International rolling stock financing in Germany

Under German law, security over rolling stock can be taken by way of a pledge (Pfandrecht) or a security (fiduciary) transfer of title (Sicherungsübereignung). While the pledge does not require a title transfer, it does require an actual transfer of possession. For this reason, security transfers of title have become the standard form of security over movable assets in Germany, including rolling stock.

The security transfer of title is documented by a security agreement in which the parties agree to transfer the relevant assets for security purposes and the lender provides the debtor with ‘constructive possession’ (Besitzmittlung) of the rolling stock.

There are no specific form requirements such as registration, notarisation etc., and no specific costs will be triggered.

However, it needs to be noted that rolling stock that is to be transferred to the lender for security purposes has to be clearly specified in the security agreement so that any third party can determine the respective asset by reference to the security agreement. It is therefore common practice in Germany to attach a list of the respective rolling stock to the security document which includes all relevant details.

There is no registration system in Germany for security over movable assets hence it is not possible for lenders to check whether rolling stock is subject to existing security. This is one of the main concerns of a secured lender in Germany.

Security over lease receivables can be taken by way a pledge (Pfandrecht an Rechten/Forderungen) or a security assignment (Sicherungsabtretung). However, in the case of a pledge, the debtor must be notified of the pledge, which is why pledges are unpopular in practice. Hence, it is market practice in Germany that security over lease receivables is taken by way of security assignment. The advantage of this security instrument is that it is possible to take a global assignment over all or part of the debtor’s receivables, including (subject to limitations in case of an insolvency of the assignor) future debts, and assignments are effective without notification to the debtor. The debtor is often entitled to collect the proceeds of the debts until an event of default under the finance documentation or the fleet management agreement has occurred, so that the assignment generally remains undisclosed to third parties. 

The security assignment is documented in a security agreement in which the parties agree to assign the relevant receivables for security purposes. The receivables that shall become subject to the security assignment have to be clearly specified in the security agreement so that any third party can determine the respective receivables by reference to the security agreement. There are no specific form requirements such as registration, notarisation etc., and no specific costs will be triggered. 

Perfection of the security does not require notification to the third party debtor. However, until receipt of notice, the debtor may discharge the respective debt by payment to the assignor. Therefore, the security assignment usually includes an obligation to notify third party debtors if an event of default under the finance documentation or the fleet management agreement has occurred. 

Under German law a non-assignability clause will be effective to prevent a security assignment being created over the relevant receivables. 

However, a non-assignability clause with respect to monetary claims is not enforceable if the transaction creating the receivable is a commercial transaction for both parties. Section 354 a German Commercial Code (Handelsgesetzbuch or “HGB”) provides that even if the parties to a commercial transaction agreed that the receivables may not be assigned, the assignment of the receivables is nevertheless valid and effective. The debtor of the receivable can, however, still make payments to the assignor with discharging effect, even if the debtor has received a notice of the assignment (a contractual provision by which the parties agree otherwise is invalid). 

Section 354 a HGB does not apply to non-assignability clauses agreed with a private consumer or to claims of credit institutions under loan agreements.

Yes, it is possible to take a global assignment and assignments of future receivables. However, with regard to future receivables, there are certain limitations in insolvency scenarios. If receivables come into existence after the opening of insolvency proceedings of the assignor, such receivables cannot become subject to the security assignment. In respect of receivables which arise from agreements for the performance of continuing obligations, such as lease agreements, it needs to be thoroughly reviewed whether such receivables will be considered as “coming into existence” only in the future.

For standard operating lease agreements relating to rolling stock, this is usually the case, i.e. in case of an insolvency of the assignor, future operating lease receivables usually cannot become subject to the security assignment.

A German law pledge would be a standard security over shares or partnership interests in a German entity. 

In respect of a German law limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) or partnership (being the standard legal forms for SPV structures) the following applies:

• a pledge over the shares in a GmbH or the partnership interests in a partnership must be notified to the pledged company
• a valid pledge of shares in a GmbH requires notarisation. The fees of the notary, which are calculated in accordance with the value of the pledged shares, can be substantial. Any limitation regarding the assignment and/or pledge of shares contained in the articles of association needs to be considered
• interests in partnerships may only be pledged if all partners agree to do so. The relevant partnership agreement and the partners’ resolution need to be considered in this regard
• pledge agreements usually expressly exclude the voting rights from ambit of the pledge, especially if the company whose shares/interests are pledged is a borrower in order to minimise the risk that in the underlying, secured debt could be recharacterised as equity.

If all mandatory requirements with regard to the enforcement of pledges are met, in particular if the secured obligations are due and payable (“Maturity of the Pledge”), the pledgee will in particular be entitled to (always subject to the applicable mandatory rules):

• realise the collateral by way of a public auction (öffentliche Versteigerung)
• collect any pecuniary ancillary right (in particular profits)
• effect a private sale of the collateral (freihändiger Verkauf) at the current price (laufender Preis), as far as it has a stock exchange or market price (Börsen- oder Marktpreis), to a third party, or acquire the title itself (Verfallsvereinbarung). However, the pledgor and the pledgee can only agree to such private sale (freihändiger Verkauf) to a third party, and to the pledgee acquiring the title itself (Verfallsvereinbarung), prior to the Maturity of the Pledge if the owner of the pledged asset and the pledgee are entrepreneurs (in the meaning of the German Civil Code), public law legal entities or special funds under public law pledge.

To the extent rolling stock qualifies as a “railcar” (“Schienenfahrzeug”) within the meaning of Article 45(1) sentence 2 no. 3 of the Introductory Act to the German Civil Code (Einführungsgesetz zum BGB or “EGBGB”), the law of the state of registration (Staat der Zulassung) within the meaning of Article 45 of the EGBGB is the relevant law. In respect of all other rolling stock that does not qualify as Schienenfahrzeug within the meaning of Article 45 EGBGB, the law of the place of the physical location of such rolling stock at the time of creation of the security interest is the relevant law. 

If a security interest has been validly created under foreign law and such foreign law is the applicable law in accordance with the German international private law rules, such security interests will in general be recognised. However, the precise nature of the recognition and the effects of such security interest in and outside an insolvency scenario will need to be reviewed on a case-by-case basis. 

As German law recognises non-possessory security over rolling stock, this does not raise any specific concerns under German law.

In Germany, Article 14 of 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”) applies, i.e. the assignor and the assignee can in principle agree on the governing law. The governing law of the receivables that shall become subject to the security, however, is relevant for the question of whether such receivables are assignable, whether the assignment can be invoked against the third party debtor, and the discharging effect of the performance of the third party debtor. In addition, the relationship between the assignee and the third party debtor is governed by the law governing the receivables that shall become subject to the security. 

Article 14 Rome I does not contain rules regarding the effect of an assignment/pledge of receivables in relation to third parties and the relevant law is highly disputed in German legal literature. The prevailing view seems to be, however, that the law governing the receivables that shall become subject to the security is also the relevant law in this regard.

In light of the above, we usually advise that the security over receivables should be governed by the law governing the receivables to be secured.

If a security interest has been validly created under foreign law, such security interests will in general be recognised, subject to the relevant laws applicable thereto in accordance with the rules on international private law set out above. However, the precise nature of the recognition and the effects of such security interest in and outside an insolvency scenario will need to be reviewed on a case-by-case basis.

We usually see an outright assignment which will be considered valid and enforceable subject to the general rules applicable to assignments generally. However, under German law, an assignment is subject to the principle of substantiation. If the assignment shall cover only the lease receivables with respect to specific rolling stock, and under the underlying lease agreements, the rent payable thereunder is not clearly allocated to each leased item of rolling stock, a German law security assignment cannot be validly created due to a lack of substantiation.

Yes, on-assignments are permitted under German law.

Under German law we usually advise structuring the management agreement as a German law “Kommissionsgeschäft” whereby the manager enters into the lease agreement in its own name but for the account of the borrower. In case of such Kommissionsgeschäft, lease receivables qualify as receivables of the owner of the rolling stock/borrower in case of an insolvency of the manager, even if these receivables have not been assigned to the owner/borrower. In practice, this rule has limited application as it does not apply if the manager has already collected the receivables. If possible, we therefore recommend taking additional security over the collection account of the manager. However it is not clear whether the rule applies to receivables which come into existence after the opening of the insolvency proceedings of the manager. 

Given that the cash flows might not be fully insolvency proof, it is also advisable to focus on the asset security, i.e. it should be ensured that the finance parties have a valid and enforceable security interest over the rolling stock taking due regard to the relevant local law for the creation of the security interest. To facilitate access to the rolling stock in an enforcement scenario we increasingly see direct agreements between the fleet manager, the owner of the rolling stock (being the borrower) and the relevant security agent. Nevertheless, as the recognition of security over rolling stock which is used cross border might raise concerns, it should also be considered: (i) whether the owner of the rolling stock/borrower can be structured as an insolvency remote SPV; and (ii) taking security over the shares/interest in the owner of the rolling stock.