The International Shipping Register of Madeira (MAR) is a Portuguese white-list shipping register with an international focus based in Madeira (a Portuguese autonomous territory). MAR is a separate shipping register associated with the Madeira Free Trade Zone. Vessels registered with MAR fly the Portuguese flag (for further details please see "Madeira shipping register – legal innovation regarding mortgages and mortgagee rights").

Attracting banks

The Portuguese legislature aims to make MAR as attractive as possible to banks within the legal and ethical boundaries of a white-list shipping register. A keystone of this approach is to provide the best possible comfort to banks by protecting their rights as mortgagees.

The 2009 amendment to the ranking of liens, which saw mortgagee rights upgraded from 12th to third (behind only judicial costs and expenses borne in the common interest of creditors and salvage and assistance salaries), is an example of this approach. The amendment was consolidated by Portugal's 2012 withdrawal from the International Convention For The Unification Of Certain Rules of Law Relating To Maritime Liens And Mortgages 1926 in order to circumvent the convention's ranking, which continued to prevail over the new domestic ranking and therefore diluted the effect of the mortgage upgrade.

The possibility of choosing a foreign law to govern a mortgage is another example of the legislature's attempt to make MAR attractive to banks.(1) This provision was informed by the practical assumption that banks financing potential candidates to register with MAR would be mostly northern European entities accustomed to a standard set of rules and principles applied to their mortgages, and that a competitive effect would be obtained if they were allowed to keep those rules and principles intact instead of being subject to Portuguese law.

However, the majority of banks flagging ships with MAR declined to exercise that right or break the lex loci rei sitæ (law of the place where the property is situated) principle, instead insisting on being subject to Portuguese law. As a result, attention turned to a point of concern regarding the protection of mortgagee rights under Portuguese law.

Right of expurgação

Under Portuguese law, the sale of a mortgaged asset (including a vessel) does not require the mortgagee's consent, and as per the in rem effect, mortgagee rights remain attached to the asset.

However, Section 271 of the Civil Code (which applies to vessels) provides for a special right of termination of a mortgage by the purchaser, provided that it is not liable for the payment of obligations secured by the mortgage under the following terms:

  • Option A – the purchaser declares that it is ready to pay the mortgagee the full amount secured by the mortgage; or
  • Option B – the purchaser declares that it is ready to pay the mortgagee up to the value of the price paid to the mortgagor or, if no price was fixed, the estimated value of the vessel.

The exercise of this right requires judicial proceedings. After those proceedings have been completed, the court declares the mortgage to be defunct. This right is called an expurgação (purge). Exercising anexpurgação under Option A is unproblematic, as the mortgagee will receive the full amount of the secured obligations; exercising this right under Option B, in contrast, represents an unacceptable situation for banks.

From a bank's perspective, an expurgação under Option B risks that the mortgagor, in cooperation with the purchaser, could force the mortgagee to incur a loss in circumstances in which the vessel's value is less than the outstanding loan amount.

No record was found of this option being exercised, but once detected it became a factor in the decisions of banks regarding where to flag vessels.

Problem solved

Several legal advisers and players in the shipping industry lobbied the Portuguese government for a change in legislation to eliminate this problem.

The government quickly responded by passing Decree-Law 234/2015, which amended the MAR Registration Act (Decree-Law 96/89).

The introduction to Decree-Law 234/2015 states that:

"Within this context, one must, at once, remove an obstacle which has been preventing the registration of a relevant number of ships in MAR. Several foreign credit institutions have opposed the registration of ships when facing the right to the 'expurgação' as it is governed by Portuguese law which they say is an obstacle to the financing of those ships. Pursuant to those institutions, the right foreseen in paragraph b) of section 721 of the Civil Code allows a buyer of mortgaged assets to pay an amount inferior to the secured amount and, although judicial means can be activated, those institutions consider that the delays of such proceedings and the uncertainties about the mortgage terms are affected and, consequently, there are uncertainties about the solidity, sustainability and integrity of the credit secured by the mortgage. Therefore, this decree-law guarantees the mortgagee the full payment of the secured amounts in case of 'expurgação', by clarifying that the mortgagee's right is not affected by the faculties foreseen in paragraph b) of section 721 of the Civil Code, which, therefore, are not applicable to those mortgages."

Paragraph 8(14) of the MAR Registration Act now reads:

"On the cases foreseen in the previous paragraph (which are the cases where the parties opted to keep Portuguese law as applicable by not choosing a different law), the purchaser of the mortgaged assets may only exercise the right to the 'expurgação', foreseen in section 721 of the Civil Code, if such exercise guarantees the mortgagee the payment in full of all the rights and charges secured by the mortgage and paragraph b) of the said section is not applicable."

Under the decree-law, all mortgages executed for vessels registered in MAR after October 14 2015 are free from the potential obstacles created by the expurgação under Option B. This marks another important step in developing MAR as a competitive shipping register.(2)

Comment

MAR's think tanks continue their work to develop the shipping register and changes are expected to improve the rules regarding bareboat charter, which is one of the most productive sources of MAR's growing portfolio.

For further information on this topic please contact Carlos Costa e Silva at Barrocas Advogados by telephone (+351 21 384 3300) or email (ccs@barrocas.pt). The Barrocas Advogados website can be accessed at www.barrocas.com.pt.

Endnotes

(1) For further details please see "Madeira shipping register – legal innovation regarding mortgages and mortgagee rights".

(2) Decree-Law 234/2015 also introduced more flexible crew nationality requirements which reduced the minimum ratio of Portuguese, Portuguese-speaking and/or European crew members from 50% to 30%.

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