Collecting your mortgage in Spain

SPAIN has a wealth of experience in ship arrest, if not always for the right reasons. Traditionally, vessel purchases in Spain have been financed through state credits from the BCI (State Bank of Industrial Credits). During the Franco regime, Astilleros Españoles, which was founded as a state-owned shipbuilder, absorbed most of the private yards. An enormous number of vessels were built for both Spanish and foreign shipowners. Indeed, the Spanish fleet became the seventh largest in the world. Easy finance attracted non-shipping investors to build vessels simply because the credit was so good. This in turn contributed to an oversupply of new tonnage in world markets, and depressed freights.

It came as no real surprise then that, in the 1980s, the BCI found itself having to arrest vessels worldwide in order to collect outstanding mortgages. A state-owned company, SEGB, was set up to manage and then sell vessels repossessed through mortgage proceedings - a very expensive venture for Spanish taxpayers. When Spain entered the European Union, state intervention in ship finance ceased.

Spain has ratified the Brussels Conventions of 1927 and 1952, both of which allow the arrest of vessels for unpaid mortgages. However, neither of them makes any stipulation about how to proceed with the sale. They both refer to the internal laws of individual states. The Spanish internal law of execution of maritime mortgages refers only to Spanish vessels, so it is unclear how to execute a maritime mortgage on a foreign-flag vessel.

When a mortgage is not paid, however, Spain offers a number of solutions to obtain payment. Ship arrest can be secured quickly in any Spanish port. Lawyers need only: (a) power of attorney to prove that they have been appointed, and to avoid denials that such instructions have been given once the vessel has been arrested, and (b) a counter-security at the discretion of the judge (usually in the region of $32,000). A watch will be kept over the arrested vessel by the Spanish police, free of cost.

In practice, outstanding instalments are invariably paid by charterers if they have good cargo deals and can=t afford having the vessel detained. But when neither the owner nor the charterer is willing to pay, even when the vessel is under arrest, there may be no way out but to arrange for public auction in Gibraltar.

Once a vessel is arrested in Spain, it is preferable to reach an agreement with the charterers and the crew to take the vessel to Gibraltar, where it can be sold at auction within four weeks. It is of course relatively easy to reach an agreement with a crew who may have outstanding wage demands. The cost of paying the crew and the charterers is compensated by savings made in Spanish port dues, and in respect of the repatriation and associated expenses of the crew.

When it is not possible to reach an agreement with the crew and charterers, it is necessary to arrange for public auction in Spain. In the particular case of German mortgages, there exists a 1983 convention, ratified by Spain in 1988, which establishes that executor proceedings should last only nine days. Due to congestion in the supreme court, such proceedings can actually take eighteen months. But if the vessel is under arrest in a Spanish port, it is possible to ask the supreme court to treat the matter with extreme urgency within the terms stipulated by the law. The supreme court can then request the appeal court at the port of arrest to inform the first instance court that the vessel can be auctioned.

According to the procedural law, the auction must be notified in the official bulletin twenty days before it takes place. At the moment, if the vessel is not sold for the price at which it has been evaluated, a second auction will be held twenty days later. If there is no purchaser at the second auction, a period of twenty days must pass before a third auction is held.

In practice, nobody is present at either the first or second auction, as the vessel is usually overvalued. All too often, the mortgagor will have to keep the vessel, and then try to sell it under better market conditions at a later date.

At the moment, under optimal circumstances, selling a vessel at auction in Spain may take five weeks more than it does in Gibraltar. But, under a new procedural law which will enter into force in Spain in January 2001, auction proceedings will be simplified. This could make Spain an attractive forum of choice for some unpaid mortgagors.