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?

It is possible to create a security over a vessel mainly by way of mortgage or fiduciary transfer.

In a fiduciary transfer, legal title to the vessel is transferred to the creditor. The ownership is transferred back to the debtor upon discharge of the secured obligation. The debtor remains with physical possession of the vessel. Upon default, the creditor may take possession and consolidate ownership. The creditor is required to sell the vessel, by way of private auction or sale, to settle the secured obligation. Debts secured by fiduciary transfers are not subject to judicial recuperations.

In a mortgage, the mortgagee must, upon default of the owner, file a foreclosure action seeking to have the vessel sold at a public auction. The sale of the vessel is mandatory.

Most monetary obligations may be secured by a mortgage or fiduciary transfer, including contingent obligations. There is no standardised form for ship mortgages or fiduciary transfer deeds. Mortgage deeds are comprehensive documents and may comprise covenants and undertakings negotiated by the parties.

Required form

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

The Brazilian Commercial Code provides that a mortgage must be created by a public deed issued by a maritime notary. This requirement also applies to fiduciary transfers. Law 7,652/88 requires that encumbrances be registered with the Maritime Tribunal to be perfected. There is no standardised form for ship mortgages. Mortgage deeds are comprehensive documents that must include the amount of secured obligation, repayment dates, interest rates and description of the collateral.

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 Maritime Tribunal is responsible for maintaining general records of property and (mortgages and other encumbrances) over Brazilian vessels. Initial filing must be submitted to the Port Authority and include the mortgage deed and supporting documentation (ie, filing forms, tax clearance certificates, corporate documentation or payment of fees). The registration perfects the security and is deemed as a public notice to third parties. Prior to registration, the mortgage creates an ‘in personam’ obligation on the mortgagor towards the mortgagee but cannot be enforced against third parties.

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?

Brazilian Civil Code requires that mortgage deeds specify the amount of the secured obligations, repayment dates, the interest rates and description of the collateral. There is no need to file the underlying debt instrument or attach it to the mortgage deed.

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

Yes, the agent or trustee would act as mortgagee on behalf of the lenders. Enforcement would be carried out by the agent or trustee as mortgagee. However, the recognition of a trust is uncertain within Brazilian courts. A trustee would probably be treated as an agent holding interests in its name on behalf of third parties.

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?

No. The change of a lender should not affect the validity of the security to the extent that the transaction documents would not need to be amended or novated.

If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?

To assign its rights and obligations under a mortgage, the mortgagee needs to execute and file a mortgage amendment with the Maritime Tribunal. The mortgagor’s execution of the amendment 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 list of maritime privileged credits that may give rise to a maritime lien on a vessel is set out by the Brazilian Commercial Code and 1926 Brussels Convention on Maritime Liens and Mortgages.

The Brazilian Commercial Code lists maritime privileged credits or liens (ranking their priorities), including wages due for services provided to the vessel (including salvages and pilotage), port and navigation fees and taxes, payments to custodians and expenses with storage of the vessel, costs of the vessel and her belongings that have been incurred for her custody and conservation, master, officers and crew wages in relation to the last voyage, principal and premium of risk letters of credit taken by the master over the vessel’s hull, equipment or freights during the last voyage, amounts advanced as loan to the master or debts that the master has incurred during the last voyage to repair and pay the costs of the vessel during the last voyage, failures on the delivery of the cargo, insurance premiums over the vessel or freights, regular damages and everything related to the last voyage only, debts arising from the construction and repair of the vessel, unpaid purchase price.

The 1926 Brussels Convention also lists the maritime privileged credits or liens, which include judicial costs due to the state and expenses incurred to preserve the vessel or procure its sale, claims relating to the crew, remuneration for assistance and salvage, indemnities for collision or other accident of navigation and claims resulting from contracts or transactions necessary for the preservation of the vessel or the continuation of its voyage.

With respect to arrests, Brazil has not ratified the Conventions on the Arrest of Ships of 1952 and 1999. Vessels can generally be arrested on the basis of the Brazilian Commercial Code and the Code of Civil Procedure. Arrests can also occur based on the 1926 Brussels Convention, the Bustamante Code, the International Convention on Civil Liability for Oil Pollution Damage and the Assistance and Salvage Law (Law 7,203/84). Arrest orders may be based on either a maritime or other in rem lien (eg, securities) or ‘in personam’ obligation of a debtor.

The arrest of associated vessels depends on specific circumstances. In principle, an arrest based on in rem obligations (maritime or security liens) should not allow the arrest of other vessels. On the other hand, an arrest based on ‘in personam’ obligations of an owner may result in the creation of liens over any asset of a debtor.

What maritime liens rank higher than a mortgage lien?

According to the 1926 Brussels Convention: (1) mortgages rank after the maritime claims listed in the Convention and (2) national law may create other maritime privileged claims, provided it does not affect the rank of the mortgages. Therefore, the claims listed in the Convention and mortgages will have priority over the claims listed in the Brazilian Commercial Code. Where the Convention does not apply (ie, the flag state is not party thereto), a mortgage would probably rank after the claims listed in the Brazilian Commercial Code.

This response does not consider priority in the context of the insolvency proceedings (judicial recuperation and liquidation).

Non-mortgage liens

May non-mortgage liens be recorded over a vessel?

Other than security liens, only judgment liens may be recorded in the vessel’s ownership registration. Although recognised by statutes, the maritime liens described above may only be formally submitted to the maritime registry pursuant to a court order recognising them.

‘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?

Generally, a mortgage on foreign flag vessels should be recognised in Brazil and share the same priority as those on vessels registered under Brazilian laws.

In 2016, there was a case in the Courts of São Paulo State related to the recognition and enforceability of a Liberian law mortgage over a Liberian-flagged FPSO operating in Brazil.

Initially, the São Paulo Court of Appeals did not recognise the mortgage and denied the mortgagee’s rights of priority against a creditor that had arrested the FPSO based on a defaulted letter of credit. The rationale for the decision was the fact that Liberia is not a party to the 1926 Convention or the Bustamante Code.

This decision was then overturned by the Superior Court of Justice, which expressly stated that mortgages over foreign vessels, duly registered with a competent registry, are valid and must be upheld by Brazilian courts. We have not had any court precedent on this matter before this case.

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 foreign mortgage in Brazil, a mortgagee must first obtain a favourable foreign judgment or arbitration award, which is valid in Brazil after ratification by the Brazilian Superior Court of Justice.

An urgent interlocutory decision granted by a foreign court or arbitration tribunal against a Brazilian entity would be recognised and accepted by Brazilian courts without retrial or examination of the merits after ratification by a Federal Court with jurisdiction.

Once accepted, the mortgagee must bring a foreclosure case to the Federal Court where the debtor is based. Although a mortgage constitutes an in rem right, the mortgagee’s rights would be repaid through the proceeds of sale. A foreclosure sale would be carried out by an auction of the vessel after a judgment. After a court ordered detention and attachment of the vessel, the mortgagee may opt to:

  • take title to the vessel (in this case, the mortgagee must accept the value of the vessel as officially appraised and pay the mortgagor if that value exceeds the secured obligation);
  • procure a private sale (if approved by the court and on the terms and conditions determined by the court); or
  • wait for the judicial auction of the vessel.

 

The entire foreclosure proceeding may take over five years.

Sale by mortgagee

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

In a traditional mortgage, no, as the sale of a mortgaged vessel must occur after a judicial proceeding and follow one of the options above. All liens over the vessel would be discharged through the judicial sale.

Enforcement of a fiduciary transfer follows a different procedure. A mortgagee (ie, the creditor to the fiduciary transfer) may file a lawsuit to seek the seizure and private sale of the vessel. All liens over the vessel would not be discharged through the private sale (ie, these liens would remain with 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?

No, self-help remedies are prohibited in Brazil. Mortgagee rights must be pursued through a court proceeding.

Limitations on rights of self-help

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

Self-help remedies are prohibited in Brazil.

Duties to owner or third-party creditors

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

A judicial sale requires an appraisal of the vessel and, if the mortgagee elects to take title to the vessel, the mortgagee must accept the value of the vessel as officially appraised (and pay the mortgagor if that value exceeds the secured obligation). In a judicial sale, third-party creditors ranking ahead of the mortgagee must be paid first. Conversely, in a private sale under fiduciary transfer, the mortgagee must not accept a low price for the vessel (less than 50 per cent of the market value).