i The transport finance industry
Portugal is historically a country of maritime adventurers, shipowners and shipbuilders. Portugal’s geography, which includes the archipelagos of Madeira and the Azores and a long Atlantic coast, calls for port activity and places Portugal as an entry point for the transport of goods into Europe.
Notwithstanding this, the shipping industry in Portugal has been struggling in recent decades. Currently, the number of newly built ships is relatively low and shipyard activity is mainly focused on repairs and maintenance. In addition, a significant number of shipowners active in Portugal correspond to international carriers and not to nationally run companies.
In this context, Portugal is taking the opportunity to regain its importance as a player in the shipping sector through the International Shipping Register of Madeira (MAR). MAR is a second shipping register operating under the Portuguese flag, open to non-residents and allowing registration of both commercial vessels and yachts. MAR was created in the late 1980s within the International Business Centre of Madeira (IBCM), which consists of a set of incentives, mainly of a tax nature, approved by the European Commission and currently in its fourth version. MAR offers attractive conditions for shipowners and crew members, while ensuring high levels of security. MAR is proving to be very successful in attracting foreign investment and is now one of the largest shipping registers in Europe.2 At the end of 2016, MAR had 491 vessels, which represents an increase of 92 vessels in relation to the previous year.
As a consequence of the above, and drawing on our experience, domestic financing for the construction and acquisition of vessels currently maintains a residual importance, while the relevance of Portugal as a flag-state is increasing. In fact, in recent years there have been several significant financings for the construction or transfer of ships, at an international level, connected with Portugal through MAR. The registration of vessels in MAR calls for the application of the Portuguese jurisdiction, mainly as concerns security packages.
The main Portuguese airports are located in Lisbon, Porto, Faro, Funchal (Madeira) and Ponta Delgada (the Azores). During 2016, an overall increase of activity in all the main airports was verified. The force behind this increase is international air passenger transport, in which low-cost airlines − specifically easyJet and Ryanair − are playing a significant role. According to the information available for the last quarter of 2016, the most important airlines at the main airports are TAP, Ryanair and easyJet. In Ponta Delgada, the presence of SATA Air Açores and SATA Internacional is also very significant.3 Monarch Airlines Ltd has appeared as an important new player, particularly in the airports of Faro and Funchal.
At the end of 2015, there were 1,211 aircraft registered in Portugal, which represents a decrease of seven aircraft in relation to 2014. The total number of aircraft includes 602 intended for private transportation and 67 for regular and non-regular transportation. There were also 26 companies licensed for air transportation and 15 for executive aviation.4 In our experience, numerous aircraft are operated in our jurisdiction under lease or financial lease agreements.
The railway network in Portugal is currently managed by Infraestruturas de Portugal, SA, a public company that resulted from the merger of Rede Ferroviária Nacional – REFER, EPE (REFER) and EP – Estradas de Portugal, SA, enacted by means of Decree-Law 91/2015, of 29 May (DL 91/2015).
According to the REFER annual management report for 2014,5 the relevant operators in Portugal were CP and Fertagus (for passengers) and CP Carga and Takargo (for cargo). CP was the main operator.
ii Recent changes
The main changes to the transport industry in Portugal over the past five years consist of political responses to the global financial crisis, implemented through legislative or regulatory measures. The government’s Strategic Plans for Transportation for the terms of 2011–2015 and 2014–2020 were useful instruments for understanding the changes in the transport sector.
The measures put into practice over recent years provided for public investment in the port sector and railway sector, while simultaneously promoting the privatisations of both a national shipyard (Estaleiros de Viana) and the management body of the main Portuguese airports (ANA). Transportes Aéreos Portugueses, SA (TAP), the national airline, has also been partially privatised.6
Furthermore, the 2020 Operational Programme for the Sea (Programa Operacional MAR 2020) was approved by the European Commission on 30 November 2015. The programme has been implemented in different instruments approved throughout 2016. Among other things, the programme sets out measures to support investment in fishing ports7 and energy efficiency in fishing vessels.8
On a different matter, in the judgment of the Court of Justice (First Chamber) of 11 September 2014 (Case C-277/13), Portugal was censured in connection with competition restrictions at Lisbon, Porto and Faro airports concerning ground-handling activity (baggage handling, ramp handling and freight and mail handling).
In spite of this, Parliament Resolution No. 78/2016, approved on 31 March 2016, provides some guidelines that show that the liberalisation process of the ground handling services in Portugal may be put on hold.
In summary, some of the main changes to the transport industry in Portugal over the past years concern the increase of private investment in traditionally publicly held companies and the international pressure to allow competition. Therefore, such changes are, to some degree, subject to political changes in Portugal.
Finally, it should be noted that in 2017 certain measures in transport-related industries – such as the Single Port Invoice9 – have already come to light. Others – such as legislative efforts to accommodate road transportation of passengers by means of electronic platforms – are currently under discussion.10
II LEGISLATIVE FRAMEWORK
The financing of aviation, rail and shipping assets is not subject to specific regulations in Portugal. In general terms, the common legislation applicable to civil and commercial matters applies.
Notwithstanding this, there are certain specificities particular to the financing of transport assets when security interests are created. Mortgages are the most common guarantee granted in Portugal to secure the financing of transport assets and may be subject to specific rules, depending on the financed asset and its registration rules.
Finally, it should be noted that the legal framework applicable to transport matters in Portugal is highly fragmented. There are numerous outdated provisions and conventions, which sometimes overlap with European Union instruments or conflict with common practices. Even though this general note does not apply to MAR’s specific regime nor does it currently deter transport finance in Portugal, this factor should be taken into consideration by operators in the Portuguese transport sector.
i Domestic and international law and regulation
Commercial ships in Portugal are subject to a dual registration system (the administrative register and the commercial register), while recreational craft are subject to a single register.
Thus, mortgages over commercial ships in Portugal must be registered with the Commercial Registry Office, under the terms of Decree-Law No. 4264, of 14 November 1959. Mortgages over recreational craft must be registered with the captaincies, under the terms of Articles 19 and 77 of the General Regulation of Captaincies and Regulation of Recreational Navigation, established by Decree-Law No. 124/2004 of 25 May.
Also, pursuant to Article 589 of the Portuguese Commercial Code (the Commercial Code), mortgages over vessels may guarantee up to five years of interest, while the ordinary regime set out in Article 693 of the Portuguese Civil Code (the Civil Code) only allows for a maximum of three years.
Finally, DL 96/89 sets out some specific rules applicable to mortgages registered in MAR. In fact, and among other specificities, MAR’s regime allows the parties to choose the law applicable to the mortgage. This option may be particularly interesting taking into consideration, for example, that a mortgage under Portuguese law may not allow for self-help remedies.
If the parties fail to choose the applicable law, Portuguese law will apply nevertheless. In that scenario, however, the right to release a mortgage set out by Article 721(b) of the Civil Code will not apply. Such a right would allow the acquirer of the mortgaged asset to cancel the mortgage by paying the mortgagee an amount equal to the price paid for the mortgaged asset. Pursuant to the MAR regime, release under those circumstances can only occur if the acquirer undertakes to pay the mortgagee for all rights under the mortgage agreement.
Concerning aviation, the registration of aircraft in Portugal must be submitted to the ANAC, further to Decree 20062, of 13 July 1931 (the Air Navigation Regulation). ANAC is also competent to register mortgages.
Finally, it should be noted that Portugal did not sign the Cape Town Convention on International Interests in Mobile Equipment.
ii Specific practices
Under Portuguese law, rights in rem usually are constituted or transferred by means of the applicable agreement. However, mortgages require registration and will only be deemed incorporated upon registration, which should be carefully provided for within a financing.
The possibility of choosing the law applicable to the mortgage registered in MAR should be carefully evaluated, taking potential discrepancies between applicable jurisdiction and applicable law specifically into consideration, as well as accounting for any enforcement issues that could arise.
Finally, and given the fragmented legal framework applicable to the Portuguese transport industry, it is advisable to liaise beforehand with the competent authorities for the registration of the financed asset concerning any aspect of the transaction that may give rise to registry or regulatory issues.
III FINANCIAL REGULATION
In Portugal, only credit institutions have permission to grant credit as a professional activity. The legal definition of a credit institution is provided by Decree-Law No. 298/92, of 31 December (DL 298/92). DL 298/92 enacts the General Credit Institution and Finance Companies Regime, which regulates the activities of banks and other financial institutions. According to DL 298/92, credit institutions are defined as entities whose activity consists of receiving deposits from the public − or other kinds of repayable funds − and granting credit on their own account. Only entities expressly recognised as credit institutions are authorised to carry out financing activities. Obviously, banks, as the main credit institutions, assume a central role in the field of financing activities.
Portugal is part of the single supervisory mechanism, with the banking system supervised by the Bank of Portugal in partnership with the European Central Bank. Created to ensure the safety and soundness of the European banking system, the single supervisory mechanism comprises the European Central Bank and the competent national authorities of each Member State of the euro area (of which the Bank of Portugal is part). The European Central Bank directly supervises the main credit institutions, while the Bank of Portugal is responsible for the supervision of the remaining institutions. Notwithstanding this, the European Central Bank has the power to replace the Bank of Portugal at any time and directly supervise the other institutions.
i Regulatory capital and liquidity
The need to ensure the safety and soundness of the national (and European) banking system after the 2007 international financial crisis, and the adoption of the Basel III Agreements − which were implemented in the European Union through Directive No. 2013/36/EU and Regulation No. 575/2013 − resulted in the implementation of a set of important measures intended to ensure the solvency and liquidity of banks and to reinforce the powers of the supervisory authorities.
Consequently, among other aspects, Portuguese banks are now obliged to ensure that their own funds are never below the minimum amount of share capital legally required. Additionally, current Portuguese legislation compels banks to have a minimum share capital of €17.5 million.
ii Supervisory regime
The supervisory system for Portuguese banks is based on two fundamental components: prudential supervision and ‘supervision of conduct’.
Prudential supervision has the main objective of ensuring credit institutions’ financial stability and the security of the funds that are entrusted to them. Therefore, supervisory institutions have power to authorise the incorporation of credit institutions, monitor their activity, enforce compliance with the applicable regulations, issue rules and recommendations, sanction potential infractions and take extraordinary measures to correct irregularities.
On the other hand, supervision of conduct compels credit institutions to respect certain standards of conduct in their relations with clients. This second component of this supervisory regime entitles supervisory institutions to establish rules to assure the transparency of the information provided by credit institutions to their clients, as well as the fairness of products and financial services transactions − either between credit institutions or between credit institutions and their clients − in addition to regulatory and supervisory powers. The legal framework also grants clients the right to file complaints with the Bank of Portugal.
Finally, it is important to stress the existence of a central credit register. The central credit register is a central database, managed by the Bank of Portugal, that contains detailed information regarding the loans granted by credit institutions to their clients.11 All credit institutions are obliged to communicate this information, so that the Bank of Portugal, on a monthly basis, may determine the amount of credit granted to each client. Through this mechanism, credit institutions are able to evaluate the risks of granting credit to a specific client with a higher degree of accuracy.
IV SECURITY AND ENFORCEMENT
Portuguese law provides a specific framework on security interests over vessels:
- a Article 578 of the Commercial Code sets out a list of 15 credits that enjoy a priority-ranking privilege; and
- b Article 25 of Decree-Law 201/98, of 10 July (DL 201/98) and Article 14 of Decree-Law 203/98, of 10 July establish that the vessel’s constructor and the maritime rescuer are granted the right to retain the vessel as security for the payment of the credits arising from its construction and the maritime salvage.
The mortgagee is granted a priority-ranking privilege, which prevails (even in the event of the mortgagor’s insolvency) over (1) the priority-ranking privileges provided for by the Civil Code and any other statutes (Article 574 of the Commercial Code); and (2) rights of retention subsequently constituted (Article 750 of the Civil Code). Court expenses and monetary consideration for the maritime salvage are ranked as having priority over the mortgagee’s credits (Article 578(1)(2) of the Commercial Code).
Portuguese law does not grant specific priority-ranking privileges to entities that finance the acquisition of aviation or rail assets. As such, the lender’s position − if a security interest is constituted over the aircraft or the rolling stock − results from the general framework set out in the Civil Code.
In fact, Portuguese law only provides the Portuguese state, the Autonomous Region of the Azores and the airports managing body with a priority-ranking privilege over the aircraft as security for the payment of (1) fees due for the operation of airline companies in Portuguese airports; and (2) administrative fines imposed for infringement of the framework governing non-scheduled transport services (Article 46 of Decree-Law 254/2012, of 28 November, Article 30 of Regional Legislative Decree 35/2002/A, of 21 November, and Article 38 of Decree-Law 19/82, of 28 January).
According to general rules, the mortgagee’s credits shall be ranked as having priority over (1) the credits secured by a priority-ranking privilege that has been subsequently constituted; and (2) the credits held by entities that enjoy a right to retain the aircraft (Articles 686, 750 and 758 of the Civil Code).
Finally, note that Portugal is not a party to any convention regarding securities over aviation, rail and shipping assets (such as the Convention for the Unification of Certain Rules relating to Maritime Liens and Mortgages, adopted in Brussels on 10 April 1926, and the Convention relating to Maritime Liens and Mortgages, adopted in Geneva on 6 May 1993).
i Financing of contracts
Financing of new assets usually follows a traditional pattern of asset finance: credit against a security interest over the asset.
Aircraft are usually acquired under a financial lease agreement. Generally, the parties enter into a sale and leaseback arrangement: the airline operator negotiates the construction and acquisition of the asset, purchases it and oversees the import procedure; then, registers the aircraft and sells it to the financial lessor. Subsequently, the operator is granted the use of the asset under a financial lease agreement (the term of which may not exceed 30 years). In many cases, the financing is granted by several financial lessors (acting as a consortium), as a means to mitigate the economic risk of the transaction.12
A secured creditor may enforce security by means of an enforcement procedure filed against the debtor (principal action or interim measure). The merits may be decided in accordance with the laws of another jurisdiction if private international law leads to the exclusion of Portuguese law (e.g., in the event that the parties have validly chosen the law of another jurisdiction to govern the financing or the security relationship).
It is generally stated that the mortgagee may take possession over the secured asset without filing a claim if the parties have entered into an agreement whereby the mortgagee undertakes − after the breach of the contract − (1) to request an updated valuation of the asset (in accordance with a procedure defined by the parties); and (2) to repay the amount corresponding to the difference between the asset’s value and the amount of the debt. In fact, it is said that the rules prohibiting self-enforcement only apply if the procedure is not agreed with the mortgagor and may not be controlled by this entity (otherwise, their rights are not jeopardised).
iii Arrest and judicial sale
The arrest of a vessel is governed by the Convention for the Unification of Certain Rules relating to the Arrest of Sea-going Ships, adopted in Brussels on 10 May 1952 (the Brussels Convention), whenever:
- a the claimant holds a maritime claim pursuant to Article 1 of the Brussels Convention (namely a credit secured by a mortgage); and
- b the vessel is present in Portugal and flying the flag of a contracting state.13
The nationality or the address of the owner of the vessel or its domicile is, thus, irrelevant.
The Brussels Convention can only be applied when at least one of two elements (the flag of the vessel or the domicile of the applicant for the arrest) does not have a connection with the Portuguese jurisdiction (Article 8(4)).
The Brussels Convention regulates: (1) the arrest of the ship to which the credit refers (offending ship), when the debtor is the owner or the charterer or whenever a third party is debtor of a maritime credit related to that ship; and (2) the arrest of another ship (sister ship) belonging to the person who, on the date of the constitution of the credit, is the owner or the charterer of the ship to which the credit refers, or debtor of a maritime credit, unless the injunction seeks coercive compliance regarding the credits indicated in Article 1(1)(o)(p) or (q) of the Brussels Convention.
For a vessel to be arrested under this international instrument, a mere claim of the right of maritime credit suffices; it is not necessary for the claimant to present evidence for the procedure, nor to allege and prove the risk of the loss of the guarantee represented by the asset (periculum in mora) (Articles 3 and 5 of the Brussels Convention).
If the case does not fall within the scope of the Brussels Convention, the Portuguese Civil Procedural Code (CPC) will be applicable. In this circumstance:
- a the claimant must allege and present evidence of the relevant facts, including the credit entitlement and the grounds for granting the interim measure (fumus boni iuris), the risk of losing the security and the admissibility of attaching the vessel (Articles 365(1), 368(1), 391(1), 392(1) and 394 of the CPC);
- b if the legal requirements are met, the arrest is declared by the court without hearing the defendant (Article 393(1) of the CPC); and
- c the vessel may be arrested even if it is undertaking a journey (Article 9(1) of DL 201/98).
The Brussels Convention and the CPC set out similar provisions:
- a the claimant may request the arrest even if it does not enjoy any security interest (mortgage) over the vessel;
- b other ships owned by the debtor may be arrested, even if they have not been given as security; and
- c the claimant may be liable for all damages arising out of the arrest in the event that the measure is deemed unjustified (this liability shall be governed by the Portuguese internal rules).
The judicial sale of ships takes place in the principal action (which has to be filed prior to or after requesting the arrest), and is carried out − after the asset having been seized − by an enforcement agent, in accordance with the rules set out in the CPC. The vessel may continue to operate until the sale (Articles 769 and 770 of the CPC). If the debtor is insolvent, the sale of the asset is governed by the Insolvency Code.
Article 21 of Decree-Law 149/95, of 24 June, entitles the financial lessor to make a request to the court for the immediate apprehension and restitution of the leased asset in the event of termination of the financial lease agreement (due, among other grounds, to an event of default attributable to the financial lessee).
The granting of the interim measure depends on:
- a the termination of the agreement having been declared by the financial lessor, by serving a written notice to the counterparty;
- b the registration of the agreement having been cancelled; and
- c the court considering proved − prima facie − the defaulting event, the non-delivery of the asset and the termination of the agreement.
Once the apprehension is ordered, the financial lessor is entitled to grant a third party the use of the asset, namely by entering into a sale and purchase, lease or financial lease agreement.
If the aircraft is owned by the airline company, an enforcement procedure has to be filed to collect the debt (through judicial sale).
V CURRENT DEVELOPMENTS
i Developments in policy and legislation
The main development in transport finance over the past several years was enacted by Decree-Law 8/2009, of 7 January, which amended the Commercial Code to include the credits guaranteed by mortgages or pledges over the vessel in the third position of the ranking of privileges over the vessel.
This measure was followed, in 2011, by Portugal’s withdrawal from the Convention for the Unification of Certain Rules relating to Maritime Liens and Mortgages, adopted in Brussels on 10 April 1926.
In fact, up until those legislative measures were introduced, mortgages would be ranked in a less favourable way (from the credit institutions’ perspective), which was presumably preventing registrations in Portugal (and in MAR). These changes were a turning point for creditors, which to some extent contributed to the growth of MAR.
ii Trends and outlook for the future
Portugal is regaining its importance in the shipping sector, and specifically in the asset finance industry through MAR. In fact, the second registry in Portugal has undergone a steady and sustainable increase over the past years and is drawing the attention of shipowners and finance parties alike. Currently,14 MAR has 491 vessels (40 commercial yachts, 73 recreational craft and 378 commercial vessels), with a gross tonnage of 12,076,294. At the end of the previous year of 2015, a total of 399 vessels were registered, with a gross tonnage of 7,925,042. The average age of the ships dropped from 11.9 years in 2015 to 11.8 in 2016. In our experience, lenders from jurisdictions as varied as Spain and Japan are relying on Madeiran mortgages to secure financing.
The growth of MAR calls for a timely response by related public entities, specifically concerning the certification of crew members. Therefore, modernisation and legislative changes are being requested from the Portuguese government in this regard.
While MAR is in development, the ordinary shipping register and the overall shipping sector in Portugal still require extensive updates. For example, on 30 April 2009, the Council of Ministers approved a proposal for a commercial navigation law that never came to fruition. Furthermore, a proposal for a new aeronautical navigation regulation was under public discussion up until 31 January 2009, and subsequently was never approved.
On 3 March 2016, the Portuguese Council of Ministers decided on several matters concerning the Portuguese strategy for the sea. Further to such meeting, Resolution of the Council of Ministers No. 11/2016 created a working group under the Ministry of Sea, which shall propose a course of action to promote sea transportation and the development of national commercial vessels, namely by means of amending the current vessel registration system. The proposals of this group are not yet public.
A broad, planned reform of the legal framework applicable to the maritime and transport sector in Portugal is long overdue. In this scenario, the refocusing of legislative efforts in the transport sector is very welcome.
1 João Anacoreta Correia is a partner, Maria João Dias is an associate, Ricardo Gaspar Dias is a junior associate and Eduardo Souto de Moura is a trainee lawyer at Uría Menéndez – Proença de Carvalho.
2 Refer to Decree-Law 96/89, of 28 March (DL 96/89), which enacts the legal framework of MAR, and to the information available on the official IBCM website: www.ibc-madeira.com/en/welcome.html.
3 Quarterly Statistics Report concerning 2016, available at www.anac.pt/vPT/Generico/PublicacoesINAC/BoletinsEstatisticosTrimestrais/Paginas/BoletinsEstatisticosTrimestrais.aspx.
4 Civil Aviation Annual Report for 2015, available at www.inac.pt/SiteCollectionDocuments/Publicacoes/anuarios/AAC_2015_V2.pdf.
5 Available at www.infraestruturasdeportugal.pt/sites/default/files/files/files/rc_rf_2014_pt.pdf (see page 31).
6 Concerning the privatisation of TAP, two significant issues arose. On the one hand, in 2015 a stake representing 61 per cent of TAP was sold to Atlantic Gateway SGPS, SA (Atlantic Gateway). Upon the change of Portuguese government following the elections of 4 October 2016, an agreement was reached between Atlantic Gateway and the Portuguese State, on 19 May 2016, for the partial repurchase of shares by the latter, in order to maintain control over 50 per cent of TAP. On the other hand, the Portuguese Civil Aviation Authority (ANAC), in a decision dated 19 February 2016, raised the issue of the non-conformity of the corporate control and financing of Atlantic Gateway with Regulation (EC) No. 1008/2008 of the European Parliament and of the Council of 24 September 2008, which requires that Member States or nationals of Member States own more than 50 per cent of the undertaking and effectively control the aviation company. This issue has subsequently been overcome, as illustrated in a new decision from ANAC dated 23 December 2016. Refer to ANAC’s press releases in this regard: www.anac.pt/vPT/Generico/Noticias/noticias2016/Paginas/ComunicadodeImprensa012016.aspx and www.anac.pt/vPT/Generico/Noticias/noticias2016/Paginas/ComunicadodeImprensa042016.aspx.
7 Refer to Order 57/2016 of 28 March, as amended.
8 Refer to Order 61/2016 of 30 March.
9 The Single Port Invoice was enacted by Decree-Law 6/2017 of 6 January and Order 14/2017 of 10 January.
10 Refer to Law Proposal 50/XIII.
11 Only balances for liabilities with a value of at least €50 need to be communicated.
12 See Conceiçao Soares Fatela, ‘A Locação Financeira de Aeronaves’, Cadernos de Direito Privado, No. 49, January/March 2015.
13 The protective order may be as well accepted if the vessel flies the flag of a non-contracting state: in this case, the vessel may be arrested to secure a maritime claim pursuant to Article 1 of the Brussels Convention, or any other claim that legitimates the arrest according to the lex fori (Article 8(2)(3) of the Brussels Convention).
14 Official newsletter 2017-01 of CINM, encompassing data concerning 2016.