A recent decision of the NSW Court of Appeal demonstrates the importance for security trustees tocarefully consider and understand their obligations in an enforcement scenario.

Need to know

In The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225, the Court of Appeal reached three important conclusions about the security trustee's obligations and conduct in relation to the "Metal Storm" insolvency.

The Court of Appeal determined that the security trustee was actually required to enforce the security and appoint a receiver, in circumstances where a voluntary administrator had been appointed to the debtor. 

Importantly, that obligation to enforce the security was not subject to any requirement that the noteholders first indemnify the security trustee in respect of the enforcement - the trustee was required to go ahead even absent an indemnity.

The security trustee's failure to take the required enforcement action was an act of negligence, sufficient to disentitle the trustee from any release or limitation of liability under the security trust deed.  This left the trustee exposed to liability to the noteholders for damages arising from the failure to enforce and appoint a receiver.

The decision also features some further interesting points around waiver of breaches by a security trustee and the ability of noteholders to direct the conduct of a security trustee.

A more detailed discussion follows below.


The respondent, Equity Trustees Wealth Services Ltd (Respondent), was the trustee for secured noteholders in respect of notes issued by Metal Storm Ltd (in liquidation, receivers and managers appointed) (Company), and pursuant to a Security Trust Deed dated 31 July 2009. On 18 August 2009, the Company granted the Respondent a fixed and floating charge (Charge) over its assets to secure its obligations under the secured notes. The appellant, the Australian Special Opportunity Fund, LP (Appellant) was the holder, by number and value, of approximately 86% of the secured notes.

The trustee Respondent's conduct

On 26 July 2012, the Company was placed into voluntary administration by resolution of its directors. Two issues arose in relation to the Respondent's conduct. First, the Respondent did not appoint a controller during the decision period (defined in the Corporations Act 2001 (Cth) as a period of 13 business days commencing on the date that the administration commences), and thus lost the opportunity to release the security over the Company's assets. The Company subsequently entered into a deed of company arrangement (DOCA).  Second, the Appellant directed the Respondent to release and discharge its security over the Company's assets, but the Respondent declined to do so.

The Appellant claimed that the Respondent's failure to act in each instance constituted a breach of its obligations and commenced proceedings in the Supreme Court seeking declaratory relief and damages (or equitable compensation).  At first instance, Justice Black found in favour of the Respondent on both issues. The Appellant appealed.

The appeal

Obligation to appoint controller

A key question was whether the Security Trust Deed imposed an unqualified obligation on the Respondent to appoint a controller in the decision period such that a failure to do so constituted a breach of trust.  Under cl 6.1(b), the security trustee was required to act within the decision period in circumstances where it had not received instructions from the beneficiaries in time to enable it to do so.  Clause 4.11(b) provided that the security trustee need not act, whether or not on an instruction from one or more of the beneficiaries, unless its liability was limited as set out in cl 2.  The parties agreed that clause would be satisfied by the Appellant's grant of an indemnity from such liability to the Respondent. 

In reconciling those clauses, Bathurst CJ found that cl 6.1(b) imposed an unqualified obligation upon the security trustee to appoint a controller during the decision period and that it was not limited in the manner contemplated by cl 4.11(b).

The Respondent had submitted that it did not make commercial sense for the trustee to be obliged to appoint a receiver in circumstances where it might be exposed to significant liability without any certainty of recovery of the liability incurred.  It described cl 4.11 as "an important aspect of the protection of the trustee from exposure to personal liability".

Although appreciating that a trustee may not be prepared to appoint a receiver without an appropriate indemnity, His Honour said that cl 6.1(b) operated in circumstances where prompt action was required and it may not be practical to inform the note holder of the appointment of an administrator, much less to negotiate the terms of the indemnity.  Second, the security trustee still had a right of indemnity out of the trust fund, arising at general law and confirmed under the deed.

Negligence - Waiver of breach and liability

Chief Justice Bathurst agreed with the primary judge that the Appellant had not waived the Respondent's breach by facilitating the appointment of an administrator and discussing a DOCA as that conduct was not inconsistent with its right to have a controller appointed under cl 6.1(b). 

However, the Chief Justice disagreed with the primary judge that the evidence failed to establish negligence on behalf of the Respondent to constitute an exception to the limitation on liability contained in cl 2.2 of the deed.  His Honour concluded that an inference that the Respondent overlooked or ignored the question of the appointment of a controller was available on the evidence. The evidence demonstrated that the Respondent was made aware of the administrator's appointment before the commencement of the decision period, but there was no evidence that any further steps were taken to consider the issue.

The Appellant's direction to release the charge

Clause 6.1(c) expressly provided that the consent of all beneficiaries was required to release the security, except where the security trustee was expressly permitted to provide such a release without the need for further instructions from any of the beneficiaries. However, His Honour found there was no express provision for the purposes of cl 6.1(c), and as such, the Respondent was neither entitled nor required to comply with the direction.

Loss or damage 

Chief Justice Bathurst found that the loss of the opportunity to have a controller appointed had value because it would have empowered the security trustee to release the security over the assets of the Company to enable an early trade sale to be negotiated. His Honour ordered the proceedings be remitted to the primary judge to determine the Appellant’s entitlement to damages or equitable compensation.


The decision has implications for security trustees in any enforcement scenario, but particularly when the Australian voluntary administration regime is brought into play by a debtor. 

Given the relatively short 13-business day "decision period", trustees should not delay in seeking instructions from noteholders and in forming their own view as to what enforcement action should (and must, depending on the terms of the trust deed) be taken in that short period of time.

Clear drafting and understanding of the security trust deed is obviously critical, as is development of standard documents and an enforcement "step plan", in order to streamline and "de-risk" decision-making for the security trustee around enforcement action.