International rolling stock financing in the Czech Republic

In practice, there are two types of security that can be granted over rolling stock under Czech law (there is no special pledge regime for rolling stock):

• Pledge over moveable asset
• Transfer of title by way of security

A pledge over rolling stock (as a collective thing) can be established by agreement between the pledgee and the pledgor and executed as a notarial deed. The security is perfected by registration in the Register of Pledges maintained by the Notarial Chamber of the Czech Republic (the “Register of Pledges”). 

The costs of the notarial deed are calculated on the amount of the debt to be secured or, if the value of the pledged asset is lower than the amount of the debt, on the value of the asset. In addition, there is a registration fee.

It is also possible to establish a pledge over individual assets/railcars. In such case, the pledge agreement does not need to be by notarial deed or registered in the Register of Pledges.

Further, it is possible to create a negative pledge over assets. A negative pledge clause is normally contained in the pledge agreement (however, there can be also a separate agreement on a negative pledge). A negative pledge registered in the Register of Pledges is established as a right in rem and prevents creation of subsequent pledges in favour of a third party. The signatures on a negative pledge agreement should be notarised. If a negative pledge is registered in the Register of Pledges separately from a pledge, there will be additional registration costs.

A transfer of title by way of security is generally a transfer of title pending discharge of the debt. There are no specific form requirements (i.e. notarial deed, notarisation of the signatures etc.). Once the agreement is signed (and unless agreed otherwise), the transfer is effective. Until the secured debt has been discharged, the transfer of title by way of security is unconditional and the debtor shall hand over to the creditor everything which is necessary for the full exercise of the transferred right.

No registration is required if a transfer of right as security does not concern an asset registered in a public register. There is currently no public register of rolling stock in the Czech Republic.

Security over lease receivables under Czech law would be by way of a pledge (or less commonly, security assignment).

A pledge over leasing receivables can be established by an agreement between the pledgee and the pledgor. No registration is required. It is however possible to establish a pledge over receivable(s) and register the pledge in the Register of Pledges. In such case, it is necessary to have the respective pledge agreement in the form of a notarial deed and the security is perfected by the registration. Registration in the Register of Pledges gives priority over any non-registered pledge (even if created before the registered pledge).

The costs of the notarial deed are calculated on the amount of the debt to be secured or, if the value of the pledged asset is lower than the amount of the debt, on the value of the asset.

It is also standard in the Czech market for a pledge over receivables to contain a negative pledge clause and an undertaking that the negative pledge be separately registered in the Register of Pledges. A negative pledge registered in the Register of Pledges is established as a right in rem and prevents establishment of subsequent pledges in favour of a third party. The notary requires the agreement on a pledge over receivables to be signed with verified signatures. Registration will trigger registration costs. The pledge becomes effective against the debtor of the pledged receivables (sub-debtor) only when notified by the pledgor or when its creation is proved by the pledgee to the debtor.

There are no specific form requirements (i.e. no notarial deed, notarisation of signatures etc.) for a security assignment. Once the agreement is signed, the assignment is effective. Until the secured debt has been discharged, the assignment is unconditional and the debtor shall hand over to the creditor everything which is necessary for the full exercise of the transferred right. This type of security is not particularly common in the Czech Republic.

For a receivable to be pledged, it must be assignable. If the underlying lease agreements contain non-assignment clauses (and provided that the sub-debtor does not consent to the pledge), security over such a receivable cannot be validly created.
As there is currently no case law in the Czech Republic on this issue, we always recommend that underlying agreements are checked for the existence of any non-assignment clauses prior to execution of any related security agreement.

Although in theory a global pledge over receivables would be possible under Czech law, in practice it cannot be validly perfected according to the Notarial Chamber of the Czech Republic as such pledge cannot be registered in the Register of Pledges.

It is possible to assign a set of receivables (as a security) if such set of receivables is sufficiently identified (e.g. receivables of a certain kind originating within a certain period of time). However, security assignments are not commonly used in the Czech Republic.

Pledge over ownership interest (shares).

The formal requirements for the creation/perfection of a security depend on the form of the asset being pledged, i.e. if the pledged asset is an ownership interest or a share (and if it is a share, whether the share is evidenced in a share certificate or is a dematerialised share).

A pledge of ownership interest is created upon registration in a public register in which the corporation is registered (the Czech Commercial Register). Registration costs apply. The pledge agreement must be in writing and the signatures verified.

A pledge of shares is created when the share certificate(s) are handed over to the pledgee. Further the share certificate must be endorsed with specific wording and the pledgee must be identified. The pledge agreement does not require notarisation unless required by the company’s articles of association.

A pledge over dematerialised shares is created upon registration in the owner’s account in the relevant register (either in the central register of dematerialised securities or in the follow-up register kept by the relevant securities trader, depending on whether the shares are kept on the owner’s account in the central or follow-up register).

Registration is made by a person authorised to maintain the register on behalf of the pledgor. The pledgee can also be authorised by the pledgor to effect registrations.

The central register of dematerialised securities is kept by the Central Securities Depository Prague. The registration of a pledge on dematerialised shares triggers registration costs. Further, suspension of the owner’s right to dispose of dematerialised shares may be registered in the relevant register. During the period of suspension of the owner’s right to dispose of dematerialised shares, it is not possible to register a change of owner in the register, nor is it possible to register another pledge. The costs correspond to the costs of the registration of the pledge. The pledge agreement does not require notarisation unless required by the company’s articles of association.

Enforcement is normally done by way of sale of the pledged asset at public auction. However, it is also possible for the parties to agree to other means of enforcement in the pledge agreement. If shares admitted to trading on a European-regulated market are pledged, they are sold in or outside of this market at the price amounting at least to that determined by the European regulated market.

Transfer (purchase) of ownership of rolling stock

In the absence of an express choice in the sale and purchase agreement and provided that the United Nations Convention on Contracts for the International Sale of Goods is not applicable, the governing law, if assessed by the Czech court, will be determined according to Regulation (EC) 539/2008 on the law applicable to contractual obligations (Rome I) (“Rome I Regulation”), i.e. the agreement will be governed by the law of the country where the seller has its habitual residence.

Pledge – Obligation statute

In the absence of an express choice of law in the pledge agreement, the governing law would be determined by a Czech court according to the Rome I Regulation. The pledge agreement shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has its habitual residence. However, if the pledge agreement is manifestly more closely connected with another country, the law of this country shall apply (e.g. such close connection can be a close relationship with another contract or contracts).

A similar procedure for determining the governing law would apply in case of assignment/transfer of title as security.

Pledge – Statute in rem

Lex rei sitae – As the Rome I Regulation principally only regulates contractual aspects, in respect of in rem rights, the Czech Act No. 91/2012 Coll., on international private law will be applied by the Czech court, when determining the governing law of in rem rights.

The in rem rights to tangible chattels are subject to the body of laws of the place where the property is located according to the Czech Act No. 91/2012 Coll., on international private law. The establishment and termination of in rem rights to tangible moveable chattels are subject to the body of laws of the place where the chattel was at the time when the event occurred which gave rise to the establishment or termination of the rights.

Foreign law security will generally be recognised under Czech law.

According to Act No. 182/2006 Coll., the Czech Insolvency Act, a secured creditor includes a creditor whose receivable is secured by an asset which forms part of the insolvency estate; such security includes, among others, a pledge, assignment/transfer of title as security or a similar right under foreign law.

It is necessary to assess each foreign law security individually as to whether its content corresponds to or is similar to the security under Czech insolvency law. As there is no (case-law or other) guidance/criteria in this area, we are unable to assess the extent and conditions under which such security will be recognised in Czech insolvency proceedings.

In general, any foreign creditor may lodge a claim in the insolvency of a Czech debtor using the standard receivable form to be established in accordance with Article 55 of Regulation (EU) 2015/848 on insolvency proceedings.

According to Czech insolvency law, in respect of secured receivables, the creditor must also indicate in the application whether they are seeking to exercise a right to satisfaction from the secured asset and identify the type of security and the date of its creation.

There are no specific restrictions regarding non-possessory foreign law security. The general rules set out above apply.

The rules for determining the governing law for the creation of security over rolling stock (as set out above) would also apply equally to the creation of security over receivables.

Generally, foreign law security may be recognised under Czech law – see above.

It is necessary to assess each foreign law security individually as to whether its content corresponds to or is similar to the security under Czech insolvency law. As there is no (case-law or other) guidance/criteria in this area, we are unable to assess the extent and conditions under which such security will be recognised in Czech insolvency proceedings.

Under Czech law, should there be an agreement between the borrower and the fleet manager (under which the fleet manager enters into individual lease agreements in its own name but for the account of the borrower), this would be considered as komisionářská smlouva and the lease receivables will be legally owned by the borrower, hence no assignment would be necessary.

Should there be any other legal concept applied (by which the receivables will be owned by the fleet manager), we would expect an outright assignment.

Yes, however, a pledge would commonly be used.

A komisionářská smlouva is a prudent option. Further, it would also be advisable to have a bank account (for the purposes of payment of lease receivables) established in the name of the borrower (and not manager) so that this will not be identified as part of an insolvency estate of the manager.

Further, one of the standard forms of security taken in the Czech Republic is a pledge over the bank account/lease receivables.