The development of transport and related infrastructure is critical for continued growth in African economies. Rolling stock leasing models are an attractive and growing response to Africa's transportation and logistics requirements but they require external finance.
Rolling stock refers to locomotives, carriages, wagons or other vehicles used on railways. As these assets move around, and even cross borders, a sensible investor would want to confirm that valid and enforceable security interests may be created wherever these assets operate. This article surveys the existing means by which funders may take security over rolling stock in selected Southern African jurisdictions, and outlines the legal framework that could apply in future.
In South Africa, security over rolling stock is generally taken by means of a special notarial bond (SNB), which is a perfected statutory pledge and does not require physical possession of the encumbered asset. The holder of the SNB obtains a real right in the subject matter of the SNB on registration, in terms of the Security by Means of Movable Property Act (51 of 1993). SNBs must be registered in the South African deeds registry where the borrower conducts its business, and in the manner prescribed in the Deeds Registries Act (47 of 1937). A nominal registration fee is payable to the deeds registry. The South African Law Society publishes a recommended ad valorem tariff for professional fees applicable to bond registrations but the full recommended tariff is seldom charged. No other documentary taxes or duties are payable in connection with the registration of a SNB in South Africa, making it a comparatively inexpensive type of security.
In Botswana, the most appropriate way to take security over rolling stock is by means of a Deed of Hypothecation. Once registered in a Botswana Deeds Registry, it creates a statutory pledge over, and real right of security in, its subject matter in terms of section 4 of the Botswana Hypothecation Act (CAP 46:03). The holder of a Deed of Hypothecation in respect of rolling stock must be approved as an authorised creditor by the Minister of Finance and Development Planning under the Act. Costs are limited to a nominal notarial fee and registration fees. In contrast with South Africa, legal professionals may not discount the prescribed hypothecation fee, which is levied on an ad valorem basis and results in a Botswana Deed of Hypothecation being expensive security.
In Swaziland, security over rolling stock is taken by means of a SNB or a Deed of Hypothecation, but the latter is only available to locally registered financial institutions. Once registered with a Deeds Registry, in terms of the Deeds Registry Act (37 of 1968), a Swazi SNB creates an unperfected security interest in favour of the credit provider, much like a South African general notarial bond. This means that perfection occurs only when a court is approached to enforce the SNB. In addition to prescribed conveyancing fees and tariffs, documentary stamp duty is levied at a hefty 0.75% of the value of a SNB or 0.10% of the value of a Deed of Hypothecation (the value generally being the principal amount of the debt plus an additional amount of 25%).
Registrable security in the form of a mortgage is not yet available in relation to rolling stock under Mozambican law. As a result, the only available form of security is a pledge. A Mozambican pledge is not subject to any registration but, if the pledge is granted by a resident entity to a non-resident entity, it is considered to be an exchange operation subject to the prior approval of, and registration with, the Bank of Mozambique. In terms of Decree Law number 29.833 of 17 August 1939, pledges granted in favour of banks do not require physical dispossession of the pledged assets to be fully valid and effective. The pledged assets will remain in the possession of the pledgor, who will be responsible for preserving and keeping the pledged rolling stock in good condition for and on behalf of the pledgee. However, documents of title would be delivered to the bank. A Mozambican pledge is subject to stamp tax at a rate of 0.3% of the total amount secured, unless stamp tax has already been paid in relation to the main financing document. Documents submitted to the Bank of Mozambique have to be in Portuguese.
Hope for harmonisation
Unlike rolling stock, ships and aircraft cannot be hypothecated under a notarial bond in South Africa. Security over a South African ship is created by a mortgage in the prescribed form under the Ship Registration Act (58 of 1998) while security over an aircraft is created by a deed of mortgage in the prescribed form under the Recognition of Rights in Aircraft Act (59 of 1993), as set out in the Mortgaging of Aircraft Regulations 1997. These statutes are local enactments of the protocols published under the Convention on International Interests in Mobile Equipment. The Convention provides a framework for the registration of security over assets that cross international borders, and has been ratified by South Africa.
The Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock provides a coherent framework for rolling stock financing arrangements where the debtor has its principal place of business in a country that has ratified it. It establishes an international register of security interests in rolling stock. If there is more than one international interest created on an asset, the first registration will have priority unless the creditors agree otherwise. Interests can be registered for a specified period of time or until they are discharged. A registered interest has priority over any other interest subsequently registered, and over an unregistered interest. This applies even if the registered interest was acquired or registered with actual knowledge of the other interest. The buyer of an asset acquires it subject to a registered interest and free from any unregistered interest, even if it has actual knowledge thereof. It is envisaged that the registry will be electronically accessible and searchable by the public, allowing prospective purchasers and funders to ascertain if any third parties have rights to a particular asset. In addition, and in recognition of the strategic importance of rolling stock, the Luxembourg Protocol allows a contracting state to declare that it will continue to apply rules of its domestic law which suspend, preclude or govern the exercise of certain remedies (including repossession) specified in the Convention and the Luxembourg Protocol, in relation to assets used for providing a service of public importance. A similar system to the one outlined in the Luxembourg Protocol has already been successfully implemented in respect of aircraft.
The Luxembourg Protocol will become effective in relation to rolling stock when it has been ratified by at least four states and the registry is in operation (this is expected to occur in 2017). Currently Gabon is the only African country to have signed the Protocol.
Legal certainty is critical to unlocking private sector investment in rail infrastructure in Africa. Navigating the current regulatory landscape across jurisdictions is a complex exercise, often resulting in uncertainty, increased transaction costs and lengthy processes for the enforcement of security. Given the benefits that a clear, uniform set of rules could have for investment in rail infrastructure, South Africa and its neighbours would do well to prioritise accession to the Luxembourg Protocol.
As published in Without Prejudice in September 2016.