Neutral Citation Number: [2017] EWHC 1788 (Comm)
Case No: FL-2016-000006
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
FINANCIAL LIST
Royal Courts of Justice
7 Rolls Buildings, Fetter Lane
London, EC4A 1NL

Date: 13/07/2017

Before :

Mr Justice Blair
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Between :

	UBS AG, LONDON BRANCH	Claimant	
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	(1) GLAS TRUST CORPORATION LIMITED
(2) FAIRHOLD SECURITISATION LIMITED	Defendants	

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Patrick Goodall QC and Georgina Peters (instructed by Gibson Dunn & Crutcher LLP) for the Claimant
Felicity Toube QC and Ryan Perkins (instructed by Ropes & Gray International LLP) for the First Defendant
The Second Defendant did not appear and was not represented

Hearing dates: 27 and 28 March 2017
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Judgment Approved
Mr Justice Blair: 
Introduction
1.	In this claim, the claimant bank, UBS AG (“UBS”), London branch, seeks declaratory relief against (1) GLAS Trust Corporation Ltd (“the Note Trustee”), which is the Note Trustee in a securitisation, and (2) Fairhold Securitisation Ltd (“the Issuer”) which is the Issuer of the Notes.
2.	The Issuer takes a neutral stance in these proceedings, though it has written to the court with various comments (which have been taken into account).
3.	The dispute raises a point of construction concerning the entitlement of the Note Trustee to incur (in effect pay) certain legal and other expenses referable to the work of an ad hoc group of Noteholders.  UBS challenges such entitlement.
4.	The dispute arises from a securitisation transaction dated 30 March 2006 the subject of which was the cashflows generated by a portfolio of sheltered housing in England and Wales. 
5.	The Issuer is an offshore SPV registered in the Cayman Islands. It issued two classes of Notes (designated as Class A and Class B respectively) due 15 October 2017. The Notes have an aggregate face value in excess of £440m.  They are in the hands of various investors.
6.	The Issuer’s obligations are ultimately backed by what is described as a complex portfolio of sheltered housing assets situated in England and Wales.  The portfolio consists of over 18,000 units which were valued in excess of £636m as of May 2007.  The cashflows generated by these assets are to be used to repay the Issuer’s debts to the Noteholders and to the “Issuer Swap Counterparties”. 
7.	UBS is one of two banks which are Issuer Swap Counterparties (the other being HBoS Treasury Services plc: HBoS also provided a credit facility of about £30m).  On 17 March 2006, and on 16 May 2007, UBS and the Issuer entered into a number of initial and forward-starting interest rate swaps, deposit contracts and inflation-linked retail price index swaps. It is said that the swaps were intended to hedge the Issuer’s obligations under the Notes.
8.	The principal Transaction Documents relevant to the claim, each of which is governed by English law, are:
i)	the Issuer Deed of Charge dated 30 March 2006 (the “IDC”); among the parties to this agreement are the Issuer, the Note Trustee, and UBS as one of the Issuer Swap Counterparties; pursuant to clause 3.1 of the IDC, the Issuer has granted security over its assets to the Note Trustee; the Note Trustee holds these security rights on trust for the Issuer Secured Creditors, including the Noteholders and the Issuer Swap Counterparties.
ii)	the Note Trust Deed dated 30 March 2006 (as amended and restated) (the “NTD”) between the Issuer and the Note Trustee; this sets out the terms under which the Note Trustee was appointed and has agreed to act under the securitisation; it contains the Issuer’s covenant to pay interest and principal on the Notes, the benefit of which is held on trust by the Note Trustee for the Noteholders.
iii)	the Amended and Restated Cash Management Agreement dated 16 May 2007 (the “CMA”); among the parties to this agreement are the Issuer, the Cash Manager (Deutsche Bank AG, London branch) and the Note Trustee; among other things, this agreement contains the payments waterfall which deals with priority as regards payments, the relevant rules in this case being those pre-enforcement (as opposed to post-enforcement).
9.	The securitisation has not prospered.  In short, the cashflows from the sheltered housing will not support both the Issuer’s liability to the Noteholders, and the liability to the banks under the swaps—these are heavily negative from the Issuer’s perspective.
10.	Matters came to a head in 2015.  The main points for present purposes are that:
i)	In March 2015, the ad hoc group of Noteholders (the “AHG”) was formed, comprising (in the words of UBS) sophisticated financial institutions.
ii)	On 2 October 2015, UBS notified the Issuer that it was exercising its right of Optional Early Termination under the swaps. According to UBS, the UBS Termination Amounts became payable by the Issuer by 23 October 2015 at the latest in the sum of £311,831,091.67, with default interest continuing to accrue.  The court was told that the equivalent under the HBoS swaps is around £275m.
iii)	The original Note Trustee was Deutsche Trustee Company Ltd.  On 6 October 2015, it was replaced by the first defendant, GLAS Trust Corporation Ltd, pursuant to the provisions of the NTD.  UBS says, and it has not been disputed, that this was at the behest of the AHG, on the basis that GLAS would be more “proactive” in its role as Note Trustee.  
iv)	On 15 October 2015, a potential event of default occurred when the Issuer failed to pay the interest due on the Notes. 
v)	On 21 October 2015, the Cash Manager informed UBS that the Note Trustee had directed it not to make any payments under the swaps and to hold amounts otherwise payable to the bank in the Issuer Transaction Account. This was on the basis that alleged fraudulent misrepresentations had been made by the banks in relation to the swaps, and that these misrepresentations entitled the Issuer to rescind those swaps.
vi)	The Issuer rescinded the swaps by letter of 4 August 2016. UBS denies that any such misrepresentations were made, and denies that the Issuer has any right to rescind the swaps.  No proceedings have been commenced by the Issuer at the present time, and it is agreed that the present claim should proceed on the basis that the swaps are valid.
vii)	The parties have been negotiating since 2015 about a potential restructuring.  UBS says (and it is not seriously in dispute) that the banks and the AHG are competing creditors of the Issuer, and that their interests are adverse. The Note Trustee is not a party to those negotiations.
11.	The present dispute arises as follows.  On 31 March 2016, an Extraordinary Resolution of Noteholders authorised and directed the Note Trustee to meet certain legal and financial expenses of the AHG, which were in the sum of £2,447,859.09 (referred to together with future expenses as the “AHG expenses”).  Pending resolution of this dispute, these sums have not been paid.
12.	The dispute to be decided by the court is whether the Note Trustee is entitled to do so, the parties being agreed that this depends on whether the AHG expenses constitute “expenses properly incurred by the Note Trustee” pursuant to clause 25.4 of the IDC and/or clause 10.5 of the NTD (which are in substantially the same terms).
13.	If so, they fall within limb (1) of the “Issuer Pre-Enforcement Priority of Payments” (expenses of the Note Trustee) in Schedule 14 to the CMA.  These are the waterfalls that govern priority in the pre-enforcement situation, which is what presently obtains.  Expenses of the Note Trustee fall to be paid first, in priority to UBS as an Issuer Swap Counterparty, and UBS in turn ranks in priority to the Noteholders.
14.	A feature of the dispute as it came before the court is the fact that the Note Trustee changed its position in its written submissions for the hearing, in that it no longer seeks to maintain its previous stance, which was that it is entitled to pay the expenses in question, and would have done so but for these proceedings.  This became an important issue at the hearing.
15.	Following the hearing, and at the court’s request, the parties provided further written submissions on 3 and 5 April 2017 on an aspect of the contractual terms which deal with “Conflict”.  
The key contractual provisions
16.	The key contractual provisions are in clause 25 of the IDC and clause 10 of the NTD.  They are both titled “Remuneration and indemnification of the Note Trustee”, and both have the same provision dealing with the obligation of the Issuer to pay legal fees and other costs and expenses properly incurred by the Note Trustee in relation to the exercise of its powers and duties in relation to the transaction.
17.	In the IDC, clause 25.4 is the central provision for the purposes of the present dispute:
“25.4	Expenses
The Issuer shall also pay or discharge all legal fees and other costs, charges, liabilities, damages and expenses which the Note Trustee may properly incurred [sic] by the Note Trustee in relation to the preparation and execution of, and the exercise of its powers, authorities, rights and discretions and the performance of its duties under, and in any other manner in relation to, this Deed or the other Transaction Documents (including, but not limited to legal and travelling expenses and any stamp and other taxes or duties paid by the Note Trustee) and in connection with any legal proceedings brought or contemplated by the Note Trustee in respect of the enforcement of the Issuer Security constituted in favour of the Note Trustee by the Transaction Documents or against the Issuer for enforcing any obligations under this Deed, the Notes or the other Transaction Documents”.
18.	In the NTD, clause 10.5 (being in materially identical terms to clause 25.4 of the IDC) is the central provision for the purposes of the present dispute:
“10.5	Note Trustee’s Expenses
The Issuer shall also pay or discharge all legal fees and other costs, charges, liabilities, damages and expenses properly incurred by the Note Trustee in relation to the preparation and execution of, and the exercise of its powers, authorities, rights and discretions and the performance of its duties under, and in any other manner in relation to, this Deed or the other Transaction Documents, (including, but not limited to legal and travelling expenses and any stamp and other taxes or duties paid by the Note Trustee) and in connection with any legal proceedings brought by the Note Trustee in respect of the enforcement of the Issuer Security constituted by the Transaction Documents or against the Issuer for enforcing any obligations under this Deed, the Notes or the other Transaction Documents”.
19.	It is common ground that:
i)	Under the Pre-Enforcement Waterfall prescribed by clause 13.1 of and Schedule 14 to the CMA, any payment to: 
a)	the Note Trustee in respect of its “costs, charges, liabilities, indemnity claims and expenses”, has first-ranking priority; and
b)	the Issuer Swap Counterparties (which includes UBS) of any amounts due and payable by the Issuer under the swaps have fourth-ranking priority, above the payment of principal and interest due to the Noteholders.
ii)	The Note Trustee’s entitlement to incur and claim reimbursement of the AHG expenses under the Pre-Enforcement Waterfall derives (if such entitlement exists, which is the principal issue in dispute) only from its contractual rights under clause 25.4 of the IDC and clause 10.5 of the NTD. 
iii)	The Issuer holds the Securitisation Funds held in the Issuer Accounts on trust for the Issuer Secured Creditors (which includes UBS and the Noteholders), which are to be distributed only in accordance with the Pre-Enforcement Waterfall.
iv)	All monies received at any time by the Note Trustee for the benefit of the Issuer Secured Creditors are also to be held by it on trust to be applied in accordance with the Pre-Enforcement or Post-Enforcement Waterfall, as the case may be (the relevant rules in this case being those pre-enforcement).
v)	The Noteholders did not have power to pass the Extraordinary Resolution of 31 March 2016 if its terms contradict or purport to modify the Pre-Enforcement Waterfall, clause 25 of the IDC and/or clause 10 of the NTD. The question whether the terms of the Resolution (if implemented) would constitute a breach of, or purport to modify, the relevant provisions of the Transaction Documents is a matter of dispute between the parties. 
The Noteholders’ direction to the Note Trustee to pay the AHG expenses 
20.	The background is that the Noteholders are closely concerned with (because they are the potential beneficiaries of) possible litigation by the Issuer to rescind the swaps, and in that regard, have retained financial and legal advisers.  Through 2015 the AHG sought to put in place arrangements to fund the expenses through their entitlement to interest payments, but this came to nothing after the Issuer defaulted in October 2015.
21.	UBS says, and it is not in dispute, that the AHG expenses which had been incurred as at 31 March 2016 totalling £2,447,859.09 covered work done by Freshfields Bruckhaus Deringer from around March 2015 until 31 March 2016, and by N.M. Rothschild & Sons Ltd from around August 2015 until 31 March 2016.  These two firms are referred to in the documents (and below) as the “AHG advisers”.
22.	As indicated above, on 31 March 2016, meetings of the Class A Noteholders and the Class B Noteholders passed an Extraordinary Resolution, notice of which was dated 16 March 2016. The Resolution was to “authorise and direct the Note Trustee to execute a Fee Letter with each of [the AHG advisers]”, pursuant to which the Note Trustee would agree, subject to available funds, to pay the “fees, costs and expenses” of the AHG advisers: 
“… as an expense of the Note Trustee which will be provided for and reimbursed by the Issuer to the Note Trustee in accordance with the applicable Issuer Priority of Payments [i.e. the payment waterfalls] on the basis that such fees, costs and expenses are in respect of work which is for the benefit of the Noteholders as a whole (including any accrued and unpaid fees, costs and expenses as at the date of this Meeting)”.
23.	As well as existing expenses, it is not in dispute that the Note Trustee proposed (and proposes) to pay the further expenses of the AHG advisers which have been incurred since 31 March 2016 and which continue to be incurred. UBS says (and it is not disputed) that it does not know what amount of advisory costs have been incurred by the AHG since that date, but these additional costs will run to further millions of pounds.  
24.	In response to requests for justification of these steps, the basis for the Note Trustee’s opinion was essentially stated to be that the costs would have had to be incurred in any case, and incurring them was in the interests of all relevant parties including UBS and HBoS.  The two areas of analysis and advice identified were as to enforcement rights and strategy, and consensual restructuring alternatives, in respect of which there was “a very significant degree of overlap”.  It was said that “… it is the Note Trustee’s opinion that both areas of analysis are directed at maximising recoveries for Issuer Secured Creditors”.
25.	Thus a letter of 26 April 2016 from the Note Trustee’s lawyers stated that:
“It is in the interests of all parties to the payment waterfall, including the Issuer Swap Counterparties, to have a strategy in place through which recoveries can be maximised (assuming cooperation from the Sponsor is not forthcoming). A prudent Note Trustee, acting in the interests of its beneficiaries, would devise such a strategy. Accordingly, it would have been necessary and appropriate for the Note Trustee to instruct professional advisers in relation to these matters if Freshfields and Rothschild had not been retained by the AHG. As Freshfields and Rothschild have spent some months working on such a strategy, it would be duplicative for the Note Trustee and its advisers to reinvent the wheel.” 
The parties’ contentions
26.	UBS contends that the Note Trustee has no power, authority or right to incur and claim reimbursement of the AHG expenses, and seeks declarations to this effect.  UBS contends that:
i)	The AHG does not want to pay for the advice it has received, and continues to receive, from Rothschild and Freshfields, but wants those fees to be paid by the Note Trustee from the funds that are allocated to the Issuer under the Securitisation, notwithstanding the fact that those funds should properly be disbursed only to those parties who are entitled to be paid under the Pre-Enforcement Waterfall.
ii)	The AHG expenses have not been “incurred” by the Note Trustee. (The court had understood this to reflect the fact that the expenses have not yet been paid by the Note Trustee, but UBS says is not the case.  In argument, its contention was the expenses are expenses “incurred” by the AHG, not the Note Trustee.)  
iii)	The Note Trustee has not demonstrated that the AHG expenses were “properly incurred”, as constituting “costs, charges, liabilities, damages and expenses” that may properly be incurred by and paid to the Note Trustee pursuant to its contractual right of indemnity under clause 25 of the IDC and/or clause 10 of the NTD.
iv)	Further, there is a lack of transparency in this regard, as to what advice etc the Note Trustee has actually seen, if any, or what the expenses were in respect of.
v)	Further, the Resolution envisaged the entry by the Note Trustee into a “Fee Letter” with each of Freshfields and Rothschild, pursuant to which the Note Trustee would agree, ostensibly, to pay future advisory fees incurred by the AHG on an ongoing basis, which is impermissible under the contractual provisions.
vi)	The advice given was (as the Note Trustee said) “shared with the Note Trustee on a non-reliance basis. As and when the Note Trustee is required to take formal steps in connection with any enforcement or restructuring process, the Note Trustee will re-assess its requirements in that respect”.  This does not constitute advice which the Note Trustee would otherwise be required to obtain for itself, nor (as was claimed) advice given by the AHG advisers “for the benefit of” all the Issuer Secured Creditors, including the banks.  Rather, it was partisan advice provided for the benefit of the AHG, which cannot be relied on by the Note Trustee, and which should be paid for by the AHG.
vii)	On the proper construction of paragraphs 18 and 20 of Schedule 4 to the NTD and Condition 11(a) of the Notes (contained in Part 4 of Schedule 2 to the First Supplemental Note Trust Deed dated 16 May 2007), the Class A and Class B Noteholders did not have power to pass the Resolution, the terms of which would constitute (if implemented) a breach of the provisions of the Transaction Documents.
viii)	Accordingly, the Resolution was not validly passed by the meetings of Class A and Class B Noteholders on 31 March 2016, such that it is invalid and of no effect, and the proposed disbursement of the AHG expenses to the Note Trustee would constitute (i) a breach of the relevant contractual provisions of the Transaction Documents, and (ii) a breach of trust.
27.	The Note Trustee contends that:
i)	It “incurred” the AHG expenses by agreeing to pay them pursuant to the Fee Letters.
ii)	It formed the view that, had the AHG not instructed Freshfields and Rothschild, it would have been necessary to instruct its own legal and financial advisers to provide substantially the same advice. This would have been a duplicative and undesirable course of action.  It therefore took the view that it would be proper for it to enter into a Fee Letter with Freshfields and Rothschild to pay their past and future expenses.
iii)	The Note Trustee has, acting bona fides, formed the clear view that it is appropriate to incur the AHG expenses as a matter of principle, although it will in due course conduct an exercise to scrutinise each of the elements of the AHG expenses to determine whether they should properly be paid.  (This, UBS submits, and it is conceded, is a new position put forward by the Note Trustee in its written submissions for the hearing, and not before.)
iv)	UBS focuses upon the elements of the invoices provided to the Note Trustee, and therefore their real complaint is about the individual items comprising the AHG expenses. However, this hearing is not a detailed assessment of the AHG expenses.  Rather than seeking a detailed assessment, UBS has adopted the position that each and every one of the AHG expenses was not “properly incurred” by the Note Trustee, and not capable of falling within clause 10.5 of the NTD as a matter of legal principle.
v)	Before causing any of the AHG expenses to be paid, the Note Trustee will review the costs in order to determine whether the work done by Freshfields and Rothschild should properly be paid as an expense of the Note Trustee.  If it considers that any of the specific items charged by way of AHG expenses do not relate to its powers and duties under the Transaction Documents in accordance with clause 10.5, the Note Trustee will query those expenses (and, if appropriate following explanations from Freshfields and Rothschild, will not pay them). The Note Trustee will also scrutinise the AHG expenses to ensure that the overall amount charged is not excessive. (Again, UBS submits, and it is conceded, that this is a new position put forward by the Note Trustee in its written submissions for the hearing.)
vi)	As a matter of law, the words “properly incurred” mean “not improperly incurred”: see Re Beddoe [1893] 1 Ch 547. The test is not one of “undue generosity”: see Re Grimthorpe [1958] 1 Ch 615. To deprive a trustee of his right of indemnity, it is necessary to show impropriety, bad faith, inequitable conduct or culpable neglect. If there is doubt, the matter is resolved in favour of the trustee.  There is no evidence of anything approaching impropriety or bad faith on the part of the Note Trustee. 
vii)	The position of the Note Trustee is even more precarious and more deserving of protection than the position of a traditional trustee.  A Note Trustee is entitled to be indemnified in respect of any risk which is more than “merely fanciful” (Concord Trust v Law Debenture Corporation [2005] 1 WLR 1591).
viii)	The draftsman of the NTD was concerned to ensure that the Note Trustee had the broadest possible power to incur expenses. Clause 10.5 is expressly drafted to encompass expenses incurred “in any manner … in relation to … the Transaction Documents”. The advice provided by Freshfields and Rothschild relates to the “exercise” of the Note Trustee’s “powers, authorities, rights and discretions and the performance of its duties under … the Transaction Documents” within clause 10.5. Freshfields and Rothschild have (insofar as they are acting on matters that concern the Note Trustee) been retained to advise on the enforcement of the Issuer Security. Any enforcement process must ultimately be conducted by the Note Trustee, being the legal person in whom the relevant security rights are vested. 
ix)	The services provided by Freshfields and Rothschild are beneficial to the Note Trustee and the wider class of Issuer Secured Creditors. The Fee Letters state that Freshfields and Rothschild will “update the Note Trustee and its legal advisers on a regular basis on the strategies to achieve a financial restructuring as they are developed in the best interests of the Noteholders as a whole and the Issuer Secured Creditors on a basis agreed with the Note Trustee”.
x)	Accordingly, the AHG expenses fall squarely within clause 10.5 of the NTD, and the court should refuse to grant the declaratory relief sought by UBS.

Discussion and conclusion
Introduction
28.	It is important to identify how the issues which the court is being asked to decide have arisen.  This is particularly important so as to understand the criticisms UBS made of the Note Trustee at the hearing.
29.	By way of introduction, it is useful to begin with the analysis of Mr Justice Robert Walker (as he then was) in an unreported judgment later cited in Public Trustee v Cooper [2001] WTLR 901 at 922H, as to the court’s role in connection with a trustee’s powers.  It is quoted in Lewin on Trusts (19th edition) at §27-070.  The judge drew a distinction between four distinct situations or categories, with the caveat that there are numerous variations (of which it may be commented that the present case is one).
30.	The first category is where the issue is whether some proposed action is within the trustees' powers. That is ultimately a question of construction of the trust instrument or a statute or both. The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but the trustees wish to obtain the blessing of the court.  The third category is that of surrender of discretion properly so called, which the court will only accept for a good reason—as to what may constitute good reason, see Lewin at §27-082, and as to the distinction between the second and third categories, see Lewin at §27-074.  The fourth category is where trustees have actually taken action, and that action is attacked as being either outside their powers or an improper exercise of their powers.
31.	Here, the position of the Note Trustee has been (at least up to now) that it is entitled to and has decided to incur the AHG expenses.  Its position can conveniently be taken from the Agreed Case Memorandum which states as follows:
“14. The Note Trustee denies that the disbursement of the AHG expenses would constitute a breach of the relevant contractual provisions of the Transaction Documents or a breach of trust.
15.  The Note Trustee claims that the AHG expenses constitute “costs and expenses” within the meaning of its indemnity under clause 25.4 of the IDC and clause 10.5 of the NTD. It further claims that it is entitled to exercise its discretion, afforded under clause 3.8 of the IDC and clause 11.7 of the NTD, to incur and claim reimbursement of the AHG expenses under clause 25.4 of the IDC and clause 10.5 of the NTD.”
32.	Although the issue is whether the proposed action in paying the AHG expenses is within the Note Trustees' powers, which is a question of construction of the trust documentation, the Note Trustee maintains there is no real doubt as to the nature of its powers or whether the proposed action falls within them.  However, this is not a case in which it has sought “to obtain the blessing of the court”.  The Note Trustee is not the applicant for directions—it is defendant to an action which UBS has brought challenging the exercise of the Note Trustee’s powers.
33.	In terms of categorisation, there was also some potential crossover with the fourth category, since part of the Note Trustee’s case was that it had “incurred” the AHG expenses by agreeing to pay them pursuant to the Fee Letters. That could be taken as suggesting that so far as the Note Trustee was concerned, the issue was closed (which is not in fact its position).  It is right to add that this was in response to what was understood by the Note Trustee (and by the court) to be a suggestion that since the expenses had not actually been paid at the time of the hearing, the expenses had not been “incurred” at all, which is not a very strong point.  UBS says that this was not its suggestion.  In its submissions, the way it puts it is that the expenses were not incurred by the Note Trustee, but by the AHG, and adopted by the Note Trustee. It is also right to add that by the end of the hearing neither party pressed this discussion, correctly, because it does not help decide the issue at hand.
34.	The fact is however that the expenses have not yet been paid.  The Note Trustee makes clear that it has not bound itself to pay them, on the grounds that the Fee Letters themselves expressly state that it is not liable to pay them if such payment cannot lawfully be made from the Payment Waterfalls (i.e. that they are “properly incurred”). For various reasons to do with the wording of the Fee Letters, UBS says that this is wrong, and that the Note Trustee has agreed to make these payments.  But it is a reasonable assumption that if the AHG advisers had regarded the Trustee as bound, the court would have been informed, and it has not been.
35.	In the course of oral argument, the Note Trustee accepted that for these reasons its contentions as to the absence of evidence of anything approaching impropriety or bad faith on the part of the Note Trustee are irrelevant, though (as it was put) these principles will inform the way that the Note Trustee will behave going forwards.  The same applies to its contentions as to indemnification. Nothing more need be said on this aspect of the submissions.  It is common ground that the question for decision depends on the construction of the relevant contractual provisions—the first category identified by Mr Justice Robert Walker.
36.	At the hearing, the Note Trustee made what appears to be a new contention to the effect that there has already been a “first stage” of independent scrutiny of the AHG expenses in the form of “the review undertaken by Freshfields and Rothschild to determine what they view as costs relating to the Note Trustee’s powers and duties, as opposed to costs relating to other matters”.  The term “other matters” is doubtless a reference to the claim to rescind the swaps.  In comments on the draft judgment, the Note Trustee clarified its position, saying that it had not been suggesting that the scrutiny by the AHG advisers was “independent”.
37.	The facts are as follows.  It is correct that on 16 May 2016, Freshfields wrote to the Note Trustee stating that, “We wish to make it clear that neither we nor Rothschild have at any time advised the AHG or the issuer in relation to the swap dispute ….  Our own terms of engagement specifically provide that this is excluded from our scope of work".    
38.	Whilst not challenging this assertion, UBS does point to items in the firm’s interim bill including liaising with the Issuer’s solicitors “in relation to potential litigation against the swap banks”. This it says at least suggests that the line may be difficult to draw.
39.	Further, Rothschild’s ongoing fees consist of a retainer of £75,000 a month and a £3.75 million transaction success fee.  UBS says that it is difficult to see how agreeing to adopt that could have been signed off as a proper exercise of power by the Note Trustee.
40.	Whatever the precise position on these issues, in agreement with UBS, the court takes the view that the simple reason that a review undertaken by Freshfields and Rothschild cannot be taken as “independent scrutiny” as claimed by the Note Trustee is that these firms were acting for the AHG and not the Note Trustee.
41.	In its submissions for the hearing, the Note Trustee put forward what it accepts is a new case.  It says that while it had “formed the clear view that it is appropriate to incur the AHG expenses as a matter of principle”, it will review the expenses both as to whether the “overall amount” is excessive, and whether payment is in conformity with its powers as set out in the Transaction Documents.  If it considers that any of the specific items charged by way of AHG expenses do not relate to its powers and duties, it “will query those expenses (and, if appropriate following explanations from Freshfields and Rothschild, will not pay them)”. 
42.	UBS says that this is inconsistent with the Note Trustee’s position to date, and this is obvious from what has been set out above, and indeed the Note Trustee does not dispute it.  So it is unnecessary to do more than further refer to the correspondence between the lawyers in which the Note Trustee maintained that it was satisfied that the work that has been and is being undertaken by the AHG’s advisers is for the benefit of the Noteholders and the Issuer Secured Creditors as a whole, and that the fees represent an expense which it is appropriate for the Note Trustee to pay (see in addition to what is referred to above a letter of 13 April 2016).
43.	This stance is reflected in the Note Trustee’s evidence for the hearing stating that the Note Trustee has “… concluded that it is right to exercise its discretion to adopt the AHG expenses as an expense of the Note Trustee and that such costs should be discharged by the Issuer in accordance with clause 10.5 of the NTD and/or clause 25.4 of the IDC as a cost or expense properly incurred by the Note Trustee”.  It is said that the expenses were “properly incurred” and thus recoverable under clause 10.5 of the NTD, and that having given the matter consideration, the Note Trustee has “… concluded that such fees are reasonable in light of the timescale involved and the complexity of the structure and the Transaction Documents”.  
44.	So the position taken prior to the hearing was that the Note Trustee was “adopting” the AHG expenses.  There was no suggestion that it was going to review the expenses, and potentially not pay them.
45.	This change of position has the further consequence, as UBS submitted, that the Note Trustee now accepts at least implicitly that the adoption and disbursement of the AHG expenses which it proposed to make without any such review would not comply with the relevant contractual provisions of the Transaction Documents.
46.	Against this background, and responding to the court’s questions as to how the Note Trustee now sees the relief that should be granted, on the second (and last) day of the hearing it tendered a draft order which sets out certain orders which it suggests the court should make.  This is dealt with below.
The construction of the trustee’s expenses clause 
47.	The analysis advanced by UBS of the provisions defining the Note Trustee’s expenses in clause 25.4 of the IDC and clause 10.5 of the NTD (which are in substantially the same terms) was largely agreed by the Note Trustee.  As noted, in this particular case the expenses have not yet been paid, so that the question is effectively whether the AHG expenses can properly be adopted under the clause as is proposed.  
48.	In the court’s view, the following approach applies.  In deciding whether particular expenses fall within the trustee’s expenses clause, it should be kept in mind that such clauses are typically (and are in this case) widely drafted, and in the context of a financial transaction should be given a commercial and not artificially restricted meaning.  This reflects the fact that the exercise of the trustee’s powers may contain a substantial measure of judgment, may be controversial, and may have to be carried out speedily to enable resolution of the transaction. Of course, the position depends on the construction of the particular clause, but subject to that, the trustee should be able to fulfil its duties with confidence that if it acts in a commercially reasonable manner, it will be entitled to indemnification.  In the financial context, any other approach would risk frustrating the transaction.  This is fully consistent with the authorities cited by the Note Trustee and referred to above.
49.	With that in mind, the Note Trustee’s entitlement to be reimbursed by the Issuer for its costs and expenses out of the Securitisation Funds is not in dispute and can be broken down as follows:
i)	The right extends to all “legal fees” and “other costs, charges, liabilities, damages and expenses” which have been incurred by the Note Trustee.
ii)	Such payments must have been properly incurred.
iii)	Such payments must have been incurred—
a)	in relation to the preparation and execution of the IDC, NTD or other Transaction Documents;
b)	in relation to the exercise of the Note Trustee’s powers, authorities, rights and discretions under and in any other manner in relation to the IDC, the NTD or the other Transaction Documents;
c)	in relation to the performance of the Note Trustee’s duties under and in any other manner in relation to the IDC, the NTD or the other Transaction Documents;
d)	in connection with any legal proceedings brought by the Note Trustee in respect of the enforcement of the Issuer Security or against the Issuer for enforcing any obligations under the IDC, the NTD or the other Transaction Documents.
50.	As has been explained above, the trustee’s expenses have first-ranking priority in Schedule 14 to the CMA which sets out the waterfalls that govern priority in the pre-enforcement situation, which is what presently obtains.  
The clause 10.3 of the IDC point
51.	In its written submissions, the Note Trustee points out that any enforcement process must ultimately be conducted by the Note Trustee, being the legal person in whom the relevant security rights are vested.  It says that, “Although the Note Trustee is required to have regard to the interests of all Issuer Secured Creditors [clause 10.1 of the IDC], the Transaction Documents expressly state that, so long as any of the Notes remain outstanding, the Note Trustee should have regard only to the interests of the Noteholders [clause 10.3 of the IDC].”
52.	Clause 10 of the IDC deals with “Conflict”, and contains a number of provisions.  The Note Trustee’s submission rests on the final sentence of clause 10.3 which reads, “Except where expressly provided otherwise, so long as any of the Notes remain outstanding, the Note Trustee is not required to have regard to the interests of any other persons entitled to the benefit of the Issuer Security”.  It is however common ground that this sentence cannot be read in isolation from the rest of the clause.
53.	It was difficult to see how far this submission went.  The construction of clause 10 of the IDC being in issue, the court asked for post-hearing written submissions to be submitted by the parties as to its potential relevance, which the parties did.  There are basic disagreements between them as to how the provisions are intended to operate, and though (in my view) the submissions of UBS seem the more consistent with the wording of the clause, the Note Trustee has provided a detailed analysis in support of a submission that the UBS construction would give rise to a “serious lacuna”.
54.	In summary, the position of UBS is that clause 10.3 is inapplicable, and irrelevant.  In oral argument, the Note Trustee accepted that not much turned on this point.  The subsidiary nature of the issue is confirmed by the Note Trustee in its post-hearing written submissions.  
55.	The true construction of the conflict clause could be significant were it to arise directly (or more directly).  Having considered the parties’ submissions, it seems undesirable for the court to embark on a difficult construction issue unless it is necessary to do so.  It is not necessary.  The point that the Note Trustee seeks to extract from the provision is that the mere fact that the Noteholders and the Issuer Swap Counterparties have conflicting interests does not prevent the Note Trustee from adopting the expenses of the former, provided that such expenses properly fall within the terms of clause 10.5 of the Note Trust Deed.  With the proviso that the term “conflicting interests” is not intended to refer to the dispute between the banks and the Noteholders as to whether the swaps should be rescinded—something which is common ground—it is unclear how far if at all this is in dispute.  In any case, the court will proceed on the basis that it is not.

Conclusion on the adoption of the AHG expenses
56.	As explained, the Note Trustee no longer seeks to maintain that it is entitled to incur and claim reimbursement of the AHG expenses under clause 25.4 of the IDC and clause 10.5 of the NTD or at all without determining, on a case-by-case basis, whether such expenses properly fall within those provisions.  It accepts that the adoption of the AHG expenses depends on it reviewing the expenses both as to whether the amount is excessive, and whether payment is in conformity with its powers as set out in the Transaction Documents.
57.	The Note Trustee was clearly right to make this concession.  Despite the court’s observations above as to the width of the expenses clause, what was put in place in March 2016 cannot be sustained legally.  The adoption en bloc of the costs and expenses of the ad hoc group of Noteholders past and future in effect surrendered the trustee’s duty to form an independent view as to whether the expenses were ones which it could properly incur.  There was also a lack of transparency as to what the expenses related to, doubts as to what parts of the material the Note Trustee had actually seen (which were not dispelled during the hearing), and at least a possible issue as to the extent to which the Note Trustee could pay for advice on which it was expressly excluded from relying, all in circumstances in which the effect of the adoption would be to invest the Noteholders’ expenses with a priority under the waterfall to which the expenses were not entitled, against the background of a dispute between the banks and the ad hoc group as to the validity of the swaps with potential litigation in sight.  All this applies a fortiori to the proposed adoption of the AHG expenses on an ongoing basis.  It is evident that the adoption of the expenses in such circumstances required a degree of careful scrutiny by the Note Trustee in order to form the opinion that the expenses were properly incurred, which it is now accepted needs to happen.
The draft order submitted by the Note Trustee
58.	UBS seeks declarations to the effect that the AHG expenses do not constitute expenses which may be incurred by the Note Trustee under clause 25 of the IDC and clause 10 of the NTD.  Broadly, and for reasons set out above, in the circumstances of the Note Trustee’s concession, it has succeeded in making good the thrust of its objections. This includes its objections to the Extraordinary Resolution of 31 March 2016 which turn on the same considerations.
59.	As noted above, at the hearing the Note Trustee tendered a draft order which sets out certain orders which it suggests the court should make.  The recitals state that the court is being asked to determine whether the fees, costs, charges and expenses charged by the AHG advisers within the scope of their respective retainers under the Fee Letters can properly be incurred by the Note Trustee.  The draft order goes on to set out the Note Trustee’s proposals in that regard.
60.	Thus, as counsel for UBS put it, the case has “morphed” into one in which the Note Trustee is in effect seeking the court’s directions as to what it should do.  But, as was pointed out, the application is not supported by the evidence that would be expected to enable the court to give such directions.  In any case, UBS chose not to respond in any detail to the drafting of the order in its reply submissions.
61.	However, there are a number of caveats to be made.  First, it was sensible that the Note Trustee should change its position albeit late rather than continue to defend a position that was not readily defensible.
62.	Second and importantly, UBS accepts in principle that a Note Trustee can adopt expenses incurred by third parties such as noteholders—clearly, it can.  As it was put on behalf of the Note Trustee in the correspondence referred to above, it would be duplicative for the Note Trustee and its advisers to reinvent the wheel.  As a matter of comment, I would add that it would be especially undesirable to incur unnecessary costs in the context of a securitisation where the underlying assets are “sheltered housing assets” if there were adverse implications for residents and others.  In its comments on the draft judgment, UBS says that there would not be adverse implications for residents and others if costs were to be incurred in the context of this securitisation: it is right to say that this issue was not raised by either party at the hearing. 
63.	Despite the obvious limitations, therefore, the court should seek to take a practical approach to move things forward.  The proposed directions are an attempt to suggest a way forward, and should so far as possible be dealt with as such.  Given that the directions were not the subject of detailed argument, I shall state my preliminary views, making it clear that these are preliminary.  That however should be sufficient to enable the responsible financial institutions that are involved in this case to agree without further recourse to the court. 
64.	On that basis, the following matters in particular arise on the draft order in determining what expenses fall within clause 25 of the IDC/clause 10 of the NTD (i.e. the expenses clause):
i)	UBS contends that advice can only be adopted if it is advice on which the Note Trustee can rely.  It contends that clause 11.1 of the NTD which entitles the Note Trustee to rely on advice whether or not addressed to the Note Trustee tells one nothing about whether the Note Trustee is entitled to adopt the cost of such advice.  Broadly, that is right.  However, I do not accept the bright line which UBS seeks to draw.  Clearly it is a relevant consideration that the advice may not be relied on, but it cannot be excluded that it would be sensible (and legitimate) in limited circumstances for the Note Trustee to adopt the expense.  If the only real consequence of a reordering which entitles the Note Trustee to rely on advice is an increase in its cost, it may be pointless.  Nothing more can be said in the abstract.
ii)	The draft order appears to make it clear that the Note Trustee considers that it is expenses relating to the exercise of its powers to enforce the Issuer Security that it is proper for it to incur (though there is some language that includes other expenses which lacks any further description). Subject to the saving words “without prejudice to the generality of the foregoing”, the draft order identifies expenses relating to the following categories of work:
a)	advising on the different possible ways in which the Issuer Security may be enforced (including the timing of enforcement, the manner of enforcement, and the advantages and disadvantages of enforcement options);
b)	advising on the question of whether enforcement is appropriate;
c)	advising on the valuation of any assets subject to the Issuer Security; and
d)	participating in negotiations with any interested commercial party (or any adviser thereof) relating to (a), (b) and (c) above.
iii)	The cost of these four categories of work are in principle proper expenses, as relating to the exercise of the Note Trustee’s powers and/or to the performance of the Note Trustee’s duties under the Transaction Documents.  What the draft does not explicitly state is whether this would extend to cover expenses incurred in this regard relation to rescheduling, which was the subject of considerable discussion at the hearing.  Broadly, I accept the submission made by UBS that a restructuring is a matter that lies between competing creditors, and is not the concern of the Note Trustee.  However, again, this is not necessarily a bright line, since as the Note Trustee has submitted, a comparison between the costs of enforcement versus restructuring may be a relevant factor for the Note Trustee to be cognisant of.  So far as UBS may be correct to say that the Note Trustee’s role in enforcement may be described as largely mechanical, this does not necessarily exclude this conclusion.  Again, nothing more can be said in the abstract.
iv)	The draft order proposes a machinery for its implementation.  In summary, if the Note Trustee proposes to pay any of the AHG expenses, it is to obtain a letter from the relevant AHG adviser which identifies the period to which the expenses relate, states the total amount, describes in a reasonable level of detail all of the work to which the expenses relate, and identifies the proportion of the expenses which fall or do not fall within the categories identified above.  The draft order contemplates that if UBS considers that the Note Trustee cannot properly incur any of the expenses, it is to serve on the Note Trustee written particulars of its objections.  In that eventuality, the parties each are to have liberty to apply to the court for further directions.
v)	UBS indicated objections to this mechanism, on the basis that it appears to leave the responsibility for identifying “properly incurred” expenses with the AHG advisers, rather than with the Note Trustee.  In comments on the draft judgment, it says that the effect of the mechanism proposed by the Note Trustee would again constitute a “surrender of its duty to form an independent view as to whether the expenses were ones which it could properly incur” (see paragraph 57 above).  There may be force in this objection, but the Note Trustee accepts that it has a duty to exercise independent discretion.  The reality is that any dispute as to the propriety of the adoption of particular expenses lies between UBS and the Noteholders.  There may be merit in a procedure along the lines suggested, and it is reasonable to expect a degree of co-operation between the parties in this regard.  If agreement cannot be reached, there is the possibility of reference back to the court.  The proposed machinery may be the only realistic alternative to the Note Trustee incurring very considerable extra expense on analysis/advice/work product which may be duplicative and not (in the event) even be particularly controversial.  As with all the above, this is expressed as my preliminary view.  
Conclusion
65.	For the reasons set out above, the adoption by the Note Trustee of the AHG expenses cannot proceed as the Note Trustee has proposed, and (as explained) it no longer seeks to uphold its original approach.  The parties are asked to agree the terms of the consequent order to be made by the court.  This should take account (so far as possible) of the preliminary views expressed above which are in some respects receptive to the draft order submitted by the Note Trustee during the course of the hearing.  The court is grateful to the parties for their assistance.