Creditors’ protection enhanced in financing railway rolling stocks following the entry into force of the Luxembourg Protocol

The Cape Town Convention on international interests in mobile equipment (the “Convention”) was adopted on 16 November 2001 and promotes the financing and acquisition of certain type of assets. It lays down uniform rules on the validity, enforceability and enforcement of security interests and enables international creditors to retain their prerogatives and rank irrespective of the location of the secured asset. It applies to (i) aircraft, (ii) railway rolling stock (“RRS”), (iii) space assets and (iv) mining, agricultural and construction equipment.

The Convention is supplemented by several protocols which contain specific provisions for each type of asset. Thus, the Luxembourg Protocol, signed on 23 February 2007 and ratified by the European Union on 18 December 2014, pertains to RRS (the "Protocol"). It entered into force on 8 March 2024.

The Protocol establishes a supervisory authority and an international registry for RRS (the "International Registry"), located in the Grand Duchy of Luxembourg. The International Registry will enable (i) the identification of RRS and (ii) the registration of international interests covered by the Protocol. The effects of the default of a secured obligation are also described in the Convention and the Protocol.

Identification of RRS in the International Registry

RRS refers to vehicles movable on a fixed railway track or directly on, above or below a guideway, together with traction systems, engines, brakes, axles, bogies, pantographs, accessories and other components, equipment and parts, in each case installed on or incorporated in the vehicles, and together with all data, manuals and records relating thereto.

The identification of RRS results from (i) the description of the RRS by item or by type or (ii) a statement that the agreement covers all present and future RRS (where applicable, with the exception of items or types of equipment specifically indicated).

The identification number is affixed to the item of RRS and associated in the International Registry with (i) the manufacturer's name and the manufacturer’s identification number for the item so affixed, or (ii) a national or regional identification number so affixed.

Registration of international interests in the International Registry

International interests regarding RRS (the “International Interests”) are classified in three categories: these are the interests (i) granted by the chargor under a security agreement (i.e. suretyship or demand guarantee or a standby letter of credit or any other form of credit insurance), or (ii) vested in a person who is the conditional seller under a title reservation agreement, or (iii) vested in a person who is the lessor under a leasing agreement. To be valid, International Interests must be constituted in an agreement which (i) is in writing; (ii) relates to an object of which the chargor, conditional seller or lessor has power to dispose; (iii) enables the object to be identified in conformity with the Protocol; and (iv) in the case of a security agreement, enables the secured obligations to be determined without the need to state a sum or maximum sum secured. An International Interest in an object extends to proceeds of that object.

The International Registry records, inter alia, registrations of (i) International Interests, prospective International Interests and registrable non-consensual rights and interests; (ii) assignments and prospective assignments of International Interests; (iii) acquisitions of International Interests by legal or contractual subrogation; (iv) notices of national interests; and (v) subordinations of such interests.

The registration, extension, amendment or discharge of the registration of the International Interest in the International Registry is subject to conditions of validity (including the written consent of the parties) set out in the Convention and in the Protocol. The registration remains effective until (i) it is discharged or (ii) the expiry of the period specified in the registration. Notices of sale of RRS are also recorded in the International Registry.

Registration of an International Interest confers priority on it. A registered interest has priority over any other interest subsequently registered and over any unregistered interest. However, the holders of competing interests or rights may agree to modify their respective ranking, but an assignee of a subordinated interest is not bound by an agreement to subordinate that interest unless at the time of the assignment a subordination had been registered relating to that agreement.

Anyone may consult the International Registry.

Measures to be taken in the event of non-performance of the International Interests

In the event of default, the chargee may, to the extent (i) that the chargor has so agreed or (ii) with an authorisation by the court (i) take possession or control of any charge to it; (ii) sell or grant a lease of any such object; (iii) collect or receive any income or profits arising from the management or use of any such object; (iv) export and physical transfer the RRS from the territory in which it is situated.

Any sum collected or received by the chargee as a result of exercise of any of the remedies is applied towards discharge of the amount of the secured obligations. If it exceeds the amount secured (increased with any costs incurred), the chargee distributes the surplus among holders of subsequently ranking interests which have been registered or of which the chargee has been given notice, in order of priority, and pay any remaining balance to the chargor. The conditional seller or the lessor, as the case may be, may terminate the agreement and take possession or control of any object to which the agreement relates; or apply for a court order authorising or directing either of these acts.

In insolvency proceedings against the debtor, an International Interest is effective if that interest was registered prior to the commencement of the insolvency proceedings. When an insolvency situation arises, the insolvency administrator or the debtor gives possession of the RRS to the creditor at the end of a so-called waiting period, specified in the declaration of the Contracting State which is the primary insolvency jurisdiction. As long as the creditor has not regained possession of the RSS, the debtor may use it and must preserve and maintain it and its value. However, the insolvency administrator or the debtor may retain possession of the RRS where it has cured all defaults other than a default constituted by the opening of insolvency proceedings and has agreed to perform all future obligations under the agreement and related transaction documents.

The Convention also governs the assignment (in whole or in part) of associated rights and International Interests, which transfers the International Interests and all the assignor's rights and priority to the assignee; the applicable law determines the defences and the rights of set-off available to the debtor against the assignee. The assigned associated rights revest in the assignor, to the extent that they are still subsisting, when the obligations secured by the assignment have been discharged. Such assignments must comply with formal requirements and subject the debtor to obligations towards the assignee; they rank pari passu and guarantee, subject to conditions, the assignee's priority with respect of the associated rights.

Finally, the Convention and Protocol introduce rules on jurisdiction and applicable law (choice of court and waiver of immunity from jurisdiction).

Should you have any questions on the above, please do not hesitate to contact one of our experts of the Banking and Finance team.