Approach to Trust Law from a Civil Law Perspective
Concepts of Equity and Trust
Equity and trust are two concepts in common law that a continental law practitioner faces with hardship to visualize. Equity can be defined as “the body of principles constituting what is fair and right; natural law.”[1] Despite that “equity” means natural justice in ordinary language, “originally, this system was inspired by ideas of natural justice, and that is why it acquired its name (…) and it is in fact nothing else than a particular branch of the law of England.”[2]
The right of trust is enforceable solely in equity “to the beneficial enjoyment of property to which another person holds the legal title; a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of a third party (the beneficiary).”[3] A trust relationship can be identified when the legal title is owned by one person (the trustee) and the beneficial interest is held by another (the beneficiary). In order to understand trust law, one would have to visualize the ownership of all property as being potentially divided. The trust provides for a legal owner to be able to deal with property for the benefit of those who cannot, or do not want to deal with it themselves.
The Three Certainties
A trust relationship requires the presence of three certainties. Firstly, certainty of intention is based on the question as to whether a trust is intended or not. Secondly, certainty of subject matter requires a property to be subject to the trust, as well as the beneficial interest to be present. Thirdly, certainty of objects asks the question: “Who are the beneficiaries of the trust?” [4].
Trust Powers
A trustee wields powers within the trust, such as the power to invest[5] or to appoint agents. For instance, if a discretionary trust holding a certain sum of money for such as the settlor’s descendants who require financial help, the trustee would have the power to invest the money to generate a greater income for the beneficiaries, i.e. the descendants. For such purpose, the trustee may appoint an agent[6].
Fiduciary powers of a trustee are valid but are unenforceable. In other words, the beneficiaries cannot enforce the exercise of such powers, but can ensure that the trustee considers such exercise. For example, a bequest that states “I give my shares in XYZ plc in the hope that Mrs. ABC (the trustee) uses the income of such shares to help my relatives,” would establish a fiduciary relationship between the relatives and Mrs. ABC, since the relatives cannot force Mrs. ABC to use her power under the trust to appoint[7].
Duties of a Trustee
Trustees are, in general, not entitled to remuneration. When a beneficiary is entitled to an income from trust property, trustees have a duty to invest. Trustees also have a duty to provide information to the beneficiaries, but such duty is not absolute[8].
Use of the Trust Concept in Financing Deals
Security Agent in Syndicated Financing
As in any form of syndicated financing, security in project finance is generally held on behalf of the lenders and other finance parties, such as hedge providers by a security trustee or security agent[9].
In a syndicated financing deal, the security agent (the Security Agent) will hold the transaction security in trust on behalf of the creditors as a whole, the membership of which can vary from time to time. These creditors are typically the lenders and other secured creditors (the Secured Parties) within a syndicated loan arrangement. The trust structure provides so that the security does not need to be:
- granted separately to each of the creditors, which can be expensive and time consuming, and
- retaken or re-registered if a Secured Party changes as a result of a loan transfer.
The Security Agent is the main contact point and acts as a bridge between the borrower or security provider and the Secured Parties. It acts as the single entity responsible for the administrative tasks regarding the security such as holding title deeds relating to the secured property and for making distributions to the other secured creditors following any enforcement.
Thus, the Security Agent is authorised by the beneficiaries of the trust to perform its rights and duties and to exercise direct or incidental rights, powers and discretions under the terms of the security trust provisions in the facility documentation or security documents. The security trust provisions in the facility documentation will include the specific duties and functions of the Security Agent in detail. The beneficiaries of the transaction security are all party to such documentation, which can be the facility agreement, a separate security trust deed or in an intercreditor agreement[10], depending on the structure of the transaction.
Powers and Duties of a Security Agent
As noted above, the specific contractual duties of the Security Agent will be set out in the facility documentation. Essentially, the Security Agent holds the transaction security and is responsible for the enforcement of the security. It also acts as a conduit between the parties for payments and the distribution of the proceeds of enforcement.
In taking on the role of trustee for the Secured Parties, the Security Agent will also have fiduciary duties in respect of the Secured Parties, i.e. its beneficiaries. Among these fiduciary duties are:
- there will be no conflict of interest in its actions with the interests of the Secured Parties;
- it will not receive and retain any secret profits from the borrower or security provider;
- it will act in good faith, and
- it will use due diligence in exercising its powers.
The rights and discretions enjoyed by the Security Agent are contained in Clause 21.8(a) - (i) of the Loan Market Association recommended Intercreditor Agreement[11], which are typical rights enjoyed by security agents. These include the right to rely on any representation, notice or document that it believes to be genuine, correct and properly authorised. The Security Agent can also rely on any statement from a director or of an employee or authorised signatory, the content of which may reasonably be assumed to be within their knowledge or within their power to verify or assume the truth and accuracy in a certificate provided to it[12].
Hague Trust Convention
The Hague Convention on the Law Applicable to Trusts and on their Recognition (“Hague Trust Convention”) has been[13] signed on 1 July 1985 and entered into force in the onset of 1992 aiming to deal with the institution of trust which is known in mostly common law states but is unknown to the majority of civil law states[14]. Among the contracting parties of the Hague Trust Convention are civil law countries, such as Switzerland (which signed in 2007), the Netherlands, France and Italy. The trust law in Switzerland is not substantive trust law; it consists of private international law provisions as well as substantive provisions on other matters that deal with trusts governed by a foreign law[15][16].
Interpretation of Trust under Turkish Law
Concept of Parallel Debt
Clause 21 of the Intercreditor Agreement contains a placeholder for an optional parallel debt structure to be used where security is being given in a non-common law jurisdiction that does not recognise a security trust structure. While some countries recommend the use of the parallel debt structure, not all jurisdictions recognise this mechanism, and other methods may be required to ensure that all secured creditors benefit from the security.
Such parallel debt wording essentially operates as a covenant by the borrower or the security provider to pay the Security Agent, as a creditor in its own right, amounts equal to the total amounts payable by the borrower or security provider to the Secured Parties as and when such sums fall due. The creation of this creditor-debtor relationship grants the Security Agent an independent right to demand payment from the borrower or security provider. Any amounts due to the Security Agent under this parallel debt clause shall be decreased to the extent that the same corresponding amount has been received by the Secured Parties and vice versa. A security right is then created in favour of the Security Agent to secure the parallel debt, and any enforcement proceeds will be applied in repayment of the debt owed to the Secured Parties.
Enforceability of Trust Law Provisions under Turkish Law
Turkey is neither a party to the Hague Trust Convention, nor does it have any provisions regarding the interpretation of the institution of trust in foreign-law applications. Given that syndicated financing deals are mostly English-law governed, such common law facility documentation includes provisions that a Security Agent is appointed as a trustee for the beneficiaries, i.e. the lenders. Therefore, in those cases whereby there are onshore securities in Turkey to be established under Turkish law, such Turkish law documents generally refer to the Security Agent provisions in the facility documentation. At this point, the question as to whether trust law can be enforced under Turkish law arises. Even though there are no conclusive Turkish court provisions regarding the concept of trust, it is generally accepted that the Security Agent provisions are applicable under Turkish law.
In Turkey, similar to other civil law jurisdictions, the concept of parallel debt is used in certain deals to ensure that accessory security would not fall away as a result of a transfer by novation and, thus, enable a changing class of beneficiaries to benefit from the security without the need for a separate transfer arrangement in Turkish deals. However, there is no direct equivalent of the institution of trust and, therefore, both academia and jurisprudence awaits commentary on the Turkish law approach to such institution, especially concerning English-law governed financing transactions.
[1]p.579 Equity definition – 2nd meaning, Black’s Law Dictionary, 8th Edition, by Bryan A. Garner, Thomson West, 2004 (“Black’s Law Dictionary”).
[2]Glanville Williams, Learning the Law 25-26 (11th ed. 1982).
[3]p.1546 Trust definition – 1st meaning, Black’s Law Dictionary.
[4]p.25, Equity & Trusts, Iain McDonald & Anne Street, Third Edition, Oxford University Press, 2013.
[5]s. 3 Trustee Act 2000.
[6]To appoint means to give in this context.
[7]Please refer to the footnote above.
[8]Equity & Trusts, Iain McDonald & Anne Street, Third Edition, Oxford University Press, 2013.
[9]Banking & Finance- Project finance; Security in project finance transactions- Security in project finance transactions, Lexis PSL.
[10]See for instance Clause 21.1 of the Intercreditor Agreement of the Loan Market Association.
[11]Loan Market Association"s (LMA) recommended form Intercreditor Agreement for Leveraged Acquisition Finance Transactions (Senior/Mezzanine), please see http://www.lma.eu.com/ for members.
[12]The security agent and security trust provisions, Lexis PSL.
[13]See https://www.hcch.net/en/instruments/conventions/authorities1/?cid=59.
[14]Proceedings of the Fifteenth Session (1984) - Trusts, applicable law and recognition, https://assets.hcch.net/upload/expl30.pdf.
[15]Trust law in Switzerland, Dr Thomas Mayer, Step Journal, January 2011, https://www.step.org/journal, reached via http://www.chinawealthplanning.com/index.php/trust-mainmenu-206/7844-trust-law-in-switzerland.html.
[16]Common Law’da Trust Kavramı ve Civil Law’da Trust Alanında Güncel Gelişmeler.
Yard. Doç. Dr. Eylem APAYDIN, Legal Hukuk Dergisi, Cilt:14, Sayı: 160, Yıl: 2016.
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