Home Law Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions
Status of International Interests in Insolvency Proceedings
Basic Rule: Applicable Law - Functionalism
The Cape Town Convention requires that a registered international interest remains effective even after the insolvency proceedings commence against the debtor. However, the Base Convention leaves the issue of the international interest’s status under the insolvency proceedings to the applicable law. Therefore, whether the exercise of an international interest is stayed or whether the obligation under the agreement may be modified, is determined by the applicable law of insolvency.
The Alternatives on the Enforceability of International Interests After Commencement of Insolvency Proceedings
It is, however, critical in structuring the asset based financing, in particular with regard to credit rating of equipment trust certificates, whether or not the right of the creditor is affected by the commencement of insolvency proceedings. For this reason, the Protocols provide detailed rules on the issue, applicable if a Contracting State opts in by a declaration. Basically, a registered international interest can be enforced even after an insolvency proceedings are commenced against the debtor, without being stayed either automatically or by an order of the court. Thus, the registered international interest under the Cape Town Convention is “bankruptcy remote.”
Furthermore, all three Protocols provide a provision that differ in the extent of the power that the creditor with a registered international interest can exercise in insolvency proceedings, and require the State that opts in the provision to choose one of these alternatives. Alternative A under all three Protocols ensure that the creditor is entitled to private enforcement of its international interest: the insolvency administrator or debtor, unless it cures all defaults (other than the opening of insolvency proceedings, which may itself be an event of default) and agrees to perform all future obligations under the agreement within the waiting period, must give possession of the object encumbered with an international interest to the creditor. The length of the waiting period is specified by the State in its declaration. Alternative A is apparently inspired by sections 1110 and 1168 of the Bankruptcy Code of the United States, which is known to have supported the development of equipment trust certificates market.
Even under Alternative B of all the Protocols, it remains the case that the insolvency administrator or debtor must choose either to cure all defaults and agree to perform all future obligations or to give the creditor the opportunity to take possession of the object in accordance with the applicable law. However, pursuant to the applicable law, the court may require that the creditor take additional steps or provide an additional guarantee. This means that the “bankruptcy remote” structure is somewhat qualified if Alternative B is applicable. Under Alternative C, contained only in the Luxembourg Rail Protocol, private enforcement can be suspended by the court order on condition that all the sums accruing to the creditor continue to be paid and that the insolvency administrator or debtor performs all other obligations. The insolvency administrator or debtor must first choose, within the cure period, either to cure all defaults and agree to perform all future obligations or to give the creditor the opportunity to take possession of the object. Then it may, before the cure period ends, apply for a court order suspending the repossession by the creditor. Limiting the private enforcement in such a manner reflects the nature of enforcement over railway rolling stock: because it may be delivered only by driving on the rail, the support by the court will anyway be required.
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