The Commercial Court considered the extent to which it was lawful for a note trustee to adopt and pay expenses incurred by a group of noteholders in obtaining advice in relation to a securitisation. While the judgment deals with the specific wording of the agreements in this case, it raises issues that will be relevant to note trustees generally.


A securitisation transaction took place in 2006, the subject of which was the cashflows generated by a portfolio of sheltered housing. Such cashflows were to be used by the issuer of the notes in this case (the Notes) to repay its debts to the holders of the Notes (the Noteholders). The cashflows were also to be used in order to meet any payments due to UBS and HBoS Treasury Services plc (together, the Issuer Swap Counterparties – HBoS does not appear to have participated in these proceedings). Such payments arose as a result of swaps entered into by UBS and the issuer as part of the overall transaction.

Cashflows generated by the portfolio became insufficient to pay both the Issuer Swap Counterparties and the Noteholders, who are now effectively competing creditors. UBS terminated the swaps in October 2015, the termination amount being almost £312 million, with (approximately) a further £275 million due to HBoS Treasury Services plc.

At around the same time:

  • an ad hoc group of the Noteholders (referred to throughout the judgment as the AHG) replaced the original note trustee with GLAS Trust Corporation Ltd. (the Note Trustee), apparently on the basis that it would be more "proactive";
  • the issuer failed to pay the interest due on the Notes; and
  • the Note Trustee directed the cash manager not to make payments under the swaps. 

In August 2016, the issuer purported to rescind the UBS swaps on the basis of alleged fraudulent misrepresentations (which UBS denies), but no proceedings have been started in that regard. The parties have also been considering a restructuring of the transaction since 2015.

The AHG, in the meantime, had instructed Freshfields and N.M. Rothschild & Sons Ltd (together the AHG Advisers). Their combined fees for the year March 2015 to March 2016 were approximately £2.5 million (the AHG expenses). In March 2016, the Noteholders passed an Extraordinary Resolution, to "authorise and direct the Note Trustee to execute a Fee Letter" with the AHG Advisers so as to pay the AHG expenses "as an expense of the Note Trustee which will be provided for and reimbursed by the Issuer to the Note Trustee..." As well as paying the fees already incurred, the Note Trustee proposed to pay the AHG Advisers for their work after March 2016 (which, in the case of Rothschild, included a £75,000 per month retainer and a £3.75 million transaction success fee). The AHG Advisers were not advising on the swaps dispute.


UBS argued that the Note Trustee had no power to incur and claim reimbursement of these costs. The practical significance for UBS was that, as would be expected, the transaction documents provided for a pre-enforcement payments waterfall. In that waterfall, UBS ranked above the Noteholders, but below the Note Trustee's right to recover its expenses. UBS took the view that the AHG was effectively trying to jump the queue, by getting the Note Trustee to pay for its advice.

The issue was one of construction – under the relevant clauses of the Issuer Deed of Charge (IDC) and the Note Trust Deed (NTD), the issuer was obliged to pay for certain costs properly incurred by the Note Trustee. The obligation arose in relation to all "legal fees" and "other costs, charges, liabilities, damages and expenses" which had properly been incurred by the Note Trustee in relation to four broadly described categories of activity by the Note Trustee. UBS disputed whether the fees of the AHG Advisers came within the scope of such clauses.

It is also clear from the judgment that:

  • the Note Trustee's position up until the hearing was that it was entitled and had decided to incur the AHG expenses, past and future;
  • the Note Trustee had seen at least some of the advice provided by the AHG Advisers to the AHG, but on a non-reliance basis;
  • the Note Trustee relied on the AHG Advisers having scrutinised the relevant expenses in order, in effect, to strip out costs that could not properly be claimed by the Note Trustee from the issuer under the IDC and NTD; and
  • crucially, at the hearing, the Note Trustee changed its position, such that it accepted that it should review whether the overall amount of the AHG expenses was excessive, and whether the specific costs comprised in the AHG expenses were within the scope of the IDC and NTD. 


The judge described clauses dealing with trustees' expenses as typically widely drafted, and to be given a "commercial and not artificially restricted meaning... This reflects the fact that the exercise of the trustee's powers may contain a substantial measure of judgement, may be controversial, and may have to be carried out speedily to enable resolution of the transaction. Of course, the position depends on the construction of the particular clause, but subject to that, the trustee should be able to fulfil its duties with confidence that if it acts in a commercially reasonable manner, it will be entitled to indemnification".

Having said that, the judge decided that the Note Trustee's position prior to the hearing (that it was entitled to adopt the past and future AHG expenses "en bloc") could not be sustained legally, and that its concession in this regard was rightly made. He noted that such position in effect surrendered the trustee's duty to form an independent view as to whether the costs were properly incurred. He also noted a continuing lack of transparency as to what the costs related to, and a doubt as to the extent to which the Note Trustee could pay for advice on which it expressly could not rely. He added that "it is evident that the adoption of the expenses in such circumstances required a degree of careful scrutiny by the Note Trustee in order to form the opinion that the expenses were properly incurred".

The judge did not, however, agree with UBS's position wholesale. He directed that the parties take account of some preliminary views he expressed as to what categories of expense should be deemed to be properly incurred, and sent them away to reach agreement. He identified the costs of four categories of work as being, in principle, properly incurred by the Note Trustee (advising on ways of enforcing the security, advising on the appropriateness of enforcement, advising on the valuation of secured assets, and participating in negotiations with any interested commercial party in relation to the other three categories). He broadly agreed with UBS that: (a) the Note Trustee could only adopt advice if it was permitted to rely on it; and (b) restructuring was a matter for the parties, not the Note Trustee, such that the costs of advising on restructuring were probably not properly incurred by the Note Trustee. However, he was not prepared to accept either of these propositions as absolutely correct, noting, for example, that it might be appropriate for the Note Trustee to obtain advice as to the relative costs of enforcement versus restructuring.


It seems likely that this particular claim is a skirmish that is part of a wider battle between competing creditors in this transaction. It illustrates some interesting points, however.

First, the judge's view that the Note Trustee's initial position was unsustainable is not surprising. The Note Trustee here was apparently too ready to elide its own position and judgment with that of the AHG. The concession it made at trial was, in substance, to accept that it must use its own judgment as to the advice it actually needed and ought properly to pay for. The judge's comments in this regard may have been something of a shot across the Note Trustee's bows, in advance of the exercise of deciding which of the AHG expenses to adopt.

Second, UBS was also reined back in this judgment to some extent, in that the judge was clearly not keen for unnecessary expense to be incurred in the Note Trustee and the AHG duplicating advice.

Finally, the outcome of the judgment leads to some practical difficulties, and it is worth considering how they might be avoided in another case. The Note Trustee will now have to deal with the minutiae of more than a year's worth of professional fees, and determine whether they were properly incurred. Experience says that undertaking such an exercise will itself involve a significant amount of time, cost and difficulty. This is particularly so in circumstances where the Note Trustee is not the AHG Advisers' client (and is therefore not entitled to see their files, or even have a full description of their contents), and was presumably not involved in instructing them at the relevant time. These issues argue in favour of finding a different way of dealing with similar situations, which avoids the trustee becoming too enmeshed in the partisan interests of noteholders. There seems no reason why trustees and noteholders should not liaise on what advice needs to be obtained and from whom, and this case illustrates the risks of not doing so. 

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