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“System of Two Promissory Notes”: Bearer Bond as Mortgage Instrument

According to the mortgage acts, a means of transport can be mortgaged to secure fulfillment of a monetary obligation (financial obligation). The promissory note or other document expressing this obligation must be appended when registration of a mortgage is applied for from the register authority. The original idea underlying the acts is that the document appended, with respect to which the mortgage is sought to be registered, expresses an actual debt owed to a creditor. Yet, financing practice has long since abandoned this idea.[1] Instead, in pursuit of flexibility, a practice known as the “system of two promissory notes” has emerged.

In this practice, a mortgage can be registered even before the existence of any actual debt, repayment of which the mortgage could secure. The document appended to the application for registration of a mortgage is typically a bearer bond (negotiable promissory note), which does not, as such, represent any actual debt owed by the owner of the means of transport. Bearer bond forms for all types of mortgageable means of transport are linked to the Trafi website:[2] Registration means that the register authority makes an entry concerning the mortgage in the relevant register and, importantly, on the bearer bond.

This chapter is written under the assumption that the document expressing the monetary obligation with respect to which a mortgage is registered, or registration is applied for, is a bearer bond, created by filling in a bearer bond form provided by Trafi. This assumption simplifies and clarifies the discussion below, and is justified in that it corresponds to the normal course of action in current financing practice. Note, though, that the law does not require use of a form provided by Trafi, or a bearer bond or other negotiable document. If an ordinary, non-negotiable promissory note is used, the applicable legal norms are partly different.[3] It is also assumed in this chapter, for the sake of simplicity, that the debtor of a secured claim, or a claim to be secured, is the owner of the means of transport.

A mortgage over a means of transport is not, as such, a security right over that means of transport, but rather an element of a security right, needed in order to bring about third-party effects as well as to fix the secured amount and priority position.[4] Indeed, a mortgage can be registered before the owner of the means of transport provides a security right to a creditor. In that case, registration of mortgage can be seen as preparation for creating a security right in the future. When the owner wishes to provide a creditor with a security right over a means of transport, the owner makes a disposition (or enters into an agreement) concerning that right. This disposition is hereinafter called “charging”, and the resulting security right a “charge”.


However, mere registration of a mortgage and charging do not create a charge in the sense of a security right that is effective against the security-provider debtor’s other creditors. To that end, the creditor has in addition to receive possession of a bearer bond that contains the register authority’s entry concerning the mortgage (hereinafter: “bearer bond with mortgage entry”).[5] It is also possible that charging takes place first, and registration of a mortgage is applied for after that. If registration is applied for by the creditor whose claim is to be secured, which is possible with the owner’s consent (see Sect. 12.4), a charge comes into existence upon registration of the mortgage.[6]

In short, the actual security right over a mortgaged means of transport is a charge. The mortgage acts prohibit possessory pledges over mortgageable means of transport (Vessel Mortgage Act, Section 23(3); Aircraft Mortgage Act, Section 1(2); Vehicle Mortgage Act, Section 2(2)).

The term “system of two promissory notes” refers, on the one hand, to a bearer bond, and, on the other, to a promissory note (or credit agreement) expressing the actual debt owed by the owner of a means of transport to a secured creditor. In legal literature, a bearer bond with mortgage entry is often referred to as a “charge promissory note”. A promissory note (or credit agreement) expressing the owner’s actual debt is often referred to as a “wrap promissory note”. As a matter of fact, a charge promissory note is a promissory note only in a formal sense. Its function, besides that related to third-party effectiveness of a security right (“perfection” by possession of the bearer bond with mortgage entry), is to establish the amount of money that the secured creditor is entitled to from the value of the means of transport if the debtor defaults. Priority between two or more charges over the same means of transport is determined by the time of registration of mortgage - first in time, first in right. If the debtor repays the secured creditor, and the secured claim thus ceases to exist, the bearer bond is returned to the debtor. A feature of the system of two promissory notes is that the debtor is able to use the returned bearer bond to secure another claim, be it by the same or another creditor, with the same priority position that was fixed at the time of registration of the mortgage.[7]

  • [1] KM 1992:44, Kuljetusvalineiden velkakiinnitystoimikunnan mietinto [Committee Report1992:44], 4.
  • [2] Website accessed 6 Oct 2016.
  • [3] See Havansi 1992, 187-192, 278.
  • [4] In a comparative perspective, using the term “mortgage” like this may be misleading. “Mortgage”is by no means a perfect translation of the Finnish term kiinnitys and the Swedish term inteckning,both of which rather denote a technical act of register entry.
  • [5] Ari Saarnilehto et al., 2012, Varallisuusoikeus, 2nd ed. (Helsinki: Sanoma Pro), 1206-1207;Tepora, Kaisto and Hakkola 2009, 126-127; Jarno Tepora, 2008, Johdatus esineoikeudenperustei-siin (Helsinki: Helsingin yliopiston oikeustieteellinen tiedekunta), 110-111; Havansi 1992,278-279.
  • [6] Saarnilehto et al. 2012, 1207. In that case, the creditor receives the bearer bond with mortgageentry directly from the register authority.
  • [7] Havansi 1992, 279.
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