In the April edition of Legalseas we considered the recent English High Court decision in Torre Asset Funding v The Royal Bank of Scotland plc. This case looked at the scope of an agent’s role and potential liabilities in a structured finance transaction.

In this issue we move on to consider the role of the security trustee and the interplay between its fiduciary and contractual duties.

The security trustee, being a trustee rather than an agent, does in principle owe a fiduciary duty to the beneficiaries of the trust property, namely the lenders in a syndicated loan. A fiduciary is someone who has undertaken to act for another in circumstances which give rise to a relationship of trust and confidence. The fiduciary will subordinate its own interest to that of the principals and must act in good faith.

However, typically a syndicated loan transaction will involve sophisticated parties who have chosen to govern their relationship through arm’s-length commercial contracts. Accordingly, the English courts recognise that the scope and nature of the duties owed are shaped by the terms of the contract.

While the contractual and fiduciary relationships co-exist, it is the contract that is fundamental because it regulates the basic rights and liabilities of the parties. The fiduciary duties will not be superimposed on the contract so as to alter its operation. As a result, while the parties cannot exclude fiduciary duties completely, they can regulate the scope of those duties. Most financing arrangements will limit the scope of the security trustee’s role in the same way that they would limit the scope of the agent’s role.

While a security trustee does have fiduciary duties, this does not mean that a security trustee will always be a fiduciary in every element of its role. The case of Saltri III Ltd v MD Mezzanine SA SICAR1 looked at this issue and set out a number of points of general significance to security trustees acting under English law documentation. The case confirmed the established principle that:

A fiduciary is not subject to a fiduciary duty because he is a fiduciary; it is because he is subject to them that he is a fiduciary

In other words, while a security trustee is a fiduciary in some respects, and so will owe fiduciary duties, the trustee does not necessarily have a fiduciary role in relation to everything it does. In order to determine whether a security trustee is subject to a particular fiduciary duty, it is necessary to consider the particular duty in conjunction with the contractual scope of the duty.

Saltri arose out of the restructuring of a group of companies known as the Stabilus Group, a global market leader in the manufacture of gas springs and hydraulic vibration dampers. Two JP Morgan entities participated, one as a senior lender and the other as security trustee.

There was an inter-creditor agreement which provided for the security trustee’s ability to enforce the transaction security at the request of the senior majority lenders. The agreement provided that in doing so, the trustee had to take reasonable care to obtain a fair market value.

Following severe financial difficulties, the lenders looked to enforce their security initially by selling the group but ultimately this was achieved by way of a restructuring. The mezzanine lenders had proposed a restructuring which would enable them to retain some equity, so were unhappy that the restructuring that was ultimately achieved wiped out their interest. They challenged the validity of the restructuring and made a number of allegations of breach of duty by the security trustee. The following interesting points arise from the decision:

  • The judge found that the scope of the duty owed in the context of enforcement in this case was not as fiduciary to principal but as a mortgagee to mortgagor.
  • Where a participant is involved in a transaction in more than one capacity (i.e. as security trustee and as senior lender) it should be careful to maintain proper separation to avoid conflicts of interests and to be aware that it owes duties to all the beneficiaries, not just the senior lenders.

The relevant duty in the context of this case related to enforcement. The contract provided that the duty on enforcement was to take reasonable care to obtain a fair market value. This did not mean that there was an absolute obligation to market the asset but the security trustee did have to take reasonable care to achieve the appropriate market value. The duty was not a fiduciary one but equivalent to that of a mortgagee to a mortgagor. While there were some criticisms of the sale process and the valuation, the actions were not “plainly on the wrong side of the line” and therefore the judge found there was no breach of this particular duty.

In any event, the judge found that even if a full marketing and sale process had taken place, there was no realistic prospect of a return in excess of the senior liabilities, so the position would have been no better than the actual restructuring. In effect, there was no loss on the part of the mezzanine lenders and accordingly no claim.

While the conduct of the security trustee was not on the wrong side of the line, the judge was critical of its failures to (i) maintain separation of its roles in different capacities; and (ii) disseminate information appropriately, and found that there was a breach of fiduciary duties to the mezzanine lenders in this regard.

Although the breach was not causative of any loss in this case, and so did not give rise to a liability, care should be taken by security trustees where a potential conflict of interests might arise. A security trustee should not only take account of the scope of the duty it owes, but should also be conscious of the parties to whom it owes that duty.