Glas Trust Corporation, the trustee of ground rents CMBS Fairhold Securitisation, cannot adopt advisory fees incurred by the ad hoc group of noteholders wholesale, the English High Court has ruled.
In a judgment handed down today (13 July), Justice William Blair directed the parties to agree an order which lay out the mechanism by which the trustee is to scrutinise the work done by the advisors — Freshfields and Rothschild — to determine whether or not the work relates to the powers of the trustee. Only fees relating to that work may be “properly incurred” under the note trust deed and therefore can be adopted by the trustee and paid out of the waterfall.
The judge gave “preliminary views” which were “in some respects receptive” to a draft order prepared by the trustee and presented during the hearing in March, but declined to adopt it as is. Instead the parties are to take the views into account as they prepare a new order by agreement.
In particular, the judge accepted that four categories of work described in the draft order were “in principle proper expenses”, namely:
a) advising on the different possible ways in which the Issuer Security may be enforced (including the timing of enforcement, the manner of enforcement, and the advantages and disadvantages of enforcement options);
b) advising on the question of whether enforcement is appropriate;
c) advising on the valuation of any assets subject to the Issuer Security; and
d) participating in negotiations with any interested commercial party (or any adviser thereof) relating to (a), (b) and
On the other hand, he “broadly” accepted the submission of claimant UBS (a swap counterparty) that “a restructuring [without enforcement] is a matter that lies between competing creditors and is not the concern of the Note Trustee”, although this was not a “bright line” and the trustee might properly receive advice on the relative costs of restructuring versus enforcement.
As regards the mechanism itself, the judge felt “there may be merit” in the draft order’s proposal and it “may be the only realistic alternative” to a costly duplicative effort. As proposed by Glas, the trustee would for any fees which it proposed to adopt obtain a letter from the advisor “which identifies the period to which the expenses relate, states the total amount, described in a reasonable level of detail all of the work to which the expenses relate, and identifies the proportion of the expenses which fall or do not fall within the categories identified above”. UBS can object to any proposed expenses adoption with written particulars, and the parties would be at liberty to apply to the court for directions.
The judge notes that the trustee accepts it must wield independent discretion during this exercise, though UBS argues the mechanism would be a surrender of such discretion.
On the underlying arguments, the judge found that the trustee’s original position, that it was entitled to adopt the AHG’s fees in toto, “cannot be sustained legally” and would be a surrender of its duty. He was not entirely convinced, however, that the trustee was only entitled to adopt fees for advice on which it was able to rely, as argued by UBS. “Clearly it is a relevant consideration that the advice may not be relied on, but it cannot be excluded that it would be sensible (and legitimate) in limited circumstances for the Note Trustee to adopt the expense.”
Generally, the court accepted a broad interpretation of the powers of the trustee, and therefore the fees that could properly be incurred, subject to the specific wording of the contracts. The clauses describing the powers “should be given a commercial and not artificially restricted meaning”, so 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”.
The ruling sidesteps the issue of the conflicts provisions of the issuer deed of charge, which the trustee argued meant it only had to have regard to the interests of noteholders so long as the notes are outstanding. The judge wrote that UBS’s submissions on the construction “seem the more consistent”, but that the trustee had made detailed submissions that UBS’s construction would give rise to a “serious lacuna”. Ultimately, the judge held it was not necessary to make a finding on the construction as it was at most a subsidiary issue in the current proceedings.