All questions

Security and enforcement

i Financing of contracts

There are two widespread mechanisms of financing new-build means of transport in Russia: through bank loans or through finance leasing.

In the first case, upon reaching the agreement and signing the appropriate instruments, the bank advances the amount of the loan either to the borrower directly or to the seller or builder of the respective means of transport as payment of the purchase price. Normally, the bank would fund only part of the purchase price with the remainder, on average 20–40 per cent, being pre-financed by the borrower itself. In most cases, the repayment of the loan and interest is secured by the mortgage or pledge of the respective means of transport, with loss and damage insurance placed in favour of the lender (jointly with the borrower), and with special arrangements in respect of the cash flow attributed to the item, channelled through a special account in the lender bank. In most cases, mortgage of the means of transport must be registered in the same registry where the title thereto is already registered; for ships, it is also possible to register them (and mortgages over them) in the registry of vessels under construction. The borrower becomes the owner of the respective item and starts to repay the loan.

In the second case, it is normally the finance leasing company or its SPV that becomes the owner of the ship, aircraft or rolling stock. Its purchase price is paid over time by the lessor (normally the item's long-term lessee or operator). When the lease payments are completed, the title to the item of lease passes to the lessee.

ii Enforcement

Russian legislation with regard to pledge enforcement has undergone substantial change over the past few years. Principal new trends have been the increase of protection of mortgagees' rights and simplification of enforcement. Initially, enforcement of mortgages was only possible on the basis of a court judgment. However, it has recently become possible to enforce a mortgage out of court – by public sale, by private sale or by appropriation of the object of mortgage by the lender. In accordance with the current regulations, in order for the pledge or mortgage to be enforceable without applying to the court, the respective pledge or mortgage contract must be executed in notarial form (certified by the notary public at the signing) and enforcement may in such cases be effected on the basis of the notary's enforcement. The legislation is yet to be tested by practice, but the availability of this option shows substantial progress.

Rights of the mortgagees are highly ranked: for example, in bankruptcy, the registered mortgagee, although obliged to surrender mortgaged property to the receivers, is also entitled to receive up to 70 per cent of the proceeds of the sale (80 per cent if the creditor is a bank that lent money for the purchase or construction of the respective property). Claims from the side of the mortgagees of the ship are outweighed only by the claims secured by the maritime liens, by the shipbuilder's lien and claims for costs of wreck removal.

iii Arrest and judicial sale

Russia is a party to the 1952 International Convention Relating to the Arrest of Sea-Going Ships and to the 2001 Cape Town Convention on International Interests in Mobile Equipment. Specific provisions concerning ship arrest on the basis of maritime claims are also contained in the Merchant Shipping Code of Russia (with the wording of respective provisions being based on the 1999 International Convention on the Arrest of Ships rather than the 1952 International Convention for the Unification of Certain Rules Relating to the Arrest of Seagoing Ships). Arrest of a ship or aircraft (or of any other property of the debtor or defendant) can also be applied for as a security measure or as a preliminary security measure within the frames of judicial procedure. In such case it will be governed by the Code of Civil Procedure and Code of Arbitration Procedure (the latter regulates procedures in Russia's commercial courts, which are traditionally known as 'arbitration courts').

The primary purpose and focus of arrest on the basis of a maritime claim is to obtain security – sale pendente lite is not possible under Russian law. Ship arrest may be imposed by the ruling of a competent court or, in some cases of arbitration, on the basis of an application of a creditor. The court must consider such application within the next day, and if the arrest is granted the vessel will be forbidden to leave port or its other location by the bailiffs or the harbour master. The applicant should be prepared to provide guarantee against damages caused by wrongful arrest on its own initiative or upon the order of the court. The vessel may be released from arrest only if the owner or debtor provides a guarantee in a suitable format. Normally, the vessel may be arrested if it is owned or bareboat-chartered by the debtor under a maritime claim. A sister ship (a vessel owned by the debtor but not connected with the claim) may also be arrested. However, the 1952 Convention also provides for the possibility to arrest the vessel when the party responsible under the claim was merely the time-charterer of the ship.

OW Bunker

The recent collapse of OW Bunker, a major ship fuel supplier, raised a wave of claims and threats to arrest ships from the unpaid physical suppliers of fuel against the shipowners in many countries, including Russia. In some instances, shipowners that took delivery of the fuel have been time-charterers rather than owners or bareboat-charterers of the vessels in question, so the possibility of invoking the relevant provisions of the 1952 Convention was widely considered.

Procedure for judicial sales of ships or aircraft

Ships or aircraft may be sold on the basis of the court judgment ordering such sale or, as it was mentioned above, on the basis of the notary's endorsement, provided that originally the relevant mortgage or pledge contract was certified by the notary public. On the basis of the judgment, the court will issue an execution order, pursuant to which the bailiffs shall impose an executional arrest and appoint a specialised organisation to make the arrangements for the sale. Notification of the sale shall be published and the court will also send notices of the intended sale to the registered owners and mortgagees. As a rule, the sale will be effected by way of public auction. If the sale is not successful, the creditor that initiated the sale may be entitled to take the title to the vessel, in which case 10 per cent will be deducted from the initial sale price of the vessel (25 per cent if sales repeatedly fail) and this will be set-off against claims to the owner. Proceeds of the sale shall first be used to cover the costs of the sale and related procedures, then the interest accrued and then the principal amount of the debt.

All procedural issues related to enforcement shall be governed by Russian law.