All questions

Security and enforcement

Access to financing in the maritime, aircraft and railway sectors is a key factor for success in the current commercial context. The indebtedness that companies operating in those sectors must assume for the construction, financing and acquisition of vessels, aircraft and rolling stock depends on the companies' capacity to provide sufficient and adequate security to the financing entities. The security package is therefore essential in asset finance. In Spain, a mortgage over the financed asset is normally granted as security to the lenders and has an important economic function and an essential role in new building projects. The entry into force of the Maritime Navigation Act, representing a significant modernisation of Spain's former maritime regulation, establishes the legal framework governing ship mortgages. Mortgages over aircraft and rolling stock are also subject to specific regulations. Moreover, as previously mentioned, Spain is a party to various international conventions that apply to these types of guarantees, including the International Convention on Maritime Liens and Mortgages (1993) and the Cape Town Convention on international interests in mobile equipment.

i Financing of contractsShipping

The ship mortgage is the basic security normally granted within the scope of shipbuilding projects, but not the exclusive form, as ancillary security such as refund guarantees and pledges are also commonly used. The legal framework governing ship mortgages is primarily contained in articles 126 to 144 of the Maritime Navigation Act, substituting Spain's previous framework on these types of security, and in the International Convention on Maritime Liens and Mortgages (1993).

There are two requirements under the Maritime Navigation Act for a ship mortgage to be validly created as a right in rem with effects against third parties: (1) it must be documented in writing in either a private or public document; and (2) it must be registered within the Chattel Registry. To create and register the mortgage over a vessel under construction, a third of the budgeted amount of the total hull value must have been invested and the ownership of the vessel registered with the Chattel Registry. The parties to the ship mortgage are the mortgagee (normally a bank financing the construction of the vessel) and the mortgagor (which can be the debtor under the financing contracts or another party, as the mortgage can be granted as security of third-party obligations).

In respect of the asset, the mortgage extends to both the vessel's component parts and fittings, but not accessories. The mortgage also covers licences linked to the vessel (such as fishing licences), compensation arising from insurance and from material damage to the vessel owing to collision or other accidents. In respect of the secured obligations, unless otherwise agreed, a mortgage granted as security of a credit that accrues interest will not exceed (to the detriment of a third party) the interest of the previous two years elapsed and the matured part of the current annual dues, in addition to the principal.

If a definitive change of the vessel's flag is intended, it may not be carried out unless all mortgages, charges and encumbrances have been cancelled or the written consent of the beneficiaries of the mortgages, charges or encumbrances has been granted. Temporary changes of flag will not affect the regulation applicable to the mortgage, which shall continue to be the act applicable under the flag flown by the vessel at the time the mortgage was granted.

Aviation

Aircraft finance can also be secured by granting a mortgage over the asset. The legal framework applicable to this kind of mortgage is primarily established in the Air Navigation Act and in the Chattel Mortgages and Non-dispossessory Pledges Act. The mortgage must be registered with the Chattel Registry for its valid creation and the security must also be registered with the Aircraft Matriculation Registry. To be able to create and register the mortgage over an aircraft during its construction, a third of its budgeted amount must have been invested in the same. The aircraft must be identified in the mortgage deed by including, among other details, the following information: (1) registration number given to the aircraft by the Aircraft Matriculation Registry; (2) stage of construction (if the aircraft remains under construction); (3) domicile of the aircraft; and (4) insurance policies covering the aircraft. The mortgage extends to the airframe, engines, radio and navigation devices and accessories. The mortgage can also extend to spare parts, provided they are listed in the mortgage deed.

Spain adhered to the Cape Town Convention in 2013, although it was not until 15 December 2015 that Spain adhered to the Aircraft Protocol, which entered into force in Spain on 1 March 2016. The Cape Town Convention contains the general framework applicable not only to securities over airframes, engines and helicopters, but also to other mobile equipment such as railway rolling stock and space assets (specific protocols are established for each type of mobile equipment). The Aircraft Protocol completes the Convention with specific terms and provisions regarding international interests in mobile equipment on matters specific to aircraft equipment. Thus, security can also be granted in the form of international interest over airframes, engines and helicopters, in accordance with the requirements under Article 7 of the Convention. The Convention also created an International Registry (Article 16) for the registration of, among others, international interests, prospective international interests, assignments and prospective assignments of international interests and acquisitions of international interests.

Rail

If a wagon or locomotive is privately owned, a chattel mortgage can be granted as security in accordance with article 12.2 of the Chattel Mortgages and Non-dispossessory Pledges Act. Chattel mortgages cannot be granted over wagons owned by the state. However, a pledge without displacement or 'non-possessory pledge' over wagons, or a chattel mortgage over locomotives, may be granted instead.

ii Enforcement

Article 140 of the Maritime Navigation Act lists specific events that will entitle the mortgagee to enforce its right against the vessel with a subsequent judicial sale of the same (see Section IV.iii). Those events are: (1) expiry of the term agreed to return the principal or interest; (2) the debtor's declaration of insolvency; (3) deterioration of the mortgaged vessel rendering it definitively unseaworthy; (4) the existence of two or more vessels mortgaged to fulfil the same obligation and where a loss or deterioration arises that renders either of them definitively unseaworthy; and (5) the occurrence of any of the agreed termination events.

Upon the occurrence of any of the above events, the mortgagee has various alternatives available to enforce the mortgage, basically consisting of: (1) ordinary declarative proceedings; (2) general rules for enforcement proceedings; (3) special enforcement proceedings on mortgaged assets; and (4) non-judicial enforcement proceedings before a notary public. The action to enforce a ship mortgage has a limitation period of three years, which runs from the date on which any of the above events occur.

The enforcement of a mortgage over aircraft or rolling stock is not subject to specific regulations under Spanish law. Thus, the general rules for enforcement in the Civil Procedure Act apply.

If the mortgagee initiates the special enforcement proceedings on mortgaged assets (articles 681 to 698 of the Civil Procedure Act), the claim for the due amounts secured with the mortgage can be exercised directly against the mortgaged asset itself. There are various formal requirements that must be fulfilled to initiate the proceedings, which essentially consist of the following: (1) the price of the mortgaged asset must be indicated in the mortgage deed so that it can be used as a reservation price in the auction of the asset; and (2) the debtor's domicile must be indicated in the mortgage deed (for notification and communication purposes).

iii Arrest and judicial saleShipping

Conservatory arrest of both domestic and foreign vessels is governed by the International Convention on the Arrest of Ships made in Geneva on 12 March 1999, articles 470 to 479 of the Maritime Navigation Act and by the Spanish Civil Procedure Act. The provisional court measure causes the detention and immobilisation of the vessel. The court with jurisdiction regarding subject-matter to hear the main claim on the merits, or the court with territorial jurisdiction corresponding to the port or place where the vessel is located (or expected to arrive), will order the vessel's arrest. The arrest cannot be effected to ensure the enforcement of a previous judgment or arbitration award: arrest is a provisional ancillary measure for the main claim.

The arrest is conditional on the fulfilment of the following requirements: (1) alleging the existence of a maritime claim and its cause; (2) the vessel to be arrested is eligible for arrest under Article 3 of the Convention; and (3) the claimant must provide security to cover any loss that may be incurred by the defendant as a result of the arrest, and for which the claimant may be found liable. Pursuant to article 472.2 of the Maritime Navigation Act, the amount of the security shall be at least 15 per cent of the amount of the maritime credit alleged.

Once the arrest has been ordered, the court will notify the harbour master of the port where the vessel is located (or expected to arrive) and will take the necessary measures to arrest and prohibit the vessel's departure. The arrest must also be notified to the vessel's master or shipping agent.

The judicial sale of a vessel is governed by the International Convention on Maritime Liens and Mortgages, made in Geneva on 6 May 1993 (the 1993 Geneva Convention), articles 480 to 486 of the Maritime Navigation Act and, for matters not expressly addressed by those acts, by the Civil Procedure Act. Prior to the forced sale of the vessel, the court must give notification of the sale of the vessel at least 30 days prior to the date on which the forced sale is intended. The notification must be directed to: (1) the registrar of the Chattel Registry and, if relevant, to the authority in charge of the registration of the vessel under a temporary change of flag; (2) the owner of the vessel; and (3) the mortgagees and holders of other encumbrances, including those established in Article 4 of the 1993 Geneva Convention (provided that the court has received notification of the corresponding credits).

The court's notification must state the date and place the forced sale is to be carried out or, if it cannot be stated with certainty, the approximate date and place. The proceeds from the forced sale must first be used to pay the procedural costs and expenses arising from the arrest, or the enforcement and subsequent sale of the vessel (e.g., expenses arising from the upkeep of the vessel and the crew as well as wages, other sums and costs referred to in Article 4, Paragraph 1(a) of the 1993 Geneva Convention, incurred from the time of arrest or seizure). The remaining amount will then be distributed according to the terms and provisions of the 1993 Geneva Convention.

Aviation

Aircraft are also subject to arrest, which is governed by the Civil Procedure Act. However, there are specific particularities under Spanish law and international conventions ratified by Spain that render the cautionary measure of arrest unattractive in practice. Article 132 of the Air Navigation Act establishes that the arrest of aircraft owned by air traffic companies may not interrupt the public service for which they are operating. The same rule is established under the Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft, adopted in Rome on 29 May 1933.