Trustees’ Role In Sukuk Structuring

In Malaysia, a trustee appointed for an Islamic bond or sukuk structuring is governed by both the Companies Act 1965 and the Capital Markets and Services Act 2007. Apart from the common law duties of the trustee, the role of the trustee is spelled out in detail in these statutes, and its fiduciary duties under these Acts are in pari materia.

Essentially, the trustee is the independent referee for the players in the sukuk transaction flow, and acts as the watchdog for the Securities Commission to which it reports any breach of statutory provisions by either the borrower or guarantor.

Vigilance is the keyword, and the trustee has to monitor the debenture deed and ensure that the rights and obligations of the borrower and guarantor are observed, in relation to the beneficiaries under the debenture, namely the investors or debenture-holders. Owing a duty of care exclusively to the beneficiaries, the trustee plays a proactive role to ensure that the debenture is enforced, especially in the event of default. In a recent interaction with the Securities Commission in relation to proposed amendments to the SC Guidelines on sukuk structuring and issuance, the trustees were debating an issue whether they ought to be involved in the transactions leading to a sign-off as they were mindful of the already onerous duties of trustees to a debenture. It is the view of the writer that being involved in the transaction documents and deliberations should not be avoided as trustees by the very nature of their statutory duties are responsible to ensure that the beneficiaries’ interests are always protected.
Short of signing off, which they should not be asked to do as this will compromise their independence, trustees should be involved in the transaction documents at every stage as this will give them the critical knowledge about the state of affairs of the transaction, especially in regard to the solvency of the parties of which they are bound to make a report. More importantly, involvement in the transaction will be proof that they have exercised due diligence and care in carrying out their duties as trustees.

As both statutes do not allow exclusion of liability as trustee, the best way to protect themselves is for trustees to pass the ‘reasonable trustee’ test, viz. that notwithstanding a breach, it has done what a reasonable trustee ought to have done to discharge its fiduciary duties. Being involved in the transaction flow instead of being passive allows the trustees to show that they are exercising due diligence and care, hence demonstrating that they are reasonable trustees as expected in common law as well as under the relevant statutes on the role and duties of trustees.

Haji Idrus bin Ismail, Senior Associate
Islamic Banking & Finance Practice Group

Azmi & Associates
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55100 Kuala Lumpur, Malaysia
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