UNIDROIT is finalising the MAC Protocol, which will establish an international legal framework for financing mining, agriculture and construction equipment. The Protocol is expected to be adopted in 2019. It may affect a wide range of Australian entities, especially those in the mining, agriculture, construction and banking industries. We take a preliminary look at its scope, main provisions and potential effects on Australian players.
where does the mac protocol fit in?
The Cape Town Convention aims to address uncertainties involved in financing assets that can be moved between countries with vastly differing security and title reservation laws. It establishes an international regime for the creation, enforcement, registration and priority of security interests in certain categories of high-value, uniquely identifiable mobile equipment. The Protocols to the Convention set out the categories of mobile equipment to which the Convention applies.
Australia has already ratified the Cape Town Convention and the associated Protocol on Matters Specific to Aircraft Equipment (commonly known as the Aircraft Protocol).
The MAC Protocol will cover mining, agriculture and construction (MAC) equipment. Various countries have engaged in consultation in preparation for the Protocol's expected adoption in a Diplomatic Conference during the second half of 2019. UNCITRAL and UNIDROIT held Australia’s first public consultations in August 2018.
HOW DOES THE MAC PROTOCOL WORK?
The Cape Town Convention and Protocols provide for the creation of international security interests and a range of default remedies for creditors. Key features include:
- a system for creditors to create an “international interest” or “prospective international interest” (during loan negotiations) in MAC equipment;
- an online International Registry for the registration of these international interests;
- priority of registered interests – provided the debtor is located in a Contracting State, a registered international interest will have priority over existing security interests under domestic law or any subsequently registered security interests;
- remedies that the creditor can exercise in the event of default by the debtor, largely based on contractual agreement; and
- protection of international interests in the event of a debtor’s insolvency.
Contracting States can choose by way of declaration whether certain parts of the Cape Town Convention and its Protocols will apply. Australia has already made declarations in relation to the Cape Town Convention and Aircraft Protocol.
What equipment does the MAC Protocol cover?
The MAC Protocol covers certain specified categories of MAC equipment, defined using the World Customs Organization’s Harmonised System codes (HS Codes). Some of these codes are for fixed equipment.
The categories are still under negotiation. There are currently 42 HS Codes in the draft MAC Protocol, with interested Contracting States invited to submit any additional HS Codes for consideration by the end of November 2018. When finalised, however, the relevant HS Codes will be set out in annexures to the MAC Protocol, with separate annexures for mining equipment, agriculture equipment and construction equipment.
Some examples of equipment currently listed in the annexures include:
- Mining – rock drilling tools, bulldozers, graders, road rollers, compacting machinery, concrete mixers, tractors and trailers;
- Agriculture – fire extinguishers, mechanical appliances for spraying liquid, sand blasting machines, bulldozers, levellers, mechanical shovels, machinery for soil preparation or cultivation and tractors; and
- Construction – cranes, rock drilling tools, excavators, tunnelling machinery, snow ploughs, machinery for public works, fire fighting vehicles, trailers.
WHAT WILL THE MAIN EFFECTS BE?
The MAC Protocol is expected to improve the predictability and enforceability of security, title reservation and leasing rights, and increase the availability of MAC equipment around the world. The Protocol is also expected to reduce credit risk, improve access to finance and open new markets to MAC equipment suppliers. The harmonisation of Australia’s security laws with those of other Contracting States is also likely to make Australia more attractive to overseas investors by reducing legal risks and due diligence costs.
UNIDROIT estimates that the MAC Protocol will have a $7 billion positive impact on GDP in developed countries, and a $23 billion impact in developing countries.
How will the MAC Protocol INTERACT WITH THE PPSA?
Security interests in MAC equipment in Australia are currently regulated by the Personal Property Securities Act 2009 (Cth) (PPSA). If Australia adopts the MAC Protocol, it will prevail over the PPSA to the extent that there is any inconsistency between the regimes.
Some potential areas to consider between the regimes are:
- Registration rules – The Cape Town Convention requires each asset to be uniquely identified. Although using serial numbers will go some way to solving this problem, UNIDROIT is still grappling with this issue in negotiations.
- Priority rules – The PPSA provides for a more nuanced priority system than the system proposed in the draft MAC Protocol. The PPSA has special rules for particular security interests, such as the rules around purchase money security interests (PMSIs).
- Taking-free rules – The Cape Town Convention does not currently have a “taking-free” rule. owever, the draft MAC Protocol provides that, if a person is a “dealer”, the buyer takes free of security interests. The taking-free provision will not extend to second-hand dealers – buyers will still need to search the register.
- Inventory finance – Inventory finance, which usually relates to a significant number of assets, will be difficult to administer using the asset-based Cape Town Convention register. Contracting States will be able to choose whether their domestic law will apply instead.
- Added complexity – The PPSA was introduced to remove complexity from the Australian security regime. It is arguable that the MAC Protocol will add back another layer of complexity. The Personal Property Securities Register could be adjusted so that it can be used as an 'entry point' to the International Registry, but it remains to be seen whether any such changes will be made.
Drawing on experience with the Aircraft Protocol, it will be best practice to register assets to which the MAC Protocol applies under both regimes.
The draft MAC Protocol is currently being considered and negotiated by 51 countries, including Australia. UNIDROIT is still encouraging private sector input.
Those in the MAC and banking industries should, however, start considering how this framework will affect them.
This article was originally co-authored by Andrew Chew.
(Andrew and Jodie have co-authored the sub-chapter on the PPSA: Implications for Infrastructure and Construction Industries in CCH’s Australian Personal Property Securities Law Reporter.)
 There are 3 existing protocols – Aircraft Protocol (for aircraft equipment), Rail Protocol (for railway rolling stock) and Space Protocol (for space assets), and the MAC Protocol will be the fourth Protocol. See here.
 The Cape Town Convention currently has 77 Contracting States, see here.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.