International rolling stock financing in England & Wales

Rolling stock is categorised as ‘moveable property’ and so under English law security can be taken by way of charge or legal mortgage. Typically lenders prefer to take security over rolling stock by way of a legal mortgage known as a chattel mortgage, rather than by way of an equitable mortgage or a fixed or floating charge. 

A legal mortgage can only be taken over assets owned by the mortgagor at the time such mortgage is granted. Therefore, where the rolling stock in question is in the process of being manufactured, the mortgagor (the entity granting security) is typically required to enter into a debenture (an all asset security comprising fixed and floating security over the assets of the mortgagor) at financial close. Such debenture will normally include provisions that upon the acquisition of future rolling stock (i.e. following delivery and transfer of ownership to the mortgagor), the mortgagor will enter into a supplemental legal mortgage (the form of which is often set out in the debenture) to secure such rolling stock in favour of the secured creditor.

A legal mortgage is created by the parties agreeing that legal title of the asset will be transferred to the creditor and the mortgagor is often required to deliver to the secured creditor all documents of title, guarantees or warranties relating to the asset. There is no specific form of mortgage required but typically there will be a written security document which evidences the creation of the legal mortgage. Furthermore, it is essential that the asset that is subject to the legal mortgage is identifiable and title and ownership are ascertainable. The mortgagor has a right to have the asset retransferred to it once the secured obligations are discharged (this right is known as the “equity of redemption”).

Where the mortgagor is a UK registered company or limited liability partnership, the security is typically required to be registered at Companies House within 21 days of creation of the security for a small fee. However, at the time of writing and as a result of COVID-19 disruption, the 21-day period for registering charges at Companies House has been temporarily extended to 31 days.  Foreign companies creating security over rolling stock (including rolling stock in the UK) do not need to register the security at Companies House. 

If the security is not registered at Companies House within the applicable time period described above, it will be void against a liquidator, administrator and any creditor of the chargor. 

At the time of writing, there is currently no central register for rolling stock in the UK which contains details of security or the holders of security over rolling stock. 

Security over receivables under English law can be taken either by way of a charge or an assignment by way of security. The assignment can either be a legal assignment or an equitable assignment. In all three cases, the security gives the creditor a proprietary interest in the receivable which is effective in the insolvency of the debtor. The only practical difference between a legal assignment and an equitable assignment is that the assignee of a legal assignment can sue the counterparty in its own name without having to join the debtor to the proceedings.

In rolling stock transactions, the market practice historically has been to take an assignment by way of security over the lease receivables rather than a charge. However, in light of recent case law, security over receivables/contracts is now more likely to be taken by way of charge unless the intention is that the secured creditor is to receive all of the cashflows under the lease (instead of the chargor receiving it).

The security, whether a charge or an assignment, will normally be created in a written security document signed by the relevant parties. Regarding perfection, in the case of a charge and an assignment (legal and equitable), the security is perfected by giving notice of the charge/assignment to the counterparty. An acknowledgement of assignment is not required, but it is market practice to request acknowledgements (where possible). There is no specific form requirement for the notice or acknowledgement but care should be taken to ensure it is correctly addressed to the relevant counterparty.

As with a legal mortgage, a charge or an assignment by way of security will need to be registered at Companies House within 21 days of creation of the security for a small fee if the chargor/assignor is a UK-registered company or limited liability partnership (or 31 days while the filing extension for COVID-19 disruption is in place). There are no other registration requirements. 

Under English law, a contractual prohibition on assignment is effective and any purported assignment in breach of such prohibition is ineffective. The purported assignee therefore does not obtain a proprietary interest in the receivable, irrespective of whether it was aware of the restriction. While some legal commentators and judges have criticised this rule, it remains the current law.

“Non-assignment” clauses need to be reviewed on a case-by-case basis, as although assignment may be prohibited, charging or disposing of the assignor’s rights in the receivables may not be prohibited and therefore, by interpretation, would be permitted. Other restrictions typically seen include limits on the number of permitted assignments before consent of other parties is required or consent being required for assignment.

Security over all present and future receivables can be taken by way of a charge or an equitable assignment.

Under English law, security over shares is normally taken by way of fixed charge.

If the chargor is a UK-registered company or limited liability partnership, the security must be registered at Companies House within 21 days of creation of the security for a small fee (or 31 days while the filing extension for COVID-19 disruption is in place) if the security document includes a charge or assignment of any dividends or a charge over interests other than shares (such as subordinated loans). If the charge is purely over shares (and no other assets) it might constitute “financial collateral” and so be exempted from registration at Companies House although market practice is to register in any event.

Generally there are no other specific form or perfection requirements, although the constitutional documents of the entity in which the shares relate (the “Relevant Company”) are often reviewed, and where appropriate, amended in advance of completion to ensure that the directors of the Relevant Company are not permitted to refuse to register transfers of the charged shares as a consequence of enforcement of the relevant share security.

The chargor will also usually be required to deliver to the secured creditor the original share certificate(s) relating to the charged shares together with a signed undated stock transfer form to allow the secured creditor to effect a transfer of the shares following enforcement.

Security created by a company incorporated in England and Wales over an overseas asset must be registered at Companies House in the same way as security created over assets in the UK.

Where the choice of law in the relevant security agreement is English law and the jurisdiction is agreed between the parties to be the English courts, then the manner and rights of enforcement are usually prescribed in the relevant security agreement. 

A standalone share charge will normally be enforced by the chargee by exercising its power of sale (which will normally be expressly set out in the security document). The chargee will either exercise the power of sale itself or, where permitted, appoint a receiver (whose powers and duties are typically expressly set out in the security document) to sell the charged assets. It is important to note that a receiver acts as an agent of the borrower/chargor but acts on the instructions of the chargee.

Where the share charge has been created pursuant to a debenture (an all asset security which includes a floating charge over all or substantially all of the assets of the chargor), the chargee may instead seek to appoint an administrator in respect of the chargor (as opposed to a receiver in relation to the charged shares) to allow for the reorganisation of that company or the realisation of its assets (including the charged shares) under the protection of a statutory moratorium as part of the administration process. This moratorium prevents a creditor and third parties from exercising most of their respective rights against the chargor or its assets (including commencing insolvency proceedings against the chargor, enforcing security over the assets of the chargor etc.), during the period of the administration. It does not alter the creditor’s substantive rights, but rather suspends them. 

In general, rolling stock is subject to the general laws relating to moveable property. The law applicable is the law of the place where the asset is located at the time of the event said to confer title (lex rei sitae or lex situs). Therefore, if the relevant rolling stock is located in England and Wales at the time the security is taken, the security documents should also be governed by English law. To the extent that rolling stock is subsequently permanently moved to operate on a network outside of England and Wales, a secured creditor may wish to consider whether it would be appropriate to take new security under the law of the jurisdiction where the rolling stock is now located and so it is not uncommon to see a restriction requiring the secured creditor’s consent before rolling stock can be moved to operate in a new jurisdiction. 

Recognition of foreign law security

As noted above, English law generally applies the lex situs rule to moveable property, hence the validity of foreign law security created over rolling stock located outside the UK would normally be determined by reference to the laws of the jurisdiction in which the rolling stock was located at the time the security was taken.

In respect of contractual obligations arising under a foreign law-governed security agreement, English law generally recognises the governing law as chosen by the parties provided that they have chosen the relevant governing law in accordance with Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), which was incorporated into English law at the end of the Brexit transition period by the European Union (Withdrawal) Act 2018 as amended by the European Union (Withdrawal Agreement) Act 2020 (UK Rome I). 

In relation to foreign law security, if the security provider is a UK entity, the foreign law security must be registered at Companies House within 21 days of creation of the security for a small fee (or 31 days while the filing extension for COVID-19 disruption is in place). 

Enforcement/insolvency scenarios

We have to distinguish between enforcement/insolvency scenarios depending on the jurisdiction involved. The foreign law security could have been granted by a UK or a non-UK entity. While it is more usual for UK entities to be placed into UK restructuring or insolvency processes, and for non-UK entities to be placed into restructuring or insolvency processes in their jurisdiction of incorporation, this is not always the case. Post-Brexit, the UK courts have a wider jurisdiction to place non-UK entities into formal UK insolvency processes (subject to certain requirements) and the key restructuring processes of schemes of arrangement and restructuring plans have remained available to any company with a “sufficient connection” to the UK. 

As a result of Brexit, Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (“Recast Insolvency Regulation”) no longer applies from 1 January 2021 in the UK and so there is no automatic recognition of UK restructuring and insolvency processes in the EU. There are certain options available to obtain recognition in the EU post-Brexit, but these are potentially more difficult, time-consuming and expensive and will, in many cases, depend on the local rules in the jurisdiction in which recognition is sought. Similarly, EU restructuring and insolvency proceedings no longer enjoy automatic recognition from 1 January 2021 in the UK. Again, there are certain options available for recognition in the UK post-Brexit (including applying for recognition under the Cross-Border Insolvency Regulations or commencing concurrent UK proceedings), but these may be more difficult, time-consuming and expensive than the automatic recognition that EU restructuring and insolvency proceedings enjoyed in the UK under the Recast Insolvency Regulation. 

We have commented above on some of the general principles relating to restructuring and insolvency processes, but the appropriate jurisdiction to open any such processes and their recognition would have to be assessed on a case-by-case basis.

Possessory and non-possessory forms of foreign law security are recognised in a similar manner under English law. Non-possessory forms of security will be subject to the same registration requirements at Companies House (to the extent the company granting it is a UK company). There are no specific requirements for the recognition of such non-possessory foreign law securities under English law.

In the UK, Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) was incorporated into English law at the end of the Brexit transition period by UK Rome I. Consequently, subject to certain exceptions, parties to foreign law security agreements may continue to determine between themselves the governing law of the relevant security agreements.

However, as a matter of English law, it is generally accepted that the proprietary effects of an assignment are governed by the governing law of the assigned receivable (i.e. whether the relevant receivables are assignable, the relationship between the assignee and the third party debtor and whether the debtor’s obligations have been discharged). Hence where the assigned receivables are governed by English law, we advise that the assignment agreement should also be governed by English law.

Please refer to the paragraphs Recognition of foreign law security and Enforcement/insolvency scenarios for our comments on the extent to which foreign law security may be recognised in the UK and the relevant considerations in an insolvency/enforcement scenario.  

A fleet manager structure is not usual in UK rolling stock financings. Unless the intention is that the secured creditors are to receive all of the cashflow under the assignment from the manager to the borrower (i.e. instead of the borrower receiving it), this would likely now be secured by way of charge.

Where the lease receivables held by the manager comprise a combination of amounts due to the borrower and third parties, this is likely to be problematic under English law and will depend on, among other things, whether the amounts due to the borrower are clearly identifiable/ascertainable. 

This issue would therefore need to be considered on a case-by-case basis and would depend on various factors including whether the fleet manager is part of the same group as the borrower or a third party fleet manager and how the leased fleet is comprised.

There is no inherent restriction applicable to such on-assignment/on-charges under English law. However, this may be contractually restricted and would be subject to any restrictions in the relevant contract. Provided the relevant contract does not expressly prevent such assignment/charge, then this is permitted under English law. 

This would need to be considered on a case-by-case basis and the considerations may differ depending on whether the fleet manager is part of the borrower group or a third party and how the leased fleet is comprised.

The management agreement used in other jurisdictions is akin to an agency relationship under English law. Under English law agents owe both contractual duties (which would be set out in the management agreement) and fiduciary duties to the principal (in this case the rolling stock owner). Agents are required to perform their contractual duties with reasonable care and skill and their fiduciary duties require them to place their principal’s interests before their own properly and in good faith. However, this will not necessarily provide much comfort to the rolling stock owner or the senior debt providers where the manager becomes insolvent. As previously mentioned, this type of arrangement is not common in the UK.

Instead an insolvency remote structure would need to be created whereby the agreements and cash flows are secured and ringfenced in favour of the rolling stock owner. This might be difficult to achieve to a standard which is acceptable to the lenders where leases relate to rolling stock owned by companies which are not all part of the same group and with different financings in place.