity of Automatic Crystallisation Clauses’ (1979) Journal of Business Law 231.
Ford, H. A. J., Austin, R. P. and Ramsay, I. M., Ford’s Principles of Corporations Law, 10th edition, Chatswood: Butterworths, 2001.
Glennie, D. and Bouter, E., Securitisation, London: Kluwer Law International, 1998.
Hanrahan, P., Ramsay, I. and Stapledon, G. (eds.), Commercial Applications of Company Law, Sydney: CCH, 2002.
Keong, L. C. (ed.), Corporate Governance: An Asia-Pacific Critique, Hong Kong: Sweet & Maxwell Asia, 2002.
Kothari, V., Securitisation: The Financial Instrument of the New Millennium, Calcutta: Academy of Financial Services, 2003.
Kothari, Vinod, Securitization: The Financial Instrument of the Future (John Wiley & Sons, 2006).
Roberts, P., Understanding Grammar, N.Y.: Harper, 1954.
True, R. B., ‘Risk and Insolvency Issues in Japanese Asset Securitization’ (1996) 28 New York University Journal of International Law and Politics 505.
Journal Articles
Baxt, R., ‘The HIH Litigation’ (2002) 30 Australian Business Law Review 145.
Chen, J., ‘Asset Securitisation and the Singapore Insolvency Regime’ (2001) 16 (8/9) Journal of International Banking Law 198.
Colbran, S., ‘Security for Costs against Corporations: Section 1335 of the Corporations Law’ (1993) 11 (5) Company and Securities Law Journal 273.
Rajapakse, Pelma, Richard Copp and J Gardner, ‘Insolvency Issues in Residential Mortgage Securitisation’ (2008) 34 Monash University Law Review 30.
Taylor, B., ‘Assignment of Securities in Corporate Refinancing’ (1998) 13 (10) Australian Banking and Finance Law Bulletin 141.
Working Papers, Magazines, Newspapers and Reports
Macquarie Securitisation Ltd, The PUMA Fund P-7: Master Information Memorandum, Sydney, February, 2000.
Macquarie Securitisation Ltd, The PUMA Sub-Fund Series – 2014: Master Information Memorandum, Sydney, July 2014.
Standard and Poor’s, ‘Credit Ratings on Mortgage-Backed Securities’, Structured Finance Australia and New Zealand, Melbourne, 1998.
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Rajapakse, P., Senarath, S. (2019). Insolvency Considerations Pertaining to Trustee-Issuer and Mortgage Originator. In: Commercial Law Aspects of Residential Mortgage Securitisation in Australia. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00605-1_7
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