In the context of Maltese capital markets, bond issuances have become an established mechanism through which issuers access financing from the public or professional investors. Where bonds are secured, a central feature of the transaction structure is often the appointment of a security trustee. This role is designed to enhance investor protection by holding and enforcing security for the collective benefit of bondholders, while at the same time preserving the fundamental principle that responsibility for the bonds remains with the issuer.
Under Maltese law, the appointment of a security trustee is firmly rooted in both the Trusts and Trustees Act (Chapter 331 of the Laws of Malta) and the Civil Code. Legislative instruments provide the legal framework within which security may be held on trust in the context of a commercial transaction, including bond issuances. In particular, Article 2095E of the Civil Code expressly recognises the concept of security being granted in favour of a trustee acting for the benefit of creditors, thereby allowing the creation of a security trust that operates independently of the individual bondholders’ identities or number.
In practice, the security trustee is appointed through a security trust deed entered into as part of the wider transaction documentation. This deed sets out the scope of the trustee’s powers, duties and limitations, and establishes the trust over the relevant security assets in favour of the bondholders as a class. The trust is not a private or discretionary arrangement, but one established in the context of a clearly defined commercial financing transaction, with the trustee typically being a professional entity authorised and regulated by the Malta Financial Services Authority. This regulatory oversight adds an additional layer of confidence for investors, ensuring that trustees operate within a well-defined statutory and supervisory framework.
The principal function of the security trustee is to hold the security interests granted by the issuer and to exercise those rights in accordance with the terms of the trust deed. This structure avoids the practical and legal difficulties that would arise if individual bondholders were required to hold or enforce security directly. Instead, enforcement rights are centralised in a single entity, enabling coordinated action in the event of default and ensuring that any enforcement proceeds are distributed in line with the agreed priority and waterfall provisions.
In line with its fiduciary obligations at law, the security trustee is required to act at all times in the best interests of the beneficiaries of the trust, who in the context of a bond issuance are the bondholders. This duty extends to the proper administration and preservation of the trust property, being the collateral held in favour of the trustee for the benefit of the bondholders. While the trustee does not guarantee the issuer’s obligations, it must nonetheless take reasonable steps to ensure that the security package remains meaningful and effective throughout the lifetime of the trust. In practice, this means ensuring that the value of the collateral is sufficient to cover the secured obligations, namely the outstanding bond capital together with an appropriate headroom, as contemplated by the transaction documentation.
Accordingly, it is both prudent and consistent with fiduciary practice for the security trustee to require periodic valuations of the secured assets during the life of the bond issue. Such valuations enable the trustee to assess whether the security continues to provide adequate coverage and, where necessary, to trigger contractual remedies or engage with the issuer in accordance with the terms of the security trust deed.
This ongoing oversight does not amount to management of the issuer’s business or assets, but rather reflects the security trustee’s duty to safeguard the integrity of the trust property for the collective benefit of bondholders. From a legal perspective, the trustee’s duties are fiduciary in nature and governed by the Trusts and Trustees Act, requiring it to act honestly, in good faith and in the best interests of the beneficiaries. However, those duties are confined to the proper administration and enforcement of the security held in trust. They do not extend to overseeing the issuer’s business, managing its liquidity, or ensuring compliance with corporate governance obligations. Responsibility for such matters rests squarely with the issuer and its governing bodies, thereby preserving the essential balance between investor protection and issuer accountability that underpins Maltese bond markets.
Importantly, while the security trustee acts as a protector of bondholder interests, its role is not to assume the obligations of the issuer. Maltese market practice, reflected consistently in MFSA-approved prospectuses, makes it clear that the trustee does not guarantee the issuer’s payment obligations and does not step into the issuer’s role in servicing the bonds. The obligation to pay interest and repay principal remains, at all times, with the issuer and, where applicable, any guarantor. The security trustee’s function is therefore protective rather than substitutive: it safeguards the security package and enforces it where contractually and legally justified, but it does not become liable for the issuer’s performance.
This distinction is fundamental to preserving issuer accountability. Bondholders invest on the basis of the issuer’s creditworthiness, business model and financial position, as disclosed in the prospectus and maintained throughout the life of the bonds in accordance with the Capital Markets Rules. The ultimate driver of the issuer’s ability to honour its interest and repayment obligations is not the existence of security, but the robustness of its corporate governance framework and the effectiveness of its internal oversight mechanisms.
In this respect, Maltese capital markets regulation places clear responsibility on the issuer’s board of directors to ensure the ongoing financial soundness of the company. The board is expected to exercise proper oversight over the issuer’s strategy, risk management and liquidity position, and to ensure that adequate systems and controls are in place to monitor cash flows and debt servicing capacity. These obligations are complemented by the role of the audit committee, which is tasked with overseeing financial reporting, internal controls and the integrity of the issuer’s financial information, thereby providing an additional layer of assurance to the market.
The MFSA’s Capital Markets Rules and related governance expectations reinforce the principle that issuers must maintain sufficient liquidity and financial resources to meet their obligations as they fall due. Compliance with these requirements is not a one-off exercise at the time of issuance, but an ongoing responsibility that continues for as long as the bonds remain outstanding. Against this backdrop, the security trustee does not act as a substitute for sound governance or financial discipline; rather, it operates alongside these mechanisms, providing a structured means of protection and enforcement if contractual triggers are met.
Although Maltese case law specifically addressing security trustees in bond issuances remains limited, general principles of trust law and fiduciary responsibility apply. Trustees are expected to act with due care and diligence, avoid conflicts of interest and preserve the trust property. These principles are reinforced by MFSA oversight and enforcement powers, which extend to breaches of the Trusts and Trustees Act and failures to comply with regulatory standards. In this way, the legal framework ensures that trustees are accountable for the proper exercise of their role without transforming them into de facto guarantors of the underlying debt.
From an industry perspective, the appointment of a security trustee is required in secured bond structures in Malta. The MFSA’s review process places emphasis on transparency and clarity, requiring offering documents to clearly delineate the respective roles of the issuer and the trustee. This clarity serves both investor protection and market integrity, ensuring that bondholders understand the nature and limits of the security trustee’s involvement.
Ultimately, the role of the security trustee in Maltese bond issuances reflects a careful balance. On the one hand, it provides bondholders with a structured and enforceable layer of protection through the holding and administration of security. On the other hand, it preserves the core principle that the issuer remains fully accountable for its obligations under the bonds. By operating within a robust statutory framework and established market practice, the security trustee supports investor confidence while reinforcing, rather than undermining, issuer responsibility.
By: Katia Cachia
