Overestimating party autonomy? The enforcement of security interests under the draft MAC Protocol to the Cape Town Convention

The hugely successful Convention on International Interests in Mobile Equipment (the Cape Town Convention) and its current Protocols for aircraft equipment, railway rolling stock and space assets adapt some of the typical features of security interests in favour of the creditor/secured party. Such typical features, which may vary from one jurisdiction to another and in different commercial settings, reflect the fiduciary relationship between the parties involved. They may include formal requirements for vesting the security interest, the accessory connection between the interest and the secured debt, the secured party’s duty to take good care of the encumbered assets, and the right of the debtor (or other interested party) to redeem the asset by paying the secured debt. The creditor may typically only enforce the security interest upon default and after giving prior notice. A key element of such enforcement is the realization of optimum value, which is commonly guaranteed by an external control mechanism such as a public auction and/or an independent third party (such as a court) being involved in the enforcement proceeding. Any surplus value should be paid to the debtor (or to other interested parties).

The creditor-friendly approach adopted by the Cape Town Convention, which is rooted in the concept of party autonomy, is tailored to the aircraft, rail and space equipment industries, all characterized by a relatively small group of major actors with more or less equal power and bargaining positions. This limited scope may, however, be about to be broadened. The current draft Protocol for mining, agricultural and construction (MAC) equipment envisages the extension of creditor-friendliness and party autonomy to industry sectors that feature a much wider set of actors that may not have equal power and bargaining positions, e.g. where major farming equipment producers and smaller farming enterprises enter into transactions. Therefore, it is important, in the run-up to the diplomatic Conference for the adoption of the MAC Protocol in November 2019, to consider whether the approach of the Cape Town Convention and its current Protocols should be applied one-on-one to the MAC sector.

Two features of the current model may prove particularly troublesome for debtors in this sector. First, instead of the value of encumbered assets being determined in the context of a public auction or by an independent party in enforcement proceedings initiated by the secured party, the treaty allows the creditor –if the parties agree and in the absence of a declaration by a State with the effect of involving a court– to independently enforce its security interest and to value the encumbered assets without an external control mechanism at the time of enforcement. The debtor can only challenge such enforcement and valuation by the creditor post-enforcement on the basis of a fairly strict standard of ‘manifest unreasonableness’. The burden of initiating proceedings and proving such unreasonableness (and of shouldering the associated costs) is shifted to the debtor. Secondly, the draft MAC Protocol, in addition to ‘ordinary’ enforcement measures open to the creditor (such as taking possession and control of equipment, its sale, as well as its export and physical transport abroad) within a short timeframe (fourteen days), also envisages the sale of equipment as a measure of ‘speedy relief’. In case a declaration to this end is made in relation to all the equipment covered by the Protocol (no distinction may be made in the declaration to reflect different economic settings), the debtor may lose its equipment within days, leaving the debtor virtually no time to arrange for alternative funding.

Such concerns may be somewhat less of an issue in the construction and mining industries, in which larger equipment intended for bigger players would seem typical, but they are particularly pressing in an agricultural setting. Here, a minor farming enterprise may well purchase or lease equipment, such as a tractor or other machinery to work the soil, from a multinational enterprise on terms determined by the latter. If the multinational party enforces a security interest by taking equipment from the farmer virtually without any delay, the farmer’s livelihood may be critically affected. The smaller farmer may, for lack of relevant expertise or finance, be forced to abstain from initiating court proceedings. A comparable scenario may play out where a collective of minor farmers has jointly purchased or leased equipment, thereby endangering the livelihood of all those forming part of the collective if the more powerful party removes the equipment. Such concerns are aggravated in the case of transactions between one or more minor farmers in a developing country with a multinational equipment producer.

A counter-argument in favour of the current approach adopted by the MAC Protocol is that party autonomy should prevail as a principle, but this argument cannot fly in a context where one of the parties is in fact not autonomous in the sense that it is in need of machinery and dependent on financing. Also, treaty design (ie the quest for similarity with Protocols for the aircraft, rail and space sectors) should not be pursued so rigidly as to result in undesirable substantive legal rules. Thus, for example, the treaty’s conceptual focus on equipment rather than on the quality of the parties involved should be dropped, at least where the setting is an agricultural one. Likewise, the argument that the Convention relates to high-value equipment alone, is not convincing. Annex 2 to the draft MAC Protocol includes all kinds of machinery for working the soil, seeding, harvesting, as well as tractors – ie, standard equipment required for agricultural purposes. Moreover, in this context the circumstance that current enforcement proceedings may take years in some jurisdictions does not justify allowing enforcement within just a couple of days (where a number of weeks or months would also do the job) or abolishing external control mechanisms such as public auction or valuation by independent parties (which could still play a role).

Of course, revising the current approach raises the issue of delineation: who needs protection and who does not? However, this cannot be an argument for imposing creditor-friendly rules all round given the potentially harmful effect on more vulnerable actors. Neither does the risk of abuse by debtors convince as an argument to support the current rules, since the creditor may (in addition to the many other remedies the Convention provides) take possession or control and thus prevent such abuse. Rather, it is the weaker actors that deserve a level of protection against creditor abuse, made possible by the current design of the MAC Protocol.

The way forward would be to pay more heed to the particularities of the mining, agriculture and construction industries covered by the draft MAC Protocol and to reflect these in the treaty. The text dealing with agriculture should contain an opt-out for smaller farming enterprises/cooperatives (e.g. based on a certain turnover in the market concerned) or exclude them altogether. Other measures to protect the livelihood of more vulnerable actors in this context might include reintroducing an external control mechanism to guarantee fair valuation, revisiting the burden of proof in relation to ‘manifest unreasonableness’, stipulating longer time-frames for taking enforcement measures, and eliminating the ‘speedy relief’ option of sale, if not for all, then at least for smaller enterprises.

The debate on the MAC Protocol shows that the paradigm of party autonomy clashes with the fiduciary features of security interests and the protection of weaker economic actors. There is, however, still time to address the problems raised by the approach in the current draft and to strike a proper balance.

Thomas Keijser is a Senior Researcher at the Business Law Institute of the Radboud University (Netherlands).