Understanding ship mortgage law

Giorgio Berlingieri, partner at Genoa-based Studio Legale Berlingieri, looks at ship mortgages under English and Italian law

IN England, a mortgage is generally qualified as a transfer of property or an interest in property as security for a debt. Being a security transaction, however, the property is redeemable by the mortgagor upon satisfaction of the debt secured by the mortgage. This is not a view shared by all legal writers. It has, in fact, been stated that the mortgage of a ship ‘transfers to the mortgagee neither a legal nor an equitable title, but merely a right to realise his debt by the sale of the thing mortgaged.’ (Strahan, Law of Property, London 1926).

In Italy, the law says that the transfer of a ship mortgage does not entail the transfer of property but rather the right to realise the debt through the forced sale of the ship. The basic difference seems to be that, while the mortgagee under English law has the power to sell the mortgaged ship, in Italy the holder of the ship mortgage has only the right to have the ship sold by the court by means of a judicial sale.

This requires the creditor to hold an enforceable title such as an enforceable judgment, an acknowledgment of debt executed before a notary public or a promissory note.

Creation of the security

In Italy, pursuant to Section 7 of Schedule 1 to the MSA 1995, a mortgage must be in the form prescribed by or approved under registration regulations, and registered in the ships’ register. Article 565 of the Code of Navigation provides that the mortgage must be granted, under penalty of nullity, by public deed or private writing, which must contain the specific indication of the elements of the identity of the ship.

Additional elements include the name and domicile of the owner of the ship and of the creditor, the amount secured, the interest thereon, and the date or dates of repayment. These elements must, pursuant to Article 565, be mentioned in the application for registration, implying that they must be mentioned in the mortgage deed itself.

While registration is not essential for the existence of a valid mortgage between the parties, Article 2808 of the Civil Code provides that the mortgage is created by registration in the registry of immovable property. Article 567 of the Code of Navigation provides that, for the purposes set out in Article 2808, the ship mortgage must be registered in the ship register and endorsed in the certificate of registry.

Subject matter of the security

No indication is given in MSA 1995 as to the scope of the mortgage. It appears, however, that the mortgage on a ship includes all articles necessary to the navigation of the ship or to the prosecution of the adventure but that, in order to be covered by the mortgage, the articles must have been specifically appropriated to the ship (Meeson, Ship and Aircraft Mortgages, London 1989).

Similarly, in Italian law no specific indication can be found as to the scope of the mortgage. The view has been expressed (F Berlingieri, I diritti reali di garanzia, Padua 1965) that, by applying the provisions on maritime liens, the mortgage covers all ships’ appurtenances which, pursuant to Article 246 of the Code of Navigation, include the ship’s boats, equipment and generally everything deemed to be permanently in ‘the service and the ornament of the ship’.

Whenever the appurtenances are owned by a third party, pursuant to Article 247 of the Code of Navigation, such ownership cannot be denied to a person who has, in good faith, acquired a right in the ship (including the holder of the mortgage) unless third-party ownership is evidenced by the ship inventory or proved by a document, the date of which is certified to precede the date of acquisition of the right.

Structure and collateral securities

The English mortgage consists of two separate documents – the mortgage, which contains basic information such as the name of the mortgager and the mortgagee, the sum assured and the repayment schedule, and the deed of covenant, which sets out all the rights and duties of the parties as well as collateral securities.

In Italy, the mortgage used to be a very simple instrument, similar to the English mortgage, but that was due to the existence in the Civil Code and the Code of Navigation of detailed provisions covering collateral securities, the rights and liabilities of the parties, and the extinction of security. However, due to ship financing becoming international, with the result that security could be provided anywhere in the world, the Italian mortgage has gradually incorporated the standard provisions of a deed of covenant.

Right to take possession of the ship

There is no equivalent in Italian law to the right of the registered mortgagee to take possession of the ship. Frequently, however, provisions to this effect are included in the mortgage deeds and, if action is taken by the holder of the mortgage in a common law country, it is very likely that such a right is enforceable. In Italy, the intervention of the judicial authority would be required and the most likely measure available would be judicial arrest, with the appointment of a custodian who may also be the holder of the mortgage.

Priority of mortgages and hypotheses

Section 7(4) of Schedule 1 to MSA 1995 provides that mortgages are registered in the order of their production to the registrar, and Section 8(1) clarifies that priority is determined by the order of registration.

Article 256 of the Code of Navigation states that the port authority of the port where the vessel is registered endorses the application for the publicity applied for (which may relate to the sale of the vessel or to its mortgage) and reproduces the contents of the application in the ship’s register, indicating the day and time on which the request has been submitted.

Article 257 of the Code of Navigation then provides that, when there are several deeds for which publication is requested, priority is established on the basis of the date of registration in the ship’s register.

Power of sale

Section 9 of Schedule 1 to MSA 1995 grants to the mortgagee the right to sell the mortgaged ship privately, which, of course, does not result in the extinction of other registered encumbrances and of maritime liens. The position is clearly different in judicial sale because the sale causes the extinction of any other security which is transferred on the proceeds of sale. There may, nevertheless, be a situation where a voluntary sale proves useful, and a clause may therefore be inserted in the mortgage deeds providing that the creditor has power of sale.

Special attention must, however, be taken in order to prevent this provision being avoidable as a consequence of the existence under Italian law, as in almost all civil laws, of the rule (Article 2744 of the Civil Code) whereby an agreement, according to which title to the encumbered property passes from the debtor to the creditor in case of failure by the debtor to pay the debt, is null and void.

In this respect, the Italian Court of Cassation has held that there is a violation of the provision under Article 2744 of the Civil Code when the debtor must transfer ownership to the creditor in fulfilment of its obligation. However, there is no such violation if the debtor agrees to authorise the holder of the security to sell its property by means of a public auction and to retain such part of the proceeds of sale as is necessary for the satisfaction of its credit, placing the balance at the disposal of the owner or of its creditors.

The power of sale granted by the owner should, therefore, be valid provided the relevant clause regulates the manner in which the sale must be conducted, possibly through leading shipbrokers, and includes protective clauses in favour of the debtor.

Generally speaking, the mortgage entitles the holder to seize the ship and request its forced sale if the amount of the debt is acknowledged in the form of a public deed. Execution and registration of the mortgage is normally a condition precedent to draw-down, and therefore the mortgage does not contain an acknowledgment of debt. However, it may be provided in the loan agreement that the acknowledgment be executed separately and concurrently with draw-down.