From the Luxembourg Rail Protocol to the draft MAC Protocol

From the Luxembourg Rail Protocol to the draft MAC Protocol Abstract While the Luxembourg Rail Protocol to the Cape Town Convention will enter into force in the very near future, the International Institute for the Unification of Private Law is currently working towards the adoption of a fourth Protocol under the Cape Town Convention umbrella, which deals with mining, agricultural, and construction equipment (MAC Protocol). This article examines the common ground and core differences between the two legal texts. To this end, the article first introduces the basic features of the Cape Town Convention system and then focuses on the expected macro- and micro-economic impact of both the Rail Protocol and the MAC Protocol. It moves on to analyse the application of the Cape Town Convention to the railway sector in areas where four major industry-specific obstacles are needed to be overcome and contrasts the draft MAC Protocol, elaborating on its unique features. The authors conclude that both Protocols will not only enhance the legal position of creditors but also bring about significant macro-economic benefits. In addition, the draft MAC Protocol features several innovative provisions and thus can be expected to become a reference point in the ongoing debate on the modernization of the secured transactions framework both at the international and the national level. I. Introduction The Cape Town Convention and the accompanying Protocol covering aircraft equipment are the most successful secured transaction-related international instruments ever, according to virtually any measure. They have demonstrably facilitated the availability and lowered the costs of credit in the aircraft-financing sphere. After two further Protocols, covering railway rolling stock and space assets respectively, were added to the Cape Town Convention family, the International Institute for the Unification of Private Law (Unidroit) is now in the process of adopting a fourth Protocol underneath the Cape Town Convention umbrella, which deals with agricultural, construction, and mining equipment. The purpose of this article is to outline and comment on the common ground and core differences between the Protocols in relation to railway rolling stock, on the one hand, and agricultural, construction, and mining equipment, on the other hand. First, this article will introduce the essential features of the Cape Town Convention system (section II). Next, the article will discuss the application of the Cape Town Convention system to the railway sector (section III). Finally, the article will contrast the draft Protocol for agricultural, construction, and mining equipment with the railway-specific Protocol and shed some light on its unique features (section IV). II. Core features of the Cape Town Convention system 1. Structural approach The Cape Town Convention lays down a legal mechanism for regulating security interests and leases in high-value, mobile, and uniquely identifiable equipment. The architects of the Cape Town Convention system had the wise foresight to draft the Convention as an umbrella treaty that establishes the basic objectives and sets out all non-equipment-specific considerations. However, the extension of the application of the Convention to a specific category of high-value mobile equipment necessitates the adoption of a Protocol for such a category.1 The Protocols under the Convention umbrella are intended to supplement and amend the Convention, thus catering to the challenges that arise in relation to a particular category of equipment as well as related industry sector practices, constraints, and requirements. Consequently, the Convention and the respective Protocol must be read and interpreted together as one single instrument.2 To the extent of any inconsistency between the Convention and the relevant Protocol, the latter will prevail.3 The text of the Cape Town Convention expressly contemplates three Protocols for (i) airframes, aircraft engines, and helicopters; (ii) railway rolling stock; and (iii) space assets.4 The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Aircraft Protocol) was adopted at the same time as the Cape Town Convention itself in November 2001. Since it came into force in March 2006, the Aircraft Protocol has had a significant impact in lowering transactional costs and risks in the financing of aircraft worldwide. To date, it has entered into force in 69 Contracting States. The next Protocol to be adopted was the Luxembourg Rail Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock (Luxembourg Rail Protocol). It was adopted at a second diplomatic conference, which was held in Luxembourg in February 2007. The Luxembourg Rail Protocol is now expected to enter into force during 2019. The adoption of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (Space Protocol) in March 2012 exhausted the categories of equipment expressly referred to in the Cape Town Convention. However, the Convention also anticipates the adoption of additional protocols and lays down the process for the extension of its application to objects of any category of high-value, mobile, and uniquely identifiable equipment.5 In all probability, the fourth Protocol to be adopted will be the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Mining, Agricultural and Construction Equipment (MAC Protocol). The draft MAC Protocol is now at a very advanced stage and will probably be submitted to a diplomatic conference for adoption in late 2018 or 2019. 2. The international interest under the Cape Town Convention The Cape Town Convention provides for the creation and protection of ‘international interests’, being security interests in relation to the legal positions of a conditional seller under a title retention agreement, a lessor under a leasing agreement, or a chargee taking security in an item of equipment under a finance agreement. Conceptually, the international interest is an autonomous right that is not derived from national law. It therefore does not require a formal or functional counterpart under the relevant domestic law. In addition, the creation of an international interest only presupposes the satisfaction of a limited set of formation requirements. The agreement under which an international interest is created must be in writing; it must relate to an object of which the chargor, conditional seller, or lessor has power to dispose; it must enable the object to be identified in conformity with an equipment-specific protocol;6 and, in case of a security agreement, it must allow for the secured obligations to be determined.7 Finally, the Convention establishes a suite of—in part sweeping—remedies for creditors in the event of the debtor’s default.8 These default remedies improve the legal position of creditors in contrast with the traditional situation in many national law systems where lengthy court processes are often required before an asset may be repossessed or disposed of. In particular, they include self-help and interim relief measures pending final determination of a claim and thus reflect the notion that adequate and readily enforceable default remedies are pivotal from a creditor’s perspective.9 3. The International Registry At the heart of the Cape Town Convention lies the establishment of a worldwide system of registering international interests under each Protocol on a fully electronic basis.10 The International Registry envisaged by the Cape Town Convention for each Protocol is accessible through the Internet 24 hours per day, seven days per week, allowing creditors to register their international interests from anywhere in the world.11 As a notice-filing system, only information sufficient to alert a potential creditor or buyer of conflicting interests is required to effect a registration. Searching parties are then expected to engage in due diligence to determine the details of a transaction relating to an interest already registered in the International Registry. Such interests will, in almost all cases, take precedence over any and all unregistered or subsequently registered in rem interests.12 Even the actual knowledge of an earlier unregistered interest does not affect the priority of the first-in-time registered interest.13 4. Rights on insolvency One of the critical achievements of the Cape Town Convention and its Protocols is the protection accorded to international interests in the event of the debtor’s insolvency. As a starting point, the Cape Town Convention provides that an international interest is effective where it was properly registered prior to the commencement of the insolvency proceedings.14 In order to accommodate the divergent approaches to insolvency law under national legal regimes, the Protocols then allow Contracting States to opt into different insolvency alternatives.15 If a State makes no such selection, its national insolvency laws will apply. From a creditor’s perspective, Alternative A is the most desirable solution as it ensures that, within a specified and non-extendable waiting period, the creditor will be able to repossess the piece of equipment that is subject to an international interest or obtain from the insolvency administrator the curing of all existing defaults as well as the agreement to perform all future obligations.16 The exact duration of the waiting period is laid down in a declaration of the Contracting State where the insolvent debtor has its centre of main interests and thus can be ascertained by the creditor before entering into a transaction with the debtor. Under the Aircraft Protocol, most Contracting States have opted for the adoption of Alternative A with a waiting period of 60 calendar days.17 The unavoidability enshrined in Alternative A, however, may conflict with national insolvency laws that in many cases take into account not only the creditors’ interests in effective and prompt remedies but also the opposing interests such as the protection of debtors, the economy, and jobs.18 Alternative B takes up these considerations and, unlike Alternative A, requires the creditor to work through the court system prior to repossessing the asset. Furthermore, the competent court is furnished with broad discretion as to whether, when, and under which circumstances the creditor may take possession. In light of the obstacles that creditors must overcome prior to enforcing their remedies in the event of the debtor’s insolvency, Alternative B essentially establishes not much more than a ‘procedural structure under which a creditor may beg and plead for a court’s mercy’.19 Against this background, the drafters of the Luxembourg Rail Protocol felt that a more balanced insolvency option was required that is not featured in the Aircraft and Space Protocols.20 The rationale for including Alternative C in the Luxembourg Rail Protocol was to maintain the self-help provisions in Alternative A while, at the same time, imposing—within much narrower bounds than in Alternative B— limited and pre-defined judicial restraint on the creditor protection components. To this end, the insolvency administrator may apply for a court order suspending the creditor’s right to repossess at the end of the initial cure period (which corresponds to the waiting period in Alternative A). If the court grants this order, it must also require the insolvency administrator to continue to perform during the subsequent suspension period all obligations as set out in the original finance agreement. In this way, Alternative C minimizes the risk that the creditor’s financial position is materially adversely affected during the suspension period. 5. Economic impact of the Cape Town Convention and its Protocols Against this background, the objectives of the Cape Town Convention are obvious; by reducing risk for equipment financiers, it intends to facilitate, on a worldwide basis, more diverse, extensive, and less costly private sector financing for specific categories of high-value, mobile equipment. In this vein, the preamble to the Cape Town Convention recognizes the advantages of asset-based financing and leasing by providing for a clear framework to govern these types of transactions. Strong evidence of the effect of the Cape Town Convention system in reducing credit risk is the recognition by the Organisation for Economic Co-operation and Development’s (OECD) Aircraft Sector Understanding.21 This multilateral arrangement establishes export-financing rules for aircraft and allows export credit agencies to charge lower premiums on the financing provided to parties located in Contracting States that have made certain (‘qualifying’) declarations under the Cape Town Convention and the Aircraft Protocol.22 There is also a Rail Sector Understanding23 concluded under the auspices of the OECD, but it is not analogous. However, the industry has strongly argued that externalities must be taken into account when setting rates, and so premium rates from export credit agencies should decrease once the Luxembourg Rail Protocol applies.24 Moreover, a recent study by Oxera has quantified the direct micro-economic benefits of the Luxembourg Rail Protocol for 20 countries across Europe alone at €19.4 billion.25 In the rail sector at least, there will also be structural benefits. The Luxembourg Rail Protocol underwrites operating leasing, which will in turn encourage more competition and create an economic dynamic towards the standardization of equipment, which in turn will lead to higher residual value assumptions (and lower lease rents) as well as economies of scale for manufacturers. The Luxembourg Rail Protocol will also support the growing cross-border operation of rolling stock, particularly in the freight sector. This will become increasingly important in the future with the predicted heavy development of the Belt and Road Initiative linking Asia and Europe. According to a recent study by Roland Berger for the International Union of Railways,26 Eurasian annual trade by rail expanded from about 25,000 twenty-foot-equivalent units (TEUs) in 2014 to 145,000 TEUs in 2016 and is predicted to quintuple by 2027. Other experts are already predicting 1 million TEUs per year by 2020. The predicted increase in freight traffic will not only require more investment in rolling stock, which will be heavily financed from the private sector, but also measures to be taken to protect the creditors holding security interests in rolling stock as it crosses multiple borders and conflict-of-law issues (with potentially competing claimants on rolling stock) become more critical.27 By providing a common set of rules and creditor protections, regardless of the physical location of the rolling stock or the debtor, the Luxembourg Rail Protocol makes the legal position easier to understand and enforce for creditors and investors. Clearly, there are also macro-economic benefits, but these will vary by asset and region. Having said that, they can be expected to be most evident for the Luxembourg Rail Protocol28 and the draft MAC Protocol, where they both play an important role in relation to sustainable economic development. Specifically, by supporting investment in railway equipment, the Luxembourg Rail Protocol also contributes to the environmental, safety, and societal benefits delivered by the rail sector. One may well ask in this context how the MAC Protocol, which targets equipment of high value, should have an impact in most developing countries where in the agricultural field, for example, the needs of MAC equipment users are for small farming equipment of lower value. However, smaller-sized businesses often form cooperatives or machinery rings for the acquisition of equipment that is shared among the members, thus making the acquisition of high-value equipment possible.29 The deployment of such enhanced agricultural equipment will in turn entail productivity gains. Correspondingly, research undertaken during its preparatory phase demonstrates that the MAC Protocol will significantly increase the gross domestic product (GDP) of low-income countries. The most current analysis projects a GDP impact of US $32–48 billion annually for low-income economies.30 These figures are large in absolute terms and vastly greater than the costs of implementing the MAC Protocol.31 III. Luxembourg Rail Protocol 1. History and status of the Luxembourg Rail Protocol Early in the planning process of the Cape Town Convention, it was decided that the Convention would be applied, at least initially, to asset types that, by their very nature, could and possibly would move across jurisdictional boundaries. However, it was also clear that there were different considerations for different types of assets. Moreover, unlike the aviation sector, procurement of rolling stock is still predominantly financed either directly by States or underwritten by the State. It was recognized that, in time, the situation would change and there would be a greater role for private financiers to play in financing rolling stock procurement. In its initial report for the Rail Working Group published in January 2016, consultants Roland Berger estimated that only 12 per cent of rolling stock procurement in Europe was exclusively funded by the private sector.32 In its second report of March 2017, Roland Berger noted that the proportion of private finance was increasing significantly such that by the end of 2015 it was clearly in excess of 20 per cent of the total procurement costs.33 However, from the outset, it was clear that the private finance market for rolling stock was not nearly as developed as it was for aircraft. Partially, this is not only because of the readiness of States to pick up the bill for the equipment but also because the legal infrastructure for financing rolling stock did not exist in many countries. Unlike the aviation sector, there are generally no national registries for registering ownership or security interests in railway equipment. This means that in many continental European jurisdictions, the position of the creditor holding a non-possessory lien on the assets forming the collateral is, to say the least, fragile. Creditors have resorted to inventive, but complex (and expensive), corporate structures to try and ameliorate the exposure. Unlike the aviation sector, there is no common system for identifying rolling stock across the world, and the identifiers being used are inherently unstable in that they can change, be duplicated and recycled, and possibly more than one number can be allocated to a specific item of equipment over its lifetime. If there is no unique way of identifying the security not only does this undermine the creditor’s position, but it also makes a public registry system untenable. This issue is exacerbated by the fact that rolling stock not only physically moves across borders into different legal systems but, in today’s global financial markets, may often be financed outside of the debtor’s jurisdiction. Even if the rolling stock does not move across jurisdictional borders, the security interests may well do so contractually. What the Luxembourg Rail Protocol therefore seeks to achieve is to create a new common legal mechanism to protect creditors both in the context of domestic as well as international financings equally applicable when equipment does or does not actually move across jurisdictional boundaries. Preparation work for the Luxembourg Rail Protocol began long before the diplomatic conference for the Convention in Cape Town in 2001.34 The first joint meeting of governmental experts took place in Bern in March 2001, but drafting began earlier.35 However, the legal issues took time to work through, and the participating States agreed first to adopt the Convention itself and the Aircraft Protocol thereto. This also came from the need to make new provisions for areas of industry concerns that were not relevant for the aviation sector. One issue to be revisited was the creditor’s rights on debtor insolvency, already discussed in section II.4. But there were other significant divergences that are examined in more detail below. Representatives of 42 States and 12 international organizations met in Luxembourg in February 2007 to review and approve the Luxembourg Rail Protocol over a two-week period. It has now been signed by Italy, Germany, France, Mozambique, Sweden, Switzerland, and the United Kingdom (UK) and signed and ratified by the European Union (EU) (in respect of its competences), Gabon, and Luxembourg—and more States are coming. Although four ratifications are required for the Protocol to enter into force, the Secretariat to the Supervisory Authority must also certify that the International Registry is ready to operate, so it is expected that the Protocol will ‘go live’ by mid-2019. 2. The unique issues confronted by the Luxembourg Rail Protocol The working assumption of Unidroit was that the different asset sectors had different issues to confront, and so it has proved. There are clear, but limited, technical divergences between the Aircraft Protocol and the Luxembourg Rail Protocol, but, for the latter, there were four major additional obstacles that needed to be overcome. A. Scope of application The first challenge was a definitional one. Precisely what equipment does the Luxembourg Rail Protocol apply to? There is a clear sense of what constitutes conventional rolling stock: locomotives, passenger trains, and freight wagons. In fact, rolling stock is incredibly diverse, ranging from high-speed train sets, at one end of the spectrum, to suburban light rail trams and metro rolling stock, at the other end. And why should maglev train sets or monorail carriages not be included? What is clear is that the equipment has to be identified by reference to its physical characteristics and not its mission. In the end, the drafters settled on an inclusive approach: any vehicle that is ‘movable on a fixed railway track or directly on, above or below a guideway’.36 As a result, the advantages of the Protocol will extend also to airport shuttles and cranes and gantries running on tracks in ports.37 B. Identification of railway rolling stock The identification of railway rolling stock was always going to present a challenge bearing in mind the wide application of the Protocol. Inter-urban rolling stock currently has completely different, imperfect, identification systems compared to, say, cable cars or trams. Even if the current manufacturer-numbering systems were acceptable for the purposes of the operation of the Protocol, there is no consistency, which makes any automated recordation system very difficult to operate, and, with thousands of manufacturers of railway rolling stock across the world, there is no mechanism to be able to verify or validate these different systems. In any event, the current numbering systems, often put in place to deal with local operator requirements or to monitor the admission of rolling stock to a rail system and then to monitor its operations, is not designed for registry recording of security interests or, for that matter, to support the creditor-identifying assets against which it requires a remedy. The Luxembourg Rail Protocol technically offers three solutions—namely, a unique identifier stipulated by the International Registry,38 the manufacturer’s serial number,39 or a national or regional numbering system stipulated by a Contracting State.40 Needless to say, running one International Registry with up to three different types of identifiers, which themselves can be different (for example, one manufacturer’s identification system may be alphanumeric and the other may be simply numeric, and there could be different systems for different types of rolling stock), results in a very cumbersome (and costly) system. However, the inevitable conclusion is that the current identification systems cannot be guaranteed to be unique and should not be accepted by the registrar of the International Registry because they will threaten the integrity of the registration system. Moreover, it is impossible to monitor the proper operation of these numbering systems. Without doubt, the best solution will be the identifier, known as the URVIS number,41 being allocated by the registrar and applied to a specific item of rolling stock. This will be a 20-digit number that will be permanently fixed to the item.42 The system will be the same regardless of the asset type and guaranteed to be unique, not just at the time of allocation but also on an ongoing basis, and the expectation is that the registrar will reject alternative identification systems when they do not produce identifiers that are demonstrably unique.43 C. Public policy It can be argued that each of the asset classes covered by the Cape Town Convention to date have a strategic importance for national and international economies. But, perhaps as a legacy of State engagement with the railways and because of hundreds of millions of people commuting to work by rail every day, and further because the railways are the most efficient way of moving people and goods domestically and internationally, railways are often regarded as a public service. Politicians are not comfortable with having to justify why their constituents are not able to get to work in the morning because a creditor repossesses the commuter trains. Moreover, there is a genuine public policy consideration; the overall damage to the economy of stranding commuters on a station platform on a Monday morning is significantly higher than the cost to the creditor of not being able to repossess its assets. In these situations, a balance needs to be found resulting in the optimum benefit for society, reconciling the needs of the consumers with the needs of creditors providing needed resources to procure the rolling stock. Uniquely for all of the Protocols and even the draft MAC protocol now under consideration, the Luxembourg Rail Protocol formulated the system, sometimes referred to as the Public Service Exemption, in its Article XXV, whereby in certain circumstances and where the Contracting State makes a declaration applying the provisions of Article XXV, the creditor could be restrained from exercising its contractual rights to repossess on default or insolvency in return for receiving from the State, or another party that steps in to take possession of the equipment, what the creditor would have received had the contract been adhered to, assuming repossession.44 In other words, this is not a requirement that the State must pay what was contractually agreed as the running obligations absent a default but, rather, what the creditor would reasonably expect to receive had it repossessed the equipment (that is, the open market rent or, if greater, the amount stipulated under local law).45 But this solution is not ideal. The purpose of the Cape Town Convention is to secure creditors, not to deprive them of their contractual rights. Thus, the remedy, constraining the creditor, is only exercised in very limited and carefully defined circumstances. It must be enforcing existing State rights and not creating new rights against the creditor,46 and it only applies to railway rolling stock ‘habitually used for the purpose of providing a service of public importance’.47 In other words, again, applicability is created by reference to the physical status and type of the equipment concerned and not the mission of specific individual items of rolling stock. This is inevitable since otherwise equipment could drop in and drop out of the ‘protected’ category continuously.48 So, for example, a wagon designed to exclusively carry nuclear materials could be regarded as ‘protected’, but a wagon type that performs various functions that could include carrying nuclear materials could not.49 D. Insolvency In the light of the public policy issues, it is hardly surprising that the Luxembourg Rail Protocol seeks, in Article IX, to modify the two alternatives presented in Article XI of the Aircraft Protocol.50 The Aircraft Protocol offers, in effect, a stark binary choice between a system that is strongly supportive of the creditor or one that, effectively, undermines its position on insolvency. As already elaborated in section II.4, Alternative C of Article IX of the Luxembourg Rail Protocol seeks to gently modify the remedies available under Alternative A by giving the courts, in very carefully pre-defined circumstances with pre-defined time limits, the ability to restrain the creditor from repossessing the asset on debtor insolvency.51 But, here, this is not just about dealing with stranded commuters; some States may find it politically, or even constitutionally, intolerable to legitimize creditor self-help on debtor insolvency without any prospect of the courts being able to intervene. Of course, it would always be possible for a State to make a declaration under Article 54(2) of the Convention, stipulating that the remedy would be subject to the review of the courts, but this option is unrestricted and, therefore, a very blunt instrument that would significantly adversely impact the creditor’s position. The critical consideration in all of the creditor repossession remedies is that any material delay in repossession, without compensation, represents real cost for the creditor and, therefore, would be factored into the financing rates. The Article 54(2) route does not allow the creditor to assume that its interests will be protected in this way. By contrast, Alternative C of Article IX provides that either there will be no material delay in repossession or, if there is, that there is a mechanism in place to ensure that the creditor essentially still receives the benefit of its bargain.52 IV. The MAC Protocol 1. History and status of the MAC Protocol The origins of the MAC Protocol date back to the year 2005 when initial research on the feasibility of a potential protocol for agricultural, construction, and mining equipment was undertaken. In 2009, the Unidroit Governing Council considered a preliminary draft text that was based on a comparative analysis of the provisions in the preceding Protocols but did not specifically take into account the legal and technical issues that arise in the MAC industries. Not surprisingly, the USA and Germany, which both have large private industries in regard to the manufacturing and financing of MAC equipment, played a special role in supporting the project. In 2014, Unidroit convened a study group entrusted with preparing a first draft of the MAC Protocol. Soon after, the MAC Working Group was formed to provide an avenue for private sector input on the MAC Protocol project.53 Although the demand for this legal framework originated with the manufacturers and financiers, it now reaches much further, including rental companies, end users, and their representative associations. The Study Group held four meetings from December 2014 to March 2016. In March 2016, it finalized its preliminary draft of the MAC Protocol for consideration at the intergovernmental level.54 The first meeting of the Committee of Governmental Experts for the MAC Protocol was held in Rome in March 2017. A second meeting took place in October 2017. The outcome of these meetings was a revised preliminary draft of the MAC Protocol.55 Subsequently, references herein to the MAC Protocol are to that draft. On the last day of its October meeting, the Committee of Governmental Experts concluded that the draft was ready to be referred to a diplomatic conference.56 This leaves open the possibility of the adoption of the MAC Protocol by a diplomatic conference in late 2018 or 2019. 2. Comparison with the Luxembourg Rail Protocol: common ground and (potential) deviations A. Introduction It has become customary that later Protocols in the Cape Town Convention family closely follow previous Protocols to the extent that this is feasible in light of the equipment categories dealt with. Consistent with the drafting approach that crystallized in the preparation of the Luxembourg Rail and the Space Protocols, the draft MAC Protocol is in many ways congruent with the existing Protocols. This is particularly true when comparing the Luxembourg Rail Protocol and the draft MAC Protocol. For instance, the default remedies available to creditors under the current draft of the MAC Protocol virtually mirror those in the Luxembourg Rail Protocol.57 In particular, Alternative C of the insolvency regime under the Luxembourg Rail Protocol also features in the MAC Protocol. As a matter of policy, there was a consensus at the second meeting of the Committee of Governmental Experts that Contracting States should be given the widest variety of options in selecting insolvency remedies.58 It is also worthy of mention that the draft MAC Protocol adopts the approach laid down in the Luxembourg Rail Protocol, which allows for the registration of notices of sale but, at the same time, stipulates that any such registration and any search made or certificate issued is to be for information purposes only and is not to have effect under the Convention or Protocol.59 The Study Group particularly noted that not providing for this possibility would constitute a further deviation from the previous Protocols, which either permit the registration of notices of sale without any substantive effect or require such registrations for the purposes of applying the priority rules to sales.60 Moreover, the MAC Working Group plausibly demonstrated at the second meeting of the Committee of Governmental Experts that private industry supported the possibility for registration of notices of sale, especially as the Protocol was permissive in nature and did not impose an obligation on States.61 Against this background, a proposal to dispense with the registration of notices of sale did not garner sufficient support from the Committee of Governmental Experts.62 Compared to the overlap between the Luxembourg Rail Protocol and the draft MAC Protocol, the differences between these legal texts are moderate. The subsequent analysis sets out the reasons why there are a few areas where the draft MAC Protocol deviates from the Luxembourg Rail Protocol. It is thereby necessary to distinguish between departures from the Luxembourg Rail Protocol already agreed by the Committee of Governmental Experts and potential divergences that remain under discussion and will have to be settled by the diplomatic conference adopting the MAC Protocol. B. Deviations (i) Scope As outlined above, the Luxembourg Rail Protocol employs an inclusive approach when describing the equipment covered. In stark contrast, the concern most often expressed during the history of the MAC Protocol project was that a broad definitional approach covering all agricultural, construction, and mining equipment was doomed to failure.63 This is due to the fact that the Cape Town Convention targets high-value, mobile, and uniquely identifiable equipment. MAC equipment, however, includes items that are low value (for example, a shovel or an axe), that are not mobile (for example, cranes that are affixed to immovable property and may not be moved at all or only rarely, such as when they are relocated to a new construction site), and that may not be uniquely identifiable (for example, for lack of a manufacturer’s serial number). The draft MAC Protocol has elegantly overcome this hurdle by embracing an ‘unprecedented solution’ for delimiting its scope.64 As the starting point, the scope of the Protocol is based on the World Customs Organization’s Harmonized Commodity Description and Coding System (HS). The objective of this system is the identification of types of goods for the purposes of custom tariffs and trade statistics covering approximately 98 per cent of international trade.65 As an additional step, the scope of the MAC Protocol is then confined to equipment covered by those six-digit HS codes that are listed in at least one of the annexes to the Protocol, covering agricultural equipment, construction equipment, and mining equipment.66 Accordingly, a well-considered selection of the HS codes specified in the annexes is paramount for ensuring that the MAC Protocol only covers equipment that generally meets the Convention standards of high value, mobility, and uniqueness. For instance, direct reference to the lists of HS codes in the annexes allows for the exclusion from the Protocol of those codes that relate to equipment that typically has no individual unique manufacturer-issued serial number and thus would be challenging to immatriculate in the International Registry. Currently, there are 42 HS codes listed in the annexes to the draft MAC Protocol. They were put forward by the private sector through the MAC Working Group and subsequently examined by the Study Group for compatibility with the Convention criteria of high value, mobility, and unique identifiability.67 The second meeting of the Committee of Governmental Experts concluded that States wishing to include further codes to the annexes should provide these additional codes, which then would be scrutinized in close consultation with the MAC Working Group with a view to forming a recommendation as to whether the codes should be added to the annexes to the MAC Protocol.68 The broad definition of railway rolling stock contained in the Luxembourg Rail Protocol occupied the MAC Study Group for another reason as well. When the Study Group commenced its work, there were concerns about an overlap between the Luxembourg Rail Protocol and the preliminary draft MAC Protocol. For instance, a construction crane running on a guideway also falls within the definition of railway rolling stock under the Luxembourg Rail Protocol. This would have given rise to the possibility of competing registrations of international interests under different Protocols for the same piece of equipment. Creditors would therefore have been forced to search all International Registries to assure themselves that a registration in the MAC registry would have priority.69 Against this background, the Study Group concluded that the interaction between the preliminary draft MAC Protocol and the previous Protocols should be dealt with as a matter of scope.70 Hence, the draft MAC Protocol provides that it does not apply to objects covered by any of the other Protocols.71 (ii) Identification of equipment for registration and searches We note as the starting point that the inclusion of MAC equipment under a listed HS code determines the applicability of the MAC Protocol but is irrelevant for the unique identification of the equipment with regard to registering international interests and searching the International Registry. Instead, the process of registration currently envisaged under the draft MAC Protocol requires two types of information.72 First, the registering person must identify the MAC equipment by specifying the manufacturer’s serial number. Typically, this is easily and reliably ascertained from the serial number plaque permanently affixed to the equipment. We note that the draft MAC Protocol does not follow the abovementioned approach adopted by the Luxembourg Rail Protocol regarding the allocation of unique identification numbers by the International Registry in order to facilitate the registration of international interests in objects that do not have a manufacturer’s serial number.73 This omission is due to plausible evidence presented by the MAC Working Group that a vast majority of the equipment designated for coverage by the MAC Protocol has individual manufacturer-issued serial numbers. The Study Group thus concluded that additional provisions on the creation and affixation of unique serial numbers replicating the approach in the Luxembourg Rail Protocol were not called for in the MAC Protocol.74 Second, the registering person must also indicate other additional information concerning the equipment as required to ensure uniqueness.75 This supplementary requirement recognizes that in rare cases identical serial numbers may appear on different pieces of MAC equipment. For instance, several manufacturers may have allocated the same serial number to one of their products. In addition, manufacturers often assign identical serial numbers to products of different types. In all such cases, the manufacturer’s serial number is not sufficient to warrant unique identification of the MAC equipment concerned. Both the format of the manufacturer’s serial number and the additional information necessary to ensure uniqueness will be specified by the future Registry regulations. Deference to these regulations seems particularly sensible in view of the fact that by the time the Luxembourg Rail Protocol and the related International Registry go live, more than a decade will have passed since the adoption of the Protocol in 2007. By the same token, the establishment of the International Registry for the future MAC Protocol may be some time away, and the use of International Organization for Standardization-compatible product identification numbers may be prevailing by then and could be prescribed in the regulations as the pertinent format of manufacturers’ serial numbers.76 The second meeting of the Committee of Governmental Experts also supported the view that when searching the International Registry, the single search criterion should be the manufacturer’s serial number.77 In this respect, the draft MAC Protocol departs from the Luxembourg Rail Protocol, which fully defers to the future Registry Regulations for the establishment of the search criteria.78 In the—hopefully rare—situations where searching the International Registry for a specific serial number yields several results (that is, where the identical serial number appears on more than one MAC object), searching parties can make use of the supplementary information presented in the search certificate to determine which of the several registrations pertains to the piece of MAC equipment in question. If doubts remain, interested parties are expected to conduct further due diligence and seek information from their debtor or the persons in whose favour the existing registrations were made.79 (iii) Public service exemption As already elaborated above, the Luxembourg Rail Protocol allows States to maintain laws in force restricting creditor enforcement to avoid disruption to services of public importance. At first glance, the MAC industries operate in fields of significant public interest, and, therefore, a public service exemption would also seem appropriate in the MAC context. Yet a close look reveals that the MAC sectors do not provide ongoing public services as such. For example, construction equipment may be used to build a fire station or military base that is central to the public interest. However, it is not the construction equipment itself but, rather, the completed infrastructure project that provides a continuous public service.80 Moreover, the Committee of Governmental Experts took the view that many MAC industry-related projects of national importance would be funded from public resources and, as such, would presumably not be backed by private financing agreements covered by the Cape Town Convention.81 For these reasons, the Study Group agreed that it was not necessary to include a public service exemption article in the preliminary draft MAC Protocol.82 C. Potential deviations (i) Assistance to creditors by administrative authorities In conformity with the Luxembourg Rail Protocol, the draft MAC Protocol adds two remedies to those given in the Convention—namely, export and physical transfer of MAC equipment from the territory in which it is situated.83 The draft MAC Protocol so far also accorded with the Luxembourg Rail Protocol, inasmuch as it imposed a general obligation on Contracting States to ensure that the relevant administrative authorities expeditiously cooperate with, and assist, creditors to the extent necessary in procuring the export and physical transfer of MAC equipment.84 This obligation was subject only to applicable safety laws and regulations. Research had originally established that this approach was suitable for the MAC Protocol in view of the fact that there may be numerous administrative authorities tasked with the regulation of MAC equipment.85 In virtually identical terms, the obligation of administrative assistance was intended to apply when creditors procure the export and physical transfer of MAC equipment as a means of interim relief86 or in the context of insolvency.87 However, at the second meeting of the Committee of Governmental Experts, several delegations took the position that the aforementioned obligations were formulated too vaguely, were not as pressing as the previous Protocols, or were even superfluous.88 Yet other delegations voiced concerns that removal from the draft MAC Protocol could give the impression that the administrative authorities in the Contracting States were not obligated to assist creditors to the same extent they were required to provide assistance to creditors under the earlier Protocols.89 No agreement could be reached on this matter. For the time being, the issue remains open for further consideration, and the relevant provisions in the draft MAC Protocol now appear in square brackets.90 The bracketed language now also makes exemplary reference to tax and customs authorities as well as transport infrastructure authorities,91 for the purpose of providing a more specific, but not exhaustive, list of administrative authorities that would be expected to provide assistance to creditors procuring the export and physical transport of MAC equipment from its existing territory.92 (ii) Designated entry points The Luxembourg Rail Protocol leaves it to each Contracting State to decide whether to designate an entity as the entry point for transmission of registration information to the International Registry.93 The use of a national entry point may be made optional or compulsory with the exception of information required for registrations in respect of notices of sale, for which use of the entry point cannot be made compulsory. At the Study Group phase, it was decided to allow the designation of national entry points in line with the Luxembourg Rail Protocol. The consensus among the members of the Study Group was that this would facilitate ratification of the MAC Protocol in countries with national property registries.94 In line with this, the language in the preliminary draft MAC Protocol was largely based on the Luxembourg Rail Protocol.95 However, at the second meeting of the Committee of Governmental Experts, the decision reached by the Study Group was reversed. The pertinent article in the draft MAC Protocol was placed in square brackets so that the designation of national entry points is an open issue at present.96 The reasons for reopening the debate were related, in particular, to the fact that the draft MAC Protocol so far does not provide for a clear criterion that would determine whether a party is obligated to use a designated entry point in registering an interest in a specific piece of MAC equipment in the International Registry.97 Furthermore, it was considered highly unlikely that there would be one single national authority with responsibility for agricultural, construction, and mining equipment that could reasonably be designated as a domestic entry point.98 3. Unique features of the MAC Protocol The MAC Protocol has faced and continues to face unique challenges not implicated by the previous three Protocols. For this reason, a few provisions in the MAC Protocol depart entirely from the rules laid down in the Luxembourg Rail Protocol. Most notably, this is the case in relation to the treatment of inventory and the association of MAC equipment with immovable property. This section deals with these two unique aspects of the MAC Protocol, each of which affords States considerable flexibility in the adoption and implementation of the Protocol. A. Treatment of inventory First of all, the MAC Protocol contains an additional rule on its application to items held for sale or lease in the ordinary course of business by dealers.99 A dealer thereby means a person (including a manufacturer) that sells or leases MAC equipment in the ordinary course of its business.100 Inventory was not an issue thus far, as the previous Protocols cover assets that are not typically kept as inventory for sale due to their high acquisition costs. However, with respect to MAC equipment, the industry took the view that the practical burdens imposed on dealers and their financiers by the real-time registration and discharge of international interests on an asset-by-asset basis were incompatible with well-established inventory-financing practices in many jurisdictions.101 In view of the priority rules in the Convention,102 the Study Group had already noted at an early stage that an international interest in favour of the dealer’s financier would have to be registered and de-registered each time the MAC equipment moved in and out of inventory in order for the buyer of such inventory to take title free and clear of the financier’s interest.103 Against this background, the current draft of the MAC Protocol reverses the Convention’s priority rule that buyers take subject to interests registered at the time of acquisition.104 Instead, the buyer of inventory from a dealer acquires its interest in it free from any registered interest as to which the dealer is the debtor, unless the applicable law otherwise provides.105 This spares buyers from having to search the International Registry for the existence of prior-ranking international interests granted by the dealer to its financing partners. The same rule applies in favour of conditional buyers and lessees of inventory.106 In a further step, interests in inventory granted by a dealer as debtor are completely denied the status of international interests if the State where the dealer is situated has made a declaration to this effect.107 In sum, the effect of the abovementioned rules is that States with established laws providing the basis for efficient inventory financing practices may continue to apply their domestic rules to dealers who avail themselves of such arrangements. At the same time, end-users of MAC equipment will still be able to utilize the MAC Protocol to obtain financing. B. Association with immovable property108 (i) Introduction The MAC Protocol faces another challenge that is unique within the Cape Town Convention family of Protocols. Unlike the objects currently covered by the Aircraft, Rail, and Space Protocols, MAC equipment may become legally associated with immovable property to an extent that the holder of an interest in the immovable property acquires an interest in the associated MAC equipment under the law of the State where the immovable property is situated.109 First and foremost, if movables are firmly attached to immovable property, they may be considered essential parts of the immovable property that can no longer be subject to separate legal rights and interests. A plausible example of such equipment would be heavy mining equipment installed deep underground. Further, in many jurisdictions, the mere association of movables with immovable property may result in the loss or limitation of individual legal identity on the part of the movable. For instance, under German law, a real estate mortgage in farmland will automatically extend to the agricultural equipment (for example, a tractor) associated with the encumbered plot of land insofar as these accessories have passed into the ownership of the owner of the plot of land.110 As already mentioned, the three previous Protocols to the Cape Town Convention do not offer any solutions in this area. The mothers and fathers of the MAC Protocol therefore had to devise a novel approach that seeks to come to grips with, accommodate, and to some extent override local immovable property laws. To this end, the draft MAC Protocol introduces the term ‘immovable-associated equipment’ (IAE).111 This term does not provide a substantive legal definition. Instead, it refers to the law of the State where the equipment is situated to determine whether an interest in the immovable property extends to the MAC object. The neutral term ‘associated’ is used because other similar terms (for example, ‘connected’, ‘attached’, or ‘affixed’) all suggest some kind of constant physical connection between the equipment and the immovable property. As explained above, such connection may actually not be necessary in many legal systems for an interest in immovable property to extend to a movable piece of MAC equipment. (ii) MAC Protocol treatment of immovable-associated equipment The MAC Protocol then goes on to impose on Contracting States a mandatory declaration for the selection of one of three alternative provisions dealing with IAE.112 Alternatives A, B, and C represent different approaches as to how potential conflicts between international interests in MAC equipment and interests under the applicable immovable property law that extend to the same object can be solved. Alternative A permits the creation of an international interest in IAE and protects the existence and priority of this interest even if, under the otherwise applicable local immovable property law, an international interest could not be created or would be extinguished or subordinated. As it stands at present, Alternative A provides: ‘If immovable-associated equipment is removable ... the association of the equipment with the immovable property does not affect its status as equipment under this Protocol.’113 Put differently, Alternative A allows MAC equipment to be fully subject to the provisions of the Protocol even in the face of local immovable property law that otherwise would eliminate or substantially impair the value of an international interest in IAE. In this way, it greatly enhances the utility of international interests in IAE.114 The drawback of Alternative A is that it would protect an international interest from impairment even if the reasonable costs of removal of the IAE from the immovable property (including the costs of repairs to the immovable property and the IAE) would surpass the anticipated value of the disassociated IAE and thus render its removal uneconomical. Similarly, it could potentially even apply if the IAE has physically lost its identity by way of incorporation into the immovable property and no longer has value or utility outside that incorporation even if removed (other than, perhaps, as scrap metal).115 For these reasons, the Committee of Governmental Experts agreed to limit the scope of Alternative A.116 However, a proposal that Alternative A apply only to IAE that could be removed from the immovable property ‘without any irreparable physical damage to the immovable property’117 did not gain sufficient approval.118 Instead, it was decided that the Unidroit Secretariat undertake intersessional work in advance of a diplomatic conference to develop an appropriate standard for a limitation of the application of Alternative A.119 Alternative B, in contrast to Alternative A, applies a legal test rather than a factual test. It respects the operation of local immovable property law when IAE has lost ‘its individual legal identity’ under the applicable local law.120 To the extent that such identity is lost, the MAC Protocol does not affect the application of any domestic immovable property laws in regard to the existence or priority of, or other effects on, international interests in IAE. Financing creditors thus are placed in the same legal position they currently enjoy in the absence of the MAC Protocol. When such legal identity is not lost in accordance with the law of the State where the immovable property is situated, however, Alternative B affords priority to the holder of an interest in the immovable property that extends to IAE only in clearly delimited circumstances.121 First, the interest in the immovable property must have been registered under domestic law prior to the registration of the international interest. Second, the MAC equipment must have become associated with the immovable property prior to the registration of the international interest. The underlying rationale is that in all situations in which the holder of an interest in the immovable property would obtain priority over an international interest in IAE, creditors under the MAC Protocol would be sufficiently protected. This is the case because a creditor registering its international interest in MAC equipment would be in a position to determine the association of the equipment with the immovable property and search the domestic immovable property registry for potentially prior-ranking registrations. Alternative C is essentially the mirror image of the pro-international interest text in Alternative A. It directs that the MAC Protocol does not affect the determination under the law of the State where the immovable property is situated as to whether international interests in the IAE would cease to exist, be subordinated to other interests, or otherwise be affected by its association with the immovable property.122 In essence, Alternative C is indifferent as to the legal protection to be afforded to an international interest in IAE. Local law may provide considerable respect for an international interest in IAE. In other situations, depending on the nature of the local law, deference to its application under Alternative C could significantly weaken the protection afforded to an international interest in IAE when compared to Alternatives A and B. V. Final remarks The timing is fascinating. The Luxembourg Rail Protocol will come into force just as the need for investment in rolling stock over the next five years significantly increases, when the State sector is withdrawing from providing finance and there is increasing utilization of rolling stock across national boundaries. It will also create a new mechanism for existing owners and operators to monetize their fleet and underwrite operating leasing as a valuable tool for the industry. This should in turn lead to a larger, more dynamic, transparent, and competitive rail industry and bring major economic, social, and environmental benefits to States, industries, and communities around the world. The initial criticism of the MAC project—that it would be impossible to confine the scope of the MAC Protocol—has been overcome through careful identification of the appropriate HS codes. Moreover, the draft MAC Protocol now features several innovative provisions, primarily those dealing with inventory financing and the effects of the association of MAC equipment with immovable property. The latter provisions represent an unprecedented step not only for the Cape Town Convention but also for any international commercial law convention. The MAC Protocol thus can be expected to greatly contribute to existing models and approaches in modernizing the secured transactions framework, and it is well suited to co-exist with the other Protocols in the Cape Town Convention family. Footnotes 1 Art. 49(1) CTC. 2 Art. 6(1) CTC. 3 Art. 6(2) CTC. 4 Art. 2(3) CTC. 5 Art. 51 CTC. 6 The various Protocols to the CTC mandate varying identification standards, which will be discussed further below with respect to the Luxembourg Rail Protocol and the MAC Protocol. 7 Art. 7 CTC. 8 Art. 8–15 CTC. 9 Many of these remedies are, however, subject to a detailed system of opt-ins, opt-outs, and reservations. States thus enjoy a certain degree of flexibility for the purpose of adapting the Cape Town Convention system to their local law and other policy considerations. See also section II.4 below in respect of remedies on insolvency. 10 Art. 16–26 CTC. 11 For a detailed overview of the International Registry in relation to the Aircraft Protocol, see John Atwood, ‘The Cape Town Convention: The New Dublin International Registration System in Practice’, 43 (2011) UCCLJ, 637–53. 12 Art. 29(1) CTC. 13 Art. 29(2)(a) CTC. 14 Art. 30 CTC. 15 See Art. XI AP; Art. IX LRP; Art. XXI SP; Art. X MACP. 16 If the estate is administered by a debtor in possession the debtor itself will be the relevant party. 17 See the status overview provided by Unidroit as the Depositary at <https://www.unidroit.org/status-2001capetown-aircraft> (accessed 15 May 2018). 18 Howard Rosen, Martin Fleetwood, and Benjamin von Bodungen, ‘The Luxembourg Rail Protocol: Extending Cape Town Benefits to the Rail Industry’, 17 (2012) Uniform Law Review, 609, 613. 19 Charles Mooney, ‘Insolvency Law as Credit Enhancement: Insolvency-related Provisions of the Cape Town Convention and the Aircraft Equipment Protocol’, 13 (2004) International Insolvency Revue, 27, 38. 20 Details are provided in Howard Rosen, ‘The Luxembourg Rail Protocol: a Major Advance for the Railway Industry’, 12 (2007) Uniform Law Review, 427, 434; Kristin van Zwieten, ‘The Insolvency Provisions of the Cape Town Convention and Protocols: Historical and Economic Perspectives’, 1 (2012) Cape Town Convention Journal, 53, 69. 21 Sector Understanding on Export Credits for Civil Aircraft 1 September 2011 (ASU 2011). 22 These declarations are set out in Appendix II Annex 1 of the ASU 2011. 23 Sector Understanding on Export Credits for Rail Infrastructure December 2013, initially running through to the end of 2017 but now extended to 31 December 2020. 24 See the submission of the Rail Working Group of 14 November 2017 at <http://www.railworkinggroup.org/wp-content/uploads/docs/OECD%20submission.pdf> (accessed 15 May 2018). 25 Published at <http://www.railworkinggroup.org/wp-content/Oxera.pdf> (accessed 15 May 2018). 26 See <https://uic.org/com/IMG/pdf/corridors_exe_sum2017_web.pdf> (accessed 15 May 2018). 27 See Howard Rosen, ‘Could the Luxembourg Protocol Enhance Belt and Road Competitiveness?’, (August 2017) International Railway Journal, <http://www.railjournal.com/index.php/policy/could-the-luxembourg-protocol-enhance-belt-and-road-competitiveness.html> (accessed 15 May 2018). 28 Howard Rosen, ‘Why the Luxembourg Protocol will Boost Railway Investment in Africa’, 5 (2015) Railways Africa, 42–4. 29 Charles Mooney, Marek Dubovec, and William Bryde-Watson, ‘The Mining, Agricultural and Construction Equipment Protocol to the Cape Town Convention Project: The Current Status’, 21 (2016) Uniform Law Review, 332, 350. 30 Unidroit 2017 – Study 72K – CGE2 – Doc. 16, Preliminary Economic Assessment (prepared by Warwick Economics and Associates), Table 5.4. 31Ibid para. 5.43. 32 See <http://www.railworkinggroup.org/wp-content/uploads/docs/160122_Private%20financing%20of%20rolling%20stock_Europe.pdf> (accessed 15 May 2018). 33 See <http://www.railworkinggroup.org/wp-content/uploads/docs/R0718.pdf> (accessed 15 May 2018). 34 Howard Rosen, ‘Creating an International Security Structure for Railway Rolling Stock: an Idea ahead of its Time?’, 4 (1999) Uniform Law Review, 313–22. 35 Unidroit 2000 – Study LXXIIH – Doc. 1. 36 Art. I(2)(e) LRP. 37 See also the Rail Working Group briefing paper What Equipment is Covered by the Luxembourg Protocol?, at <http://www.railworkinggroup.org.nova.ch-meta.net/wp-content/uploads/docs/r0556.pdf> (accessed 15 May 2018). 38 Art. XIV(1) LRP. 39Ibid. 40 Art. XIV(2) LRP. 41 Unique Rail Vehicle Identification System. 42 For more on URVIS, see the Rail Working Group briefing paper Identifying Railway Rolling Stock: It’s Time for a World-wide System, at <http://www.railworkinggroup.org/wp-content/uploads/docs/r0480.pdf> (accessed 15 May 2018). 43 Art. XIV(2) LRP. 44 Art. XXV(4) LRP technically allows a Contracting State to make a declaration that there will be no compensation but it is unlikely that this will be used since it will certainly heavily undermine creditors offering genuine asset-backed financing. 45 Art. XXV(3) LRP. 46 Art. XXV(1) LRP. 47Ibid. 48 The Public Service Exemption is explored in more detail in Howard Rosen, ‘Public Service and the Cape Town Convention’, 2 (2013) Cape Town Convention Journal, 131–47. 49 Another example which was discussed during the Protocol’s drafting was a royal train carriage dedicated to transporting members of the British Royal Family. 50 Technically there is a third alternative which is to refrain from selecting either alternative when local legislation provides an efficient remedy for the creditor but watch for areas where those statutory remedies can have unexpected limitations. See, regarding the applicability of § 1168 of the US Bankruptcy Code, Barbara Goodstein and Howard Rosen, ‘Financing Rolling Stock: Luxembourg Rail Protocol Steams Ahead’, (5 April 2017) New York Law Journal. 51 Paragraphs 3 and 4 of Alternative C. 52 Note that this is the benefit of the deal according to the contract, not the market rental value of the asset assuming repossession. 53 Included in the Working Group membership are many of the largest MAC equipment manufacturers globally as well as several trade associations. 54 An annotated version of this draft is contained in Unidroit 2016 – Study 72K – SG4 – Doc. 6. 55 This draft is set out in Appendix III of Unidroit 2017 – Study 72K – CGE2 – Report. 56 Unidroit 2017 – Study 72K – CGE2 – W.P. 14, para. 22. 57 There is only one potential deviation which is discussed below. 58 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 116. 59 Art. XVII LRP; Art. XVIII MACP. 60 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 155. 61 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 24. 62Ibid para. 26. 63 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 7. 64 Mooney, Dubovec, and Bryde-Watson (n 29) 345. 65 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 7. 66 E.g., HS code 843210 (‘Agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground rollers – Plows’) in the Annex for agricultural equipment; HS code 842641 (‘Ship’s derricks; cranes, including cable cranes; mobile lifting frames, straddle carriers and works trucks fitted with a crane—Other machinery, self-propelled—On tires’) in the Annex for construction equipment. 67 For more detailed information regarding the equipment proposed for inclusion see Unidroit 2017 – Study 72K – CGE2 – Doc. 5. 68 Unidroit 2017 – Study 72K – CGE2 – W.P. 6, para. 47. 69 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 51. 70Ibid para. 49. 71 Art. II(4) MACP. 72 Art. XVI MACP. 73 Art. XIV(1) LRP. 74 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 46. 75 This could be the brand name under which the MAC asset is sold, the model designation, or the manufacturer’s name (see Unidroit 2017 – Study 72K – CGE2 – Doc. 11, paras. 45–7). 76 Unidroit 2017 – Study 72K – CGE2 – Doc. 11, paras. 7, 42. 77 See Art. XVII(1) MACP. 78 See Art. XV(1) LRP. 79 Unidroit 2017 – Study 72K – CGE2 – Doc. 11, para. 53. 80 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 178. 81Ibid. 82Ibid, para. 179. 83 See Art. VII(1) LRP and Art. VIII(1) MACP. 84 See Art. VII(5) LRP and Art. VIII(5) MACP. 85 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 47. 86 Art. IX(6) MACP. 87 Art. X Alternative A(8) and Alternative C(9) MACP. 88 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 13–16. 89Ibid, para. 18. 90 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 19–20; Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 59. 91 See Art. VIII(5) MACP. 92 See Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 143, which carefully examines which administrative authorities could be required to provide assistance to creditors. 93 Art. XIII LRP. 94 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 89. 95 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 90. 96 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 13. 97 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 5. 98 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 6. 99 Art. XIbis MACP. 100 Art. I(2)(c) MACP. 101 Unidroit 2017 – Study 72K – CGE2 – W.P. 3, para. 1. 102 Art. 29(3) CTC. 103 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 71. 104 Art. 29(3)(a) CTC. 105 Art. XIbis (1) MACP. 106 Art. XIbis (2) MACP. 107 Art. XIbis (3) and (4) MACP. 108 The following is the condensed version of a more comprehensive analysis regarding the association of MAC equipment with immovable property that is presented in Benjamin von Bodungen and Charles Mooney, ‘Immovable-associated Equipment under the Draft MAC Protocol: A Sui Generis Challenge for the Cape Town Convention’, 6 (2017) Cape Town Convention Journal (forthcoming). 109 Admittedly, in future the association with immovable property could also become an issue under the Rail Protocol in relation to the announced plans for development of elevators running vertically and horizontally on tracks inside buildings. 110 See section 1120 of the German Civil Code (Bürgerliches Gesetzbuch): ‘The mortgage extends ... to the accessories of the plot of land with the exception of accessories that have not passed into the ownership of the owner of the plot of land.’ 111 Art. I(2)(h) MACP. 112 Art. VII(2) MACP. 113 MAC Protocol art VII Alternative A(3). 114 In this respect Alternative A is reminiscent of the MAC Protocol’s Art. X Alternative A on insolvency remedies and the corresponding provisions in the other CTC Protocols. 115 Admittedly, the likelihood of such cases may be remote if the listed HS codes are carefully selected. For instance, of the 42 HS codes currently envisaged for inclusion in the MAC Protocol only a very few contain equipment that potentially could become affixed to immovable property in any significant manner. 116 Unidroit 2017 – Study 72K – CGE2 – W.P. 6, para. 59. 117 This proposal was put forward by the United States Department of State, see Unidroit 2017 – Study 72K – CGE2 – Doc. 10, para. 4. 118 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 3-9; Unidroit 2017, Study 72K – CGE2 – W.P. 13, paras. 50-3. 119 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 53. 120 Art. VII Alternative B(3) MACP. 121 Art. VII Alternative B(4) MACP. 122 Art. VII Alternative C(3) MACP. © The Author(s) (2018). Published by Oxford University Press on behalf of Unidroit. All rights reserved. For permissions, please email journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Uniform Law Review/Revue De Droit Uniforme Oxford University Press

From the Luxembourg Rail Protocol to the draft MAC Protocol

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Abstract

Abstract While the Luxembourg Rail Protocol to the Cape Town Convention will enter into force in the very near future, the International Institute for the Unification of Private Law is currently working towards the adoption of a fourth Protocol under the Cape Town Convention umbrella, which deals with mining, agricultural, and construction equipment (MAC Protocol). This article examines the common ground and core differences between the two legal texts. To this end, the article first introduces the basic features of the Cape Town Convention system and then focuses on the expected macro- and micro-economic impact of both the Rail Protocol and the MAC Protocol. It moves on to analyse the application of the Cape Town Convention to the railway sector in areas where four major industry-specific obstacles are needed to be overcome and contrasts the draft MAC Protocol, elaborating on its unique features. The authors conclude that both Protocols will not only enhance the legal position of creditors but also bring about significant macro-economic benefits. In addition, the draft MAC Protocol features several innovative provisions and thus can be expected to become a reference point in the ongoing debate on the modernization of the secured transactions framework both at the international and the national level. I. Introduction The Cape Town Convention and the accompanying Protocol covering aircraft equipment are the most successful secured transaction-related international instruments ever, according to virtually any measure. They have demonstrably facilitated the availability and lowered the costs of credit in the aircraft-financing sphere. After two further Protocols, covering railway rolling stock and space assets respectively, were added to the Cape Town Convention family, the International Institute for the Unification of Private Law (Unidroit) is now in the process of adopting a fourth Protocol underneath the Cape Town Convention umbrella, which deals with agricultural, construction, and mining equipment. The purpose of this article is to outline and comment on the common ground and core differences between the Protocols in relation to railway rolling stock, on the one hand, and agricultural, construction, and mining equipment, on the other hand. First, this article will introduce the essential features of the Cape Town Convention system (section II). Next, the article will discuss the application of the Cape Town Convention system to the railway sector (section III). Finally, the article will contrast the draft Protocol for agricultural, construction, and mining equipment with the railway-specific Protocol and shed some light on its unique features (section IV). II. Core features of the Cape Town Convention system 1. Structural approach The Cape Town Convention lays down a legal mechanism for regulating security interests and leases in high-value, mobile, and uniquely identifiable equipment. The architects of the Cape Town Convention system had the wise foresight to draft the Convention as an umbrella treaty that establishes the basic objectives and sets out all non-equipment-specific considerations. However, the extension of the application of the Convention to a specific category of high-value mobile equipment necessitates the adoption of a Protocol for such a category.1 The Protocols under the Convention umbrella are intended to supplement and amend the Convention, thus catering to the challenges that arise in relation to a particular category of equipment as well as related industry sector practices, constraints, and requirements. Consequently, the Convention and the respective Protocol must be read and interpreted together as one single instrument.2 To the extent of any inconsistency between the Convention and the relevant Protocol, the latter will prevail.3 The text of the Cape Town Convention expressly contemplates three Protocols for (i) airframes, aircraft engines, and helicopters; (ii) railway rolling stock; and (iii) space assets.4 The Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Aircraft Protocol) was adopted at the same time as the Cape Town Convention itself in November 2001. Since it came into force in March 2006, the Aircraft Protocol has had a significant impact in lowering transactional costs and risks in the financing of aircraft worldwide. To date, it has entered into force in 69 Contracting States. The next Protocol to be adopted was the Luxembourg Rail Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock (Luxembourg Rail Protocol). It was adopted at a second diplomatic conference, which was held in Luxembourg in February 2007. The Luxembourg Rail Protocol is now expected to enter into force during 2019. The adoption of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (Space Protocol) in March 2012 exhausted the categories of equipment expressly referred to in the Cape Town Convention. However, the Convention also anticipates the adoption of additional protocols and lays down the process for the extension of its application to objects of any category of high-value, mobile, and uniquely identifiable equipment.5 In all probability, the fourth Protocol to be adopted will be the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Mining, Agricultural and Construction Equipment (MAC Protocol). The draft MAC Protocol is now at a very advanced stage and will probably be submitted to a diplomatic conference for adoption in late 2018 or 2019. 2. The international interest under the Cape Town Convention The Cape Town Convention provides for the creation and protection of ‘international interests’, being security interests in relation to the legal positions of a conditional seller under a title retention agreement, a lessor under a leasing agreement, or a chargee taking security in an item of equipment under a finance agreement. Conceptually, the international interest is an autonomous right that is not derived from national law. It therefore does not require a formal or functional counterpart under the relevant domestic law. In addition, the creation of an international interest only presupposes the satisfaction of a limited set of formation requirements. The agreement under which an international interest is created must be in writing; it must relate to an object of which the chargor, conditional seller, or lessor has power to dispose; it must enable the object to be identified in conformity with an equipment-specific protocol;6 and, in case of a security agreement, it must allow for the secured obligations to be determined.7 Finally, the Convention establishes a suite of—in part sweeping—remedies for creditors in the event of the debtor’s default.8 These default remedies improve the legal position of creditors in contrast with the traditional situation in many national law systems where lengthy court processes are often required before an asset may be repossessed or disposed of. In particular, they include self-help and interim relief measures pending final determination of a claim and thus reflect the notion that adequate and readily enforceable default remedies are pivotal from a creditor’s perspective.9 3. The International Registry At the heart of the Cape Town Convention lies the establishment of a worldwide system of registering international interests under each Protocol on a fully electronic basis.10 The International Registry envisaged by the Cape Town Convention for each Protocol is accessible through the Internet 24 hours per day, seven days per week, allowing creditors to register their international interests from anywhere in the world.11 As a notice-filing system, only information sufficient to alert a potential creditor or buyer of conflicting interests is required to effect a registration. Searching parties are then expected to engage in due diligence to determine the details of a transaction relating to an interest already registered in the International Registry. Such interests will, in almost all cases, take precedence over any and all unregistered or subsequently registered in rem interests.12 Even the actual knowledge of an earlier unregistered interest does not affect the priority of the first-in-time registered interest.13 4. Rights on insolvency One of the critical achievements of the Cape Town Convention and its Protocols is the protection accorded to international interests in the event of the debtor’s insolvency. As a starting point, the Cape Town Convention provides that an international interest is effective where it was properly registered prior to the commencement of the insolvency proceedings.14 In order to accommodate the divergent approaches to insolvency law under national legal regimes, the Protocols then allow Contracting States to opt into different insolvency alternatives.15 If a State makes no such selection, its national insolvency laws will apply. From a creditor’s perspective, Alternative A is the most desirable solution as it ensures that, within a specified and non-extendable waiting period, the creditor will be able to repossess the piece of equipment that is subject to an international interest or obtain from the insolvency administrator the curing of all existing defaults as well as the agreement to perform all future obligations.16 The exact duration of the waiting period is laid down in a declaration of the Contracting State where the insolvent debtor has its centre of main interests and thus can be ascertained by the creditor before entering into a transaction with the debtor. Under the Aircraft Protocol, most Contracting States have opted for the adoption of Alternative A with a waiting period of 60 calendar days.17 The unavoidability enshrined in Alternative A, however, may conflict with national insolvency laws that in many cases take into account not only the creditors’ interests in effective and prompt remedies but also the opposing interests such as the protection of debtors, the economy, and jobs.18 Alternative B takes up these considerations and, unlike Alternative A, requires the creditor to work through the court system prior to repossessing the asset. Furthermore, the competent court is furnished with broad discretion as to whether, when, and under which circumstances the creditor may take possession. In light of the obstacles that creditors must overcome prior to enforcing their remedies in the event of the debtor’s insolvency, Alternative B essentially establishes not much more than a ‘procedural structure under which a creditor may beg and plead for a court’s mercy’.19 Against this background, the drafters of the Luxembourg Rail Protocol felt that a more balanced insolvency option was required that is not featured in the Aircraft and Space Protocols.20 The rationale for including Alternative C in the Luxembourg Rail Protocol was to maintain the self-help provisions in Alternative A while, at the same time, imposing—within much narrower bounds than in Alternative B— limited and pre-defined judicial restraint on the creditor protection components. To this end, the insolvency administrator may apply for a court order suspending the creditor’s right to repossess at the end of the initial cure period (which corresponds to the waiting period in Alternative A). If the court grants this order, it must also require the insolvency administrator to continue to perform during the subsequent suspension period all obligations as set out in the original finance agreement. In this way, Alternative C minimizes the risk that the creditor’s financial position is materially adversely affected during the suspension period. 5. Economic impact of the Cape Town Convention and its Protocols Against this background, the objectives of the Cape Town Convention are obvious; by reducing risk for equipment financiers, it intends to facilitate, on a worldwide basis, more diverse, extensive, and less costly private sector financing for specific categories of high-value, mobile equipment. In this vein, the preamble to the Cape Town Convention recognizes the advantages of asset-based financing and leasing by providing for a clear framework to govern these types of transactions. Strong evidence of the effect of the Cape Town Convention system in reducing credit risk is the recognition by the Organisation for Economic Co-operation and Development’s (OECD) Aircraft Sector Understanding.21 This multilateral arrangement establishes export-financing rules for aircraft and allows export credit agencies to charge lower premiums on the financing provided to parties located in Contracting States that have made certain (‘qualifying’) declarations under the Cape Town Convention and the Aircraft Protocol.22 There is also a Rail Sector Understanding23 concluded under the auspices of the OECD, but it is not analogous. However, the industry has strongly argued that externalities must be taken into account when setting rates, and so premium rates from export credit agencies should decrease once the Luxembourg Rail Protocol applies.24 Moreover, a recent study by Oxera has quantified the direct micro-economic benefits of the Luxembourg Rail Protocol for 20 countries across Europe alone at €19.4 billion.25 In the rail sector at least, there will also be structural benefits. The Luxembourg Rail Protocol underwrites operating leasing, which will in turn encourage more competition and create an economic dynamic towards the standardization of equipment, which in turn will lead to higher residual value assumptions (and lower lease rents) as well as economies of scale for manufacturers. The Luxembourg Rail Protocol will also support the growing cross-border operation of rolling stock, particularly in the freight sector. This will become increasingly important in the future with the predicted heavy development of the Belt and Road Initiative linking Asia and Europe. According to a recent study by Roland Berger for the International Union of Railways,26 Eurasian annual trade by rail expanded from about 25,000 twenty-foot-equivalent units (TEUs) in 2014 to 145,000 TEUs in 2016 and is predicted to quintuple by 2027. Other experts are already predicting 1 million TEUs per year by 2020. The predicted increase in freight traffic will not only require more investment in rolling stock, which will be heavily financed from the private sector, but also measures to be taken to protect the creditors holding security interests in rolling stock as it crosses multiple borders and conflict-of-law issues (with potentially competing claimants on rolling stock) become more critical.27 By providing a common set of rules and creditor protections, regardless of the physical location of the rolling stock or the debtor, the Luxembourg Rail Protocol makes the legal position easier to understand and enforce for creditors and investors. Clearly, there are also macro-economic benefits, but these will vary by asset and region. Having said that, they can be expected to be most evident for the Luxembourg Rail Protocol28 and the draft MAC Protocol, where they both play an important role in relation to sustainable economic development. Specifically, by supporting investment in railway equipment, the Luxembourg Rail Protocol also contributes to the environmental, safety, and societal benefits delivered by the rail sector. One may well ask in this context how the MAC Protocol, which targets equipment of high value, should have an impact in most developing countries where in the agricultural field, for example, the needs of MAC equipment users are for small farming equipment of lower value. However, smaller-sized businesses often form cooperatives or machinery rings for the acquisition of equipment that is shared among the members, thus making the acquisition of high-value equipment possible.29 The deployment of such enhanced agricultural equipment will in turn entail productivity gains. Correspondingly, research undertaken during its preparatory phase demonstrates that the MAC Protocol will significantly increase the gross domestic product (GDP) of low-income countries. The most current analysis projects a GDP impact of US $32–48 billion annually for low-income economies.30 These figures are large in absolute terms and vastly greater than the costs of implementing the MAC Protocol.31 III. Luxembourg Rail Protocol 1. History and status of the Luxembourg Rail Protocol Early in the planning process of the Cape Town Convention, it was decided that the Convention would be applied, at least initially, to asset types that, by their very nature, could and possibly would move across jurisdictional boundaries. However, it was also clear that there were different considerations for different types of assets. Moreover, unlike the aviation sector, procurement of rolling stock is still predominantly financed either directly by States or underwritten by the State. It was recognized that, in time, the situation would change and there would be a greater role for private financiers to play in financing rolling stock procurement. In its initial report for the Rail Working Group published in January 2016, consultants Roland Berger estimated that only 12 per cent of rolling stock procurement in Europe was exclusively funded by the private sector.32 In its second report of March 2017, Roland Berger noted that the proportion of private finance was increasing significantly such that by the end of 2015 it was clearly in excess of 20 per cent of the total procurement costs.33 However, from the outset, it was clear that the private finance market for rolling stock was not nearly as developed as it was for aircraft. Partially, this is not only because of the readiness of States to pick up the bill for the equipment but also because the legal infrastructure for financing rolling stock did not exist in many countries. Unlike the aviation sector, there are generally no national registries for registering ownership or security interests in railway equipment. This means that in many continental European jurisdictions, the position of the creditor holding a non-possessory lien on the assets forming the collateral is, to say the least, fragile. Creditors have resorted to inventive, but complex (and expensive), corporate structures to try and ameliorate the exposure. Unlike the aviation sector, there is no common system for identifying rolling stock across the world, and the identifiers being used are inherently unstable in that they can change, be duplicated and recycled, and possibly more than one number can be allocated to a specific item of equipment over its lifetime. If there is no unique way of identifying the security not only does this undermine the creditor’s position, but it also makes a public registry system untenable. This issue is exacerbated by the fact that rolling stock not only physically moves across borders into different legal systems but, in today’s global financial markets, may often be financed outside of the debtor’s jurisdiction. Even if the rolling stock does not move across jurisdictional borders, the security interests may well do so contractually. What the Luxembourg Rail Protocol therefore seeks to achieve is to create a new common legal mechanism to protect creditors both in the context of domestic as well as international financings equally applicable when equipment does or does not actually move across jurisdictional boundaries. Preparation work for the Luxembourg Rail Protocol began long before the diplomatic conference for the Convention in Cape Town in 2001.34 The first joint meeting of governmental experts took place in Bern in March 2001, but drafting began earlier.35 However, the legal issues took time to work through, and the participating States agreed first to adopt the Convention itself and the Aircraft Protocol thereto. This also came from the need to make new provisions for areas of industry concerns that were not relevant for the aviation sector. One issue to be revisited was the creditor’s rights on debtor insolvency, already discussed in section II.4. But there were other significant divergences that are examined in more detail below. Representatives of 42 States and 12 international organizations met in Luxembourg in February 2007 to review and approve the Luxembourg Rail Protocol over a two-week period. It has now been signed by Italy, Germany, France, Mozambique, Sweden, Switzerland, and the United Kingdom (UK) and signed and ratified by the European Union (EU) (in respect of its competences), Gabon, and Luxembourg—and more States are coming. Although four ratifications are required for the Protocol to enter into force, the Secretariat to the Supervisory Authority must also certify that the International Registry is ready to operate, so it is expected that the Protocol will ‘go live’ by mid-2019. 2. The unique issues confronted by the Luxembourg Rail Protocol The working assumption of Unidroit was that the different asset sectors had different issues to confront, and so it has proved. There are clear, but limited, technical divergences between the Aircraft Protocol and the Luxembourg Rail Protocol, but, for the latter, there were four major additional obstacles that needed to be overcome. A. Scope of application The first challenge was a definitional one. Precisely what equipment does the Luxembourg Rail Protocol apply to? There is a clear sense of what constitutes conventional rolling stock: locomotives, passenger trains, and freight wagons. In fact, rolling stock is incredibly diverse, ranging from high-speed train sets, at one end of the spectrum, to suburban light rail trams and metro rolling stock, at the other end. And why should maglev train sets or monorail carriages not be included? What is clear is that the equipment has to be identified by reference to its physical characteristics and not its mission. In the end, the drafters settled on an inclusive approach: any vehicle that is ‘movable on a fixed railway track or directly on, above or below a guideway’.36 As a result, the advantages of the Protocol will extend also to airport shuttles and cranes and gantries running on tracks in ports.37 B. Identification of railway rolling stock The identification of railway rolling stock was always going to present a challenge bearing in mind the wide application of the Protocol. Inter-urban rolling stock currently has completely different, imperfect, identification systems compared to, say, cable cars or trams. Even if the current manufacturer-numbering systems were acceptable for the purposes of the operation of the Protocol, there is no consistency, which makes any automated recordation system very difficult to operate, and, with thousands of manufacturers of railway rolling stock across the world, there is no mechanism to be able to verify or validate these different systems. In any event, the current numbering systems, often put in place to deal with local operator requirements or to monitor the admission of rolling stock to a rail system and then to monitor its operations, is not designed for registry recording of security interests or, for that matter, to support the creditor-identifying assets against which it requires a remedy. The Luxembourg Rail Protocol technically offers three solutions—namely, a unique identifier stipulated by the International Registry,38 the manufacturer’s serial number,39 or a national or regional numbering system stipulated by a Contracting State.40 Needless to say, running one International Registry with up to three different types of identifiers, which themselves can be different (for example, one manufacturer’s identification system may be alphanumeric and the other may be simply numeric, and there could be different systems for different types of rolling stock), results in a very cumbersome (and costly) system. However, the inevitable conclusion is that the current identification systems cannot be guaranteed to be unique and should not be accepted by the registrar of the International Registry because they will threaten the integrity of the registration system. Moreover, it is impossible to monitor the proper operation of these numbering systems. Without doubt, the best solution will be the identifier, known as the URVIS number,41 being allocated by the registrar and applied to a specific item of rolling stock. This will be a 20-digit number that will be permanently fixed to the item.42 The system will be the same regardless of the asset type and guaranteed to be unique, not just at the time of allocation but also on an ongoing basis, and the expectation is that the registrar will reject alternative identification systems when they do not produce identifiers that are demonstrably unique.43 C. Public policy It can be argued that each of the asset classes covered by the Cape Town Convention to date have a strategic importance for national and international economies. But, perhaps as a legacy of State engagement with the railways and because of hundreds of millions of people commuting to work by rail every day, and further because the railways are the most efficient way of moving people and goods domestically and internationally, railways are often regarded as a public service. Politicians are not comfortable with having to justify why their constituents are not able to get to work in the morning because a creditor repossesses the commuter trains. Moreover, there is a genuine public policy consideration; the overall damage to the economy of stranding commuters on a station platform on a Monday morning is significantly higher than the cost to the creditor of not being able to repossess its assets. In these situations, a balance needs to be found resulting in the optimum benefit for society, reconciling the needs of the consumers with the needs of creditors providing needed resources to procure the rolling stock. Uniquely for all of the Protocols and even the draft MAC protocol now under consideration, the Luxembourg Rail Protocol formulated the system, sometimes referred to as the Public Service Exemption, in its Article XXV, whereby in certain circumstances and where the Contracting State makes a declaration applying the provisions of Article XXV, the creditor could be restrained from exercising its contractual rights to repossess on default or insolvency in return for receiving from the State, or another party that steps in to take possession of the equipment, what the creditor would have received had the contract been adhered to, assuming repossession.44 In other words, this is not a requirement that the State must pay what was contractually agreed as the running obligations absent a default but, rather, what the creditor would reasonably expect to receive had it repossessed the equipment (that is, the open market rent or, if greater, the amount stipulated under local law).45 But this solution is not ideal. The purpose of the Cape Town Convention is to secure creditors, not to deprive them of their contractual rights. Thus, the remedy, constraining the creditor, is only exercised in very limited and carefully defined circumstances. It must be enforcing existing State rights and not creating new rights against the creditor,46 and it only applies to railway rolling stock ‘habitually used for the purpose of providing a service of public importance’.47 In other words, again, applicability is created by reference to the physical status and type of the equipment concerned and not the mission of specific individual items of rolling stock. This is inevitable since otherwise equipment could drop in and drop out of the ‘protected’ category continuously.48 So, for example, a wagon designed to exclusively carry nuclear materials could be regarded as ‘protected’, but a wagon type that performs various functions that could include carrying nuclear materials could not.49 D. Insolvency In the light of the public policy issues, it is hardly surprising that the Luxembourg Rail Protocol seeks, in Article IX, to modify the two alternatives presented in Article XI of the Aircraft Protocol.50 The Aircraft Protocol offers, in effect, a stark binary choice between a system that is strongly supportive of the creditor or one that, effectively, undermines its position on insolvency. As already elaborated in section II.4, Alternative C of Article IX of the Luxembourg Rail Protocol seeks to gently modify the remedies available under Alternative A by giving the courts, in very carefully pre-defined circumstances with pre-defined time limits, the ability to restrain the creditor from repossessing the asset on debtor insolvency.51 But, here, this is not just about dealing with stranded commuters; some States may find it politically, or even constitutionally, intolerable to legitimize creditor self-help on debtor insolvency without any prospect of the courts being able to intervene. Of course, it would always be possible for a State to make a declaration under Article 54(2) of the Convention, stipulating that the remedy would be subject to the review of the courts, but this option is unrestricted and, therefore, a very blunt instrument that would significantly adversely impact the creditor’s position. The critical consideration in all of the creditor repossession remedies is that any material delay in repossession, without compensation, represents real cost for the creditor and, therefore, would be factored into the financing rates. The Article 54(2) route does not allow the creditor to assume that its interests will be protected in this way. By contrast, Alternative C of Article IX provides that either there will be no material delay in repossession or, if there is, that there is a mechanism in place to ensure that the creditor essentially still receives the benefit of its bargain.52 IV. The MAC Protocol 1. History and status of the MAC Protocol The origins of the MAC Protocol date back to the year 2005 when initial research on the feasibility of a potential protocol for agricultural, construction, and mining equipment was undertaken. In 2009, the Unidroit Governing Council considered a preliminary draft text that was based on a comparative analysis of the provisions in the preceding Protocols but did not specifically take into account the legal and technical issues that arise in the MAC industries. Not surprisingly, the USA and Germany, which both have large private industries in regard to the manufacturing and financing of MAC equipment, played a special role in supporting the project. In 2014, Unidroit convened a study group entrusted with preparing a first draft of the MAC Protocol. Soon after, the MAC Working Group was formed to provide an avenue for private sector input on the MAC Protocol project.53 Although the demand for this legal framework originated with the manufacturers and financiers, it now reaches much further, including rental companies, end users, and their representative associations. The Study Group held four meetings from December 2014 to March 2016. In March 2016, it finalized its preliminary draft of the MAC Protocol for consideration at the intergovernmental level.54 The first meeting of the Committee of Governmental Experts for the MAC Protocol was held in Rome in March 2017. A second meeting took place in October 2017. The outcome of these meetings was a revised preliminary draft of the MAC Protocol.55 Subsequently, references herein to the MAC Protocol are to that draft. On the last day of its October meeting, the Committee of Governmental Experts concluded that the draft was ready to be referred to a diplomatic conference.56 This leaves open the possibility of the adoption of the MAC Protocol by a diplomatic conference in late 2018 or 2019. 2. Comparison with the Luxembourg Rail Protocol: common ground and (potential) deviations A. Introduction It has become customary that later Protocols in the Cape Town Convention family closely follow previous Protocols to the extent that this is feasible in light of the equipment categories dealt with. Consistent with the drafting approach that crystallized in the preparation of the Luxembourg Rail and the Space Protocols, the draft MAC Protocol is in many ways congruent with the existing Protocols. This is particularly true when comparing the Luxembourg Rail Protocol and the draft MAC Protocol. For instance, the default remedies available to creditors under the current draft of the MAC Protocol virtually mirror those in the Luxembourg Rail Protocol.57 In particular, Alternative C of the insolvency regime under the Luxembourg Rail Protocol also features in the MAC Protocol. As a matter of policy, there was a consensus at the second meeting of the Committee of Governmental Experts that Contracting States should be given the widest variety of options in selecting insolvency remedies.58 It is also worthy of mention that the draft MAC Protocol adopts the approach laid down in the Luxembourg Rail Protocol, which allows for the registration of notices of sale but, at the same time, stipulates that any such registration and any search made or certificate issued is to be for information purposes only and is not to have effect under the Convention or Protocol.59 The Study Group particularly noted that not providing for this possibility would constitute a further deviation from the previous Protocols, which either permit the registration of notices of sale without any substantive effect or require such registrations for the purposes of applying the priority rules to sales.60 Moreover, the MAC Working Group plausibly demonstrated at the second meeting of the Committee of Governmental Experts that private industry supported the possibility for registration of notices of sale, especially as the Protocol was permissive in nature and did not impose an obligation on States.61 Against this background, a proposal to dispense with the registration of notices of sale did not garner sufficient support from the Committee of Governmental Experts.62 Compared to the overlap between the Luxembourg Rail Protocol and the draft MAC Protocol, the differences between these legal texts are moderate. The subsequent analysis sets out the reasons why there are a few areas where the draft MAC Protocol deviates from the Luxembourg Rail Protocol. It is thereby necessary to distinguish between departures from the Luxembourg Rail Protocol already agreed by the Committee of Governmental Experts and potential divergences that remain under discussion and will have to be settled by the diplomatic conference adopting the MAC Protocol. B. Deviations (i) Scope As outlined above, the Luxembourg Rail Protocol employs an inclusive approach when describing the equipment covered. In stark contrast, the concern most often expressed during the history of the MAC Protocol project was that a broad definitional approach covering all agricultural, construction, and mining equipment was doomed to failure.63 This is due to the fact that the Cape Town Convention targets high-value, mobile, and uniquely identifiable equipment. MAC equipment, however, includes items that are low value (for example, a shovel or an axe), that are not mobile (for example, cranes that are affixed to immovable property and may not be moved at all or only rarely, such as when they are relocated to a new construction site), and that may not be uniquely identifiable (for example, for lack of a manufacturer’s serial number). The draft MAC Protocol has elegantly overcome this hurdle by embracing an ‘unprecedented solution’ for delimiting its scope.64 As the starting point, the scope of the Protocol is based on the World Customs Organization’s Harmonized Commodity Description and Coding System (HS). The objective of this system is the identification of types of goods for the purposes of custom tariffs and trade statistics covering approximately 98 per cent of international trade.65 As an additional step, the scope of the MAC Protocol is then confined to equipment covered by those six-digit HS codes that are listed in at least one of the annexes to the Protocol, covering agricultural equipment, construction equipment, and mining equipment.66 Accordingly, a well-considered selection of the HS codes specified in the annexes is paramount for ensuring that the MAC Protocol only covers equipment that generally meets the Convention standards of high value, mobility, and uniqueness. For instance, direct reference to the lists of HS codes in the annexes allows for the exclusion from the Protocol of those codes that relate to equipment that typically has no individual unique manufacturer-issued serial number and thus would be challenging to immatriculate in the International Registry. Currently, there are 42 HS codes listed in the annexes to the draft MAC Protocol. They were put forward by the private sector through the MAC Working Group and subsequently examined by the Study Group for compatibility with the Convention criteria of high value, mobility, and unique identifiability.67 The second meeting of the Committee of Governmental Experts concluded that States wishing to include further codes to the annexes should provide these additional codes, which then would be scrutinized in close consultation with the MAC Working Group with a view to forming a recommendation as to whether the codes should be added to the annexes to the MAC Protocol.68 The broad definition of railway rolling stock contained in the Luxembourg Rail Protocol occupied the MAC Study Group for another reason as well. When the Study Group commenced its work, there were concerns about an overlap between the Luxembourg Rail Protocol and the preliminary draft MAC Protocol. For instance, a construction crane running on a guideway also falls within the definition of railway rolling stock under the Luxembourg Rail Protocol. This would have given rise to the possibility of competing registrations of international interests under different Protocols for the same piece of equipment. Creditors would therefore have been forced to search all International Registries to assure themselves that a registration in the MAC registry would have priority.69 Against this background, the Study Group concluded that the interaction between the preliminary draft MAC Protocol and the previous Protocols should be dealt with as a matter of scope.70 Hence, the draft MAC Protocol provides that it does not apply to objects covered by any of the other Protocols.71 (ii) Identification of equipment for registration and searches We note as the starting point that the inclusion of MAC equipment under a listed HS code determines the applicability of the MAC Protocol but is irrelevant for the unique identification of the equipment with regard to registering international interests and searching the International Registry. Instead, the process of registration currently envisaged under the draft MAC Protocol requires two types of information.72 First, the registering person must identify the MAC equipment by specifying the manufacturer’s serial number. Typically, this is easily and reliably ascertained from the serial number plaque permanently affixed to the equipment. We note that the draft MAC Protocol does not follow the abovementioned approach adopted by the Luxembourg Rail Protocol regarding the allocation of unique identification numbers by the International Registry in order to facilitate the registration of international interests in objects that do not have a manufacturer’s serial number.73 This omission is due to plausible evidence presented by the MAC Working Group that a vast majority of the equipment designated for coverage by the MAC Protocol has individual manufacturer-issued serial numbers. The Study Group thus concluded that additional provisions on the creation and affixation of unique serial numbers replicating the approach in the Luxembourg Rail Protocol were not called for in the MAC Protocol.74 Second, the registering person must also indicate other additional information concerning the equipment as required to ensure uniqueness.75 This supplementary requirement recognizes that in rare cases identical serial numbers may appear on different pieces of MAC equipment. For instance, several manufacturers may have allocated the same serial number to one of their products. In addition, manufacturers often assign identical serial numbers to products of different types. In all such cases, the manufacturer’s serial number is not sufficient to warrant unique identification of the MAC equipment concerned. Both the format of the manufacturer’s serial number and the additional information necessary to ensure uniqueness will be specified by the future Registry regulations. Deference to these regulations seems particularly sensible in view of the fact that by the time the Luxembourg Rail Protocol and the related International Registry go live, more than a decade will have passed since the adoption of the Protocol in 2007. By the same token, the establishment of the International Registry for the future MAC Protocol may be some time away, and the use of International Organization for Standardization-compatible product identification numbers may be prevailing by then and could be prescribed in the regulations as the pertinent format of manufacturers’ serial numbers.76 The second meeting of the Committee of Governmental Experts also supported the view that when searching the International Registry, the single search criterion should be the manufacturer’s serial number.77 In this respect, the draft MAC Protocol departs from the Luxembourg Rail Protocol, which fully defers to the future Registry Regulations for the establishment of the search criteria.78 In the—hopefully rare—situations where searching the International Registry for a specific serial number yields several results (that is, where the identical serial number appears on more than one MAC object), searching parties can make use of the supplementary information presented in the search certificate to determine which of the several registrations pertains to the piece of MAC equipment in question. If doubts remain, interested parties are expected to conduct further due diligence and seek information from their debtor or the persons in whose favour the existing registrations were made.79 (iii) Public service exemption As already elaborated above, the Luxembourg Rail Protocol allows States to maintain laws in force restricting creditor enforcement to avoid disruption to services of public importance. At first glance, the MAC industries operate in fields of significant public interest, and, therefore, a public service exemption would also seem appropriate in the MAC context. Yet a close look reveals that the MAC sectors do not provide ongoing public services as such. For example, construction equipment may be used to build a fire station or military base that is central to the public interest. However, it is not the construction equipment itself but, rather, the completed infrastructure project that provides a continuous public service.80 Moreover, the Committee of Governmental Experts took the view that many MAC industry-related projects of national importance would be funded from public resources and, as such, would presumably not be backed by private financing agreements covered by the Cape Town Convention.81 For these reasons, the Study Group agreed that it was not necessary to include a public service exemption article in the preliminary draft MAC Protocol.82 C. Potential deviations (i) Assistance to creditors by administrative authorities In conformity with the Luxembourg Rail Protocol, the draft MAC Protocol adds two remedies to those given in the Convention—namely, export and physical transfer of MAC equipment from the territory in which it is situated.83 The draft MAC Protocol so far also accorded with the Luxembourg Rail Protocol, inasmuch as it imposed a general obligation on Contracting States to ensure that the relevant administrative authorities expeditiously cooperate with, and assist, creditors to the extent necessary in procuring the export and physical transfer of MAC equipment.84 This obligation was subject only to applicable safety laws and regulations. Research had originally established that this approach was suitable for the MAC Protocol in view of the fact that there may be numerous administrative authorities tasked with the regulation of MAC equipment.85 In virtually identical terms, the obligation of administrative assistance was intended to apply when creditors procure the export and physical transfer of MAC equipment as a means of interim relief86 or in the context of insolvency.87 However, at the second meeting of the Committee of Governmental Experts, several delegations took the position that the aforementioned obligations were formulated too vaguely, were not as pressing as the previous Protocols, or were even superfluous.88 Yet other delegations voiced concerns that removal from the draft MAC Protocol could give the impression that the administrative authorities in the Contracting States were not obligated to assist creditors to the same extent they were required to provide assistance to creditors under the earlier Protocols.89 No agreement could be reached on this matter. For the time being, the issue remains open for further consideration, and the relevant provisions in the draft MAC Protocol now appear in square brackets.90 The bracketed language now also makes exemplary reference to tax and customs authorities as well as transport infrastructure authorities,91 for the purpose of providing a more specific, but not exhaustive, list of administrative authorities that would be expected to provide assistance to creditors procuring the export and physical transport of MAC equipment from its existing territory.92 (ii) Designated entry points The Luxembourg Rail Protocol leaves it to each Contracting State to decide whether to designate an entity as the entry point for transmission of registration information to the International Registry.93 The use of a national entry point may be made optional or compulsory with the exception of information required for registrations in respect of notices of sale, for which use of the entry point cannot be made compulsory. At the Study Group phase, it was decided to allow the designation of national entry points in line with the Luxembourg Rail Protocol. The consensus among the members of the Study Group was that this would facilitate ratification of the MAC Protocol in countries with national property registries.94 In line with this, the language in the preliminary draft MAC Protocol was largely based on the Luxembourg Rail Protocol.95 However, at the second meeting of the Committee of Governmental Experts, the decision reached by the Study Group was reversed. The pertinent article in the draft MAC Protocol was placed in square brackets so that the designation of national entry points is an open issue at present.96 The reasons for reopening the debate were related, in particular, to the fact that the draft MAC Protocol so far does not provide for a clear criterion that would determine whether a party is obligated to use a designated entry point in registering an interest in a specific piece of MAC equipment in the International Registry.97 Furthermore, it was considered highly unlikely that there would be one single national authority with responsibility for agricultural, construction, and mining equipment that could reasonably be designated as a domestic entry point.98 3. Unique features of the MAC Protocol The MAC Protocol has faced and continues to face unique challenges not implicated by the previous three Protocols. For this reason, a few provisions in the MAC Protocol depart entirely from the rules laid down in the Luxembourg Rail Protocol. Most notably, this is the case in relation to the treatment of inventory and the association of MAC equipment with immovable property. This section deals with these two unique aspects of the MAC Protocol, each of which affords States considerable flexibility in the adoption and implementation of the Protocol. A. Treatment of inventory First of all, the MAC Protocol contains an additional rule on its application to items held for sale or lease in the ordinary course of business by dealers.99 A dealer thereby means a person (including a manufacturer) that sells or leases MAC equipment in the ordinary course of its business.100 Inventory was not an issue thus far, as the previous Protocols cover assets that are not typically kept as inventory for sale due to their high acquisition costs. However, with respect to MAC equipment, the industry took the view that the practical burdens imposed on dealers and their financiers by the real-time registration and discharge of international interests on an asset-by-asset basis were incompatible with well-established inventory-financing practices in many jurisdictions.101 In view of the priority rules in the Convention,102 the Study Group had already noted at an early stage that an international interest in favour of the dealer’s financier would have to be registered and de-registered each time the MAC equipment moved in and out of inventory in order for the buyer of such inventory to take title free and clear of the financier’s interest.103 Against this background, the current draft of the MAC Protocol reverses the Convention’s priority rule that buyers take subject to interests registered at the time of acquisition.104 Instead, the buyer of inventory from a dealer acquires its interest in it free from any registered interest as to which the dealer is the debtor, unless the applicable law otherwise provides.105 This spares buyers from having to search the International Registry for the existence of prior-ranking international interests granted by the dealer to its financing partners. The same rule applies in favour of conditional buyers and lessees of inventory.106 In a further step, interests in inventory granted by a dealer as debtor are completely denied the status of international interests if the State where the dealer is situated has made a declaration to this effect.107 In sum, the effect of the abovementioned rules is that States with established laws providing the basis for efficient inventory financing practices may continue to apply their domestic rules to dealers who avail themselves of such arrangements. At the same time, end-users of MAC equipment will still be able to utilize the MAC Protocol to obtain financing. B. Association with immovable property108 (i) Introduction The MAC Protocol faces another challenge that is unique within the Cape Town Convention family of Protocols. Unlike the objects currently covered by the Aircraft, Rail, and Space Protocols, MAC equipment may become legally associated with immovable property to an extent that the holder of an interest in the immovable property acquires an interest in the associated MAC equipment under the law of the State where the immovable property is situated.109 First and foremost, if movables are firmly attached to immovable property, they may be considered essential parts of the immovable property that can no longer be subject to separate legal rights and interests. A plausible example of such equipment would be heavy mining equipment installed deep underground. Further, in many jurisdictions, the mere association of movables with immovable property may result in the loss or limitation of individual legal identity on the part of the movable. For instance, under German law, a real estate mortgage in farmland will automatically extend to the agricultural equipment (for example, a tractor) associated with the encumbered plot of land insofar as these accessories have passed into the ownership of the owner of the plot of land.110 As already mentioned, the three previous Protocols to the Cape Town Convention do not offer any solutions in this area. The mothers and fathers of the MAC Protocol therefore had to devise a novel approach that seeks to come to grips with, accommodate, and to some extent override local immovable property laws. To this end, the draft MAC Protocol introduces the term ‘immovable-associated equipment’ (IAE).111 This term does not provide a substantive legal definition. Instead, it refers to the law of the State where the equipment is situated to determine whether an interest in the immovable property extends to the MAC object. The neutral term ‘associated’ is used because other similar terms (for example, ‘connected’, ‘attached’, or ‘affixed’) all suggest some kind of constant physical connection between the equipment and the immovable property. As explained above, such connection may actually not be necessary in many legal systems for an interest in immovable property to extend to a movable piece of MAC equipment. (ii) MAC Protocol treatment of immovable-associated equipment The MAC Protocol then goes on to impose on Contracting States a mandatory declaration for the selection of one of three alternative provisions dealing with IAE.112 Alternatives A, B, and C represent different approaches as to how potential conflicts between international interests in MAC equipment and interests under the applicable immovable property law that extend to the same object can be solved. Alternative A permits the creation of an international interest in IAE and protects the existence and priority of this interest even if, under the otherwise applicable local immovable property law, an international interest could not be created or would be extinguished or subordinated. As it stands at present, Alternative A provides: ‘If immovable-associated equipment is removable ... the association of the equipment with the immovable property does not affect its status as equipment under this Protocol.’113 Put differently, Alternative A allows MAC equipment to be fully subject to the provisions of the Protocol even in the face of local immovable property law that otherwise would eliminate or substantially impair the value of an international interest in IAE. In this way, it greatly enhances the utility of international interests in IAE.114 The drawback of Alternative A is that it would protect an international interest from impairment even if the reasonable costs of removal of the IAE from the immovable property (including the costs of repairs to the immovable property and the IAE) would surpass the anticipated value of the disassociated IAE and thus render its removal uneconomical. Similarly, it could potentially even apply if the IAE has physically lost its identity by way of incorporation into the immovable property and no longer has value or utility outside that incorporation even if removed (other than, perhaps, as scrap metal).115 For these reasons, the Committee of Governmental Experts agreed to limit the scope of Alternative A.116 However, a proposal that Alternative A apply only to IAE that could be removed from the immovable property ‘without any irreparable physical damage to the immovable property’117 did not gain sufficient approval.118 Instead, it was decided that the Unidroit Secretariat undertake intersessional work in advance of a diplomatic conference to develop an appropriate standard for a limitation of the application of Alternative A.119 Alternative B, in contrast to Alternative A, applies a legal test rather than a factual test. It respects the operation of local immovable property law when IAE has lost ‘its individual legal identity’ under the applicable local law.120 To the extent that such identity is lost, the MAC Protocol does not affect the application of any domestic immovable property laws in regard to the existence or priority of, or other effects on, international interests in IAE. Financing creditors thus are placed in the same legal position they currently enjoy in the absence of the MAC Protocol. When such legal identity is not lost in accordance with the law of the State where the immovable property is situated, however, Alternative B affords priority to the holder of an interest in the immovable property that extends to IAE only in clearly delimited circumstances.121 First, the interest in the immovable property must have been registered under domestic law prior to the registration of the international interest. Second, the MAC equipment must have become associated with the immovable property prior to the registration of the international interest. The underlying rationale is that in all situations in which the holder of an interest in the immovable property would obtain priority over an international interest in IAE, creditors under the MAC Protocol would be sufficiently protected. This is the case because a creditor registering its international interest in MAC equipment would be in a position to determine the association of the equipment with the immovable property and search the domestic immovable property registry for potentially prior-ranking registrations. Alternative C is essentially the mirror image of the pro-international interest text in Alternative A. It directs that the MAC Protocol does not affect the determination under the law of the State where the immovable property is situated as to whether international interests in the IAE would cease to exist, be subordinated to other interests, or otherwise be affected by its association with the immovable property.122 In essence, Alternative C is indifferent as to the legal protection to be afforded to an international interest in IAE. Local law may provide considerable respect for an international interest in IAE. In other situations, depending on the nature of the local law, deference to its application under Alternative C could significantly weaken the protection afforded to an international interest in IAE when compared to Alternatives A and B. V. Final remarks The timing is fascinating. The Luxembourg Rail Protocol will come into force just as the need for investment in rolling stock over the next five years significantly increases, when the State sector is withdrawing from providing finance and there is increasing utilization of rolling stock across national boundaries. It will also create a new mechanism for existing owners and operators to monetize their fleet and underwrite operating leasing as a valuable tool for the industry. This should in turn lead to a larger, more dynamic, transparent, and competitive rail industry and bring major economic, social, and environmental benefits to States, industries, and communities around the world. The initial criticism of the MAC project—that it would be impossible to confine the scope of the MAC Protocol—has been overcome through careful identification of the appropriate HS codes. Moreover, the draft MAC Protocol now features several innovative provisions, primarily those dealing with inventory financing and the effects of the association of MAC equipment with immovable property. The latter provisions represent an unprecedented step not only for the Cape Town Convention but also for any international commercial law convention. The MAC Protocol thus can be expected to greatly contribute to existing models and approaches in modernizing the secured transactions framework, and it is well suited to co-exist with the other Protocols in the Cape Town Convention family. Footnotes 1 Art. 49(1) CTC. 2 Art. 6(1) CTC. 3 Art. 6(2) CTC. 4 Art. 2(3) CTC. 5 Art. 51 CTC. 6 The various Protocols to the CTC mandate varying identification standards, which will be discussed further below with respect to the Luxembourg Rail Protocol and the MAC Protocol. 7 Art. 7 CTC. 8 Art. 8–15 CTC. 9 Many of these remedies are, however, subject to a detailed system of opt-ins, opt-outs, and reservations. States thus enjoy a certain degree of flexibility for the purpose of adapting the Cape Town Convention system to their local law and other policy considerations. See also section II.4 below in respect of remedies on insolvency. 10 Art. 16–26 CTC. 11 For a detailed overview of the International Registry in relation to the Aircraft Protocol, see John Atwood, ‘The Cape Town Convention: The New Dublin International Registration System in Practice’, 43 (2011) UCCLJ, 637–53. 12 Art. 29(1) CTC. 13 Art. 29(2)(a) CTC. 14 Art. 30 CTC. 15 See Art. XI AP; Art. IX LRP; Art. XXI SP; Art. X MACP. 16 If the estate is administered by a debtor in possession the debtor itself will be the relevant party. 17 See the status overview provided by Unidroit as the Depositary at <https://www.unidroit.org/status-2001capetown-aircraft> (accessed 15 May 2018). 18 Howard Rosen, Martin Fleetwood, and Benjamin von Bodungen, ‘The Luxembourg Rail Protocol: Extending Cape Town Benefits to the Rail Industry’, 17 (2012) Uniform Law Review, 609, 613. 19 Charles Mooney, ‘Insolvency Law as Credit Enhancement: Insolvency-related Provisions of the Cape Town Convention and the Aircraft Equipment Protocol’, 13 (2004) International Insolvency Revue, 27, 38. 20 Details are provided in Howard Rosen, ‘The Luxembourg Rail Protocol: a Major Advance for the Railway Industry’, 12 (2007) Uniform Law Review, 427, 434; Kristin van Zwieten, ‘The Insolvency Provisions of the Cape Town Convention and Protocols: Historical and Economic Perspectives’, 1 (2012) Cape Town Convention Journal, 53, 69. 21 Sector Understanding on Export Credits for Civil Aircraft 1 September 2011 (ASU 2011). 22 These declarations are set out in Appendix II Annex 1 of the ASU 2011. 23 Sector Understanding on Export Credits for Rail Infrastructure December 2013, initially running through to the end of 2017 but now extended to 31 December 2020. 24 See the submission of the Rail Working Group of 14 November 2017 at <http://www.railworkinggroup.org/wp-content/uploads/docs/OECD%20submission.pdf> (accessed 15 May 2018). 25 Published at <http://www.railworkinggroup.org/wp-content/Oxera.pdf> (accessed 15 May 2018). 26 See <https://uic.org/com/IMG/pdf/corridors_exe_sum2017_web.pdf> (accessed 15 May 2018). 27 See Howard Rosen, ‘Could the Luxembourg Protocol Enhance Belt and Road Competitiveness?’, (August 2017) International Railway Journal, <http://www.railjournal.com/index.php/policy/could-the-luxembourg-protocol-enhance-belt-and-road-competitiveness.html> (accessed 15 May 2018). 28 Howard Rosen, ‘Why the Luxembourg Protocol will Boost Railway Investment in Africa’, 5 (2015) Railways Africa, 42–4. 29 Charles Mooney, Marek Dubovec, and William Bryde-Watson, ‘The Mining, Agricultural and Construction Equipment Protocol to the Cape Town Convention Project: The Current Status’, 21 (2016) Uniform Law Review, 332, 350. 30 Unidroit 2017 – Study 72K – CGE2 – Doc. 16, Preliminary Economic Assessment (prepared by Warwick Economics and Associates), Table 5.4. 31Ibid para. 5.43. 32 See <http://www.railworkinggroup.org/wp-content/uploads/docs/160122_Private%20financing%20of%20rolling%20stock_Europe.pdf> (accessed 15 May 2018). 33 See <http://www.railworkinggroup.org/wp-content/uploads/docs/R0718.pdf> (accessed 15 May 2018). 34 Howard Rosen, ‘Creating an International Security Structure for Railway Rolling Stock: an Idea ahead of its Time?’, 4 (1999) Uniform Law Review, 313–22. 35 Unidroit 2000 – Study LXXIIH – Doc. 1. 36 Art. I(2)(e) LRP. 37 See also the Rail Working Group briefing paper What Equipment is Covered by the Luxembourg Protocol?, at <http://www.railworkinggroup.org.nova.ch-meta.net/wp-content/uploads/docs/r0556.pdf> (accessed 15 May 2018). 38 Art. XIV(1) LRP. 39Ibid. 40 Art. XIV(2) LRP. 41 Unique Rail Vehicle Identification System. 42 For more on URVIS, see the Rail Working Group briefing paper Identifying Railway Rolling Stock: It’s Time for a World-wide System, at <http://www.railworkinggroup.org/wp-content/uploads/docs/r0480.pdf> (accessed 15 May 2018). 43 Art. XIV(2) LRP. 44 Art. XXV(4) LRP technically allows a Contracting State to make a declaration that there will be no compensation but it is unlikely that this will be used since it will certainly heavily undermine creditors offering genuine asset-backed financing. 45 Art. XXV(3) LRP. 46 Art. XXV(1) LRP. 47Ibid. 48 The Public Service Exemption is explored in more detail in Howard Rosen, ‘Public Service and the Cape Town Convention’, 2 (2013) Cape Town Convention Journal, 131–47. 49 Another example which was discussed during the Protocol’s drafting was a royal train carriage dedicated to transporting members of the British Royal Family. 50 Technically there is a third alternative which is to refrain from selecting either alternative when local legislation provides an efficient remedy for the creditor but watch for areas where those statutory remedies can have unexpected limitations. See, regarding the applicability of § 1168 of the US Bankruptcy Code, Barbara Goodstein and Howard Rosen, ‘Financing Rolling Stock: Luxembourg Rail Protocol Steams Ahead’, (5 April 2017) New York Law Journal. 51 Paragraphs 3 and 4 of Alternative C. 52 Note that this is the benefit of the deal according to the contract, not the market rental value of the asset assuming repossession. 53 Included in the Working Group membership are many of the largest MAC equipment manufacturers globally as well as several trade associations. 54 An annotated version of this draft is contained in Unidroit 2016 – Study 72K – SG4 – Doc. 6. 55 This draft is set out in Appendix III of Unidroit 2017 – Study 72K – CGE2 – Report. 56 Unidroit 2017 – Study 72K – CGE2 – W.P. 14, para. 22. 57 There is only one potential deviation which is discussed below. 58 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 116. 59 Art. XVII LRP; Art. XVIII MACP. 60 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 155. 61 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 24. 62Ibid para. 26. 63 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 7. 64 Mooney, Dubovec, and Bryde-Watson (n 29) 345. 65 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 7. 66 E.g., HS code 843210 (‘Agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground rollers – Plows’) in the Annex for agricultural equipment; HS code 842641 (‘Ship’s derricks; cranes, including cable cranes; mobile lifting frames, straddle carriers and works trucks fitted with a crane—Other machinery, self-propelled—On tires’) in the Annex for construction equipment. 67 For more detailed information regarding the equipment proposed for inclusion see Unidroit 2017 – Study 72K – CGE2 – Doc. 5. 68 Unidroit 2017 – Study 72K – CGE2 – W.P. 6, para. 47. 69 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 51. 70Ibid para. 49. 71 Art. II(4) MACP. 72 Art. XVI MACP. 73 Art. XIV(1) LRP. 74 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 46. 75 This could be the brand name under which the MAC asset is sold, the model designation, or the manufacturer’s name (see Unidroit 2017 – Study 72K – CGE2 – Doc. 11, paras. 45–7). 76 Unidroit 2017 – Study 72K – CGE2 – Doc. 11, paras. 7, 42. 77 See Art. XVII(1) MACP. 78 See Art. XV(1) LRP. 79 Unidroit 2017 – Study 72K – CGE2 – Doc. 11, para. 53. 80 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 178. 81Ibid. 82Ibid, para. 179. 83 See Art. VII(1) LRP and Art. VIII(1) MACP. 84 See Art. VII(5) LRP and Art. VIII(5) MACP. 85 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 47. 86 Art. IX(6) MACP. 87 Art. X Alternative A(8) and Alternative C(9) MACP. 88 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 13–16. 89Ibid, para. 18. 90 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 19–20; Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 59. 91 See Art. VIII(5) MACP. 92 See Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 143, which carefully examines which administrative authorities could be required to provide assistance to creditors. 93 Art. XIII LRP. 94 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 89. 95 Unidroit 2017 – Study 72K – CGE2 – Doc. 3, para. 90. 96 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 13. 97 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 5. 98 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 6. 99 Art. XIbis MACP. 100 Art. I(2)(c) MACP. 101 Unidroit 2017 – Study 72K – CGE2 – W.P. 3, para. 1. 102 Art. 29(3) CTC. 103 Unidroit 2017 – Study 72K – CGE2 – Doc. 4, para. 71. 104 Art. 29(3)(a) CTC. 105 Art. XIbis (1) MACP. 106 Art. XIbis (2) MACP. 107 Art. XIbis (3) and (4) MACP. 108 The following is the condensed version of a more comprehensive analysis regarding the association of MAC equipment with immovable property that is presented in Benjamin von Bodungen and Charles Mooney, ‘Immovable-associated Equipment under the Draft MAC Protocol: A Sui Generis Challenge for the Cape Town Convention’, 6 (2017) Cape Town Convention Journal (forthcoming). 109 Admittedly, in future the association with immovable property could also become an issue under the Rail Protocol in relation to the announced plans for development of elevators running vertically and horizontally on tracks inside buildings. 110 See section 1120 of the German Civil Code (Bürgerliches Gesetzbuch): ‘The mortgage extends ... to the accessories of the plot of land with the exception of accessories that have not passed into the ownership of the owner of the plot of land.’ 111 Art. I(2)(h) MACP. 112 Art. VII(2) MACP. 113 MAC Protocol art VII Alternative A(3). 114 In this respect Alternative A is reminiscent of the MAC Protocol’s Art. X Alternative A on insolvency remedies and the corresponding provisions in the other CTC Protocols. 115 Admittedly, the likelihood of such cases may be remote if the listed HS codes are carefully selected. For instance, of the 42 HS codes currently envisaged for inclusion in the MAC Protocol only a very few contain equipment that potentially could become affixed to immovable property in any significant manner. 116 Unidroit 2017 – Study 72K – CGE2 – W.P. 6, para. 59. 117 This proposal was put forward by the United States Department of State, see Unidroit 2017 – Study 72K – CGE2 – Doc. 10, para. 4. 118 Unidroit 2017 – Study 72K – CGE2 – W.P. 11, paras. 3-9; Unidroit 2017, Study 72K – CGE2 – W.P. 13, paras. 50-3. 119 Unidroit 2017 – Study 72K – CGE2 – W.P. 13, para. 53. 120 Art. VII Alternative B(3) MACP. 121 Art. VII Alternative B(4) MACP. 122 Art. VII Alternative C(3) MACP. © The Author(s) (2018). Published by Oxford University Press on behalf of Unidroit. All rights reserved. For permissions, please email journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

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Uniform Law Review/Revue De Droit UniformeOxford University Press

Published: May 24, 2018

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