International interests in railway rolling stock
The Luxembourg Rail Protocol to the Cape Town Convention marks a transformative moment for railway financing in Sweden. Effective as of March 2024, it introduces a streamlined, internationally recognized system for creating and enforcing security interests in railway rolling stock, from locomotives to trams. This new legal framework allows creditors to secure their interests with confidence, reducing the complexities of cross-border financing and providing robust protection in cases of borrower default or insolvency. As the international registry goes live, this Protocol offers a major advancement for investors, enhancing security and accessibility in railway asset financing.
Investments in railway rolling stock entail significant amounts of capital and are commonly financed by way of various leasing solutions or by bank loans where the lenders are granted a security interest by way of a security transfer. In Sweden, a perfected security interest over chattels has previously required that the transaction is registered and announced in accordance with a formalistic and cumbersome procedure as set out in the 1845 Swedish Chattel Sales Act (Sw. lag (1845:50 s.1) om handel med lösören, som köparen låter i säljarens vård kvarbliva). In the case of sale-and-lease-back transactions, too, the buyer/lessor has had to ensure that the formalities of the Swedish Chattel Sales Act are carried out to perfect the sale.
The laws governing security interests vary greatly between jurisdictions, resulting in uncertainty for creditors operating on the international market. The Cape Town Convention and the Luxembourg Rail Protocol (together, the “Convention“) aims to increase access to financing by providing an internationally harmonised set of rules which allow for the creation of proprietary rights which are recognised across all the jurisdictions that are party to the Convention.
By registering the interest in a searchable international registry, a creditor with an international interest (Sw. internationell säkerhetsrätt) in railway rolling stock (including locomotives, passenger coaches, freight wagons, tunnel wagons, trams and work vehicles) maintains its priority in relation to unregistered interests as well as any other interests that are subsequently registered. The creditor also gains access to a comprehensible set of remedies in the event of default or insolvency of the borrower. Previously, the rules set out in the Cape Town Convention and the Aircraft Protocol have been available for transactions relating to aircraft equipment, and have significantly simplified and enhanced the financing of aircraft and aircraft engines in the international market.
An international interest within the meaning of the Convention is created by way of a (written) agreement where:
- an interest is either
- granted in the form of a security interest (including by way of security transfer),
- vested in the conditional seller under a title reservation agreement, or
- vested in a lessor under a leasing agreement,
- the object of the collateral, purchase or lease is an identifiable asset which falls within the scope of railway rolling stock as defined in the Railway Protocol, and
- the borrower/buyer/lessee is situated in a jurisdiction party to the Railway Protocol.
As regards international interests in the form of a charge or security transfer, the secured obligations must be determinable based upon the agreement, however without any requirement for the agreement to state a specific amount or maximum amount so secured.
The created international interest is an interest in its own right and thus not dependent on any formalities which might otherwise be required under Swedish law, including those set out in the Swedish Chattels Sales Act. A creditor with a registered international interest has a special preferential right (Sw. särskild förmånsrätt) in the collateral according to the Swedish Rights of Priority Act (Sw. förmånsrättslagen (1970:979)). Furthermore, the Convention includes harmonised provisions with respect to a creditor’s rights to remedies in the event of default or insolvency of the debtor. Remedies include, among other things, the rights of the creditor to take possession of the collateral, to have it sold, or to receive the proceeds of its use. In addition, provided that the borrower has consented thereto, the creditor has a right to have the railway rolling stock exported from the jurisdiction where it is located.
The international registry is operated from Luxembourg, is completely digitalised and automatised, and is accessible over the Internet 24/7 for anyone who has a registered log-in. To register an international interest to a certain railway rolling stock, the railway rolling stock must have been designated and affixed with a unique identification number (URVIS), administered by the registrar.
A security interest which was created before the Convention entered into force has priority before an international interest created thereafter. Going forward, registration of security interests in accordance with the Convention is advisable in order to ensure the international interest’s priority over any other interests created and registered subsequently, as well as to give creditors access to the Convention’s comprehensible and effective remedies in the event of default or insolvency.