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 UK statutory forms of mortgage generally fall into two categories, those securing ‘principal sum and interest’ only and those securing an ‘account current or other obligation’. Ship mortgages can be granted by an owner to secure their own obligations whether as principal debtor or as guarantor of another party’s obligations, although where a third party granting a ship mortgage is a UK company, lenders should ensure that the English law corporate benefit tests are met. Because principal sum and interest mortgages will not secure contingent or other liabilities beyond principal and interest payable under the loan, it is ‘account current or other obligation’ mortgages that are usually used in ship finance transactions. The current pro forma UK statutory mortgages are issued by the MCA. These contain limited information, and although English statute and common law provides mortgagees with a number of general rights if the owner defaults (such as the right to take possession of the ship, the right of sale, the right to appoint a receiver, the right to foreclose and the right to arrest the ship), it is usual that a lender will also require that a deed of covenants ‘collateral’ to the ship mortgage be executed. This will set out the lender’s rights and powers in more detail. The deed of covenants is not registrable with the MCA. However, if the owner is a UK company, the deed of covenant, together with the ship mortgage, must be registered at Companies House to ensure the lender’s priority (see question 17).Required form
Give details of any required form for ship mortgages in your jurisdiction.
The Merchant Shipping Act states that a registered ship mortgage must be in one of the forms prescribed by or approved under registration regulations and published on the MCA website: www.dft.gov.uk/mca.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 register of mortgages over UK ships is the responsibility of the centralised Registry of Shipping and Seamen in Cardiff, Wales (the Registry). Filings are made to the Registry.
A mortgage creates a fixed security over the ship, which attaches to the ship in rem. The mortgage will survive a change of ownership. It entitles the lender to sell the ship and use the sale proceeds to pay off the amount owing to it if the owner is in default. Under the Merchant Shipping Act every registered mortgagee shall have power, if the mortgage money or any part of it is due, to sell the ship or share in respect of which he or she is registered, and to give effectual receipts for the purchase money.
Mortgages are registered in the order in which they are produced to the registrar for the purposes of registration. Registration gives the mortgagee higher priority over unregistered mortgagees. This is irrespective of whether the unregistered mortgage was created first and is irrespective of knowledge. Where more than one mortgage is registered against the same ship or share, the priority of the mortgages between themselves shall be determined by the order or time in which the mortgages were registered, the earliest registered mortgage having priority.
Failure to register a mortgage at the Registry does not render the mortgage void. However, an unregistered mortgage will be an equitable mortgage and an unregistered mortgagee will not have priority over a subsequent registered mortgagee (see question 17 regarding the position if there is a failure to register a mortgage or charge against a UK company at Companies House).
Under English law, any person who is an intending mortgagee under a proposed mortgage may notify the registrar of the intended interest, and the registrar shall record that interest. This is known as a ‘Notice of Mortgage Intent’ (form MSF 4739). A priority notice has effect for a period of 30 days. If the mortgage is executed and registered within 30 days and during that time another mortgage has been registered, the mortgagee with the priority notice will take priority over the other mortgage even though it has been registered first.
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?
In rare circumstances where the ‘principal sum and interest’ statutory mortgage is used, it is necessary to state the amount of the loan. Neither the total amount of the mortgage nor the maturity date need be stated in the ‘account current’ mortgage.
It is only the original mortgage instrument that must be presented when registering the mortgage with the Registry - neither the underlying debt instrument nor the deed of covenants need to be filed or attached to it. The Registry will endorse the mortgage with the date and time of its registration and it will then be returned to the mortgagee.
Where the owner is a UK company, the mortgage and deed of covenants should also be registered with Companies House within 21 days of creation of the charge. A copy of the security document will be placed on the register at Companies House and will be open to inspection by search against the company. A failure to register with Companies House within this time limit renders the charge void against a liquidator, administrator or any creditor of the company.
Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?
Yes, the Registry will accept for registration of a mortgage in favour of an agent or trustee (or, under English law, more commonly known as a security trustee) for the benefit of multiple lenders.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?
English law has well-established principles of trust and agency. If a syndicate of banks have put a trust structure in place whereby one of those lenders acts in a separate capacity as security trustee for itself and the other syndicate members, then for as long as the security trustee remains appointed in this capacity, security will not need to be amended if any of the syndicate banks (including the security trustee in its separate capacity as lender) sells or otherwise transfers its loan commitment to another lender.
If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?
The UK statutory form of mortgage can be transferred to a new mortgagee if the outgoing mortgagee completes and signs the form of transfer contained in the statutory mortgage and lodges this with the Registry. The Registry would not require evidence that the mortgagor has consented to this transfer. However, the loan documentation may have been negotiated in such a way that the lender or lenders may have to seek the borrower’s consent to any transfer of commitment or of the underlying security. If the lenders in question also benefit from a deed of covenants this will need to be transferred to the new security trustee (and if the transfer is by way of a novation, details of the amendment filed with Companies House for UK borrowers).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?
Under English law, there are five main categories of maritime lien:
- salvage remuneration;
- damage done by a ship;
- master and crew wages;
- master’s disbursements; and
- bottomry and respondentia (largely redundant).
These claims give rise to an action in rem against a ship and a right to arrest a ship.
Maritime liens operate as a charge on the ship that will follow the ship notwithstanding a change of ownership. This is so even where a purchaser is a bona fide purchaser for value without notice of the claim. As maritime liens survive the sale of a ship, this may operate to allow the arrest of a ship even if it has changed ownership. This is because the lien attaches to the ship at the time the cause of action arises and will remain attached until satisfied or time-barred.
It is also possible to arrest a sister ship of a ship that is subject to a maritime lien if the owner of the sister ship was the owner or demise charterer or bareboat charterer, or in possession or control of that ship, when the cause of action arose in relation to the defendant ship; and that person or entity is also the beneficial owner of all the shares in the sister ship when the claim is commenced.
The Senior Courts Act 1981 sets out a list of maritime claims that give rise to a statutory right of action in rem against a ship. These are commonly referred to as statutory liens and these also give rise to a right to arrest a ship.
What maritime liens rank higher than a mortgage lien?
Claims for all of the maritime liens set out in question 21 will rank higher than a registered mortgage, even if they arise after the mortgage has been created or registered. A possessory lien (eg, a shipowner’s right to retain possession of cargo until moneys owed to it by the ship’s charterer have been paid) will also rank higher than a mortgage lien.
Typically, a mortgage will have priority over statutory liens unless a claim has been made and a writ in rem has been issued against the ship prior to the date of the mortgage.Non-mortgage liens
May non-mortgage liens be recorded over a vessel?
Non-mortgage liens may not be recorded or registered over a ship under English 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?
Yes, in the UK, mortgages on ‘foreign’ flag ships are recognised. The priority of the foreign mortgage will be the same as if it had been a similar mortgage over a UK-flagged ship.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?
If the owner is in default under the mortgage documents, the mortgagee has the right to apply to the court for the arrest and sale of the ship if it is located within UK territorial waters. The Admiralty Court in England and Wales has jurisdiction over all ships in UK territorial waters irrespective of their flag.
To arrest the ship, the mortgagee must issue its claim in the Admiralty and Commercial Court Registry. The claim form must then be served by fixing it on the ship. Usually the mortgagee will apply for the issue of a warrant of arrest at the same time as issuing its claim. For the court to issue a warrant of arrest the mortgagee must file an affidavit setting out, among other things, the details of the mortgage and the default in payment by the owner. The mortgagee must also provide an undertaking to meet the costs of the Admiralty Marshal. Upon receipt of the application and the payment of the fees, the warrant of arrest will be issued and the Admiralty Marshal will serve the warrant of arrest. After the arrest, the ship remains in the custody of the Admiralty Marshal until it is released or sold by the court.
The mortgagee may make an application to the court for an order for sale. Once the order has been made, the ship will be valued and ship brokers will be instructed to advertise the sale in the trade press. Potential buyers will usually inspect the ship and make sealed bids. The ship will then be sold for the highest bid (if the mortgagee finds a buyer privately, the court may, in exceptional circumstances, allow for the ship to be sold to that buyer, though recent case law has further limited the scope of such ‘private’ sales). Once the ship is sold, the proceeds of sale are paid into court. The Admiralty Marshal will submit his or her expenses and apply for leave to pay these expenses from the fund in court. The mortgagee will then apply for judgment for an order for the payment out of the proceeds of the court.Sale by mortgagee
May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?
Yes, under English law a ship may be sold through the court or privately by the mortgagee pursuant to the powers given to it under the mortgage documents. The private sale by the mortgagee will not discharge liens over the ship unless they are discharged from the proceeds of sale.Default under mortgage
Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?
Yes; however, this method of enforcement is very rarely used in practice.Limitations on rights of self-help
What are the limitations on rights of self-help by a mortgagee?
See question 14 regarding the lender’s powers set out in the deed of covenants collateral to the mortgage.Duties to owner or third-party creditors
What duties does a mortgagee owe to an owner or third-party creditors?
With regard to a private sale of a ship by the mortgagee, it will owe a duty to the owner to act in good faith, with reasonable skill and care and must take all reasonable steps to obtain the best price reasonably obtainable for the ship. Mortgagees do not owe duties to unsecured creditors.