Exploring the Luxembourg Rail Protocol Martin J Fleetwood – Partner Secretary, Rail Working Group

Exploring the Luxembourg Rail Protocol

Martin J Fleetwood – Partner

Secretary, Rail Working Group

Overview

Remedies on Insolvency – Article IX

Public Service Exemption – Article XXV

Pre-existing transactions – Article XXVI

Remedies on Insolvency – Art IX

Important for creditors in pricing risk

Starting point is the existing insolvency laws of the Contracting State

Contracting State has a number of options

– Continue to apply existing domestic insolvency laws

– Adopt one of the 3 alternative remedies set out in Art IX

– Adoption of relevant alternative made by declaration

Aviation Protocol only has two options

Third alternative offered to provide a “middle ground” between the two other options


Alternative A

– Strong pro-creditor provision

– Asset to be delivered up within a period of time (cure period) no later than lesser of:

period set under domestic insolvency law; and

period specified in declaration adopting Alternative A

– General obligation imposed on insolvency administrator or debtor to look after the rolling stock where possession retained during cure period

– Insolvency administrator or debtor able to retain possession of the rolling stock after cure period if it has:

cured the default within the cure period, and

agreed to perform all future obligations under its agreement with the creditor


Alternative A (cont)

– Where a default of future obligations occurs, cure period no longer applies to delay the delivery of the rolling stock to the creditor

– Alternative A cannot alter or affect any rights that the insolvency administrator may have under domestic insolvency law to terminate the agreement with the creditor

– Where the Convention permits a creditor to export and physically transfer the rolling stock to another territory, the administrative authorities in the Contracting State are to assist the creditor in exercising such remedy


Alternative B

– More debtor-friendly provision

– Creditor needs to request insolvency administrator or debtor to give it notice whether insolvency administrator or debtor will:

cured the default and agreed to perform all future obligations under its agreement with the creditor; or

give the creditor the opportunity to take possession of the rolling stock under local insolvency law

– Response period of insolvency administrator or debtor is specified in declaration adopting Alternative B

– Creditor to provide evidence of claim and registration of international interest


Alternative B (cont)

– If insolvency administrator or debtor do not cure defaults and agree to perform all future obligations or allow creditor to take possession of rolling stock, creditor has to apply to local court for remedy

– Parties cannot sell rolling stock without a decision of the court regarding the claim and the international interest

– Creditor is subject to speed of the local court


Alternative C

– Compromise position similar to Alternative A but with additional rights for insolvency administrator or debtor

– Asset to be delivered up within a period of time (cure period) no later than lesser of:

period set under domestic insolvency law; and

period specified in declaration adopting Alternative C

– General obligation imposed on insolvency administrator or debtor to look after the rolling stock where they retain possession during cure period


Alternative C (cont)

– insolvency administrator or debtor can apply to local court during cure period for order suspending creditor’s right to repossess at the end of the cure period (suspension period) on terms the local court considers just

Suspension can be up to expiry or renewal of the existing agreement

Payments due to creditor during suspension period must be paid as they become due

All other contractual obligations to be performed during suspension period

Obligation to preserve and maintain rolling stock, including its value, during suspension period

Creditor entitled to apply for any other forms of interim relief available under domestic law


Alternative C (cont)

– Application for suspension period required to be granted by local court within time period specified in declaration adopting Alternative C otherwise application deemed withdrawn and creditor can repossess rolling stock

– Insolvency administrator or debtor able to retain possession of rolling stock and any suspension order ceases to apply if it has:

cured original default within cure period or suspension period, and

agreed to perform all future obligations under its agreement with the creditor

– Similar rights to Alternative A on subsequent failures to meet future obligations, rights to terminate agreement under domestic insolvency law and assistance to remove rolling stock to another territory apply


Conclusions

– All remedies require using local courts, but creditor knows initial applicable time-frame

– Alternative A provides greatest comfort for creditors – remedy or recovery

– Alternative C provides comfort during suspension period due to obligation to maintain value of rolling stock as well as to maintain but risk of less favourable payment terms applied by local court

– Alternative B is least attractive for creditors – remedy or

recovery is effectively subject to domestic law and more onus on creditor to pursue its claim

Public Service Exemption – Art XXV

Art XXV(1)

– Allows a Contracting State to declare that it will continue to apply rules of its law in force at the time of the declaration and that are set out in the declaration, which preclude, suspend or govern the exercise within its territory of any of the insolvency remedies specified in Chapter III of the Cape Town Convention and Articles VII to IX of the Luxembourg Rail Protocol in relation to railway rolling stock habitually used for the purpose of providing a service of public importance

– The declaration:

can be made at any time

must specify which rules of law will apply

– Only applies to “railway rolling stock habitually used for the purpose of providing a service of public importance”


Why required?

– Railways are viewed as fundamental to the operation of the economies of a number of States

– Some States e.g. Germany have laws to protect the provision of rail transport

– A number of States indicated they had significant reservations in agreeing to a position where creditors could simply remove trains from operation without the State being able to step into the shoes of the debtor

Risk to Creditors can be assessed

– Declaration is a public record available to all creditors

– Creditors can see the law which will apply and assess its impact

– Affected rolling stock must be:

used for services of public importance, not just public interest

habitually used for such services


Creditor protection under Art XXV(2) and (3)

– Party taking control of such rolling stock is to preserve and maintain the rolling stock from the time it exercises its power until possession, use or control is restored to the creditor (Art XXV(2))

– Creditor is to be paid for the use of the rolling stock an amount equal to the greater of:

the amount required to be paid under the rules of the law of the relevant State; and

the market lease rental in respect of such rolling stock(Art XXV(3))

BUT Arts XXV(2) and (3) can be disapplied under Art XXV(4) if the Contracting States make a further declaration to this effect


Why disapply Art XXV(2) and (3)?

– Constitutional constraints may require a Government or any agency of it to be able to take possession of such rolling stock without compensation

What protection is there for creditors?

– Art XXV(4) requires a public declaration to advise all creditors, allowing an assessment of the risk

– A risk premium can be applied to financing such rolling stock

– Only applies to rolling stock habitually used for services of public importance

– The rail industry can apply pressure on the relevant States to repeal such local legislation


Conclusions

– Brought about by necessity

– Declarations required so creditors can assess risks involved

– Is limited in scope but extent of “rolling stock habitually used for services of public importance” not yet tested in the courts

– Pressure can be applied by the rail and finance industries to persuade Contracting States not to make such declarations

Pre-existing transaction – Art XXVI

Luxembourg Rail Protocol not designed to apply retrospectively

– Retrospective application would reset priorities of security interests already in existence

– Unfair on existing creditors

Ability to include pre-existing rights within the Luxembourg Rail Protocol under Art XXVI

– Provides for Contracting States to declare a transition period for pre-existing interests to be registered and retain their priority

– Transition period of between 3 and 10 years


A declaration under Art XXVI will not:

– Apply to a pre-existing interest created at a time when the debtor was not situated in the declaring State

– Allow a creditor of a pre-existing interest to apply the remedies available under the Cape Town Convention

Remedies remain those available under local law

No prohibition on a Contracting State amending its local laws to mirror those of the Cape Town Convention


Conclusions

– Attempt to bring registration of all interests in railway rolling stock within one place at the International Registry set up under the Luxembourg Rail Protocol

– Will take time for transition to be completed, so creditors will need to continue to check outside the International Registry for existing priority claims in the early years

– Does not create new remedies for existing interests

Contacts

Martin Fleetwood – Partner

Secretary, Rail Working Group Association

Direct Line: +44 (0)20 7809 2004

Direct Fax: +44 (0)20 7003 8521

Mobile: +44 (0)7836 720 537

E-mail: [email protected]

Documents

Exploring the Luxembourg Rail Protocol Martin J Fleetwood – Partner Secretary, Rail Working Group