UBS Ag, London Branch v Glas Trust Corporation Ltd & Anor

A trustee’s expenses clause in a financial transaction is generally construed commercially and without artificial restriction. Expenses must nevertheless be properly incurred and sufficiently connected with the trustee’s powers, duties or the transaction documents. A trustee may in principle adopt expenses incurred by third parties, but it must independently scrutinise whether the particular expenses fall within the clause and whether the amount is excessive. An en bloc adoption of present and future expenses, especially where the expenses arise from advice given to a competing creditor group and lack transparency, is impermissible. Advice concerning enforcement may qualify; advice concerning restructuring requires a fact-sensitive assessment and is not automatically excluded.

UBS, an issuer swap counterparty, sought declarations against the note trustee and issuer in relation to a securitisation. Noteholders had passed an extraordinary resolution directing the note trustee to pay the past and future legal and financial expenses of an ad hoc noteholder group. Payment would have given those expenses first priority under the pre-enforcement waterfall, ahead of the swap counterparties.

The issue was whether those expenses were expenses properly incurred by the note trustee under clause 25.4 of the Issuer Deed of Charge and clause 10.5 of the Note Trust Deed. The note trustee ultimately accepted that it could not adopt the expenses without reviewing them individually and assessing their conformity with the transaction documents.

1. Construction of the expenses clauses. The court treated the question as one of construction of the trust documentation. Clauses 25.4 and 10.5 were widely drafted and, in a financial transaction, had to be given a commercial rather than artificially restricted meaning. The relevant expenses had to be incurred by the note trustee, properly incurred, and connected with the preparation or execution of the transaction documents, the exercise of its powers and rights, the performance of its duties, or specified enforcement proceedings.
2. Independent scrutiny. The note trustee’s proposed adoption of the ad hoc group’s past and future expenses en bloc could not be sustained. It surrendered the trustee’s duty to form an independent view as to whether the expenses were properly incurred. The lack of transparency, uncertainty as to the material reviewed by the note trustee, the non-reliance basis of some advice, and the competing interests of the noteholders and swap counterparties reinforced that conclusion. A review by advisers acting for the ad hoc group was not independent scrutiny.
3. Third-party expenses. UBS accepted that a note trustee can in principle adopt expenses incurred by third parties where doing so avoids duplication and the expenses properly relate to the trustee’s powers or duties. Advice on enforcement options, enforcement timing, asset valuation and related negotiations could in principle qualify. Advice on restructuring was not automatically within or outside the clause: it might be relevant when comparing enforcement with restructuring, but a restructuring principally concerned competing creditors.
4. Disposition. The court upheld the substance of UBS’s objections to the proposed adoption and to the related extraordinary resolution. The note trustee no longer defended its original approach. The parties were directed to agree the consequential order, taking account of the court’s stated preliminary views on a possible mechanism for reviewing disputed expenses.