Ship mortgages and other liens over vesselsTypes of ship mortgage
What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardised forms?
The Marshall Islands follows the American model of ship mortgages, unifying the essential features of a mortgage grant with covenants, representations, warranties, events of default and other provisions. While there are requirements to establish a preferred mortgage, there is no required form as such. A Marshall Islands preferred mortgage is flexible enough to secure any obligation of the mortgagor debtor. A preferred mortgage may secure a term loan, future advances and contingent obligations, including guaranties, swap obligations and other obligations, under present commitments or agreements (the Preferred Ship Mortgage and Maritime Liens Act, section 309).
Under the financing charter provisions enacted in the Marshall Islands in March 2013, the Marshall Islands registry became the first registry to permit the registered owner in a financing charter to record the financing charter as a type of preferred mortgage. These provisions, as further amended, allow the registered owner, typically a financial institution or affiliate, to hold title and be deemed a preferred mortgagee up to ‘the maximum aggregate of the nominal amount of all charter hire payments, termination payments, and purchase or put option amounts which could under any circumstances be due and payable under such financing charter, exclusive of any interest, indemnities, expenses, or fees’ (the Preferred Ship Mortgage and Maritime Liens Act, section 302A).
Section 302A of the Preferred Ship Mortgage and Maritime Liens Act permits financing structures similar to those used for aircraft and railcar net lease financing. To date, numerous charters have been registered as preferred mortgages in the Marshall Islands under this law, with the vast majority of these involving charterers in Asia and the rest involving charterers in Europe and North America.Required form
Give details of any required form for ship mortgages in your jurisdiction.
There is no required form of Marshall Islands preferred mortgage, as such. Marshall Islands mortgages follow the American model, similar in some respects to what a red-ensign system might include in a deed of covenants. There are, however, elements that must be included in a Marshall Islands mortgage for it to be deemed a ‘preferred mortgage.’ These elements are more particularly described in the Preferred Ship Mortgage and Maritime Liens Act.Registration of mortgages
Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the effect of registration?
All instruments of ‘sale, conveyance, hypothecation, mortgage or assignment of mortgage of any vessel’ as well as financing charters are recorded and maintained in the central office of the Marshall Islands Maritime Administrator, in the United States, or by its duly authorised agent elsewhere (the Preferred Ship Mortgage and Maritime Liens Act, sections 302(1) and 302A(1)). A vessel mortgage or financing charter is not valid against any person other than the mortgagor or the charterer, his heirs or devises and persons having actual notice thereof until the mortgage or financing charter is so recorded (see the Preferred Ship Mortgage and Maritime Liens Act, sections 302(1) and 302A(1)). The Maritime Administrator or its duly authorised agent shall record each such vessel mortgage and financing charter in an index showing, among other information, the name of the vessel, the names of the parties, the date and time that the vessel mortgage or financing charter was received for recordation and the amount or amounts secured (see the Preferred Ship Mortgage and Maritime Liens Act, sections 302(3)) and 302A(1)). As a practical matter, the functions of the Maritime Administrator are delegated to and performed by the Commissioner of Maritime Affairs and various deputy commissioners in New York, London and elsewhere around the world. However, the central repository of all document filings related to vessels is in the United States.
Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt instrument be filed with or attached to the recorded mortgage?
Section 302(3)(e) of the Preferred Ship Mortgage and Maritime Liens Act requires that a mortgage state ‘the amount or amounts of the direct or contingent obligations [. . .] that are or may become secured by the mortgage.’ In the case of revolver facilities or committed facilities not fully drawn at closing, the mortgage may either be stated as the maximum amount that may be outstanding at any time or as the ‘aggregate of all possible advances’ (the Preferred Ship Mortgage and Maritime Liens Act, section 309). Only indebtedness incurred on or prior to the maturity date or date of termination of a preferred mortgage made ‘pursuant to agreement’ shall retain its status and ranking as a preferred maritime lien, and a preferred mortgage made ‘by agreement’ must set forth, in addition to other terms and conditions, the maturity date or a statement of the date of termination if it is other than the maturity date (see the Preferred Ship Mortgage and Maritime Liens Act, section 309). There is no stated requirement to attach and file a copy of the agreement creating the obligation secured. However, as a matter of practice, parties do normally attach the form of or a copy of the executed note, credit facility, guaranty or other evidence of the secured obligation.
Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?
Mortgages are generally registered in favour of a security trustee acting on behalf of lenders in all transactions in which more than one lender is or may become party to the credit agreement that the mortgage is intended to secure.Filings on transfer
If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender?
By use of the security trustee, transfers of the underlying debt positions need not be registered in the Marshall Islands registry.
If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?
The filing of an instrument transferring the mortgagee’s interest is not required to maintain the validity of the mortgage, but should be done to avoid difficulties and delays in establishing the assignee’s right to foreclose on the mortgage at some future time. Marshall Islands law does not require the consent of the mortgagor for the assignment of a mortgage, but the mortgagor and mortgagee may agree that the mortgagor's consent is required.Maritime liens
What other maritime liens over vessels are recognised in your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?
The Preferred Ship Mortgage and Maritime Liens Act recognises certain maritime liens over vessels, including, among others, maritime liens for damages arising out of tort, crew's wages, general average, salvage, necessaries and certain other expenses, fees and costs (eg, the Preferred Ship Mortgage and Maritime Liens Act, sections 318 and 319).
Other than in the case of vessels operating only in the Marshall Islands, it would be highly unusual to arrest a Marshall Islands- or foreign-flagged vessel under the jurisdiction of the Marshall Islands High Court. It is doubtful that any significant number of Marshall Islands-flagged vessels engaged in foreign trade ever call at the Marshall Islands during their service life.
A maritime lien creditor's ability to arrest and foreclose on a vessel in satisfaction of a lien on or an amount owed in respect of an associated or sister vessel will depend on the law of the jurisdiction in which the vessel is arrested, the nature of the lien and the relationship between the vessels.
What maritime liens rank higher than a mortgage lien?
Although rankings may vary from jurisdiction to jurisdiction, section 318 of the Preferred Ship Mortgage and Maritime Liens Act, which may or may not apply depending on where lien enforcement is sought, states that a preferred mortgage would have priority over all claims except preferred maritime liens for:
- damages arising out of tort;
- certain ‘unpaid tonnage taxes, fees, penalties and other charges' (the Documentation and Identification of Vessels Act, section 238(3));
- crew's wages;
- general average;
- salvage (including contract salvage); and
- ‘expenses and fees allowed and costs taxed by the court'.
In addition, and depending on the jurisdiction in which lien enforcement is sought, any maritime lien claim for necessaries against a vessel could have priority over or be subordinate to the lien of a preferred mortgage on such vessel regardless of when the preferred mortgage was recorded.
As between mortgages, the rule is ‘first in time, first in right,’ subject to any consensual subordination or intercreditor arrangement between mortgagees.Non-mortgage liens
May non-mortgage liens be recorded over a vessel?
Only preferred mortgage maritime liens can be recorded against vessels in the Marshall Islands registry. There is no facility or procedure for filing evidence of any other type of lien, maritime or otherwise, against a vessel. In practice, lawyers may file charges in a company’s register or file Uniform Commercial Code financing statements against a foreign owner. Such filings are only in the nature of ‘belt and braces’, and are usually not expected to be relied upon.‘Foreign’ flag vessels
Will mortgages on ‘foreign’ flag vessels be recognised in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?
Section 317 of the Preferred Ship Mortgage and Maritime Liens Act provides that foreign mortgages, hypothecations or similar charges ‘created as security upon any documented foreign vessel’ are also recognised in the Marshall Islands courts as ‘preferred mortgages’ if they are ‘duly and validly executed and registered’ under the laws of the nation in which the foreign vessel’s ownership is documented. Marshall Islands law does not distinguish between preferred mortgages on Marshall Islands vessels and foreign preferred mortgages on foreign vessels either in terms of mortgage foreclosure procedures or in the ranking and priority of liens. Differences might arise, however, depending on the jurisdiction in which the liens arose. This goes more to the question of whether a maritime lien is recognised in the place it is claimed to have arisen, such as a bunker lien, which is not universally recognised.Enforcement of mortgages
What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?
Other than in the case of vessels operating only in the Marshall Islands, it would be highly unusual to arrest or foreclose on a Marshall Islands- or foreign-flagged vessel under the jurisdiction of the Marshall Islands High Court. It is doubtful that any significant number of Marshall Islands-flagged vessels engaged in foreign trade ever call at the Marshall Islands during their service life.Sale by mortgagee
May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?
The Preferred Ship Mortgage and Maritime Liens Act is silent on whether a mortgagee may sell a vessel privately in the Marshall Islands and what effect that would have on claims against the vessel. Section 318 of the Preferred Ship Mortgage and Maritime Liens Act provides that the sale of a vessel in an in rem suit in the Marshall Islands High Court would terminate all pre-existing claims on the vessel. The proceeds would be applied in payment of claims of creditors.
Section 316(2) of the Preferred Ship Mortgage and Maritime Liens Act does provide that a preferred mortgage on a Marshall Islands vessel may be enforced ‘in rem in Admiralty or otherwise in any foreign country in which the vessel shall be found’ and defers to the enforcement procedures in the country of arrest.
Generally speaking, a vessel will be ‘free and clear’ of all liens and claims whatsoever following an arrest and foreclosure sale in a public auction overseas. In the United States it is possible, but highly unusual outside of the bankruptcy context, for a mortgagee to arrange the sale of a vessel privately after arrest subject to confirmation by a federal court. It is unclear at best whether such sales, even if valid in the United States, would be given wide recognition in other countries.Default under mortgage
Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?
Section 316 of the Preferred Ship Mortgage and Maritime Liens Act provides that the lien of a preferred mortgage may be enforced in rem against a vessel in the Marshall Islands courts and also provides for in personam action against a shipowner on default of a preferred mortgage on a Marshall Islands vessel. This section also specifically permits the initiation of in rem proceedings in foreign courts. Any request for the appointment of a receiver would be grounded in the law of the forum in which the vessel is arrested or there is jurisdiction over the person of the shipowner. So, for example, a Marshall Islands vessel might be arrested in the United States under 46 USC section 31325(b)(1) and a US District Court, acting under 46 USC section 31325(e)(1), might ‘appoint a receiver and authorize the receiver to operate the mortgaged vessel’.Limitations on rights of self-help
What are the limitations on rights of self-help by a mortgagee?
Most nations insist on the sale of arrested vessels by or through specialised courts, admiralty or otherwise, as a predicate to the discharge of all liens and encumbrances. Resort to self-help remedies as an aid in advance of foreclosure has long been in use in many countries in the enforcement of ship mortgages, including Marshall Islands preferred mortgages. Inasmuch as Marshall Islands law adopts the non-statutory general maritime law of the United States (see the Maritime Administration Act, section 113), the exercise of self-help remedies pursuant to a mortgage cannot breach the peace.Duties to owner or third-party creditors
What duties does a mortgagee owe to an owner or third-party creditors?
Marshall Islands law states the notice requirements for the arrest and foreclosure of vessels by the Marshall Islands High Court. Section 316(1) of the Preferred Ship Mortgage and Maritime Liens Act provides that:
In addition to any notice by publication, actual notice of the commencement of suit shall be given by the libellant, in such manner as the Court directs, to the Master, other ranking officer, or caretaker of the vessel, and to any person who has recorded a notice of claim of an undischarged lien upon the vessel, unless after search by the libellant satisfactory to the Court such person is not found within the [Marshall Islands]. Failure to give such notice shall not constitute a jurisdictional defect, but the libellant shall be liable to such person for damages in the amount of his interest in the vessel terminated by the suit.
The provision does not indicate where the libellant might search for any recorded notice of such a claim, but the Preferred Ship Mortgage and Maritime Liens Act, which provides for the registration of vessels and recordation of mortgages, does not provide for the recordation of claims of liens.