An extract from The Transport Finance Law Review, 6th Edition

Security and enforcement

i SecurityAircraft

Lenders require a first priority mortgage (or equivalent security) over an aircraft that is enforceable in every relevant jurisdiction. Problems arise, however, where different jurisdictions have different rules as to how security over a particular aircraft should be created. For example, under English law, before the Cape Town Convention was implemented, the validity of proprietary rights over aircraft had to be determined in accordance with the lex situs – the laws of the jurisdiction where the aircraft is situated at the time the security was created. That is still the case except to the extent that rights are created under the Cape Town Convention. However, under French law, the laws of the state of registration would be determinative of the issue.

It is common practice in some situations for an English law mortgage to be executed over an aircraft while it is in English airspace and, possibly, a mortgage governed by the laws of the state of registration of the aircraft (often referred to as local law mortgages) when it is physically situated there.

Local law mortgages are often problematic because:

  1. there may be no legal framework for their creation (for example, in Belgium);
  2. there may be prohibitive stamp duty payable on their registration (for example, in Spain);
  3. there may be restrictions on the identity of the creditor to whom they may be given (for example, in Colombia); or
  4. their enforcement before the local courts may present practical problems in terms of timing and judicial risk.

It is for these reasons that an English law mortgage is often required instead of, or in addition to, a local law mortgage. However, parties need to consider in which jurisdictions such an English law mortgage over a foreign-registered aircraft would be recognised.

Security over aircraft may now also be created under English law by creating an international interest under the Cape Town Convention to the extent that it applies. It will apply if either the debtor is situated in a contracting state or, to a limited extent, if the aircraft is registered in one. In this event, the location of the aircraft is not a relevant consideration.

If an individual aircraft is owned by a special purpose company, it is common for the lenders to take security over the shares in that company.


The main security will generally be a ship mortgage (governed by the laws of the ship's state of registry), supplemented by security over the ship's earnings and insurances, any compensation that may be due if the ship is ever confiscated by its state of registry (e.g., in time of war) and, sometimes, a significant charter of the ship.

It is also common for lenders to take security over bank accounts into which a ship's earnings are to be paid or reserved.

When financing a ship that is still under construction (and therefore cannot yet be registered and mortgaged by its intended owner), lenders will take security over the buyer's rights under the shipbuilding contract and any related guarantees or security provided to the buyer for the shipbuilder's obligations.

Lenders may also take security over the shares of a single-purpose, single shipowning company.


There being no specific legislation concerning the legal nature of rolling stock or protecting its title or for the creation of security over rolling stock, rolling stock falls to be dealt with in the same way as any other movable property.

A corporate owner may create a mortgage or charge over rolling stock in favour of a lender and that mortgage or charge should be registered on the Companies House charges register of the mortgagor or chargor.

There being no statutory protections, it was common in the early days of privatisation, in order to protect title to rolling stock, for notices to be fixed to rolling stock to ensure nobody could claim not to have notice of the ownership, as that lack of notice could defeat the claims of the true owner. However, such is the level of clear identification of each rolling stock vehicle and of the tracking of the daily movements of each vehicle, that the risk of loss of vehicles in this way is minimal.

ii Financing of contractsAviation

Airlines wishing to finance new aircraft will normally issue a request for proposals seeking offers from financial institutions to finance the relevant aircraft. There are a number of common structures that are often established for financing purposes, including:

  1. a finance lease, in which the aircraft is owned by an orphan trust and leased to the airline;
  2. export credit financing, in which the export credit agency of the state where the aircraft is manufactured provides support for its financing;
  3. purchase and leasebacks, in which, following delivery of the aircraft by the manufacturer to the airline, the latter immediately on-sells it to an operating lessor and takes it back on operating lease; and
  4. capital markets-based structures, such as the Enhanced Equipment Trust Certificate.

Increasingly, operating lessors buy aircraft directly from manufacturers for immediate use in their leasing business.


For ships under construction, typically, the buyer will pay between 20 and 50 per cent of the contract price from equity or debt by stage payments. The builder funds the construction and is paid the balance on delivery, which may be funded by export credit agency-supported debt (perhaps at a fixed rate).


Typically, rolling stock is procured at the behest of a franchised operator who needs more rolling stock. The contract for manufacture is normally tripartite, with the ROSCO taking title and paying the stage payments. The ROSCO will fund the purchase from equity or from general corporate, or specific debt, facilities, and will negotiate the payments required to service that debt as part of the lease discussions with the operator. Although the operator might be required to undertake a proper competitive tender procurement exercise for the rolling stock, the financing will normally be arranged privately by the operator approaching one or more ROSCOs.

On occasion, rolling stock is financed directly by an operator group, but this carries risks for the financier, which are reduced significantly if the ROSCO is the borrower. It is unlikely that an operator will hold the necessary franchise for the operation of the rolling stock for its full useful life, giving rise to risks with regard to the repayment of the debt. Rolling stock might also be purchased, not necessarily via a ROSCO, for the purposes of a specific project, in which case there will be a specific allocation of risks between the parties.

The owner of rolling stock is normally required to enter into an agreement with the franchising authority (currently the Department for Transport), ensuring the continued availability of the rolling stock for the franchised railway system and restricting rights of disposal. Similar arrangements may apply on specific projects.

These arrangements are expected to change once the findings of the ongoing Williams Review are published.

iii Enforcement

The general English law approach to the enforcement of security over assets is one of self-help, relying on the contractual terms of the security without the need to enlist the aid of the court. Other laws, however, may not allow lenders the full range of self-help remedies and may require judicial authorisation and, possibly, the enforcement of security through a court-supervised public auction. There are certain specific concerns for aircraft, ships and rail equipment.

All of these enforcement methods may be restrained if the owner of the asset is subject to insolvency procedures that restrain creditors from enforcing security (such as administration in the United Kingdom and Chapter XI proceedings in the United States).


Countries ratifying the Cape Town Convention are encouraged (but not required) to adopt self-help remedies for creditors in respect of aircraft equipment and also to adopt Chapter XI-style insolvency proceedings for airlines under their jurisdiction under 'Alternative A' procedures. Under these procedures, defaulting airlines will be required to remedy a default within a specified waiting period or, if not, hand the aircraft back to the creditor. The United Kingdom has adopted the Alternative A procedures, supplementing the administration framework currently in place (which requires the creditor to obtain court consent before repossessing the aircraft).

Creditors seeking to repossess aircraft also need to be aware of possible third-party creditors of the airline who may be able to claim liens, or detention rights, over the aircraft at law. Who these creditors consist of is a matter for the laws of the jurisdiction where the aircraft is situated at the relevant time. Common categories include repairmen, airports and air navigation authorities and unpaid salaries and taxes.


The most common method of enforcement is to seek the arrest of the ship while in port and request that the local court sell the ship, usually by some form of auction process. The court will then distribute the net proceeds (after expenses) to the mortgagees and others with maritime claims against the ship. This method is favoured because such a sale is generally recognised in maritime countries as freeing the ship from existing encumbrances and debts.

If a ship is not sold through a court in this way then existing liabilities could potentially be left in place and, as a result, a potential buyer is likely to require warranties and indemnities from a creditworthy person against the existence and consequences of such liabilities (which a lender will probably be unwilling to give).

If self-help remedies are available under the laws of the ship's state of registry, other options may be to sell the ship as mortgagee or to take possession of it. Selling a ship privately as mortgagee will, however, only clear the ship's title of registered mortgages and not other types of maritime claim. Obtaining possession raises practical difficulties but, having achieved it, exposes the lender to the risk of claims arising from accidents or pollution incidents involving the ship during its possession, as well as responsibility for bearing the costs of insuring, maintaining and conserving the ship. Procedures and practices for arrest and sale of ships vary from country to country and some are considered more favourable to a speedy and efficient process than others.


When taking security over rolling stock used within the franchised railway system, the security holder is required to agree with the franchising authority that the rights to enforce the security are subject to rights of the franchising authority to take on the leasing of the rolling stock (similar arrangements may apply on specific projects). Where franchised operators have failed to date, the failure has been at the franchise contract performance level and not at the corporate level, and the arrangements in place for keeping the railway operating have ensured the continued use of and payment for rolling stock, so no enforcement action has been taken against rolling stock for borrower default.

There are special rules relating to the administration of a railway company, intended to ensure that the rolling stock owned or operated by that company remains active in the franchised railway system.

iv Arrest and sale

All relevant issues relating to the arrest and sale of aircraft, ships and rolling stock are dealt with in Section IV.iii.