Introduction to ship mortgages: Powers of the mortgagee
Ship mortgages are legal instruments which allow the shipowners to secure their financings by using their ship as collateral. A ship mortgage creates a fixed security interest which attaches to the ship in rem meaning that such interest will survive a change of ownership of the ship and will confer more than just personal rights against the owner. The purpose of a ship mortgage is to enable the lender to sell the ship and use the sale proceeds to pay off the amounts due to it if the owner is in default. Therefore, a ship mortgage is considered the primary form of security in the context of a ship finance transaction.
The governing law of a ship mortgage will be the law of the title registry state (i.e. the jurisdiction in which the ship’s title is registered). The governing law of the mortgage does largely determine the powers of a mortgagee under such mortgage, so a financier needs to be satisfied that such rights, as well as the integrity of the ship registration regime itself, are sufficiently wide and robust to give it a reliable and enforceable fixed security over the ship. Consequently, a financier will often need to carry out legal due diligence on the laws of the proposed title registry state and will often seek a legal opinion from lawyers in the relevant jurisdiction as to the validity and enforceability of the ship mortgage.
Undeniably, the most important power granted to the mortgagee under a ship mortgage is the power to sell the ship. Jurisdictions vary as to the way in which the mortgagee's right of sale may be exercised. Some jurisdictions require the ship to be sold by a court sale (via a public auction) whereas others permit private sales as well as court sales. In England and certain other common law jurisdictions it is sometimes even possible to negotiate a sale privately but effect that sale through the court.
A court sale is attractive to a purchaser as a court order will normally clear the ship's title of all claims against the ship and will transfer them instead to the sale proceeds. The sale proceeds will then be held by the court and shall be paid to the ship's creditors once the merits of their claims, and the rankings of those claims, have been determined. This is the most important advantage of a court sale as it allows the ship to be sold before the claims of her various creditors have been considered, which in practice can be a lengthy process, and it also enables the buyer to take title over the ship free of any claims against it. This obviously makes more buyers keen on purchasing the ship as they will have the comfort that their asset cannot be further pursued by creditors of the previous owner. On the contrary, under a private sale effected by the mortgagee, the buyer will take title over the ship from the mortgagee subject to all claims then attaching to it, even if neither the owner nor the mortgagee is aware of them. In such cases, the mortgagee will often be asked to give a warranty as to clean title to achieve the sale. Most mortgages, however, will not be able to give this warranty, as they were not involved in the trading of the ship and cannot possibly confirm the existence of any liens or other security over the vessel. On this scenario, it is very likely that the buyer will seek in return to buy the ship with a substantial reduction in its price, so as to make up for the additional risks it is taking on.
In most jurisdictions, in addition to the power of sale, the mortgagee will also be entitled to take possession of the ship, if the owner is in default. This allows the mortgagee to direct the ship to a port of the mortgagee's choice and can be important in achieving a successful mortgage enforcement because the laws of the place of arrest will govern the enforcement procedure and determine the ranking of all competing claims on the ship. However, the disadvantage of taking possession as a mortgagee is that this renders the mortgagee responsible for paying the operating costs of the ship and may also expose the mortgagee to liability to the owner for any imprudent use of the ship.
Law Tutors Online, UK Law Tutor, UK Law Notes, Manchester Law Tutor, Birmingham Law Tutor, Nottingham Law Tutor, Oxford Law Tutor, Cambridgeshire Law Tutor, New York Law Tutor, Sydney Law Tutor, Singapore Law Tutor, Hong Kong Law Tutor, London Tutors, Top Tutors Online and London Law Tutor are trading names of London Law Tutor Ltd. which is a company registered in England and Wales. Company Registration Number: 08253481. VAT Registration Number: 160291824 Registered Data Controller: ZA236376 Registered office: Berkeley Square House, Berkeley Square, London, UK W1J 6BD. All Rights Reserved. Copyright © 2012-2024.
