MARITIME MORTGAGE : THE GONG OF THE LAW

INTRODUCTION

It is true that business minds who invest in the business of shipping usually seek the assistance of financial institutions for finance to start up. Sometimes, these institutions advance loan to these business minds for the purchase of ships, and this is usually by way of mortgage on the ship. It is the ships themselves which serve as security for any loan until the repayment is done. The financial institution which advances the loan is known as the “mortgagee” the owner of the ship who obtain the loan is the “mortgagor”, and the ship remains the mortgaged asset. The loan agreement contain covenants regulating the conduct of the borrower, the mortgagor gives the mortgagee a preferential security interest in the ship, insurance to protect the interest of the mortgage on the ship, assignment of the insurance proceeds of the ship in the event of loss, and the assignment the earnings of the ship. 

I.  WHAT IS SHIP MORTGAGE ?

Put simply, A legal mortgage is a transfer of interest or property in a ship to the lender (mortgagee) by the borrower (mortgagor) as a security for loan with an understanding that the vessel shall be redeemed, and the constructive transfer to the lender cancelled on repayment of the amount due. It is a creation of a charge or encumbrance in favour of the lender by the person wishing to borrow. Although a ship is mortgage, the mortgagor or owner is free to continue operating the vessel provided he does not act in such a manner as to put the ship at risk as security, and thereby prejudicing the mortgagee’s position. At common law, the mortgagor absolutely conveyed a mortgaged ship to the mortgagee, and on repayment of the mortgage debt and interest in accordance with the term of the agreement, the mortgagee would reconvey the vessel to the mortgagor. However, this method was discontinued since 1825. There are two broad categories of mortgages, and they are statutory and equitable mortgage.

II. ESTABLISHMENT OF STATUTORY MORTGAGE OF A SHIP 

 It is pertinent to note that a statutory mortgage is created in Nigeria under the Merchant Shipping Act 2007. 

A quick look at Section 53(1) of the Act provides that:

        A ship registered in Nigeria, or a share in the ship may be made a security for a loan or other valuable consideration, and there shall be a proper written instrument creating the security. The written instrument is generally known to be a Deed of Mortgage. In order to protect the security, the mortgage must be registered with appropriate regulatory bodies (e.g Nigerian Maritime Administration and Safety Agency (NIMASA) and Corporate Affairs Commission (CAC)). The Mortgagor is obliged before executing any Deed of Mortgage to 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 and of which the Mortgagor is aware. 

Where the Mortgagor fails to disclose, the Mortgagee may treat the Mortgage debt immediately due and payable. (Section 54(1) and (2) of the Merchant Shipping Act 2007). 

Creation of statutory mortgage ranks in priority over all creditors of the ship with respect to prior or unregistered mortgages. Priority is determined according to the date on which each mortgage is recorded in the register and not according to the date of the mortgage is executed. (Section 56(1) of the Merchant Shipping Act 2007). 

Interestingly, where there are multiple registered mortgagees of the same ship, a subsequent mortgagee cannot, except with the order of a court , sell the ship without the consent of every prior registered mortgagee(s). (Section 57(2) of the Merchant Shipping Act 2007). 

iii. EQUITABLE MORTGAGE OF A SHIP 

Here, An equitable mortgage can be created by general words or mere deposit of the title documents. See Swiss Bank Corp v Lloyds Bank Ltd (1982) A.C. 584. A quick instance is,  when a ship is under construction, an equitable mortgage can be created by the deposit of a builder’s certificate of the ship. 

However,  equitable mortgage is subject to the overriding interest of existing legal mortgages and maritime lien holders,  hence "Equity follows the Law".

iv. SHIP MORTGAGE AND OTHER SECURITY DISTINGUISHED 

Interestingly, there are some maritime commercial activities which are apparently related to ship mortgage,  however there are dichotomies that exist among these transactions. Some of these include :

Charge

Here,  a mortgage under the Merchant Shipping Act 2007 is different from a charge on a property.One distinguishing feature between a charge and mortgage is that while a mortgagee has the right to take possession a chargee does not have such a right.  A charge  is seen as an appropriation of a property as security for a debt. Being equitable, the chargee can realize his security by judicial process either by appointment of a receiver or court sale. A charge on a ship is not registrable under the Merchant Shipping Act 2007 

Maritime Lien 

Here, maritime lien suffers the same fate as maritime charge. A maritime lien does not vest title in the vessel or the lien holder, whereas the mortgage vests title on the mortgagee. Furthermore, A lien holder does not have a right of sale in the event of default without due process of law whereas a mortgagee has a right of sale. Unlike lien,  mortgage transactions are registrable in most ship registries. 

Pledge 

To make it very clear and unambi,  a pledgee needs to be in possession of a mortgaged property for the creation of the interest. while a mortgage may enter into possession when his security is impaired. 

V. REGISTRATION 

It is worthy to hold here that , obtaining of priority has been identified as the most important advantage of registration in the date which ranks  one mortgage against another mortgage.  Failure to register a mortgage does not render the transaction void, but precedence is given to later registered encumbrance. 

Consequently, There is no legal obligation to register a mortgage, but it is necessary to register in order to give proper legal effect to the mortgage. Thus, any mortgagee who fails to register a mortgage cannot claim any benefit under the Merchant Shipping Act 2007. 

Where a mortgage on a ship is produced to the Registrar at the ship’s port of registry, the Registrar shall record the mortgage in the register. (See section 53(2) of the Merchant Shipping Act 2007). 

Vi. RIGHTS AND DUTIES OF A MORTGAGOR

The rights and corresponding duties of the parties are governed by the term of their contract. Some of these include :

Duty To Insure 

Here, it is incumbent on the mortgagor to insure,  pay all premium and comply with insurance warranties on the vessel against the physical loss of or damage to the mortgaged ship.  The reason the mortgagor must insure is simply because; it is the mortgagor who is declared to have an insurable interest in the full value of the property. Where the mortgagor fails in discharging this obligation, the mortgagee can insure the ship and charge the costs on to the mortgage debt, provided that right of the mortgage to insure is expressly stated in either the mortgage deed or the collateral deed. See Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand Ltd). 

 Duty To Maintain The Ship In Sea-worthy Condition And Repair

Being in possession of the ship, The Mortgagor has an obligation to maintain the ship in good condition. The purpose of this covenant is to ensure that the security is not devalued by the deterioration of the ship. The mortgagor has the obligation to ensure that the mortgaged ship does not breach any of the provisions of the International Safety Management Code (ISMC) which may lead to its detention. T

 Duty to Discharge Claims Or Liabilities 

The mortgagor has an obligation to discharge all debts and liabilities which can be enforced against the security by arrest. If the ship is arrested, the mortgagor must provides security and procure it release. 

Duty Of Legitimate maritime transactions 

A ship which is used for illegal trading such as illegal importation of fire arms and ammunitions, hard drugs, bunkering may be arrested or confiscated. The mortgagor should not engage in any of the illegal deals mentioned. 

Duty To Notify The Mortgagee 

The mortgagor has an obligation to notify the mortgagee on the movement of the ship. This is the ensure that the ship does not sail either in war zones, whence the security will be exposed to a higher risk or in jurisdictions in which the law may be unfavorable to the priority enjoyed by the mortgage over other maritime claims. 

Duty Not To Sell Or Sub-Charge 

The mortgage has an obligation not to sell, or grant a mortgage or change the ship to any person without first discharging the debt to the mortgage.

Duty As To Charterparties

The mortgagor may need to inform the mortgagee before engaging the ship in a long term charter party in case the terms of the charter party prevents the mortgagee from exercising his rights in case of default by the mortgagor. 

Right of Redemption 

The mortgagor has an equitable right to redeem the ship upon repayment of the loan and the accrued interest. The court will not allow any clog or fetter on the mortgagor’s right of redemption. See Fletcher and Campbell v City Marine Finance Ltd (Supra). However, the court will not intervene if on the face of the contract, it is discovered that the parties had agreed how to deal with the ship, notwithstanding there is an unlawful exercise of power of sale without notice See The Maule (1997)1 WLR 528 

Vii.  RIGHTS AND DUTIES OF A MORTGAGEE

A cursory look at section 57(1) and (2) of the Merchant Shipping Act 2007, intends that the mortgagee is not by reason of the mortgage, regarded as the owner of the ship. But if the situation arise for a mortgagee to realize his security he has owner-type rights conferred on him, but only such rights as and necessary for the enforcement of the security. 

Right of Repayment(s) 

The law allows the mortgagee to receive repayments of the principal together with interest at the time stipulated in the mortgage deed the collateral deed as agreed. I will add that the very important clause usually and expressly stipulated in the deed is that, should the mortgagor fails to repay the sums at the agreed time, the mortgagee is at liberty to seize the sum owing to him. Where there is a default in the mortgage deed by the mortgagor, for instance, if the Mortgagor defaults in payment, endangers the security in any way, or if the vessel is burdened by maritime lien for an unreasonably longtime, the mortgage becomes enforceable. 

The right to take possession 

It is worthy of note that the mortgagee has no right to take possession, actual or constructive, of the ship unless there is a default or a threat to his security, or express contractual provisions, he will be liable to the mortgagor for costs and substantial damages. 

Right to Freight 

Apparently, freight is the consideration in maritime contracts. The mortgagee of a ship by taking possession before the freight is completely earned, obtains a legal right to receive the freight. He has a priority over every equitable charge of which he has no notice, and it makes no difference that any subsequent incumbrance was the first to give notice to the charterers of his charge on the freight. See Liverpool Marine Credit Co v Wilson (1872) LR 7ch 507 

Power of Sale 

The power of sale of the mortgagee is statutory and contractual. Under the Act, with the consent of the minister every registered mortgagee shall have power absolutely to dispose of the mortgaged vessel or share in respect of which he is registered, and to give effectual receipts for the purchase money, but where there are more person than one registered an mortgager of the same ship or share, a subsequent mortgagee shall not except under the order of a Court of competent jurisdiction, sell the ship or share without the consent of every mortgagee. See section 57(2) of the Act.  However, in exercising his power of sale, the mortgagee is not a trustee of the power of sale for the mortgagor, but the mortgagee must act bonafide for the purposes of realizing his security and must take reasonable precautions to secure a proper price. See Farrar v Farrar Limited (1888) 40 Ch.D 395. 

Appointment of Receiver 

In the face of a deed, the mortgagee can appoint a receiver to collect the income of the mortgaged ship, and pay all the necessary expenses until the realization of the security. If the deed does not provide for appointment of a receiver, the mortgagee can apply to court for such an appointment. 

Viii. CONCLUSION AND RECOMMENDATION

It is satisfactory to submit that,  although a mortgagee may seek to secure the repayment of the advance made under a ship mortgage, but the use of a ship as a security is not an ideal form of security.This because certain privileged claims can rank against the ship in priority. Second, being a floating object, it may disappear from the jurisdiction of the courts thereby making her arrest and subsequent enforcement of the lien impossible. Third, the permanent exposure to partial damage or total destruction through the perils of the seas is another factor to be considered in a ship mortgage transaction. Equitable mortgage is not a reliable security interest by way of rank of ship mortgage and other types of security. 

Since a maritime lien travels with a ship wherever she goes, it is important for the Mortgagee to know the what type of lien has been created against the ship as this may jeopardize the security of the Mortgagee. 

Inspite of the shortcomings of ship mortgage, a registered mortgage still remains the viable means by which a Mortgagee can secure whatever loan advanced to a Mortgagor. In granting a loan under a ship mortgage, a mortgagee needs the services of a maritime expert to prepare a well structured agreement. Maritime lien is devoid of any legal consequence unless and until it is enforced by a proceeding in rem.