Security Trust in Malta

Security trusteeship has several benefits; primarily that the trustee “shall have the power and legal interest to file any legal proceedings for the enforcement.”[1]. Hence, the Security Trustee has the power to enforce the security on its own even though all creditors enjoy the right to sue the debtors for the enforcement of the debt.

Security Trust Services

CSB Trustees & Fiduciaries Limited, is a fully licensed trustee company recognised under the Trusts and Trustees Act and licensed by the Malta Financial Services Authority to act as trustee of trusts and administrator of foundations. CSB Trustees & Fiduciaries Limited offers the possibility to be appointed as Security Trustee in any commercial structure. Our team has the experience and the knowledge to guide clients in setting up a security trust.

Our Security Trusteeship Experience

CSB Trustees & Fiduciaries Ltd has been at the heart of a number of commercial transactions availing of the concept of security trusteeship, holding the position of security trustee in transactions involving the offering of securities, whether to the public or for private placement, portfolio management and custody of investment instruments. The securitisation of assets is also a transaction in which the Company has often been appointed as security trustee for the purpose of segregating assets of the Special Purpose Vehicle (SPV) from the originator and the creditors and consequently mitigating any risks of consolidation of assets in any bankruptcy proceedings.

History of Security Trust

Even before Act XIII of 2004 came into force, security trusts were already known to law practitioners. As a matter of fact, subsequent to the enactment of the Recognition of Trusts Act in 1994 and Malta’s ratification of The Hague Convention, Malta had the possibility to recognise trusts which are not regulated by Maltese law. The shift occurred when Act XIII of 2004 came into force. It has then been agreed and approved that the proper law of a security trust can be any law. Hence, trusts can also be regulated by Maltese law.

Definition of a Security Trust

In relation to security trusts, one needs to make reference to two separate laws; Chapter 16 of the Laws of Malta, Civil Code and Chapter 331 of the Laws of Malta, Trusts and Trustees Act. The most important article found in the civil code is Article 2095E. The latter provides for the possibility of having a security “created in favour of a trustee for the benefit of any creditor/s, present or future, or in favour of a class or classes of creditors”. In such case the trustee, who would be referred to as ‘Security Trustee’, would be eligible to take “particular types of security” or else through the “settlement of property” in favour of the same, for the benefit of all the creditors/beneficiaries to secure all the present and future indebtedness, both actual and contingent, that might be due to the creditors. The Civil Code goes on to define ‘security’ as “any arrangement whereby the rights of a creditor are legally protected”[2]..  The law goes on to provide a non exhaustive list of “arrangement” through which a security could be created. These include, a guarantee, pledge, mandate, privilege or hypothec or even placing property in possession of the trustee that would possibly have rights of retention and sale (as agreed between parties).

The role of the Security Trustee can be changed

A change catered by the security trust would be that of the trustee itself. The Trust Instrument would mention the possibility to substitute the existing trustee with a new one. In this case, even if the trustee changes, the security taken shall remain in force. The only change that would happen is that the security would then be registered under the name of the new trustee. The possibility to substitute the trustee is very crucial as this ensures the continuity of the security which security would still continue to rank from the date of registration of the retiring trustee.

Beneficiaries right to assign their debt

As mentioned earlier on, a security could be provided for any creditor/s future or present or even a class of creditors. Hence, the law caters as well for any future changes that may occur to the creditor. This is worth highlighting especially when there is a group of creditors who decide at a later stage to sell their loan participation. This would be carried out in an effective manner without leaving any bearing on the security taken by the Security Trustee. Indeed Article 2095E(10) provides for the possibility of the beneficiaries; which are ultimately the creditors, to have their debt assigned. The debt may be assigned to third parties and “in such case the assignees of such debt shall enjoy the rights of beneficiaries under the security trust upon notice to or acknowledgement by the trustee without the need of a separate assignment of the beneficiary rights under the trust deed”.

Advantages of a Security Trust

Security trusteeship has several benefits; primarily that the trustee “shall have the power and legal interest to file any legal proceedings for the enforcement.”[1]. Hence, the Security Trustee has the power to enforce the security on its own even though all creditors enjoy the right to sue the debtors for the enforcement of the debt. It is worth noting that a Security Trustee shouldn’t be held liable for the obligations of other creditors as otherwise it is very challenging to find a trustee that would agree to act so in such situations. Nevertheless, the Civil Code provides a loophole whereby the parties can freely agree otherwise, if they so desire. A security trust is also beneficial for other reasons, some of which are:

1. The trust assets are segregated from those of the trustee;
2. Tax transparency on any distribution carried out to the beneficiaries; and
3. The trust deed can be tailor made to fulfil the client’s wishes.

A trust is not only seen well by clients for their own estate planning but also by banks and financial institutions in cases of loan structures whereby a bank or a financial institution would have a security (usually in the form of a hypothec) over certain assets belonging to the borrower. A trust would also be the perfect solution whereby a number of bondholders take a security over an issuer’s assets or else when an employer enables its employees to benefit under a share option scheme.

Commonly used Security Trust

In Malta a Security Trustee is popular in two specific practices:

1. A security trust is used in the shipping sector whereby mortgages over Maltese registered ships would be granted by the Maltese ship owning company in favour of the security trustee; and
2. A security trust is used when bonds are issued by Maltese companies on which security over immovable property in Malta is provided to the Security Trustee.

Various types of Security Trust

There are various types of security trusts and for a better understanding one would need to refer to Article 2 of the Trusts and Trustees Act. Article 2 provides a detailed description of what could ultimately fall under a ‘commercial transaction’. Hereunder we shall discuss the most commonly used types of security trusts:

a) Securities offerings whether to the public or for private placement, portfolio management and custody of investment instruments;

The said definition, refers to when there is an issuer to several individuals which would have rights that they can enforce against the issuer. As mentioned previously, in these type of trusts, there would be a security in place that would secure the obligations of the issuer. In this case, should a Security Trustee not be involved, all the holders of the obligations (whether they are bonds or anything else) would need to appear personally on the public deed. It would not only be impractical for everyone to appear on the public deed but also to decide on any actions required, amendments suggested or enforcement needed. Hence why a trustee is essential, as it would be able to group all the creditors and it would take the security provided over the assets for the benefit of the beneficiaries which are ultimately the creditors.

b) the securitisation of assets;

This type of commercial transaction would usually involve the transfer of a portfolio of assets (usually known as ‘securitisation assets’) by a particular person (usually known as ‘originator’) to a securitisation vehicle (usually known as the ‘Special Purpose Vehicle’ or else referred to as ‘SPV’).

Originator    >     Securitisation Assets     >    Special Purpose Vehicle

The SPV would then raise finance on the market which usually occurs through a bond issue issued to investors in order to pay for the assets. It is through such mechanism that the SPV grants security to secure the borrowing over the assets to the investors. The SPV can take various forms, such as a commercial partnership, an investment company, a foundation or even a trust created by a written instrument.

There are various advantages to have the SPV in the form of a trust created by a written instrument. The trust would be able to segregate the assets of the SPV from the originator and the creditors and consequently mitigate any risks of consolidation of assets in any bankruptcy proceedings. Thus, if the originator becomes insolvent, one cannot claim against the assets of the SPV which would be segregated from those of the originator. This means that the investors of the SPV would not become creditors as the originator’s creditors.

[1] Article 2095E(6) of the Civil Code.

[2] Article 2095E(3) of the Civil Code