One of the main uses of Security Trusts within the context of commercial transactions, is that of holding assets as security for an underlying obligation, e.g. a loan, which security is held for the benefit of creditors, present or future or for the benefit of a class of creditors. The security may take various forms and may be movable or immovable property including a hypothec, pledge, undertaking or any property which is transferred to the Security Trustee with rights over such property as outlined in the relevant Security Trust instrument.
In order to ensure that the rights of creditors are legally protected through the holding of such property as security for the benefit of creditors, Maltese law includes specific provisions in the Civil Code that regulate such an arrangement. Article 2095E of the Civil Code specifically deals with such Trusts and provides that when security is being held by a Trustee for the benefit of creditors the Trustee shall be treated as a creditor and shall be entitled to register the relevant security in its name as Trustee. Furthermore, the Trustee is granted by law the power and legal interest to file any legal proceedings for the enforcement of the relevant security. Any payment by the debtor either to the Security Trustee or to the beneficiaries (when these are also the creditors) shall discharge the obligation of the debtor to the extent of the payment made.
These are some of the benefits of a Security Trust within the context of a commercial transaction:
- One entity, being the Security Trustee, may hold multiple forms of security for the benefit of the same creditors;
- The Trustee will hold the security and have rights and obligations in relation thereto in accordance with the terms of the relevant Trust instrument agreed to between the debtors and the creditors;
- The Security Trustee will act on behalf of all creditors as their agent, thereby simplifying transactions involving multiple creditors, including the payment of the debt itself or the enforcement of the security.
- Creditors with different interests in the same security may also be catered for within the same Security Trust.
- It is possible for the creditors (being the beneficiaries of the Trust) to assign their debt with the benefit of the security without the need of a separate assignment of their beneficial interest, since the assignees will become beneficiaries upon the assignment being notified to the Trustee.
- The Trustee as a professional body will have the necessary experience, knowledge and resources to manage such arrangements.
A similar type of Trust may also be used within the context of securities listing. In these cases a Trustee may be appointed by the issuer to act as a Trustee for the benefit of the numerous security holders as a class e.g. bondholders, which Trustee may also hold security for their benefit. The security holders will have the added benefit of a third party who is independent form the issuer acting on their behalf and for their benefit. The use of such Trusts also simplifies matters for the issuer who may communicate with the Trustee on behalf of all the security holders, and on the other hand the Trustee may also take action and communicate with the issuer on behalf of the security holders as stipulated in the relevant Trust instrument.
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