Considerations for lease financing companies, charterers and lenders

In March 2013 the Marshall Islands Nitijela passed the Maritime (Amendment) Act (No.1), 2013 which amended certain portions of the Marshall Islands Maritime Act, 1990 and has implications and opportunities for those involved in the vessel lease financing industry. This change to Marshall Islands law may be of particular interest in Asia where lease financing has grown to play a key role in international vessel financings, especially in recent years.

In summary the new law allows for a vessel “financing charter” to now be recorded in the Marshall Islands with the Marshall Islands Maritime Administrator. Upon recording the financing charter will be treated in essentially the same way as a preferred ship mortgage and the lessor (as ship owner) will be granted the status of a secured party. In other words the lessor (ship owner) will have the benefit of being treated in much the same way as a mortgagee is treated in relation to a Marshall Islands preferred ship mortgage.

This concept may seem familiar to those involved in aircraft and equipment leasing transactions but it is a relatively new concept in the world of vessel financings. There has long been a concern in relation to vessel lease financings that a court or other authority may deem a charterer to be in fact the true owner of the vessel under a bareboat charter used in connection with a vessel financing. If this were to occur the lessor as ship owner would have limited remedies available to it for example in the case of insolvency proceedings in some jurisdictions. Although many would assume that documented ownership of the vessel through an entity registered in the flag state of the vessel is sufficient by itself to show true ownership and protect the lessor’s interests, the concern nevertheless exists of a lessor/ship owner losing its interest in a vessel due to a recharacterization of the demise charter as in effect merely a form of security agreement.

A “financing charter” is defined in the new law as “a contract in the form of a demise or bareboat charter, regardless of duration, between the documented owner and the finance charterer of the entire vessel, which contract is agreed by the parties to be or is determined in judicial or arbitral proceedings to create in favor of the documented owner a security interest in the vessel granted by the finance charterer.” In order for a financing charter to be recorded in the Marshall Islands it must be dated, signed and acknowledged by the documented owner and the charterer and must include the name and official number of the vessel, the names and addresses of the documented owner and charterer, and the aggregate of the nominal amount of all charter hire payments and purchase option amounts payable (or which may become payable) under the charter, exclusive of any interest, indemnities, expenses or fees.

Leasing companies, charterers, ship owners and lenders should take note of this new legislation and review the new protections afforded to lessors of Marshall Islands vessels. Interested parties should discuss with their counsel how best to take advantage of the opportunities presented as a result of this new law in the Marshall Islands.