All You need to Know About Ship Mortgages | LegaMart Articles
Numerous ship mortgages involved in taking security over a vessel by ship owners

All You need to Know About Ship Mortgages

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.

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How Ship Mortgages are Distinct?

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Ship mortgages are distinct from other mortgage kinds in three respects.

First off, some claims that are privileged rank higher than mortgagee claims made 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 in accordance with 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.

Registration, Alteration and Discharge or Ship Mortgages

Prior to actually 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. The registry merely offers preliminary proof of ownership.

Lord Herschell LC stated in Baumvoll Manufacture Von Carl Scheibler v. Furness that:

“Although the Legislature has now taken greater security to see that the person registered as owner is properly registered than it had done before, all it has done is to make the register prima facie evidence of ownership. In fact it assumes that anybody may displace altogether the statutory effect which has been given to it, by proving what the facts really are.”

Registration and Alteration of Ship Mortgage

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It is never an easy task to choose which legislation should be applied to the security documents pertaining to a ship mortgage. Although the flag of registry determines the legislation that applies to a ship mortgage, the underlying security documentation frequently is 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 have been frequently chosen.

A ship mortgage must be registered in order to be enforceable, while failing to do so 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 
  • In order 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. The priority that the mortgagee receives as a result of registration, with priority ranking purely determined by the date of registration, is one of the most important benefits. By publishing a “notice to the world,” the registered mortgagee may be shielded from any subsequent secured creditors of the mortgagor who would use the same ship as collateral to get further financing from other sources.

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 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 in a registered British ship are permitted to notify the Registrar of their planned interests, and 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

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According to Regulation 62(2) of the Merchant Shipping (Registration of Ships) Regulations of 1993:

“If for 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.

Registering Ship Mortgages Around the World

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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 process of registration is fairly straightforward. Maritime New Zealand’s Registrar of Ships requires a Mortgage (to secure account current) form, 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 be aware of the steps that must be taken if enforcement is required 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 then weigh its choices. Speed and flexibility are crucial. When the vessel is operating in international seas and there are practical limitations on bringing an enforcement action against the mortgage in any pertinent foreign jurisdiction, this may be very crucial.

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