A security trustee is a person or corporate entity which holds security for the benefit of others. The security involved may comprise a charge over property, a debenture over the assets and undertaking of a company, a bank account charge or a combination of other types of security for the performance of obligations.
Security trustees are often used in structures such as secured loan notes, where the benefit of the security is held on behalf of the loan note holders as a group. A security trustee is usually (but not always) an independent entity which is regulated by the Financial Conduct Authority or equivalent financial services regulator.
Here are some of the main reasons for using a security trustee as part of a structure:
- If the beneficiaries of the security are too numerous for them all to appear on the relevant register (such as the Land Registry in the case of a charge over property).
- If the composition of the group of beneficiaries is likely to change over time (such as in the case of loan note holders) – appointing a security trustee in this situation avoids the inconvenience and cost of transferring the underlying security each time a new beneficiary is added or an existing beneficiary transfers its interest.
- In order to demonstrate independence from the parties associated with the debtor, originator of the debt obligation, the chargor or the subject matter of the security. In other words, if something goes wrong and the security needs to be enforced, the security trustee would act impartially in taking the necessary steps to enforce the security and distribute the proceeds of enforcement to those entitled.