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April 25, 2019updated 11 Jun 2019 2:55pm

Mac equipment: cross-border financing and leasing

By Asena Degirmenci

Following a trip to Africa, Jacqueline Cook, senior professional support lawyer at Stephenson Harwood LLP, looks at the issues involved with moving assets between countries – and even continents.

Could a tractor travel from Europe to Africa? Would it be sold, financed or leased? Would it be destined for a lone farmer or a small company?

These thoughts struck me as I stood at the Zambia-Zimbabwe border, where pedestrians jostled with huge logistics trucks. Suddenly, there it was: the familiar green of a John Deere tractor, ready for delivery, atop an enormous truck in a long queue heading over the bridge towards Zambia.

Legal analysis kicked in: If this tractor were a secured asset, what law would apply to the security now, and later on the other side of the border?

What if it were leased, or supplied second hand: what law would apply to the lease if the leasing company were in a third jurisdiction? Which entity would actually own the tractor: a leasing company, a financier or the debtor?

The answers would all involve time, legal and jurisdictional research and costs, with documentation requiring different governing law provisions and different enforcement and insolvency regimes.

Fortunately, these concepts inform the makings of a new international treaty, the MAC Protocol, the future fourth protocol to the Cape Town Convention on International Interests in Mobile Equipment (CTC) specifically for mining, agricultural and construction (MAC) equipment – covering, yes, my travelling tractor.

The MAC Protocol, once ratified, could provide legal certainty and protection for security interests, leases and conditional sale agreements over high-value equipment in international financing and leasing transactions.

Developed by the International Institute for the Unification of Private Law (Unidroit), the MAC Protocol will be adopted at a diplomatic conference in Praetoria, South Africa in November 2019.

All UN member states will be invited to participate in negotiations, although only the 79 states that have already adopted the CTC will be able to ratify the MAC Protocol. The 79 current CTC contracting states include not just states in Africa, but also member states of the EU, some states in South America and Asia, and the UK in its own right through legislation on its exit from the EU. So indeed, this is an international solution beyond the EU, but which could be used by the UK, EU-27 and other states further afield.

Unidroit, with the input of the World Bank Group, in particular the International Finance Corporation and the MAC Protocol Working Group, recognises the vital role that MAC equipment plays in the global economy by adding the MAC Protocol to the three existing protocols dealing with aircraft objects, rail rolling stock and space assets.

The World Bank asserts that there is “potential to increase access to finance for MAC equipment for smallholder farmers and larger agricultural, mining and construction firms”.

The MAC Protocol is designed to cover high-value, uniquely identifiable, mobile MAC equipment. An international electronic register would be created to provide protection for security interests, title reservation agreements and lease interests where the debtor is located in a contracting state.

The MAC Protocol Study Group opted to use the Harmonised Commodity Description and Coding System (HS System), the global naming system used by the World Customs Organisation to identify assets, as proposed by the private sector representative group, the MAC Working Group.

A six-digit code identifies a category of asset. For example: “842952: Self-propelled bulldozers, angledozers, graders, levellers, scrapers, mechanical shovels, excavators, shovel loaders, tamping machines and road rollers – mechanical shovels, excavators and shovel loaders – machinery with a 360-degree revolving superstructure.”

Our travelling tractor is listed in all three annexes: “870193: Tractors – other, of an engine power exceeding 37kW but not exceeding 75kW.”

International Interest Security interests, leases and conditional sale agreements of any piece of high-value, uniquely identified MAC equipment covered by an HS code listed in the Protocol’s annexes could be registered and qualify as an international interest afforded the protections of the CTC.

The particular asset will need to be identified by the manufacturer’s serial number, plus any additional information specified in the registry regulations.

Sales of MAC equipment, however, are not intended to be registered as international interests, which is a different position from the Aircraft Protocol.

On a default, the creditor would have a right to procure the export and physical transfer of MAC equipment from the territory where it is situated. It could take possession and control of, sell, lease, or collect income from management or use of the MAC equipment.

Alternatively, ownership could vest in the chargee. A default would mean a lessor or conditional seller could terminate the agreement or take control of the MAC equipment. In all cases, the creditor could only exercise these rights in a commercially reasonable manner.

Where insolvency proceedings are commenced, depending on the declarations made by the CTC member state in implementing the Protocol, possession of the equipment could be given to the creditor. However, a debtor could retain possession if defaults are cured. Priority would be awarded to the holder of a registered international interest notwithstanding the rules of domestic legal systems.

So, could the MAC Protocol make a difference to the global economy? It seems so. Unidroit commissioned the MAC Protocol Economic Assessment from Warwick Economics and Associates, which states: “The MAC Protocol may increase the stock of MAC equipment in developing countries by $90bn (€79.5bn).”

It continues: “[It] is predicted to have a positive impact of $23bn on GDP in developing countries and of $7bn in developed countries.”

All eyes now turn to November 2019 for the next step in an international effort to provide certainty to the financiers, lessors, suppliers and debtors of MAC equipment.

by Jacqueline Cook

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