The debenture trustee requirement, and the offers that trigger it.

Chapter 2L attaches to the way debentures are offered rather than to every debenture on issue. Before a body makes an offer of debentures that needs disclosure to investors under Chapter 6D, it must enter into a trust deed that complies with the chapter's content requirement and appoint a trustee that satisfies the eligibility provision. Both have to exist before the offer is made, so the position is tested against the state of affairs at the time of the offer rather than against the view the issuer took of its own disclosure obligations. ASIC holds a power to exempt a person from the chapter or to modify how it applies, and that is the only route to relief.

This is why a genuinely wholesale note programme runs without a statutory trustee. If every offer sits inside a Chapter 6D exemption, whether the sophisticated investor limb, the professional investor limb or the small scale provision capped at 20 investors and $2 million in any 12 months, the requirement is never engaged. The exemption has to hold offer by offer. A note trustee appointed by contract in a wholesale programme carries none of the statutory duties in Chapter 2L, whatever the deed calls the office.

The chapter is not confined to a first retail offer. It also reaches defined offers that escape a disclosure document, including offers made to people who already hold debentures of the body and sale offers made under the cleansing regime for quoted securities, so the disclosure analysis and the Chapter 2L analysis are two questions rather than one. Rolling maturing holders into new notes is itself an offer and has to find its own footing under both. Where debentures are enhanced disclosure securities the issuer is a disclosing entity, which for an unlisted issuer means half year financial reports and continuous disclosure of price sensitive information to ASIC. As a borrower under a trust deed it also owes the trustee copies of its financial reports, and its auditor owes the trustee a report on any matter likely to be prejudicial to the interests of debenture holders.

The statutory content requirement is short. The deed must provide that three things are held on trust by the trustee for the benefit of the debenture holders: the right to enforce the borrower's duty to repay, any security for that repayment, and the right to enforce any other duties the borrower and any guarantor have under the terms of the debentures, the deed or the chapter. The first of those changes the issuer's relationship with its investors permanently, because the right to enforce repayment is held and exercised for the holders as a group. Enforcement becomes a collective process directed through the trustee instead of a bilateral matter with whichever holder moves first.

Everything past that minimum is negotiated: events of default, financial covenants, the security package, reporting above what the chapter requires, and the trustee's fee and indemnity. One area is closed to negotiation. A term of a debenture, a provision of a trust deed or a term of a contract with holders is void so far as it would exempt the trustee from liability for failing to show the degree of care and diligence required of it, or would indemnify it against that liability. What survives is a release for something already done or not done, which the deed may allow a meeting of debenture holders to approve. The deed is also not something the borrower can retire at will while money is still owing under the debentures.

Eligibility is fixed by statute. Alongside the categories the Act lists, a person may be appointed and act as trustee only if the appointment or the acting will not result in a conflict of interest or duty, and the general law on conflicts is preserved on top of that. A trustee drawn from inside the borrower's own group, or one holding an economic interest in the outcome it exists to test, does not clear that test, which closes off the arrangement many promoters would prefer.

The office is designed to be continuously occupied. An existing trustee continues to act until a new trustee has taken office, even after it has resigned, and where the borrower becomes aware that its trustee has ceased to exist, was not validly appointed, is no longer eligible or will not act, it carries a statutory duty to replace it. Chapter 2L also puts the office on the public record, through a duty on the borrower to notify ASIC of information relating to its trustee and a register relating to trustees for debenture holders. The categories the Act allows are these.

Two of the trustee's duties are duties of reasonable diligence rather than of result, so the question is always what it did to find out. It must exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available, by way of security or otherwise, will be sufficient to repay the amount deposited or lent when it becomes due, and whether the borrower or a guarantor has breached the terms of the debentures, the deed or the chapter. The first duty is directed at sufficiency when the money falls due rather than at solvency on the day of the review, which is why a working trustee presses on the currency of valuations, on what ranks ahead of the security it holds, and on the assumptions behind any refinance the repayment depends on.

Those duties are fed by an information flow that runs whether or not the deed asks for it. The borrower must give the trustee a quarterly report and lodge a copy with ASIC. The report covers any failure to comply with the debentures, the deed or the chapter, any event that could make amounts immediately payable or remedies enforceable, circumstances materially prejudicing the borrower, its subsidiaries, the guarantors or any security interest, and any substantial change in the nature of the business. It also covers money deposited with or lent to a related body corporate, so a programme that on-lends to promoter connected entities puts that in front of the regulator every quarter. The report is made in accordance with a resolution of the borrower's directors, which puts it at board level rather than with the finance team.

The borrower must also inform the trustee about security interests it creates, make its financial records available to the trustee for inspection, and allow that inspection to be carried out by an auditor acting for the trustee. Each guarantor carries duties that mirror the borrower's, including its own duty to inform the trustee about security interests. The chapter backs both sets of duties with its own offence provisions, so a reporting failure is not simply a matter between the parties to the deed. The first reporting quarter is fixed by written notice from the borrower to the trustee after the first debenture is issued under the deed, so the reporting calendar is set at the start of the programme.

The remedy duty is triggered by knowledge. Where the trustee knows of a breach of the terms of the debentures, the deed or the chapter, it must do everything in its power to ensure that the borrower or the guarantor remedies it, unless the trustee is satisfied that the breach will not materially prejudice the interests of the holders or any security for the debentures. Those are the only two positions open to it, and the second is a decision it can expect to have to justify later. The trustee also owes ASIC notice where the borrower has failed to meet the reporting duties the chapter imposes, and must tell ASIC and the borrower if it ceases to be eligible itself.

Where a breach is not remedied when the trustee requires it, the chapter moves to the holders. The trustee may call a meeting of debenture holders, put proposals for protecting their interests and ask for directions. Holders can require the borrower to call a meeting to give the trustee directions on the exercise of its powers, and the court can order a meeting where that mechanism fails. The trustee must comply with directions given at a meeting unless it considers them inconsistent with the debentures, the deed or the Act, or otherwise objectionable, and has obtained or is seeking a court order setting them aside.

The court powers matter most while an issuer is still trading and still taking money in. On an application by the trustee or ASIC, the court may stay proceedings by or against the borrower or a guarantor, restrain payments to holders, order that security become immediately enforceable, appoint a receiver of secured property, restrain the borrower from advertising for deposits or loans, and restrict further borrowing. The chapter also gives a person who suffers loss because of a contravention a right to recover it from the person who contravened and from a person involved in the contravention, which reaches past the issuing entity to those who took part.

The Act also closes off the naming of the product. A borrower may describe its debentures, in any disclosure document for the offer, in any other document relating to the offer and on the debentures themselves, only in accordance with a table of four permitted descriptions. Each description is tested against the security position as it stands when the offer is made.

The description turns on the security actually held by the trustee and, for the strongest description, on the valuation carried in the disclosure document, so the name cannot be settled before the security package and the valuation are. The same description then has to hold across every document relating to the offer, and the secured note description brings additional statutory requirements of its own about what the advertising and the reporting have to say.

The requirement bites before the offer is made, which puts characterisation at the front of the structuring work. The failure pattern is rarely deliberate avoidance. A programme begins as a small wholesale raise, existing investors roll their notes at maturity, the website acquires an application form, and an applicant is accepted without a current accountant's certificate. At some point an offer has been made that needed disclosure, which means it also needed a trust deed and an eligible trustee that did not exist. That contravention attaches to the offer, and amending a document afterwards does not reach it.

The pool of eligible trustees is closed by statute, so the counterparty is approached well before the offer documents are drafted. An eligible trustee runs its own diligence before it signs, so the borrower should expect questions about valuations, ranking and related party lending while the deed is still being negotiated. The naming table is tested at the offer and reaches every document relating to it, so the marketing surfaces are built against the security position rather than drafted first and checked afterwards.