Shipping loans and collateral damage

Shipping finance transactions are characterised by peculiar risk factors principally on account of the shipping asset’s transient operations. The applicable rules and mercantile usages – reflective of this reality themselves – must therefore be adequately factored into financiers’ lending procedures and loan recovery strategies, whether they be banks or private investors. This article offers helpful guidance to such lenders.

 

What laws apply?

Section 53(1) of the Merchant Shipping Act (MSA) 2007 provides that a ship registered in Nigeria, or a share in the ship, may be made security for a loan or other valuable consideration. The law requires that there must be a “proper written instrument creating the security” known as a ship mortgage. The mortgage may be registered with the Registrar of Ships. While non-registration will not make the ship mortgage void, it should be noted that the priority of mortgages is determined by the time of registration basis. Thus, Section 57 of the MSA provides that:

[i]f there are more mortgages than one registered in respect of a ship or share, the mortgagees shall, notwithstanding any express, implied or constructive notice, be entitled in priority one over the other, according to the date on which each mortgage is recorded in the register and not according to the date of each mortgage itself.

What kind of interest do lenders acquire in ships?

A ship mortgage under Nigerian law is neither an absolute transfer of title nor a pledge of the ship. The mortgagee thus acquires purely a security interest in the ship which grants it the conditional power of sale in the event of the mortgagor’s default, while preserving the mortgagor’s equity of redemption. Under Section 58(1) of the MSA, the mortgagee will not, by reason of the mortgage, be deemed the ship’s owner nor will the mortgagor be deemed to have ceased to be the ship’s owner. The practical implication of this is that any obstruction of the mortgagor’s equity of redemption, even if contractual, will not be countenanced.

How secure is security?

As noted above, ship mortgages rank in priority on a time-of-registration basis. Prompt registration of the mortgage, therefore, offers a layer of protection to the mortgagee in terms of the standing of its claims against similar ones. This is in addition to such registration serving as a public notice of an encumbrance on the ship.

However, whatever the ranking of ship mortgages among themselves, they nonetheless rank lower than maritime liens on the scale of priorities. (1) Maritime liens are so called for their being available to appropriate claimants as redress for some wrong chargeable to the ship and not just its owners. They thus endure even beyond a bona fide transfer of ownership in the ship and can be exercised despite the claimant not having physical possession of the ship.

Section 66 (a-d) of the MSA lists maritime liens to include:

• claims for wages and other sums due to the master, officers and other members of the ship’s complement in respect of their employment on the ship;
• disbursements of the master on account of the ship;
• claims in respect of loss of life or personal injury occurring, whether on land or on water in direct connection with the operation of the ship;
• claims for damage caused by a ship;
• claims for salvage, wreck removal and contribution in general average; and
• claims for ports, canals and other waterways, dues and pilotage dues.

Because of the potency of maritime liens, a major thrust of the mortgagee’s risk management strategy must involve a system for identifying and ameliorating their impact on the mortgage.

What are lenders’ implicated rights?

In addition to the mortgagee’s right of sale in the event of the mortgagor’s default, before executing any mortgage, the mortgagor in a ship mortgage transaction must disclose in writing to the mortgagee the existence of any maritime lien, prior mortgage or other liability in respect of the ship to be mortgaged which they are aware. If a mortgagor fails to do this, the mortgage debt will, at the election of the mortgagee, become immediately due and payable, notwithstanding anything to the contrary in the mortgage. (2)

Private or judicial sale: when and why?

A registered mortgagee has the power to dispose of the ship or share in respect of which they are registered and to give effectual receipts for the purchase money without recourse to court. However, such a sale will pass to the purchaser only a title which is subject to any in rem liabilities on the ship. Where the mortgagee obtains a judicial sale (i.e., a sale pursuant to a court order to a sheriff or admiralty marshal to conduct the sale) the buyer obtains a clean title that is free from all in rem liabilities.

 Thus, a judicial sale will extinguish all mortgages and preferential rights – except those assumed by the purchaser with the consent of the mortgage holders – and all ties and other encumbrances pertaining to the ship. (3)

For further information on this topic please contact Victor Onyegbado at Akabogu & Associates by telephone (+234 1460 5550) or email (victor@akabogulaw.com). The Akabogu & Associates website can be accessed at www.akabogulaw.com.

Endnotes

(1) See Section 67(1) of the MSA.

(2) See Section 54(1) of the MSA.

(3) Section 75 of the MSA.

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