Ship mortgages and other liens over vessels

Types 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?

There are no specific types of ship mortgages prescribed in Chinese law. Ship mortgages exist as a general means to secure fulfilment of lawful obligations. In principle, contingent obligations can be secured by a ship mortgage, provided that the obligation to be secured actually exists.

Required form

Give details of any required form for ship mortgages in your jurisdiction.

Where a mortgage is established in respect of a vessel of 20 tons of gross tonnage or more, the following documents are required by the Regulations on the Registration of Vessels (2014 Revision):

  • a written application signed by both mortgagee and mortgagor;
  • a certificate of vessel’s ownership or shipbuilding contract; and
  • a contract of ship mortgage and a principal contract.

In addition, if there is another mortgage that has already been established on a vessel, the relevant certificate must also be submitted.

Where a mortgage is established on a jointly owned vessel, the joint owners shall, in addition, submit a document evidencing the agreement by the joint owners holding more than two-thirds of shares of the vessel.

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?

The local branches of the MSA, as the vessel registers, maintain the register of ship mortgages. The following information is recorded in the register of a branch of the MSA with respect to a single ship mortgage:

  • the name and address of the mortgagee and the mortgagor of a vessel;
  • the name and nationality of the mortgaged vessel and the authority that issued the certificate of ownership and the certificate number thereof; and
  • the amount of debt secured, the interest rate and the period for repayment of the debt.

The effect of registration of a ship mortgage is that no ship mortgage shall be effective against a third party acting in good faith unless duly registered.

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?

Yes. The total amount of the mortgage shall be stated in the certificate of ship mortgage issued by a branch of the MSA and be recorded in the register of the branch of the MSA. The period for repayment of the debt shall be the same as contained in the contract of ship mortgage and the principal contract and be indicated in the certificate of ship mortgage issued by the branch of the MSA, as well as being recorded in the register of the branch of the MSA. The underlying contract of the ship mortgage and the principal contract shall be attached to the recorded mortgage.

Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?

A ship mortgage cannot be registered in the name of an agent or trustee for the benefit of multiple lenders. The name of the actual mortgagee or mortgagees identical to that of those contained in the principal contract and the contract of mortgage must be recorded.

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?

The ship mortgagee cannot be an agent or trustee for a lending syndicate because current Chinese law does not recognise the validity of a syndicate. If a portion of the underlying debt is to be transferred among existing lenders or to a new lender, the supporting document or documents, such as a contract of transfer of the creditor’s right, must be filed with the 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 mortgagee’s interest in the mortgage can be transferred to a new lender or other third person and consequently the transferee acquires the transferred mortgage interest. However, the transferee is required to apply for registration of the transferred mortgage by filing an application together with the relevant underlying contract that stipulates the transfer of the creditor’s right from the mortgagee to a new lender with the branch of the MSA at which the mortgage is registered. Without such registration, the transfer of mortgage interest cannot act against a third party acting in good faith.

When the mortgagee transfers its interest, the mortgagor’s consent is not required, but the mortgagee must notify the mortgagor of the transfer.

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?

As defined in article 21 of the Chinese Maritime Code, a maritime lien is the right of the claimant to take priority in compensation against the shipowners, bareboat charterers or ship operators with respect to the vessel that gave rise to the claim. The following maritime claims are secured by maritime liens as provided for in article 22 of the Maritime Code:

  • payment claims for wages, other remuneration, crew repatriation and social insurance costs made by the master, crew members and other members of the vessel’s complement in accordance with the relevant labour laws, administrative rules and regulations or labour contracts;
  • claims in respect of loss of life or personal injury occurring in the operation of the vessel;
  • payment claims for the vessel’s tonnage dues, pilotage dues, harbour dues and other port charges;
  • payment claims for salvage payment; and
  • compensation claims for loss of or damage to property resulting from a tortious act in the course of the operation of the vessel.

However, as provided for in article 22 of the Chinese Maritime Code, claims for oil pollution damage caused by a vessel carrying more than 2,000 tons of oil in bulk as cargo that has a valid certificate attesting that the vessel has oil pollution liability insurance coverage or other appropriate financial security are not secured by a maritime lien. As a matter of construction, other claims that are secured by liability insurance coverage or other appropriate financial security are also not secured by a maritime lien.

These maritime liens do give rise to a right to arrest a vessel. In accordance with article 28 of the Chinese Maritime Code, a maritime lien shall be exercised by application to the court for arresting the ship.

A maritime court may, upon application filed by a maritime claimant, arrest another vessel that, when the arrest is effected, is owned by the shipowner, demise charterer, time charterer or voyage charterer of the offending vessel who is liable for the maritime claim, except for claims with respect to ownership or possession of a vessel, in which case only the vessel in dispute is subject to arrest.

What maritime liens rank higher than a mortgage lien?

According to article 25 of the Chinese Maritime Code, a maritime lien shall have priority over a possessory lien, and a possessory lien shall have priority over a ship mortgage. Therefore, maritime liens and possessory liens rank higher than a ship mortgage. A possessory lien is limited to the right of a vessel repairer and shipbuilder over the vessel repaired or built on the condition that when it exercises possessory lien the vessel is in its possession.

Non-mortgage liens

May non-mortgage liens be recorded over a vessel?

Non-mortgage liens may not be recorded over a vessel in the vessel’s registry under Chinese law.

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?

In principle, mortgages on foreign flag vessels will be recognised in China. In particular, in judicial practice in China, where a mortgage on a foreign-flag vessel was confirmed by an enforceable legal instrument such as a civil ruling issued by a foreign court or a foreign arbitral award, and if this legal instrument has been recognised by a Chinese court, the mortgage will be 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?

To enforce a mortgage on a vessel, the mortgagee shall apply to a maritime court for arrest of the vessel and then apply to the court for an auction sale of the vessel.

There is no concept of interlocutory sale under Chinese law. According to article 70 of the Supreme Court’s Interpretation on Several Issues Concerning the Application of Guarantee Law, where the act of the mortgagor may devalue the mortgage and the mortgagee’s request for reinstatement or security is rejected, the mortgagee is entitled to demand that the debtor repay the debt or request to enforce the mortgage in advance. Theoretically, therefore, interlocutory sales of vessels are permitted. In judicial practice, however, such sales seldom occur.

Usually, a judicial sale will take at least three months, mainly depending on how many rounds of auction it takes for the vessel to be sold. A ship as collateral may be sold if two rounds of auctions have been abortive. The sale price shall not be lower than 50 per cent of the assessed value.

The auction costs, including the auctioneer’s fees, auction venue rental, security cost, watch-keeping fees, survey fees, evaluation fees and berthing fees, etc, are calculated on the basis of the actual costs incurred.

Sale by mortgagee

May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?

The mortgagee is not allowed to sell the mortgaged vessel privately, nor will a private sale of a mortgaged vessel discharge possessory liens or maritime liens over the vessel.

Default under mortgage

Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?

There is no such provision in current Chinese law. However, where the mortgagor fails to pay its due debts, the court will support the claim of the mortgagee that he or she may seek preferential payments from the auction or sale of the mortgaged ship in accordance with the Chinese Maritime Code.

Limitations on rights of self-help

What are the limitations on rights of self-help by a mortgagee?

Current Chinese law does not have any provision for the right of self-help by a mortgagee.

Duties to owner or third-party creditors

What duties does a mortgagee owe to an owner or third-party creditors?

There is no such provision in current Chinese law. In legal theory, a mortgagee has the obligation not to interfere with the normal operation of the mortgaged vessel conducted by the owner, a third-party operator or bareboat charterer.