International rolling stock financing in Luxembourg

As tangible movable assets, security can be taken over rolling stock which is located/held in Luxembourg, either by:

• a “common” pledge governed by the provisions of the Luxembourg Commercial Code (the “LComC”) and by certain provisions of the Luxembourg Civil Code (the “LCivC”). Such pledge would need to include parallel debt provisions in order to secure all finance parties
• a fiduciary contract as security for existing or future obligations (subject to the Luxembourg law of 27 July 2003 on trusts and fiduciary contracts – the “2003 Law”). The 2003 Law does not limit the scope of obligations which can be secured (it can potentially secure obligations of other obligors (e.g. part of the same group of companies)).

The pledgor and the pledgee enter into a pledge agreement. The pledge is perfected by transferring the pledged assets into the possession of the pledgee or an agreed third party holder (i.e. they must be, or be deemed to be, at the pledgee’s/the third party holder’s disposal, e.g. on its premises). For this reason pledges over rolling stock are not commonly used in Luxembourg. If the pledged assets are held by a third party, the perfection of the pledge may be completed by a notification of the pledge (under private seal) to such third party. 

The fiduciary contract as security must be evidenced in writing and, subject to any specific validity or enforceability rules applicable to the particular type of assets, such security is valid and enforceable against third parties as from the entry of the parties into it.

The fiduciary contract operates in a manner similar to that of a transfer of ownership of tangible movable assets, which is valid and enforceable:

• between the parties from the date of the agreement, and
• as regards third parties, as from the payment of the consideration by the transferee and its receipt of the assets (through their physical delivery, its receipt of the keys to the building(s) where they are located, or by sole agreement of the parties, if the delivery cannot occur at the moment of the transfer or if the transferee already has the assets in its possession by other means).
• For a fiduciary contract (as security) where the fiduciary property is rolling stock and rights related thereto, there is no registration or notarisation requirement.

Security over receivables is generally taken by way of pledge under the Luxembourg law of 5 August 2005 on financial collateral arrangements as amended (the “2005 Law”). Pledges which are subject to the 2005 Law can be granted to a security agent/security trustee and do not require parallel debt constructs. Such pledges can also cover future assets, but only if they are of the same type as the ones pledged (i.e. receivables to be owed by the same debtor to the relevant pledgors), subject to the perfection requirements with respect to such future assets once they come into existence.

A pledge over receivables under the 2005 Law is created and is perfected, as a matter of Luxembourg law, by the entry into the pledge agreement. There are no additional requirements under Luxembourg law. All pledges which are subject to the 2005 Law can be granted under private seal, and do not require the intervention of a notary public or other similar officer for the purposes of their creation or their perfection in Luxembourg. 

Yes, the parties to the underlying lease agreement will need to amend the restrictions in the non-assignment clauses or waive the restrictions. 

A global pledge is possible, but only if the receivables are of the same type (i.e. receivables to be owed by the same debtor to the relevant pledgors).

A pledge over shares is typically granted.

The pledge is granted by the parties entering into a pledge agreement, and is perfected by the combination of:

• notification to, or its acceptance by, the pledged company (normally satisfied by the company being party to the pledge agreement), and
• if the shares are in registered form, the registration of the pledge in the pledged company’s shareholder register (this is not a publicly available document – the registration is hence normally done by the pledged company’s management, their legal advisers or their domiciliation agent).

Specific perfection requirements would apply if the pledged shares are in bearer or dematerialised form. 

In case of bearer shares, these must already have been deposited with a specifically authorised professional depository entity which must also keep a register thereof. The pledge needs to be registered in such register for perfection.

In case of dematerialised shares, these would be booked on a securities account (which account has to be held in Luxembourg for a Luxembourg law pledge to be able to be granted over it), and it would be that securities account which would be pledged under an account pledge agreement (the creation and the perfection of the pledge is completed through the process of: (i) notification of the pledge to the account-holding bank, and (ii) the issuance of an acknowledgement of pledge by such account-holding bank and the latter marking the dematerialised shares as pledged on the pledged account) rather than a share pledge agreement.

The main methods of enforcement for share pledges would be:

• appropriation of the pledged assets by the pledgee or a nominee (whereby they would become the legal owner/holder) – the appropriation is done at the value and in the manner set out in the pledge agreement (usually at fair value, as determined by the pledgee or by an external expert (réviseur d’entreprises agréé) appointed by the pledgee). The valuation of the pledged assets can be carried out before or after the date on which the appropriation becomes effective; or
• private sale of the pledged assets by the pledgee, on normal commercial terms.

The above enforcement methods do not require the intervention of a court or other public authority (e.g. a notary), and the pledgee is free to choose the enforcement method(s). The 2005 Law allows for partial or full enforcement at the discretion of the pledgee, regardless of whether the enforcement proceeds (would) exceed the amount of the secured obligations: several enforcement methods can be used by the pledgee on the same pledged assets. 

Regarding the transfer of ownership of rolling stock from the manufacturer/seller to the borrower, 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”) should apply, hence the governing law of the sale contract for the rolling stock would be applicable. However, if the rolling stock is located in Luxembourg and the borrower/buyer thereof is also a Luxembourg company, Luxembourg law may be deemed to be the most appropriate governing law for such transfer. 

Regarding the creation of security over the rolling stock in principle, it should be the law governing the asset. As these are movable assets, it should be the law of their actual location/holding place.

In relation to foreign security over the rolling stock: 

• the Luxembourg security grantor’s obligations thereunder would (subject to their validity, legality and enforceability under their governing law) in general be recognised in Luxembourg as valid and enforceable obligations, subject to (in particular) the application of: (i) Luxembourg laws affecting creditors’ rights generally; (ii) mandatory provisions of Luxembourg law; and/or (iii) principles of Luxembourg international public policy, (in each case) from time to time in force; and 
• assuming that such foreign law security interest does not cover assets located or deemed to be located in Luxembourg at the time of the creation of the security or subsequently (in respect of future assets expressed to be covered by that security interest), the chosen governing law (in respect to contractual obligations) and jurisdiction provisions would be generally recognised in Luxembourg subject to the rules and requirements of Rome I and Regulation (EU) 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters (recast) (respectively). 

To the extent that the foreign law governing the security interest over the rolling stock does not require such steps/documents for its validity, they should also not be necessary in Luxembourg as a matter of Luxembourg law.

On the basis of Luxembourg private international law rules, a security interest over receivables would be governed by the law governing the receivable itself, as chosen by the parties to the underlying document/agreement. If there is no such specific law designated, the law governing the receivables would be considered to be the law of the domicile of the debtor. Therefore, a Luxembourg law pledge would normally be granted only over receivables which are governed (or considered to be governed) by Luxembourg law.

However, where the debtor of the Luxembourg law governed receivable is a foreign entity, the pledge must also be perfected in accordance with the requirements of the local law of that debtor. In addition, where a Luxembourg law governed pledge purports to cover receivables governed (or considered to be governed) by a foreign law, Article 14 of Rome I would apply as well.

Matters of the validity and/or the enforceability of such foreign law security are governed by and subject to the law governing such security. For foreign law security interests over receivables granted by a Luxembourg company, Article 24 of the 2005 Law provides that Luxembourg insolvency proceedings would not be applicable to foreign law security interests which are, or which are similar to, “financial collateral” within the meaning of the 2005 Law (i.e. being chiefly pledges over financial instruments, notably shares and receivables). In essence, this means that if such Article 24 is found to apply, an enforcement of such security interest may still be possible despite Luxembourg insolvency proceedings having been opened against the security provider. In this regard, it should be noted that specific assets, which are expressed to be subject to a security interest granted to a particular creditor of a Luxembourg company, in principle would generally not be available to other creditors of that same insolvent security provider (subject, however, to – most notably – applicable principles of insolvency law in case Article 24 of the 2005 Law is found not to apply, and to any attachment proceedings by third parties existing over the relevant assets). While there is no case law or other guidance as to which foreign law security interests would be considered similar to “financial collateral” for the purposes of the precited Article 24, security interests not existing in Luxembourg, such as English law floating charges, are not likely to be covered.

This would not be an assignment (whether for security purposes or otherwise), but a pledge over receivables under the 2005 Law, whose granting under Luxembourg law would be subject to the lease agreements being governed by Luxembourg law and which would be the governing law of the pledged receivables. 

The manager would have to grant such pledge to secure payment obligations it may have towards the borrower – presumably those which may arise under the management agreement to be entered into between the borrower and the manager with respect to the management of the rolling stock. 

Provided that the management agreement is itself governed by Luxembourg law, the borrower may pledge the receivables it would have against the manager under such management agreement to the security agent (for itself and for the other finance parties). Such second receivables pledge (also subject to the 2005 Law) would cover, in addition to the receivables themselves, also any accessory rights thereto (including security interests granted for their payment, such as the manager pledge referred to above). 

The second pledge agreement would provide that the security agent has the right, upon the occurrence of the agreed trigger events, to directly enforce any security interest granted over the pledged assets – such as the abovementioned manager pledge – and collect the payment receivables due by the debtors thereunder (i.e. the lessees).

As the “cascading” pair of pledges described above would be subject to the 2005 Law, they would also benefit from its insolvency protections (including with respect to the manager as debtor/pledgor thereunder).

The usual approach in Luxembourg would be to have the entities which are involved in the cash flow process grant pledges over their relevant bank accounts if such accounts are held/located in Luxembourg. Such pledge would be created and perfected through the process of:

• entry into the pledge agreement and notification of the pledge to the account-holding bank, and 
• the issuance of an acknowledgement of pledge by such account-holding bank (for this purpose, the pledged accounts must be fully operational).    

If the finance parties’ control over such accounts and the related cash flows shall be further ensured, the pledged accounts can be structured as blocked accounts. A Luxembourg law pledge over bank accounts would be subject to the 2005 Law and its insolvency protections.