Law of Ship Mortgages

David Osborne recently retired as a partner in Watson Farley & Williams LLP after a career of more than 40 years as an asset finance lawyer (covering both secured lending and leasing), primarily in the shipping and offshore energy sectors. He has written extensively on the subject in legal and industry periodicals and has served on two International Working Groups of the Comité Maritime International (CMI).Charles Buss is a Partner in the Dispute Resolution Group of Watson Farley & Williams LLP. He specialises in banking and maritime litigation and arbitration and has extensive experience advising mortgagees and financial lessors in security enforcements, restructurings and insolvencies. He also regularly acts for ship owners and charterers in relation to dry shipping disputes under charterparties, shipbuilding contracts, ship sale and purchase contracts and marine insurance policies.Joanne Champkins is Knowledge Counsel in the Dispute Resolution Group of Watson Farley & Williams LLP. She has more than 20 years’ experience in litigation and arbitration, with extensive expertise in the maritime sector, in particular marine insurance, dry shipping, enforcement and complex offshore construction disputes.

• Foreword xiiiPreface and acknowledgements xviTable of cases xviiiTable of legislation xxCHAPTER 1 HISTORICAL INTRODUCTION 11.1 Background 11.2 Maritime law and ship mortgages 41.3 Legislative reform 81.4 The nature of the statutory mortgage 111.5 The international legacy 161.6 Mortgages of unregistered ships 17CHAPTER 2 OWNERSHIP AND REGISTRATION 182.1 Legal ownership 182.2 Registration; history and development 212.3 The Register 242.4 Fishing vessels 252.5 Small ships 262.6 The nature and effect of registration 272.7 The certificate of registry 282.8 Registration and beneficial ownership – including the arrest context 292.9 Registration and priority 352.10 Other circumstances, where registration is not conclusive or relevant 382.11 Refusal of registration, termination and expiry of registration 392.12 The ship 422.13 Bareboat charters and registration 472.14 Mortgages on ‘bareboat charter in’ ships 492.15 Mortgages on ‘bareboat charter out’ ships 49CHAPTER 3 SECURITY INTERESTS IN SHIPS 503.1 Introduction 503.2 Statutory mortgages – the primacy of registration 523.3 The form and effect of a registered statutory ship mortgage 533.4 Common law mortgages 553.5 Disguised mortgages 583.6 Equitable mortgages 593.7 Equitable charges 633.8 Submortgages 663.9 Mortgage of a share in a ship 673.10 Mortgages of ships under construction 68CHAPTER 4 THE CONFLICT OF LAWS 714.1 Introduction 714.2 The general maritime law 754.3 International conventions 764.4 Property in registered ships under English domestic law 794.5 The mid-nineteenth-century conflicts cases (on ships and on chattels generally) 824.6 The cases on foreign ship mortgages 864.7 The cases on registered ownership and arrest jurisdiction 894.8 The conflict of laws dimension to priority issues 904.9 The WD Fairway litigation 974.10 Property in registered aircraft under English domestic law 1064.11 The Blue Sky litigation 1074.12 Conclusions on the English conflict of laws on lex situs and registered ships 110CHAPTER 5 EXECUTION, SECURED OBLIGATIONS ANDPROPERTY COVERED 1165.1 Parties 1165.2 Execution 1165.3 The form of mortgage and obligations secured 1185.4 Multiple obligations 1215.5 Change of parties 1245.6 Change of obligations 1245.7 Relationship between the mortgage and the collateral deed of covenant 1275.8 Special fees and ‘upside’ sharing arrangements 1295.9 Property covered by the mortgage 133CHAPTER 6 REGISTRATION OF MORTGAGES 1386.1 Introduction 1386.2 Merchant Shipping Act 1995 1396.3 Companies Act 2006 1436.4 The Bills of Sale Acts 1486.5 Reform of the registration system 149CHAPTER 7 PRIORITY 1507.1 Statutory registered priority 1507.2 Agreed priority 1527.3 Failure to register a mortgage 1567.4 Equitable mortgages and charges 1577.5 Floating charges; negative pledges 1587.6 The Order of Priorities in an Order for Sale 1607.7 Tacking of further advances 1607.8 Tabula in naufragio 1657.9 Priority of security over ancillary receivables 1667.10 Marshalling 167CHAPTER 8 MORTGAGOR’S OBLIGATIONS AND UNDERTAKINGS 1748.1 Introduction 1748.2 Typical express owners’ undertakings 1768.3 Certain issues on owners’ undertakings 1788.4 Sanctions 1838.5 Consents and discretions 1918.6 Protection of security 196CHAPTER 9 AMENDMENT, TRANSFER AND DISCHARGE 1989.1 Amendment 1989.2 Correction and rectification of the Register 1999.3 Transfer and transmission 2009.4 Discharge 2049.5 Consolidation 207CHAPTER 10 LIENS 20910.1 Introduction 20910.2 Common law liens 21010.3 Equitable liens 21210.4 Maritime liens 21210.5 Statutory liens 21610.6 Statutory possessory liens 217CHAPTER 11 DEFAULT, AND SELF-HELP ENFORCEMENT POWERS 21911.1 Introduction 21911.2 Events of Default (EODs) 22211.3 Non-payment EODs 22311.4 Other EODs 22411.5 Discretions in relation to default 23211.6 Waiver of EODs 23211.7 Effect of an EOD 23511.8 Default interest and break-funding 23911.9 The lender’s/mortgagee’s options following a default 24211.10 Enforcement 24411.11 The right to take possession at common law 24511.12 Method of taking possession 25011.13 Factors relevant to the mortgagee’s decision to take possession 25311.14 The rights of a mortgagee in possession 25911.15 Sale of the mortgaged ship 26011.16 Mechanics and effect of a mortgagee’s private sale 26411.17 The mortgagee’s expenses of sale 26511.18 Application of the proceeds of sale 26711.19 Receivership 26811.20 Foreclosure 27211.21 Subsequent mortgagees 27311.22 Enforcement of security over ancillary receivables 274CHAPTER 12 THE COURTS’ PROTECTION OF THE MORTGAGOR 27612.1 Introduction 27612.2 Protection of the mortgagor’s right to redeem 27712.3 The mortgagee in possession’s duties to the mortgagor 27912.4 The mortgagee’s exercise of its power of sale 28312.5 Sales to self 28812.6 Sales to favoured buyers; improper purposes 29112.7 Are ship mortgages different from mortgages of land? 29612.8 Derivative liability to relevant parties 30212.9 Excluding duties 30612.10 Anti-set-off clauses 30712.11 Marshalling 30912.12 The perils of intermeddling 30912.13 The conflict of laws 310CHAPTER 13 DUTIES AND LIABILITIES OF THE MORTGAGEE TOTHIRD PARTIES 31113.1 Introduction 31113.2 Mortgagee enforcing security: liability to non-demise charterers and cargo interests 31313.3 Mortgagee enforcing security: demise (bareboat) charterers 33513.4 Third-party purchase options 34113.5 Liabilities of a mortgagee in possession to third parties 34213.6 Interference with third-party property 34413.7 Issues arising under the Partnership Act 1890 34513.8 Wider lender liability risks 34713.9 Equitable subordination 34913.10 Lender liability: an attempt to summarise 350CHAPTER 14 ENFORCEMENT BY ARREST AND COURT SALE 35214.1 Introduction 35214.2 The Admiralty jurisdiction of the High Court 35414.3 Ship arrest procedure 36014.4 Court sale procedure 37314.5 Enforceability of the court bill of sale 38714.6 Determination of priorities and payment out 391CHAPTER 15 RESTRUCTURING AND INSOLVENCY 40415.1 Introduction and background 40415.2 Consensual restructurings 40915.3 Schemes of arrangement under the Companies Act 2006, Part 26 41215.4 Restructuring plans under the Companies Act 2006, Part 26A 41615.5 The move towards restructuring globally 42015.6 Chapter 11 (and Chapter 15) of the United States Bankruptcy Code 42215.7 The Recast Insolvency Regulation 42915.8 The UNCITRAL Model Law on Cross-Border Insolvency and the Cross-Border Insolvency Regulations 43715.9 Other UK cross-border jurisdictional issues 44215.10 Hanjin 444CHAPTER 16 INSURANCE 44616.1 Introduction 44616.2 The nature of the mortgagee’s interest 44916.3 Insurance placed by the mortgagee for its own benefit 45216.4 Co-assurance 45416.5 Assignment 45616.6 Notice of assignment 46116.7 Assignment: clubs and mutual associations 46516.8 Loss payable clauses 46616.9 Letters of undertaking 46716.10 Claims 47016.11 The conflict of laws 47116.12 Illegality risk 47316.13 Reinsurances; assignments of reinsurances 47716.14 Mortgagees’ interest insurance 47816.15 Mortgagees’ Additional Perils (Pollution) (‘MAPP’) insurance 50216.16 Mortgagees’ rights insurance (‘MRI’) 50516.17 Other mortgagees’ insurances 50716.18 Concluding observations 508CHAPTER 17 SECURITY OVER EARNINGS AND CHARTERPARTIES 51017.1 Introduction 51017.2 The commercial background 51217.3 Present rights and future rights 51717.4 Partial assignments, suspensory assignments and assignments by way of charge 52017.5 Notice of assignment 52317.6 Legal assignments and equitable assignments 52517.7 Certain set-off issues 52717.8 The conflict of laws 52917.9 Restrictions on assignment 53017.10 Liens on sub-freights 53417.11 Charterparties and step-in rights 53617.12 Earnings account 54217.13 Financial Collateral Arrangements 54417.14 Pooling arrangements 54517.15 Requisition compensation 545CHAPTER 18 PRE-DELIVERY SECURITY 55318.1 Background and Introduction 55318.2 The builder’s refund obligations 55518.3 Refund guarantees 55618.4 Advance payment guarantees 56418.5 Assignment issues, control over disputes 56518.6 Stepping in to the buyer’s position 567CHAPTER 19 SECURITY OVER SHARES 57119.1 Introduction 57119.2 Reasons for taking shares security 57119.3 SPC liabilities 57419.4 Aspects of the security documents; enforcement 57619.5 The courts’ protection of the grantor of the security 57719.6 The conflict of laws 579CHAPTER 20 LEASE FINANCING OF SHIPS 58120.1 Introduction and background 58120.2 The nature and form of a ship lease 58720.3 Differences between financial leases and ship mortgages in relation to default and enforcement 58820.4 Recharacterisation of financial leases 60620.5 Liability of lessors to third parties 61120.6 Leases and mortgages combined 61620.7 Issues for financial lessees 61820.8 Financial leases and secured loans; some reflections on the differences 621Appendix 1: Statutory Material 623A Merchant Shipping Act 1995, Part II 624B Merchant Shipping Act 1995, Schedule 1 637C Merchant Shipping (Registration of Ships) Regulations 1993, SI 1993/3138, Part VII (as amended) 641 D Senior Courts Act 1981, section 20(2) 646Appendix 2: Statutory Forms 650A Form MSF 4736 REV 1118 (Mortgage of a Ship to secure Account Current etc. other/obligation) 651B Form MSF 4737 REV 1118 (Mortgage of a Ship to secure Principal sum and Interest) 665C Form 4739 REV 1118 (Notice of Mortgage Intent) 678Appendix 3: Specimen Deed of Covenant 682Appendix 4: Institute Mortgagees’ Interest Clauses - Hulls 722Appendix 5: The Admiralty Marshal’s Conditions of Sale and Bill of Sale 727Index