Introduction
It is imperative to note that a shipowner transfers a security interest in a ship to a lender as collateral for a mortgage loan in a ship mortgage. A ship mortgage is legally composed of three components, similar to other forms of mortgages: the mortgage loan, the mortgage document, and the rights arising from the mortgage deed granted to the money lender.
A registered ship or a share in any such ship may be made security for the repayment of a loan or the discharge of any other obligation, according to paragraph 21 of Schedule 1 to the Merchant Shipping Act of 1988. Upon production of the document establishing any such security (referred to in this Act as a mortgage), the registrar of the ship’s port of registry shall record it in the register.
The Merchant Shipping Act of 1894, the Merchant Shipping Act of 1988, and later revisions to the 1988 Act are the legal foundations for ship mortgages in the United Kingdom. According to the Merchant Shipping Act of 1894, only registered ships are eligible for “statutory legal mortgages”, otherwise known colloquially as ship mortgages. All other ship-related mortgages must be purely equitable and may be placed on incomplete boats, foreign vessels and other vessels.
How Ship Mortgages are Distinct?
Ship mortgages are distinct from other mortgage kinds in three respects.
First, some privileged claims rank higher than mortgagee claims against the ship. Secondly, ships inevitably cross international borders. Thirdly, when at sea, a ship is always susceptible to partial or complete destruction. In the 19th century, ship mortgages were a commonly used practice in the shipping industry and a significant source of funding for ship owners.
Ships are considered chattels in the UK, and ownership disputes are resolved following the rules that apply to the law of personal property, particularly the provisions regarding the passing of property and conveying of title found in the Sale of Goods Act 1979. However, in general, the title to a ship won’t pass by delivery and won’t be established by possession.
What is a preferred ship mortgage?
The Preferred Ships Mortgage gives a vessel’s lender or financier competitive standing among rival claims that may emerge against the vessel.
History
Traditionally, a mortgage wasn’t considered a marine contract under maritime law. As a result, it could not be foreclosed under maritime law, and creditors seeking to retrieve debts due by a vessel gave it little priority. Congress recognized that this common law gap provided little motivation to fund a vessel. As a result, it adopted the Ship Mortgage Act, which established the Preferred Ship Mortgage, among other things. The lender’s only plausible alternative was to secure the loan with a bottomry bond.
In maritime law, however, a loss of a ship cancels an obligation secured by a bottomry bond. As a result, the bottomry bond is now just a choice for the daring or thrill-seeking investor.
The establishment of a Preferred Ship Mortgage necessitates both eligibility and paperwork criteria. Among the qualifying conditions are that the vessel owner is a US citizen and the vessel is documented in the US. Effective documentation necessitates strict adherence to time, place, and manner regulations. Because a vessel may have many mortgages on her, the financier must be certain that it is securing the “whole” vessel, including her appurtenances, to be granted “preferred” status. A mortgage can also cover more than one vessel.
Benefits of a Preferred Ship Mortgage
The Ship Mortgage Act gives a deficient borrower two principal enforcement procedures.The lender can execute its lien against the vessel in federal court.
The lender may potentially file a lawsuit in federal or state court against the vessel’s owner. The Preferred Ship Mortgage will frequently include a clause allowing the mortgage holder to use self-help measures to repossess the vessel in the event of delinquency.
The Ship Mortgage Act and the Federal Judicial Sales Act establish judicial processes for selling a foreclosed vessel. Aside from that, a judicial auction clears any known and undiscovered liens on the vessel; therefore, purchasing a boat at this sale is the only method to obtain a clean title to a vessel.
Facts to Know When You Consider a Ship Mortgage
- If the lender followed the correct federal processes, the borrower should expect additional action to be taken against her personally to recover any difference between the debt owing and the money collected from the sale of the vessel. If federal processes were not followed correctly, courts are split on whether to use state law to allow for a deficiency judgment.
- Please keep in mind that each country has its form of a Ship Mortgage. The general criteria are comparable to those of a Ship Mortgage Act mortgage. However, there are changes in how to document and perfect the mortgage. Since the international community recognizes over 193 nations, most of which have their own registry standards.
- When there is more than one registered mortgage, the registration sequence determines the mortgage’s precedence unless a priority notice is filed with the MCA. For instance, if a third party files a Notice of Mortgage Intent early to filing your Mortgage and the other party’s Mortgage is registered after yours, the third party’s mortgage will take precedence. It is essential to emphasize that holders of rights of ownership or statutory liens don’t rank ahead of a registered mortgage unless the lien holder has launched an in rem suit.
- If the owner is a corporation, the lender must additionally register the mortgage with the corporate registry in the firm’s place of organization. Finally, before agreeing to lend the cash, a lender should consider obtaining other forms of security from the owner and doing necessary credit and due diligence checks on the borrower, beneficial owner, and any guarantors.
Registration, Alteration and Discharge or Ship Mortgages
Prior to delving into the specifics of the Merchant Shipping Act 1995’s registration provisions, it is important to understand that the register is not intended to—and does not—offer a comprehensive scheme for the registration of interests in ships, similar to the one that the Land Registration Acts are intended to—offer for the registration of land.
Lord Herschell LC stated in Baumwoll Manufacturer Von Carl Scheibler v. Furness that:
“Although the Legislature has now taken greater security to see that the person registered as an owner is properly registered than before, all it has done is to make the register prima facie evidence of ownership. In fact, it assumes that anybody may altogether displace the statutory effect given to it by proving what the facts really are.”
Registration and Alteration of Ship Mortgage
In the case of a ship mortgage, the choice of applicable law should be incorporated into the security documents of the ship mortgage. Although the flag of registry determines the legislation that applies to a ship mortgage, the underlying security documentation is frequently subject to a separate law. Despite the fact that each of these nations has a completely distinct process for enforcing ship mortgages, both Norwegian and English law has been frequently chosen.
A ship mortgage must be registered to be enforceable while failing does not necessarily deem the mortgage null and void. For this:
- The sellers guarantee that the ship is devoid of any charters, encumbrances, mortgages, maritime liens, and other obligations at the time of delivery, despite the buyer’s protection provision in the Norwegian Sales Form 1993, and
- To prevent further legal action following sales brought on by claims relating to unregistered mortgages, it is crucial for purchasers to register ships with mortgages.
Under the Merchant Shipping Acts, an unregistered mortgagee is not eligible for any of the advantages listed. One of the most important benefits of registration is the priority that the mortgagee receives based on the registration date.
In the following situations, but not limited to them, registration gives a mortgagee a higher priority:
- Later registered or unregistered mortgages;
- Earlier unregistered mortgages, regardless of knowledge of them;
- And additional advances were made later under a prior registered mortgage, where it was agreed that the mortgage should cover present and future advances by the mortgagee.
Mortgagees of a ship or a part of a registered British ship are permitted to notify the registrar of their planned interests. The registrar may record those notices under rule 59 of the Merchant Shipping (Registration of Ships) Regulations of 1993 in the UK. The registered mortgagees will take precedence over other registered mortgages that may have been completely registered initially after they have been later completed or registered.
Discharge of Ship Mortgage
According to Regulation 62(2) of the Merchant Shipping (Registration of Ships) Regulations of 1993:
“If for a good reason, the registered mortgage cannot be produced to the Registrar; he may, upon being satisfied that the mortgage has been properly discharged, record in the Register that the mortgage has been discharged”.
When a mortgage has been registered by a person falsely claiming to be the mortgagee or when the mortgage was not completed by the mortgagee, it is proper to ask that record in the register be deleted.
Simply put, once the mortgage obligation has been satisfied, a mortgage may be discharged. According to Schedule 1’s Paragraph 13 of the Merchant Shipping Act of 1995:
“Where a registered mortgage has been discharged, the registrar shall, on production of the mortgage deed and such evidence of the discharge of the mortgage as may be prescribed,119 cause an entry to be made in the register to the effect that the mortgage has been discharged.”
When a discharge entry is accidentally entered in the register, the mortgage is still considered to be discharged, and all future entries pertaining to the mortgage are void. A note on the register stating that the discharge had been entered incorrectly could not be used to reinstate the mortgage. In contrast, the court will order the purchaser to be registered as the owner in cases where an entry of discharge was made accidentally, and a bill of sale was completed by a mortgagee.
Whether someone who relies on the register will be harmed by the inaccurate entry must be considered in each circumstance. If not, the court may order that the entry be corrected, but it will not do so at the expense of a third party that has relied on the entries in the register while acting innocently.
How to enforce a Ship Mortgage under English Law?
To understand which law is applicable to the security documentation of a ship mortgage can be a difficult process. Even though it is the law of the flag of registry which is responsible for governing the ship mortgage, however, a different law may be used for the security documentation procedure. For this, the English law has been one of the most popular choices.
The English Law procedure is based on a contractual right. Therefore, the terms agreed by a mortgagor are the specific terms that derive the rights of a mortgagee. Usually, the loan documentation identifies the events of default by the mortgagor, which eventually gives the mortgagee the right to enforce the mortgage. Identifying the event of default can itself be a difficult task, considering the wide range of certain events, such as any breach of a material adverse change clause. However, at the end, the same is identified on a case-to-case basis.
The process for the enforcement of a ship mortgage is as follows:
Service of notice and demand
After the event of default has been successfully identified, we then need to ensure that a notice and demand is adequately served to the mortgagor, the process of which must be in accordance with the agreed terms of the mortgage. If there is any deviation with the agreed terms of the mortgage, it is possible for the notice to be deemed invalid.
Repossession
It is possible to enforce the mortgage, once the notice and demand has been served, and a reasonable time period has passed, providing the mortgagor with the adequate opportunity to make the repayment arrangements. The enforcement is usually done by the mortgagee, through repossession of the vessel. The main objective behind taking the repossession would be to sell the vessel as soon as possible, in most of the cases. However, till the time the sale is completed, it is advisable to employ a commercial manager for the proper operation of the vessel.
Under the English Law, if the terms of the mortgage grant the mortgagee the right to repossession after the demand has been served, it is not necessary to obtain any official court order to take the repossession of the vessel. This can be done through the appointment of any specialist firm for obtaining the physical possession of the vessel, or through the appointment of any Law of Property Act receiver, or through the services of LegaMart.
Once the possession is received by the mortgagee, and the mortgagee makes the decision to sell the vessel, the mortgagee is expected to sell the vessel at the best price which is reasonably obtainable for the vessel. If the mortgagee is unable to do so, it might be possible that the mortgagee faces the claims of the mortgagor and other creditors.
The mortgagee is not required to hold the title of the vessel before the sale of the vessel, mainly because the terms of the loan and the mortgage documents themselves grant the mortgagee with the power to sale, either through its own right or as an attorney of the mortgagor.
While this may seem to be a beneficial course with a speedy repossession of the vessel, however, it is not possible to go down this route in case the mortgagor has disputed the event of default and/or the repossession of the vessel. Further, if other creditors also exist in the picture, they would need to be paid off by the mortgagee, before the mortgagee can proceed with the sale of the vessel.
Therefore, to avoid such issues and disputes over the vessel, and to ensure that the sale is through a clean title, mortgagees often prefer to arrest the vessel and go through the sale procedure through a court order.
Choosing the Governing Law
When choosing the governing law for the security documentation, the enforcement procedure is necessary to be known. Under the English law, as discussed above, the contract between the parties allows the mortgagee to take repossession of the vessel in the event of default, and even allow the mortgagee to further sell the vessel without any court intervention. Therefore, be aware of these facts before entering into any contractual obligations.
Registering Ship Mortgages Around the World
Nigeria
A ship registered in Nigeria, or a share in the ship, may be used as security for a loan or other valuable consideration, and a valid written document must be used to provide the security, according to Section 54(1) of the Merchant Shipping Act, 2007. A Deed of Mortgage is utilized to establish this security. The Corporate Affairs Commission (CAC) and the Nigerian Maritime Administration and Safety Agency (NIMASA) are the appropriate places to file such a mortgage.
According to the Admiralty Jurisdiction Act of 1991, a mortgage on a ship gives rise to a propriety claim, which is often more valuable than a normal maritime claim. This gives the mortgagee the right to bring a real estate action against the ship to enforce its security.
China
In China, the process is fairly simple. Both the mortgagor and the mortgagee are required to submit three important documents, namely, a written application signed by both parties, the original Ship Ownership Registration Certificate, and the contract of ship mortgage, in accordance with Article 20, Chapter IV of the People’s Republic of China’s Regulations Governing the Registration of Ships.
New Zealand
Even in New Zealand, the registration process is fairly straightforward. Maritime New Zealand’s Registrar of Ships requires a Mortgage (to secure account current) form, a mortgage (to secure principle sum and interest) form, and a NZ$490 charge to register a mortgage on a ship. Mortgages are registered according to the sequence in which the registrar receives them. From the time the correctly completed paperwork and processing money are received, the processing time is approximately 10 business days.
Conclusion
It is crucial to know what steps to take if enforcement is needed when deciding on the governing legislation for the underlying security papers for a ship mortgage. English law operates under the premise that it will respect the contractual agreement reached by the parties and that the courts will act to enforce that agreement where necessary. According to English law, the parties’ contractual agreement gives the mortgagee the right to seize the vessel in the event of a default and, if it so chooses, to sell it without seeking a judge’s permission.
English law, which allows a mortgagee to enforce a right of possession, authorizes the mortgagee to take the vessel and weigh its choices. Speed and flexibility are crucial. When the vessel operates on international waters, and there are practical limitations on bringing an enforcement action against the mortgage in any pertinent foreign jurisdiction, this may be very crucial.
Frequently Asked Questions (FAQs)
Why should you go for a preferred ship mortgage?
The Ship Mortgage Act gives a deficient borrower two principal enforcement procedures. The lender can execute its lien against the vessel in federal court. Or the lender may potentially file a lawsuit in federal or state court against the vessel’s owner. The Preferred Ship Mortgage will frequently include a clause allowing the mortgage holder to use self-help measures to repossess the vessel in the event of delinquency, making it easier for the mortgagee to take repossession of the vessel without any legal hassle.
What is the effect of registration of a mortgage?
Under the Merchant Shipping Acts, an unregistered mortgage is not eligible for any of the advantages. One of the most important benefits of registration is the priority that the mortgagee receives based on the registration date. In the following situations, but not limited to them, registration gives a mortgagee a higher priority:
- Later registered or unregistered mortgages;
- Earlier unregistered mortgages, regardless of knowledge of them;
- And additional advances were made later under a prior registered mortgage, where it was agreed that the mortgage should cover present and future advances by the mortgagee.
How can you enforce a ship mortgage under English Law?
The English Law procedure is based on a contractual right. Therefore, the terms agreed by a mortgagor are the specific terms that derive the rights of a mortgagee, as well as the enforcement mechanism for the ship mortgage.
