International rolling stock financing in Austria

Under Austrian law security over rolling stock can be taken either by way of pledge or an outright  transfer of ownership for security purposes (i.e. security ownership).

While the pledge over movable assets is explicitly regulated by the Austrian Civil Code, the security ownership is a concept which was initially developed by the market to circumvent the strict perfection requirements applicable to the pledge. The perceived benefit of security ownership is no longer available, as courts nowadays also apply the perfection requirements and other rules aimed at protecting the security provider to the security ownership. In case of enforcement or an insolvency of the owner of the assets, the pledge and the security ownership are treated similarly. 

A pledge over a movable asset is created by a pledge agreement between the creditor as pledgee and the owner as pledgor. While no written, certified or notarised form is required, written form is recommended.

There is no public register available in Austria in respect of security over rolling stock. Instead commercially impractical perfection requirements must be complied with to ensure validity and enforceability of the pledge against third parties. In principle, the pledge is perfected by transfer of actual custody of the movable asset to the creditor.

Only if a transfer of custody is physically impossible or unreasonable may the pledge be perfected by attaching easily recognisable signs. The fact that a company may not continue its business without the pledged assets does not render the transfer of custody to the pledgor unreasonable.
Although there is no case law specifically dealing with security interests over rolling stock, jurisprudence suggests that the substantial size or weight of the collateral may be sufficient to render transfer of custody unreasonable. Hence perfection of a pledge over rolling stock might then be achieved by affixing signs to the asset.

Such signs must make the security interest of the beneficiary readily and reliably perceptible to anyone who might be interested in the collateral. They must display the name of the pledgee and the underlying legal relationship and be attached to each asset. However, if such signs are removed the pledge is lost.

If the rolling stock is operated by a fleet manager that does not own the rolling stock, no transfer of custody to the pledgee is required. Instead the fleet manager can be instructed that it is holding the rolling stock on behalf of the pledgee and no longer on behalf of the owner. In practice, this is achieved by having the fleet manager, the owner of the rolling stock and the pledgee sign a tripartite custodian agreement. It is essential to ensure in such custodian agreement that instructions given by the pledgee prevail over those given by the owner. Additionally, it is recommended to affix signs to the asset.

A security ownership over a movable asset is created by security agreement between the creditor as beneficiary and the owner as security provider. While no written, certified or notarised form is required for the security agreement to be valid, written form is recommended.
As the security ownership and the pledge serve the same purpose, the courts apply the same statutory perfection requirements set out for pledges to the security ownership. 

The creation and perfection of security over movable assets do not trigger any registration fees, notary costs or stamp duty.

When it comes to enforcement, the pledge and the security ownership are treated similarly. Both can be enforced out of court and are subject to the same statutory restrictions. 

Likewise, in case of the owner’s insolvency, no material differences between the pledge or the security ownership exist. Even though the creditor is the owner of the rolling stock in case of a security ownership, the creditor may not claim that the rolling stock is separated from the insolvency estate. Like being a mere pledgee, the creditor is only entitled to the proceeds generated from the sale of the rolling stock. It is up to the insolvency administrator to realise the assets. Only if the rolling stock were in the custody of the creditor might the creditor itself realise the collateral; however, this is not done in practice.

Security over receivables under Austrian law can be taken by way of pledge or an assignment and transfer for security purposes (i.e. security assignment).

As in the case of security over rolling stock described above, in principle there is no decisive benefit of a security assignment over a pledge.

The pledge over receivables is created by a pledge agreement between the pledgee and the pledgor. While no written, certified or notarised form is required for the pledge agreement to be valid, written form is recommended.

Perfection of a pledge over receivables is done either by: (i) notification to the third party debtor of the pledge; or (ii) annotation in the books of the pledgor which generally mark the respective receivables towards the third party debtor as assigned. Removing such annotations would invalidate a security assignment. While either action is sufficient to validly perfect the pledge, creditors tend to require both, because each perfection step has its upsides and downsides.

The security assignment is created by a security assignment agreement between the assignor and the assignee. While no written, certified or notarised form is required for the security assignment agreement to be valid, written form is recommended.

As the perfection requirements applicable to the pledge under statutory law are applied by courts to the security assignment as well, the security assignment is also perfected by: (i) notification of the third party debtor; or, alternatively: (ii) annotation in the books of the assignor. 

The creation and perfection of security over receivables do not trigger any registration fees, notary costs or, except for the security assignment, stamp duty. The security assignment is however exempted from stamp duty if only claims arising out of a facility agreement are being secured. Thus, the security purpose should not extend to all finance documents (e.g. hedging agreements or fee letters) to benefit from this exemption.

When it comes to enforcement, the pledge and the security assignment are treated similarly. Both can be enforced out of court and are subject to the same statutory restrictions. Likewise, in case of the assignor’s insolvency, in principle no material differences between the pledge and the security assignment exist. 

In principle, non-assignment clauses in commercial contracts regarding monetary claims are only valid if such clauses have been negotiated individually and are not grossly detrimental to one party. A valid non-assignment clause binds the contracting parties only. The restricted party may still validly assign its monetary claims to a third party. The mere knowledge of the third party assignee of the non-assignment clause does not prevent the assignment or lead to liability on part of the assignee. However, it would expose the assignor to liability for damages for breach of contract. 

A global security assignment covering existing and future receivables arising from various contracts is permitted. However, the principle of substantiation must be considered. The receivables to be assigned must be sufficiently individualised so that any potential third party creditor may readily and clearly determine which receivables are actually assigned and therefore no longer available for discharging its potential claims. By way of illustration, this principle of substantiation is satisfied if the assignment relates to all receivables arising from a certain business operation or all receivables in respect of certain customers or all receivables arising from a specific legal basis (e.g. all receivables from lease agreements); in this case it is not necessary that the assignee and assignor also specify potential third party debtors by name.

Such global security interest over receivables may alternatively also be structured as a pledge. 

Shares in corporations (i.e. limited liability companies and joint-stock corporations) and partnerships can be pledged. As SPVs in Austria are typically set up as limited liability companies or limited partnerships, the particularities of pledges over shares in joint-stock corporations will not be addressed.

Alternatively, the shares may be transferred to the creditor by way of security ownership. While legally permitted, this type of security is rarely used in practice as the creditor would expose itself to substantial liability risks when being a shareholder of the debtor.

The pledge over shares is created by a pledge agreement between the pledgee and the pledgor. While no written, certified or notarised form is required for the pledge agreement to be valid, written form is recommended. Please note that as set out below, ordinarily the pledgee requests the pledgor to issue and deliver separate powers of attorney to the pledgee which must be certified.

Perfection of the pledge is done either by notification of the company whose shares are to be pledged or, alternatively, by annotation in the books of the pledgor. While either action is sufficient to validly perfect the pledge, creditors tend to require both, because each perfection step has its upsides and downsides.

A pledge and the subsequent sale of the shares may be subject to the approval of the shareholders or the company. If such approval requirement is set out in the company’s articles of association, such approval must be obtained, otherwise no pledge may be validly established.

Since a pledge over shares may cover ownership and other monetary claims attached to the shares but may not be extended to administrative rights such as voting rights, the pledgee ordinarily requires the pledgor to issue a voting power of attorney. Additionally, as statutory law does not grant the pledgee a statutory power to sell the shares if the parties agree on an out of court enforcement, a power of attorney for such sale must also be obtained by the pledgee. The power of attorney should be certified by a notary public. 

The creation and perfection of security over shares do not trigger any registration fees, notary costs or stamp duty. If a power of attorney is issued in connection with the pledge over shares, such power of attorney needs to be certified by a notary public, the cost of which is not substantial.

The pledge over shares may be enforced in court and, if agreed upon between the pledgor and the pledgee, also out of court. As such out of court enforcement it not foreseen in statutory law (unlike the pledge over movables), strict requirements must be set out in the pledge agreement to ensure that a sale is undertaken in the best interest of the pledgor. Further, as set out below, the pledgor must grant the pledgee a power of attorney to enable the pledgee to sell the pledged shares.

The law applicable to the manufacturing/sale and purchase agreement and the security agreement may be freely selected by the parties under the Rome I Regulation so long as the security provider is not a consumer. The Rome I Regulation however does not specify the law that applies to the perfection of the security interest which is subject to local international private law. 

Under Austrian international private law, rights in rem over rolling stock are determined according to the law of the state in which the company that is operating the vehicles maintains its actual head office.

This specific conflict of law rule applies to both the transfer of ownership in and the creation of security over the rolling stock. This conflict of law rule is mandatory and the parties may not agree on a law of another state to govern these rights in rem over rolling stock.

Austrian courts had previously held that foreign law security interest over movable assets that are brought into Austria will only be recognised if the security interest has been perfected in a way which clearly reveals the security interest towards third parties similar to the Austrian law perfection requirements as described above. However, in 2018 case law changed. The Austrian Supreme Court held that if a non-possessory security ownership which has been validly established in Germany is brought to Austria, it nevertheless remains effective even though it does not satisfy Austrian perfection requirements.

Yes. When the security interest is validly created over rolling stock abroad according to the applicable foreign law and subsequently moved to Austria, such security interest will be recognised by Austrian courts irrespective of whether the foreign law perfection requirements (if any) are similar to the Austrian ones. For more details please see above.

The law applicable to the security agreement may be freely selected by the parties under the Rome I Regulation as long as the security provider is not a consumer.

Furthermore, the Rome I Regulation states that the law applicable to the security agreement also determines the law relevant for assessing the transfer of the rights in rem over the receivables, but only among the assignor and the assignee. But rules aimed at the protection of the third party debtor are governed by the law of the state which is applicable to the assigned receivables. It must therefore be determined according to the law applicable to the assigned claim, which objections the debtor can raise against the assignee and whether payments to the assignor have discharging effect. 

In Austria, security interest over receivables takes legal effect against third parties (including an insolvency administrator) if the parties comply with Austrian perfection requirements. According to the prevailing view in Austria (also confirmed by a recent court decision of the ECJ), the perfection requirements are rules with an impact on third parties and are therefore determined by local international law rather than the Rome I Regulation.

Since Austrian international private law does not contain an explicit referral for rights in rem over receivables, the general principle applies according to which the law with the strongest link to the case shall be relevant. Austrian courts hold that the law applicable to the assigned claim is that decisive link. 

Assuming that the receivables to be pledged or assigned are governed by Austrian law while the underlying security agreement is not, it is advisable to fully comply not only with the requirements set out by the law governing the security agreement but also the Austrian law perfection requirements.

Assuming that the fleet manager is an Austrian entity and the lease receivables to be assigned to the borrower are governed by Austrian law:

Each assignment of receivables under Austrian law requires an underlying legal title that justifies the assignment. Such legal title is ordinarily a purchase, a gift or a security interest. An abstract assignment, e.g. an assignment which does not specify the legal ground for the transfer, is not permissible. 

If the assignment from the fleet manager to the borrower is structured as an assignment to secure the borrower’s claims against the fleet manager, such assignment must comply with the Austrian perfection requirements to take legal effect towards third parties and to be recognised by an insolvency administrator appointed over the assets of the fleet manager. The perfection is performed by either: (i) a notification of the third party debtor, being the lessees of the rolling stock; or (ii) an annotation in the books of the fleet manager. The borrower usually wants to avoid sending notifications to all lessees which means the parties have to resort to the book annotations which, however, require that the lease receivables appear in the fleet manager’s account books.

Fulfilment of those perfection requirements may be avoided if the assignment is based on a legal title other than a security assignment. However this might be tricky due to the limited options available. The commission arrangement between the fleet manager and the borrower may serve as such legal title. That structure, however, requires detailed analysis and has not yet been tested before the Austrian  courts. It further depends on the law applicable to the commission arrangement. 

Additionally, an assignment, whether for security purposes or not, triggers Austrian stamp duty which is calculated on the basis of the consideration received by the assignee or the secured amount. There are workarounds to avoid such stamp duty which, however, come with certain downsides. 

The on-assignment or pledge by the borrower to the finance parties is in principle permissible. Such on-assignments for security purposes or pledges require fulfilment of the corresponding perfection requirements. Therefore, the lessees as third party debtors must be notified (in the case at hand this means that all present and future lessees under the lease agreements must be notified of both assignments/the assignment and the pledge), which the borrower usually likes to avoid, or book annotations are entered into the borrower’s account books which, however, requires that the on-assigned/pledged lease receivables appear in the borrower’s accounts. 

In order to safeguard the lease revenues against potential deficiencies of a global assignment, the relationship between the fleet manager and the borrower may be set up as a commission under which the fleet manager enters into all lease agreements relating to the financed rolling stock in its own name but for the account of the borrower. Lease receivables are held on trust for the benefit of the borrower. Consequently, those lease receivables do not belong commercially to the fleet manager’s insolvency estate. The borrower may file with the insolvency administrator that the lease receivables are separated from the other assets of the fleet manager so that the borrower may continue to collect the lease revenues outside of the insolvency proceeding, but only until the date on which one of the parties to the underlying lease agreement is entitled to exercise a break option (irrespective of whether it is actually exercised).