Security Interests in Transport Vehicles

From Max-EuP 2012

by Eva-Maria Kieninger

1. Transport vehicles as collateral

Transport vehicles such as airplanes, ships and railway rolling stock typically are extremely valuable assets, which are financed on the basis of credit and which are particularly well suited because of their value to serve as collateral. In order to give such goods as security for a loan, they need to be encumbered with a real right. According to the practically universally accepted lex rei sitae rule of private international law (PIL), the prerequisites and the effects of security interests in movables are determined by the law where the object is situated at the time at which the right is established or sought to be enforced (property law (international)). However, security rights in transport vehicles are by the very nature of the collateral especially susceptible to a constant change of the applicable law. Considering the varied nature of national security interest laws, it would hardly be possible, or indeed not at all possible, to use transport vehicles internationally as collateral without special rules. That is why, both in the area of conflict of laws as well as in property law, there exist special, partly standardized international rules.

2. Conflict of laws

At the level of conflict of laws there exist in Germany special rules for certain kinds of transport vehicles (see Art 45 of the Introductory Act to the Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuche—(EGBGB)) as well as state treaty rules for airplanes, which prevail over national conflict rules. In English law, the basic lex situs rule applies to transport vehicles as to movables in general (but see exceptions at b) below).

a) International agreements

The relevant international treaty for airplanes is the Convention on the International Recognition of Rights in Aircraft, signed at Geneva on 19 June 1948. According to Art 1(1) of the Convention certain security interests which are effective and registered in a contracting state must be recognized by all other contracting states. In Germany, the provisions of the Convention were incorporated into national law by ss 103–106, Gesetz über Rechte an Luftfahrzeugen (Law on Security Rights in Airplanes). These rules expand Art 1(1) of the Convention so that not only airplanes registered in signatory states of the Convention, but rather all airplanes are covered. Other contracting states of the Convention are, inter alia, France, Greece, Italy and the United States, but not the United Kingdom.

The International Convention on Maritime Liens and Mortgages, which was signed on 6 May 1993, came into force on 5 September 2004 and now has 11 members. It was signed but never ratified by Germany. The United Kingdom has neither signed nor ratified the Convention. Member States include Spain, Estonia, Lithuania and the Russian Federation. For the application of the treaty it is not necessary for the ship to be registered in a Member State (Art 13(1) of the Convention). The treaty applies to all ships which are the subject of litigation in a Member State. The treaty sets up rules for the recognition and ranking of foreign ship mortgages by Member States (Art 1(f)), establishes several basic rules for the compulsory auction of ships (Art 11(f)) and determines the relationship between the rights of creditors and registered ship mortgages (Art 4). Ship creditor rights are unregistered property rights which arise by virtue of the law to secure financial claims resulting from the operation of the ship.

b) Application of national conflict rules

The national German conflict of laws rules contained in Art 45(1)1 EGBGB provide for a special connecting factor for property rights in relation to transport vehicles, which can be easily, reliably and objectively determined using the principle of closest relationship. Rights in airplanes, ships and trains are therefore subject to the law of the country of origin, which is determined by the nationality in the case of airplanes, by the place of registration in the case of ships and by the place of licensing in the case of railway rolling stock (see Art 45(1)2 EGBGB). Similar rules for determining the applicable law exist in Belgium (Art 89 Belgian Private International Law Code); Estonia (s 22 Estonian Private International Law Code); the Netherlands (Art 2, paras 2–3 Wet conflictenrecht goederenrecht); Austria (s 33 Austrian Private International Law Code); Spain (Art 10(2)1 Código civil); and Turkey (Art 22 Turkish Private International Law Code).

English law provides no special conflicts rule for transport vehicles, so that the applicable law depends on the situs of the object. Since no national law can be applied when a vehicle is not on or above national territory, a ship is deemed to be situated at her port of registry when the vessel is upon the high seas. Likewise, an aircraft is deemed to be at its country of registration when it is in fact over the high seas or over (or on) territory which is not under the sovereignty of any state.

For the creation of legal security interests, the applicable law is the law of the place where the debt arose, following Art 45(2)1 EGBGB, rather than the law of the state of origin. If there are several competing contractual or security interests, they are ranked according to the lex situs at the moment of enforcement of the security interest (Art 45(2)2 EGBGB).

Article 45 EGBGB does not apply to other means of transport, such as automobiles. The German legislature decided that the determination of the applicable law would be made according to the location of the vehicle, and thereby stuck to the fundamental lex situs rule set out in Art 43(1) EGBGB. Similarly in Spain, the applicable law for automobiles and other street vehicles according to Art 10(2)2 Código civil is the law of the place where the vehicles are located.

3. Convention on international interests in mobile equipment, of 16 November 2001 (Cape Town Convention)

Under the auspices of the International Institute for the Unification of Private Law (UNIDROIT), the Convention on International Interests in Mobile Equipment was concluded on 16 November 2001 in Cape Town. It came into force on 1 March 2006 and already applies to 44 states, among them the United States, Ireland, Luxembourg, the Netherlands and the European Community. The United Kingdom and Germany, as well as several other European countries (eg France, Italy and Switzerland) have signed the agreement but not ratified it. On 28 April 2009 the European Community acceded to the Convention as an organization under Art 48, and its membership came into force on 1 August 2009. Membership of the European Community, in addition to membership by individual EC Member States, was necessary because the Community had legislative competence in several areas covered by the Convention (legislative competence of the EU).

a) Objects of the Convention

The Convention creates a uniform international security interest which is recognized as such equally in all contracting states and which is effective in security and insolvency cases without the necessity of determining the applicable law. Non-unified national laws only intervene in areas not covered by the Convention, such as, for example, the possibility for an insolvency administrator to challenge the granting of a security right in the case of fraud (actio pauliana). The Convention contains general rules addressing, inter alia, the creation of security rights, their effects, the relationship between different security rights in the same collateral and jurisdiction. These regulations are applicable regardless of what kind of means of transport is encumbered. They are supplemented and partly adapted by supplementary protocols which were negotiated separately for each individual kind of vehicle. Both the framework convention and the additional protocols are to be read and interpreted together as a single convention, according to Art 6 of the Convention, whereby the Protocol prevails if there is any inconsistency between the two sets of rules. To date there exist supplementary protocols for aircraft equipment and railway rolling stock. The former came into force on 1 March 2006; the latter will only come into force after ratification by four states and the certification of a functional international register. The EC Council’s decision to accede to the Convention included the Aircraft Equipment Protocol. Further additional protocols, for space equipment and mining equipment, as well as for agricultural equipment and construction equipment, are intended to follow.

b) Application of the Convention

For the application of the Convention, it is important, according to Art 3, that the debtor is situated in a contracting state at the time of conclusion of the agreement creating the international security interest. Both the place of business of the creditor and the location of the object are irrelevant.

The security interest is created by a written agreement between the parties, under Art 7, and is effective from that moment onwards. The parties may agree on the creation of a security interest, a retention of title or a leasing contract. For each of these three types of security interests, in order to become effective vis-à-vis third parties, particularly against the insolvency administrator, it must be perfected (registered) under Art 29(f). The ranking of the security in respect of other registered security interests is determined by the time of registration. Registered interests have priority over non-registered interests. It does not matter whether or not the creditor had notice of existing security interests. Furthermore, according to Art 29(3) a purchaser for value without notice is nevertheless subject to the registered interest.

c) Registration

Registration is to take place in a special international register which is only electronic and is held separately for each type of vehicle. The framework Convention includes general rules for the organization of the register whereas the additional protocols contain specific rules for different kinds of equipment. Access to the register is available both for new entries as well as for internet searches. It follows that material information, upon which the effectiveness of a security right in other respects depends, is not checked by the registrar. It is not necessary to submit copies of the contractual documents; rather, the provision of certain information about the collateral and the parties to the security agreement suffices. Registration can be made under Art 20(1) of the Convention by either party to the agreement with written assent of the other party. After the complete entry of the required data and their acceptance by the system, the registration is effective. The entry remains effective until it is deleted or until a predetermined removal date set at the time of registration. According to Art 22 of the Convention anyone may search the register. It must, however, be remembered that the register is asset-based, so that entries of security interests must be identified by serial numbers or other identification numbers pertaining to the collateral.

d) Additional protocol for aircraft equipment

According to Art 2(3)(a) of the Convention, taken together with Art 1(1) and (2)(b), (e) of the Protocol, parts of an airplane or helicopter, airframes or engines may be the object of a security interest, but not a complete airplane. This conforms to the needs of practice. It is not unusual for engines to be removed and subjected to separate transactions. The Protocol makes explicit the rules of the Convention regarding the rights of the creditor in case of default or insolvency and partly modifies them, setting out additional rules on the possibility of agency. It also contains some technicalities on the registration procedure. The register is available on the internet at <http:// internationalregistry.aero>. It is supervised by the International Civil Aviation Organization (ICAO), which participated in the creation of the Protocol. The register has its seat in Dublin and is managed as a joint venture between a private firm and the Irish government.

e) Additional Protocol for railway rolling stock

The latest additional Protocol is applicable with respect to charges on rolling stock. According to Art 1(2)(e) of the Protocol, this includes moveable railway vehicles plus all equipment necessary for running them. The additional Protocol includes simplified requirements for the identification of the collateral object in the security interest agreement, but it nevertheless requires that the entry in the register be unequivocal as to the object of the security interest. The concept is due to the fact that railway equipment, unlike airplane equipment, does not always have identification numbers. The Protocol furthermore contains specific rules on the rights of the secured creditor in the event of the debtor’s insolvency.

The establishment, running and supervision of the register for railway rolling stock will be under the auspices of an institution created by the contracting states, as the Intergovernmental Organisation for International Carriage by Rail (OTIF) does not operate worldwide. The seat of the new institution is anticipated to be Luxembourg.

4. Security interests in airplanes in national law

As many states have not yet ratified the Cape Town Convention and its adjacent Protocols, security interests in airplanes are still created under autonomous national law. In German law, the Law on Security Rights in Airplanes provides in s 1 that an aircraft registered in the Aircraft Register can be used to secure a claim, creating a registered lien. What are required according to s 5 para 1 of that law is the agreement of the parties and entry of the security interest in the Register for Liens on Aircraft. The regulations of the Law on Security Rights in Airplanes mirror those of immovable property in the Bürgerliches Gesetzbuch. Only aircraft registered in the Aircraft Register may be subject to a lien.

According to English law, an aircraft which is registered in the United Kingdom may be used as collateral for a loan or other valuable consideration (Art 3 Mortgaging of Aircraft Order 1972). The mortgage may be registered in the Register of Aircraft Mortgages which is kept by the Civil Aviation Authority. The mortgage will also be effective without registration (Art 13 Mortgaging of Aircraft Order 1972), but registration is crucial to determine the priority between two or more existing mortgages. Registered mortgages have priority over unregistered ones whether or not the secured creditor had knowledge of the unregistered mortgage (Art 14(1), Mortgaging of Aircraft Order 1972). Between two registered mortgages priority is determined by the date of registration (Art 14(2), Mortgaging of Aircraft Order 1972). Another issue is registration under company law. Typically, the aircraft will be the property of a company registered in the United Kingdom. Therefore, a charge over it has to be registered at Companies House (s 860(7)(h) Companies Act 2006).

Under French law, aircraft can serve as collateral according to the Civil Aviation Code (Code de l’aviation civile, amended by Ordonnance n° 2010-1307) and the Transportation Code (Code des transports). Provided that the aircraft has been logged in the aircraft register maintained by the Ministry of Aviation, Art L.121-2 Code de l’aviation civile, a so-called hypothèque aérienne, a security right that is essentially a non-possessory pledge, may be created according to Art L. 6122-1 Code des transports. The contract is to be in writing, Art L.6122-2 Code des transports, and will only be perfected if logged in the aircraft register, Art L.6122-8 Code des transports. The date of registration is crucial whenever an aircraft is encumbered with more than one security right, so that antecedent pledges take priority over subsequent ones, Art L.6122-10 Code des transports. The security right will lose effect after ten years if not renewed, Art L.6122-11 Code des transports.

A special security interest in airplanes exists furthermore in Italian law (Arts 1027 ff Codice della navigazione). In the Netherlands a registered aircraft may be subject to a hypotheek (Arts 3:227 ff Burgerlijk Wetboek). Belgian law has no special rules to create a security interest in an airplane. The creditor only has available either the—rather impractical—possessory pledge (gage/ pand) or a registered non-possessory pledge over the debtor’s business (gage sur fonds de commerce/pand handelszaak).

5. Security interests in ships in national law

The substantive legal requirements for creating security interests over ships are to be found in the respective national legal systems, in Germany in the Act on Rights over Registered Ships (Gesetz über Rechte an eingetragenen Schiffen und Schiffsbauwerken). Mortgages can be created over ships which are registered in the ships’ register of a German court. The rules pertaining to mortgages over ships mirror those dealing with mortgages over land. In English law, rules on the registration of mortgages over certain types of registered ships are to be found in the Merchant Shipping Act 1995 and the Merchant Shipping (Registration of Ships) Regulations 1993. A security interest in unregistered ships can be created by way of a regular charge or mortgage. The aforementioned statutes create a centralized Shipping Mortgage Register for different kinds of ships, eg fishing vessels or bareboat charter ships. Registration of the mortgage in the ships’ register is not a precondition for the effectiveness of the mortgage, but it is, again, crucial for the determination of priority.

French law includes the hypothèque maritime and the hypothèque fluviale. The first serves to create security interests in vessels used for maritime navigation, according to the rules provided by the Décret n°67-967 du 27 octobre 1967 relatif au statut des navires et autres bâtiments de mer, notably in Art 13 through Art 25. By contrast, the hypothèque fluviale is used to encumber vessels undertaking inland water navigation. The formerly relevant regulations of the Code du domaine public fluvial et de navigation intérieure were abolished in 2010 by Ordonnance n° 2010-1307, instead the pledge will henceforth be created in accordance with Art L.4122-1 – Art L.4122-10 Transportation Code (Code des transports). Both pledges only gain effectiveness as against third parties if entered into a special register, which for the hypothèque maritime is kept by the local customs authority and in the case of the hypothèque fluviale by the local commercial court.

Other European jurisdictions also provide for special security rights over ships, see eg Italy (Arts 565 ff Codice della navigazione) and Belgium (Arts 25–42 Code de commerce, Livre II, Wetboek van Koophandel, Boek II). In the Netherlands, just as for aircraft, a hypotheek (Arts 3:227 ff Burgerlijk Wetboek) can be created.

6. Security interests in motor-driven vehicles in national law

Some jurisdictions recognize special security rights over motor vehicles whereas others submit them to the same rules as ordinary movables. Examples of the latter category are Germany and England. In Germany, credit is usually granted against a security transfer of ownership of the car. In England, the non-possessory mortgage or charge may be used. Italy and France are examples of the first category. The Italian automobile mortgage (privilegio sull’autoveiculo, under Arts 12, 14, 16, 21 Regio decreto-legge No. 436 del 15 marzo 1927) is a non-possessory lien which must be separately registered in addition to registration in the motor vehicle register. The mortgage is also entered into the foglio complementare that contains information about the first owner, transfers of ownership and car mortgages. In France, the seller of a vehicle or the purchaser on credit can create a special security interest called a gage sur véhicule automobile (Arts 2351–2353 Code civil). This is a non-possessory security right created by registration with the motor vehicle registration authority.

Literature

Ulrich Drobnig and Konrad Zweigert, Das Statut der Schiffsgläubigerrechte, Zeitschrift für Versicherungsrecht, Haftungs- und Schadensrecht (1971) 581; Ulrich Drobnig, ‘Vorschlag einer besonderen sachenrechtlichen Kollisionsnorm für Transportmittel’ in Dieter Henrich (ed), Vorschläge und Gutachten zur Reform des deutschen internationalen Sachen- und Immaterialgüterrechts (1991) 13; Beate Czerwenka, ‘Internationales Übereinkommen von 1993 über Schiffsgläubigerrechte und Schiffshypotheken’, TranspR (1994) 213; Christoph Henrichs, ‘Das Übereinkommen über internationale Sicherungsrechte an beweglicher Ausrüstung’ [2003] IPRax 210; Karl Kreuzer, ‘Internationale Mobiliarsicherungsrechte an Luftfahrzeugausrüstung’ in Festschrift Peter Schlechtriem (2003) 869; Matthias Reuleaux, Sicherungsrechte an Flugzeugtriebwerken, Die Zeitschrift für Bankrecht und Bankwirtschaft (2005) 354; Ronald CC Cuming, ‘The International Registry for Interests in Aircraft’ [2006] Uniform Law Review 18; Hugh Beale, Michael Bridge, Louise Gullifer and Eva Lomnicka, The Law of Personal Property Security (2007); Roy Goode, Cape Town Convention and Aircraft Protocol (2008); Roy Goode, Cape Town Convention and Luxembourg Protocol (2008).

Retrieved from Security Interests in Transport Vehicles – Max-EuP 2012 on 19 May 2022.

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