- Financing and Security - General
In a ship finance deal, a lender advances money to a borrower to assist them to build or buy a new vessel. Alternatively, the money may be advanced in order to refinance existing indebtedness or undertake repairs.
As well as entering into loan documentation in respect of the lend, the lender will undoubtedly want to take security over the vessel to ensure that in the event the borrower breaches any of its obligations to the lender, the lender will have a right to exercise a number of rights and remedies against the borrower.
Typical documentation involved in a marine financing transaction can therefore include:-
1.1 Loan Agreement
A Loan Agreement is a contract entered into between the lender and the borrower which stipulates the terms and conditions associated with a financing transaction. The terms of the loan and the type of facility offered by the lender will differ depending on the circumstances. However, before committing to the loan itself, the lender will generally look for a large amount of information and documentation in respect of both the borrower and the vessel to be made available to them and their legal representatives.
1.2 Ship Mortgage
Importantly, statute provides for the creation of a mortgage over a vessel under the Merchant Shipping Act 1995. A Ship Mortgage is therefore a security document and accordingly, if the borrower fails to repay the debt, the mortgage holder is entitled to sell the vessel.
1.3 Deed of Covenant
It is impossible to include the usual undertakings contained in a charge or mortgage in the form of Ship Mortgage prescribed by statute in the UK. Accordingly, it has become common practice to set out such undertakings in another document, which is collateral to the Ship Mortgage. This document is generally known as a Deed of Covenant. Generally, a Deed of Covenant will provide:
1.3.1 That the borrower will undertake to repay the loan in accordance with the terms specified in the Loan Agreement;
1.3.2 That the borrower will mortgage the vessel, to ensure that, in the event the statutory Ship Mortgage is unenforceable, the mortgage created by the Deed of Covenant will constitute a valid charge on the vessel;
1.3.3 That the borrower has an obligation to insure the vessel. The Deed will often set out detailed provisions in this respect;
1.3.4 It may also include an assignment of insurances and earnings to the lender. Such assignments will be granted to secure the performance obligations, the most important being repayment of the loan. In some circumstances, the lender may prefer to include these in a separate general assignment document instead;
1.3.5 The obligations and restrictions on the borrower including maintaining registration of the vessel, classification and safety requirements; and
1.3.6 The events of default under the loan and the lender’s powers in terms of enforcement of security.
The lender may obtain an undertaking to guarantee the payment of the loan or the performance of obligations from a third party. Where the borrower is a company, the obligation is often undertaken by a parent, other group company or principal shareholder. This means that in the event of default on the borrower’s part, the third party will assume the obligation for the loan (and/or the performance of specified obligations).
In some circumstances, the Guarantee itself may be secured over the assets of the Guarantor.
1.5 Share Charge
Where the borrower is a company, the lender will often require to take a charge over the shares in the borrower as additional security. The main advantage of taking security over the shares of the borrower is that on default, the lender will be able to sell the company which owns the vessel, rather than just the vessel itself.
- Ship Registration – Why Register?
There is no legal requirement to register a vessel with the UK Ship Registry which is maintained by the Maritime and Coastguard Agency ("MCA") although it is strongly recommended to allow the vessel to fly the national flag and therefore prove its nationality. The Register is split into four different parts depending on the type of vessel involved. Part 1 deals with Merchant and Pleasure Vessels; Part 2 with Fishing Vessels; Part 3 with Small Ships (under 24 metres); Part 4 relates to Bareboat Charter of foreign vessels.
Importantly, from a lender’s perspective, Part 1 registration is required in order to ensure that a mortgage can be duly registered on the MCA’s register of ship’s mortgages against the vessel.
The MCA procedure also allows registration of a "Notice of Mortgage Intent." This is a form which is signed by the borrower and once lodged with the MCA allows an intended mortgagee to notify the Registrar of its interest in a registered vessel. This interest is then recorded on the Register. The Notice has effect for 30 days. If the form is sent back to the Registry, it can be updated another two times (2x sets of 30 days). Thereafter, a new original needs to be signed by the proposed mortgagee and mortgager and submitted to the Registry together with the original expired Notice. There is a fee charged for lodging each Notice (and every further submission).
Given that a mortgage over a vessel cannot be registered unless the vessel is also registered, a registered mortgage over a vessel under construction is an impossibility. As a result, a lender will have to seek other types of security when financing new-build vessels in the UK.
A common approach is for a lender to take an assignment of the borrower’s rights under the building contract and refund guarantee. In the event of the borrower’s default, the lender will be able to continue with the construction of the vessel, take delivery and then sell the vessel to repay the outstanding debt.
- Registration Process
3.1 Who can own a UK Registered Ship?
The ownership of a British Ship is divided into 64 shares. It is possible to be registered as the owner of all or any of the shares subject to the proviso that any share may be owned by up to five people or companies as joint owners. For registration on Part 1 of the Register, at least 33 of the shares in the vessel must be in the ownership of a person or a company fitting into one of the following categories (a “qualifying owner”):
3.1.1 British Citizens;
3.1.2 Citizens of an EU member state exercising their rights under Article 48 or 52 of the EU Treaty in the UK;
3.1.3 Citizens of the British Dependent Territories;
3.1.4 British Overseas Citizens;
3.1.5 Companies incorporated in a country in the European Economic Area (“EEA”)
3.1.6 Companies incorporated in a British overseas possession having their principal place of business in the United Kingdom or in that overseas possession; and
3.1.7 European Economic Interest Groupings.
There are a number of particular points to remember when companies are involved. For example, where entitlement to register arises by virtue of the qualifying owner being a company incorporated in an EEA country, that company should be resident in the UK (that is, having a place of business in the UK) Where this condition is not satisfied, the vessel will be registered only if a representative person is appointed.
In addition, Ship Mortgages and Deeds of Covenant granted by companies must be registered at Companies House within 21 days of the date of creation of the charge.
3.2 Title Documentation Required
The documentation required by the MCA to register the vessel on Part 1 depends on whether it has been registered previously.
Where the vessel has been registered on Part 1 by a previous owner, the following documentation is required in order to register the vessel in the name of the new owner:-
3.2.1 The original Certificate of British Registry from the date the vessel was last registered with the MCA;
3.2.2 The Original Bill of Sale in favour of the borrower together with any other original Bills of Sale linking transfers in title since the vessel was last registered;
3.2.3 (If applicable) A Certificate of Incorporation;
3.2.4 A Declaration of Eligibility in MCA standard form signed by the Borrower; and
3.2.5 The applicable registration fee.
Where the boat has never been registered with the MCA, full title history for the last 5 years is required, to include:-
3.2.6 Original Bills of Sale in respect of each transfer of title to the vessel;
3.2.7 The original Bill of Sale in favour of the borrower;
3.2.8 The original Builder’s certificate;
3.2.9 (If applicable) A Certificate of Incorporation;
3.2.10 An Application to Register;
3.2.11 A Declaration of Eligibility executed by the customer in MCA standard form; and
3.2.12 The applicable registration fee.
Please note that any vessel registered on Part 1 may not have a name which is the same as that of another vessel currently registered. An application for approval of name can be made in advance to the Registry and any approved name can be reserved for a period of up to three months from notification of approval by the Registrar.
Where the boat has been registered in another jurisdiction, the MCA require sight of the Deletion Certificate from the Foreign Registry, an extract from the appropriate Register, together with the usual required registration documents. Please note that any foreign documents should be accompanied by a notarised translation.
It is important to note that the MCA are very stringent in their requirements and therefore all documentation should be thoroughly checked prior to submission of any application.
3.3 What Other Documentation is Required?
To complete the registration process, the MCA will require a Certificate of Survey and Tonnage certifying that the vessel has been surveyed by a recognised MCA surveyor. (If the vessel is over 24m, an International Tonnage Certificate is required) Once the Registry is satisfied that the documentation produced to it is acceptable for registration of the vessel, the Registry will issue a Carving and Marking Note showing the official number and other details of the vessel which must be marked on her. Registration will not be complete until this is signed and returned by the customer
Upon completion of the registration process, the mortgage can then be registered.