Cape Town Convention Academic Project Conference 2020
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The Pretoria Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Mining, Agricultural and Construction Equipment of 2019 (‘MAC Protocol’) is the latest addition to the system of the UNIDROIT Cape Town Convention (‘CTC’) and brings with it the specific challenge of establishing an International Registry for international interests in MAC assets. The 2020 Cape Town Convention Academic Project Conference featured a session on the features, issues, challenges and importance of the MAC International Registry (‘MAC IR’), chaired by Professor Louise Gullifer and including presentations by the authors of this report.

THE ROLE OF

The Pretoria Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Mining, Agricultural and Construction Equipment of 2019 (‘MAC Protocol’) is the latest addition to the system of the UNIDROIT Cape Town Convention (‘CTC’) and brings with it the specific challenge of establishing an International Registry for international interests in MAC assets. The 2020 Cape Town Convention Academic Project Conference featured a session on the features, issues, challenges and importance of the MAC International Registry (‘MAC IR’), chaired by Professor Louise Gullifer and including presentations by the authors of this report.

I. THE ROLE OF THE MAC IR IN GENERAL AND ACCESSIBILITY AND SIMPLIFICATION AS ITS OVERARCHING OBJECTIVES1

The function of Protocol-specific Registries is central to the CTC, whose system of publicity and priority depends upon the registration of notices. The existing Registry for the Aircraft Protocol (‘AIR IR’), which operates efficiently and reliably and at a reasonable cost, is recognized as one of the core success factors for the CTC. The task of establishing the new MAC IR is currently carried out by a Preparatory Commission (‘MAC PrepComm’), established for this purpose by resolution of the 2019 Diplomatic Conference in Pretoria. The MAC PrepComm will generally design the MAC IR on the basis of the successful model of the AIR IR, benefitting also from more than 14 years of operational experience of the latter. However, the design of the MAC IR will have to consider specific challenges, such as the lesser degree of sophistication of its users, the lack of a uniform standard of identification of MAC assets and the large number of manufacturers. The transaction costs for accessing the MAC IR for registration and other purposes must be kept at a minimum, otherwise the MAC IR cannot be useful for typical transactions involving MAC assets, which have a much lower value as compared to aircraft (while the average price for aircraft is in the range of USD 10 million to 100 million, for MAC assets it is USD 10,000 to 7 million). At the same time, simplifying the registration process must not compromise the objective of legal certainty which is the foundation of the Registry.

II. IDENTIFICATION OF EQUIPMENT FOR PURPOSES OF REGISTRATION IN THE MAC IR

Registrations are stored in an electronic database to enable searchers to retrieve them according to an identifier of the object. Article XVII of the MAC Protocol has chosen a unique approach for the identification of MAC assets for purposes of registration, requiring the indication of the manufacturer’s serial number as the single registration criterion, together with additional information as required by the Regulations for the MAC IR. While the serial number is the registration and indexing criterion (and therefore must be indicated exactly, with even trivial errors leading to the ineffectiveness of the registration), the additional information is not an indexing criterion. Any errors or inaccuracies in the additional information can only affect the validity of the registration if this makes the information seriously misleading. Its purpose is to allow the unique identification of an asset where this is not ensured already by the use of the serial number alone. This can occur because there is not yet a worldwide standard for the allocation of serial numbers and the same number may be used for different assets and by different manufacturers. In such cases, the additional indication of information such as the manufacturer’s (brand) name and model designation should generally allow the unique identification of the assets. Unlike under Article VII of the Aircraft Protocol, these types of information cannot be used as an indexing and search criterion, as due to the large number of manufacturers of MAC assets and the variety of company and trading names used by them, the precise indication of the correct names could not be ensured as efficiently as in the case of the lists available under the AIR IR and thus there would be a risk that inadvertent errors lead to the invalidity of the registration. Once manufacturers have switched to standardized ISO-compatible Product Identification Numbers as serial numbers that ensure the unique identification of MAC assets, there will no longer be a need for such additional information.

III. SEARCHING THE MAC IR

A priority search of the MAC IR, that is, a search that is decisive for the determination of the priority status of a registered interest, will be conducted using the manufacturer’s serial number as the searching criterion (see Article XVIII(1) of the MAC Protocol). The MAC IR will be designed to retrieve all registrations that are indexed according to this serial number. In the rare event that there are multiple search results for a serial number, the searcher will then be able to determine on the basis of the registered additional information (which will also be contained in the search certificate) whether any of them refers to the specific asset which the searcher is interested in. Unlike the AIR IR, it is suggested that the MAC IR should not allow for the possibility of informational searches on the basis of the additional information because searches against criteria such as the manufacturer’s name or model designation would likely yield too many results, giving overly wide access to registered information.

IV. USE OF THE MAC IR FOR ADDITIONAL INFORMATION PURPOSES2

The role of the Registrar is set out in Article 17(5) of the CTC as ensuring ‘the efficient operation of the International Registry’ and performing ‘the functions assigned to it by this Convention, the Protocol and the regulations’. The traditional view is that a registry should do well what is expected of it and nothing else. An alternative view is that a registry offers opportunities to provide additional information beyond the information for the identification of the MAC asset that is contained in the search certificates.

In considering whether the MAC IR should be used for additional information purposes, it is useful to examine whether any precedent exists, the general direction of travel for technology platforms, and finally the intended purpose of this approach. One precedent for additional information is the International Registry pursuant to the Luxembourg Rail Protocol (‘Rail IR’), which although not yet operational, is expected to offer ancillary services (anticipated to be mainly information based). The purpose of these ancillary services is to generate extra revenue to enhance the funds available to operate the core services of the Rail IR, and to allow the Registrar, through this extra revenue stream, to reduce the commercial risk on their investment. When we consider the general direction of technology platforms, we see that many consolidate information from other sources and publish that (for example, travel booking sites offer weather forecasts which they collect from weather services). The use of Application Programming Interfaces (‘APIs’) enables the easy sharing of information between platforms. However, most of these technology platforms are commercial, unlike the MAC IR, which is for the public good.

There are several obvious additional information purposes which could apply to the MAC IR including location of the equipment, status or usage information of the equipment and general trend data, for instance how many tractors were financed in a particular year. Business strategy teaches that value can be created when we carry out tasks that are unique and hard to replicate. Applying this discipline, we examine whether we can add MAC IR data to external data to create something unique. One interesting idea is consolidating equipment-usage data, with manufacturer-published carbon performance data for specific equipment allowing an owner or financier to see their environmental impact.

It is clear that the MAC IR could be used for additional information purposes, but the key question remains whether it should be. If the answer is ‘yes’, the Registrar and Supervisory Authority must ensure the core functions of the MAC IR are not undermined or put at risk.

V. ISSUES CONCERNING ACCOUNTS, CONSENT AND ELECTRONIC SIGNATURES3

Not all electronic signatures are created equal. More technologically and procedurally sophisticated electronic signatures offer a higher evidentiary weight than simpler ones. The European eIDAS Regulation provides for three levels of assurance, an electronic signature (often called a basic electronic signature), an advanced electronic signature and, offering the highest level of assurance, a qualified electronic signature. The Aircraft IR uses advanced electronic signatures, requiring the registering parties to be issued with a digital certificate to sign the registration. This is appropriate given the value of aircraft equipment and the nature of the parties who work on these transactions, typically large law firms and other specialists. However, the level of sophistication may be an unnecessary burden for typical MAC transactions where the value is lower and some transactions may be done by equipment dealers, small banks or community lenders.

We are well served by the careful drafting of the Cape Town Convention. Article 20 of the CTC requires consent to be ‘in writing’ and ‘writing’, according to Article 1(nn), ‘means a record of information (including information communicated by teletransmission) which is in tangible or other form and is capable of being reproduced in tangible form on a subsequent occasion and which indicates by reasonable means a person’s approval of the record’. The final phrase of the definition of ‘writing’ is well aligned with the final phrase in the definition of a ‘basic electronic signature’ under the eIDAS Regulation. Point 10 of Article 3 of the Regulation says, ‘“electronic signature” means data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign’. This suggests that there is no requirement to use an advanced or qualified electronic signature on the MAC IR, giving the drafters of the Regulations for the MAC IR discretion to innovate in this area.

For instance, the Regulations which are currently prepared by the MAC PrepComm could allow creditors to authenticate debtors who wish to electronically sign a registration. Most creditors will already have completed KYC (‘know-your-customer’) checks on their debtor and are well positioned to confirm the identity of the debtor for the purposes of signing the registration. In this case, the creditor might also be required to obtain a digital certificate from the Registrar before having the right to confirm the identity of debtors. This may mean that the bank or dealership does most of the work on the MAC IR and the debtor might be able to simply consent to the registration with one click. This ease of use also comes with reduced cost, both important to ensure widespread adoption of the MAC IR. While the MAC IR can learn much from the AIR IR, it can only be successful if it is designed carefully for the purpose and customers it will serve.

VI. DESIGNATED ENTRY POINTS UNDER THE MAC IR4

Article XVI(1) of the MAC Protocol provides that Contracting States may designate an entry point (‘DEP’) through which registrations to the MAC IR ‘shall or may’ be required to be made. The nomination of DEPs is an issue which has been subject to extensive discussion, consultation and negotiation in the making of the MAC Protocol. This is a result of the strong correlation between the DEP and the relevant factor connecting the interest to the Contracting State, but also debate as to the potential utility of DEPs in reducing non-consensual vexatious filings or fraud. The 2019 Diplomatic Conference ultimately agreed that the MAC Protocol should not expand or deviate from Article 3 of the CTC, which requires that the debtor be situated in a Contracting State at the conclusion of the agreement creating or providing for the international interest.5

However, notwithstanding the inclusion of the provision to allow Contracting States to establish a DEP, importantly, Article XVI(3) of the MAC Protocol explicitly specifies that the effectiveness of international interests will not be invalidated should a secured creditor not use the DEP specified by a Contracting State. Whilst a Contracting State may apply a penalty to a creditor who does not comply with the use of the domestic DEP, the inclusion of this provision demonstrates an important consideration for the practical application of the MAC Protocol, ensuring preservation of the sanctity of a core principle behind the CTC system, ensuring secured creditors have confidence that their registered interest and its associated priority is supported by the force of law. The primary interest of the Supervisory Authority and Registrar is to preserve the integrity of the system supporting the principal objective of the CTC, namely the facilitation of the efficient financing and leasing of mobile equipment.

VII. DELETION OF ENTRIES IN THE MAC IR

Continual existence of entries on the MAC IR following completion of the underlying obligation may be problematic and unnecessarily constrain future financial dealings of the debtor. Article XIX of the MAC Protocol makes important amendments to the discharge provisions of the CTC by broadening the definition of those who may request discharge of a relevant interest and clarifying the competent court’s jurisdiction to remove registrations where one of the parties ceases to exist.

VIII. REGISTRATION OF NON-CONVENTIONAL INTERESTS IN THE MAC IR

As highlighted above (see Section IV), there are potential benefits to the efficiency and cost effectiveness of allowing the Registrar to offer ancillary services. One possibility is the ability to allow the registration of additional entries in the MAC IR. Any such additions must be carefully considered and approved by the Supervisory Authority to ensure the reputation and the core functions of the MAC IR are not compromised.

IX. CLOSING ROOM

As regards the AIR IR, the ‘closing room’ feature is a particularly useful addition given the often-complex structure of parties and transactions underpinning registration of interests. Parties to a transaction, wishing to register an international interest, may collaborate in the closing room before making entries directly to the live registry. This functionality allows parties to ensure the order and coverage of the registrations aligns with the priority ranking and asset coverage in the underlying security agreement or agreements. Once all parties are satisfied, the AIR IR then enables the registrations represented in the closing room to be directly transposed into the live system. A final search of the live AIR IR by the parties allows confirmation that the transaction is correctly represented.

Whilst a very useful addition to the AIR IR, the utility of a closing room for the MAC IR is less obvious. However, with some transactions underpinning the MAC IR registrations likely to be of a sophisticated nature, the Supervisory Authority and the Registrar should remain open to the possibility of including features akin to that provided by the AIR IR, particularly as industry users of the MAC IR become more familiar with the regime.

X. CONCLUDING COMMENTS6

As highlighted in this Report, the MAC IR is the focal point of the MAC Protocol system. An improper design may undermine trust of the users and hence legal certainty and predictability. In addition to the legal and procedural aspects, addressed in the MAC Protocol and future Regulations, the MAC IR must operate on a sound technological platform. After years of meetings and consultations with the industry stakeholders, the Cape Town Convention Academic Project published a Guide on Best Practices in Electronic Collateral Registries which should become an invaluable source in the technical and operational design of the future MAC IR. The MAC IR will benefit from the experience of the AIR IR in considering which services to offer. Even though it might not be clear whether the closing room would also benefit parties involved in MAC transactions, the registry design should consider such capability. Whether or not a designated entry point is identified by a Contracting State, the future MAC IR should contemplate its role within a broader ecosystem that provides creditors and other interested parties with information facilitating financing transactions. While some of those functions may not be appropriate for this type of registry, the design should be enabling in terms of facilitating future adaptations. The future MAC IR should not be playing merely a passive role in receiving and storing registration data but seize the opportunity to become a facilitator of transactions with MAC assets. Its design should remain technology neutral. Even though blockchain has emerged as the technology that affects various aspects of financing transactions, it remains unclear whether that is the appropriate foundational platform for the MAC IR.

  • 1

    Sections I to III report on the presentation by Ole Böger.

  • 2

    Sections IV and V report on the presentation by Rob Cowan.

  • 3

    For the purposes of this report, the terminology used in relation to electronic signatures is aligned with the EU eIDAS Regulation (Regulation (EU) No 910/2014 of 23 July 2014 on Electronic Identification and Trust Services for Electronic Transactions in the Internal Market and Repealing Directive 1999/93/EC (OJ L 257/73)).

  • 4

    Sections VI to IX report on the presentation by Gavin McCosker.

  • 5

    For a detailed description on the application of connecting factors, including regards the timing of the application of the provision and related matters, see Sir Roy Goode’s Official Commentary to the MAC Protocol.

  • 6

    This Section reports on the comments by Marek Dubovec.

Contributor Notes

Dr jur (Göttingen), LLM (King’s College London); Judge at the Hanseatic Court of Appeal in Bremen, Germany.

BE Electrical and Electronic (University College Dublin), MBA (Dublin City University); Managing Director of the International Registry (CTC and Aircraft Protocol).

LLB (University of Southern Queensland); MBA and Bcomm (University of New England); Fellow CPA Australia; Acting Chief Executive, Inspector-General in Bankruptcy and Registrar of Personal Property Securities, Australia.

SJD (University of Arizona); Executive Director of the Kozolchyk National Law Center (NatLaw).