Ship Finance in 18 Jurisdictions Worldwide 2014 Contributing Editor: Lawrence Rutkowski

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Ship Finance in 18 jurisdictions worldwide 2014 Contributing editor: Lawrence Rutkowski

Published by Getting the Deal Through in association with: Adepetun, Caxton-Martins, Agbor & Segun

Arias, Fabrega & Fabrega

Clifford Chance

Ehlermann Rindfleisch Gadow

Fenech & Fenech Advocates

Haridass Ho & Partners

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Joseph & Partners

Jurinflot International Law Office

Kincaid – Mendes Vianna Advogados

Liberian International Ship and Corporate Registry

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S Friedman & Co, Advocates

Stephenson Harwood AARPI

V&P Law Firm

Vedder Price PC

Wikborg, Rein & Co Advokatfirma DA

Wintell & Co

Yoshida & Partners CONTENTS

Ship Finance 2014 Global Overview 3 Malaysia 52 Lawrence Rutkowski Melanie Mishra Pillai Contributing editor: Seward & Kissel LLP Joseph & Partners Lawrence Rutkowski Seward & Kissel LLP Brazil 4 Malta 58 Camila Mendes Vianna Cardoso Mark Fenech and Lara Saguna Axiaq Kincaid – Mendes Vianna Advogados Fenech & Fenech Advocates

Getting the Deal Through is delighted to China 10 Marshall Islands 66 publish the first edition of Ship Finance, a James Hu, Lawrence Chen, Mervyn Chen Francis X Nolan III new volume in our series of annual reports, and Jasmine Liu Vedder Price PC which provide international analysis in key Wintell & Co areas of law and policy. Nigeria 72 France 16 Following the format adopted throughout Funke Agbor and Chisa Uba the series, the same key questions are Alain Gautron and Ezio Dal Maso Adepetun, Caxton-Martins, Agbor & Segun Stephenson Harwood AARPI answered by leading practitioners in each of the 18 jurisdictions featured. Norway 78 Germany 22 Gaute Gjelsten, Henrik Hagberg and Every effort has been made to ensure that Stefan Rindfleisch Solveig Frostad matters of concern to readers are covered. Ehlermann Rindfleisch Gadow Wikborg, Rein & Co Advokatfirma DA However, specific legal advice should always be sought from experienced local advisers. Greece 28 Panama 83 Getting the Deal Through publications are John Papapetros, Christina Economides Jorge Loaiza III updated annually in print. Please ensure and Dimitris Manolopoulos Arias, Fabrega & Fabrega you are always referring to the latest print V&P Law Firm edition or to the online version at www. Russia 88 gettingthedealthrough.com Hong Kong 35 Alexander Mednikov Alastair MacAulay Jurinflot International Law Office Getting the Deal Through gratefully Clifford Chance acknowledges the efforts of all the Singapore 94 contributors to this volume, who were Israel 41 chosen for their recognised expertise. V Hariharan Getting the Deal Through would also like to Michael Safran Haridass Ho & Partners S Friedman & Co, Advocates extend special thanks to contributing editor Lawrence Rutkowski of Seward & Kissel LLP United Kingdom 98 for his assistance in devising and editing Japan Visit www.gettingthedealthrough.com Tony Rice and Ian Hughes this volume. Norio Nakamura Holman Fenwick Willan LLP Yoshida & Partners Getting the Deal Through United States 106 London Liberia 47 Lawrence Rutkowski July 2014 Zaharoula (Hara) Gisholt and Seward & Kissel LLP Brad L Berman Liberian International Ship and Corporate Registry and Norton Rose Fulbright

Publisher The information provided in this publication is Gideon Roberton Law general and may not apply in a specific situation. [email protected] Legal advice should always be sought before Business taking any legal action based on the information Subscriptions provided. This information is not intended to Sophie Pallier Research create, nor does receipt of it constitute, a lawyer– [email protected] client relationship. The publishers and authors Published by accept no responsibility for any acts or omissions Business development managers Law Business Research Ltd contained herein. Although the information George Ingledew 87 Lancaster Road provided is accurate as of July 2014, be advised [email protected] London, W11 1QQ, UK that this is a developing area. Tel: +44 20 7908 1188 Alan Lee Fax: +44 20 7229 6910 Printed and distributed by [email protected] © Law Business Research Ltd 2014 Encompass Print Solutions No photocopying: copyright licences do not apply. Tel: 0844 2480 112 Dan White [email protected] ISSN 2056-4015

www.gettingthedealthrough.com 1 Seward & Kissel LLP GLOBAL OVERVIEW Global Overview

Lawrence Rutkowski Seward & Kissel LLP

Ship finance has long been the preserve of specialists in the field were now syndicated bank deals as the capital markets soured on operating in an environment where market participants all knew shipping. However, fee-driven Wall Street is not known for its institu- each other, where knowledge was evenly shared by those partici- tional memory and before long shipping was caught by another bug – pants and where the faces rarely changed. Moreover, the shipping IPO fever. The first decade of this century saw dozens of shipping industry itself was shrouded in mystery, lacked transparency to all companies tapping into this capital source. But again, IPOs do not but insiders and was populated by private companies who relied make sense unless the sums involved are significant and, of course, solely on trusted advisers with whom long relationships existed. The once a company has built an equity capital base, it can re-enter the former is still largely true but developments in the regulatory envi- debt markets at a much more significant level. By 2007, traditional ronment and rapid changes in the global markets have had a mate- shipping banks were underwriting or syndicating loan transactions rial impact on the latter. Whether caused by government reactions to of US$1 billion or more. We all know what happened next. environmental issues and post-9/11 security problems, or the impact Following the liquidity crisis in the bank market in 2007, the of a prolonged recession following the financial crisis, the industry Lehman Brothers bankruptcy in 2008 and the collapse of the secu- has changed. Perhaps it would be more accurate to say it has evolved ritisation market, the world economy teetered on the brink and or even matured. Whatever the cause, the industry is more trans- freight rates collapsed. The once reliable LIBOR market became parent today, has seen considerable consolidation (and insolvency- unglued. Shipowners needed capital but there were very few – if any driven restructurings) and has attracted the attention of Wall Street. – sources of it. More insolvencies ensued (and continue to this day), One of the consequences of this is the stream of new entrants into the capital markets struggled and banks nearly withdrew from the the market. It is this last development that serves as the rationale for market. In fact, many banks did withdraw and others significantly this volume and the issues addressed in the various country surveys. narrowed their focus. Indeed, indications are that bank loan volume A little detour through recent history in ship finance is war- in shipping shrunk by two-thirds between 2007 and 2009 and even ranted. For decades the shipping industry’s principal source of now will likely only reach about half of 2007’s volume in 2014. capital was the international bank market. The typical transaction Of what relevance is all of this for this publication? Well, the involved a single bank making a loan to a single-purpose company, story does not end with these changes in the bank market. The sometimes supported by parent company or personal guarantees, shipping market did not, and will not, go away – there is still only but ultimately secured by a mortgage over the ship financed. The one way to move large volumes of cargo from one continent to the loan had a tenor of three to five years, amortisation was based on a next and economic cycles will not lessen the world’s dependence on profile tied to the vessel’s useful life and scrap value and interest was shipping. Shipping remains capital intensive and the world fleet will based on LIBOR. The vessel would be flagged (ie, registered) in one always require periodic renewal. Put simply, this means someone of a handful of select jurisdictions with which the banking industry will step into the funding breach. Whether it is renewed interest by had become comfortable. the capital markets with investors prepared to fund the next growth Shipping is, however, a capital-intensive industry. Loan trans- cycle or private equity – the newest entrant into the market – seeking actions became larger; they increasingly involved multiple vessels to realise on the value proposition presented in a distressed market, and perhaps multiple lenders in a ‘club deal’ or syndicated financ- the ship finance market will have its participants. This time around, ing though the basic loan profiles were unchanged. By the end of those participants may not be the same faces that were there in the the 1990s though, Wall Street discovered shipping (or shipping dis- past. These new players may inject equity or buy debt and in mean- covered Wall Street – opinions differ) and a new pattern developed. ingful amounts. There are players accustomed to a different way of With investment bankers sensing an appetite in the capital markets doing business, investors who see ‘management teams’ where oth- for high-yield debt instruments and with shipowners captivated by ers saw ‘shipowners’; people who bring a new set of values to a the prospect of non-amortising debt in volatile freight markets, a market; professionals whose focus is on return on investment with marriage was made and dozens of high-yield bond deals were closed a viewpoint untethered emotionally to the asset class in which they at the end of that decade. Unfortunately, most of those high-yield are invested. These new market participants and their advisers are bond deals earned the more common name ‘junk bonds’ as the venturing into (excuse the pun) uncharted waters. While they will freight markets in the ensuing years were worse than volatile and all hopefully understand the need to use experienced, seasoned practi- but one or two of the deals defaulted or were restructured. tioners, this volume can provide a resource to them. One by-product of the high-yield debt craze was the increase in This volume answers some basic questions an investor or lender debt size. While it was easy to consummate a single-vessel financing needs to know. How can one be certain who holds what interests in for amounts of US$25 million or lower, the costs and expenses of the asset in question? How can one determine the precise interests of venturing onto Wall Street could not be justified except in trans- various stakeholders? How secure is a mortgage lien? What about actions of US$100 million or more. That meant larger fleets being non-vessel collateral? What obligations come with an acquisition of assembled under one issuer. The increase in debt size became a trend debt? Of what tax consequences should one be aware? What risks even after the workouts that followed the junk bond debacle. The do future insolvencies present? These are but a few of the subjects trend was probably also nurtured by regulatory developments (cer- addressed in the chapters that follow. My fellow authors and I hope tainly, regulatory developments and public capital markets spurred you will find the answers to questions posed helpful. greater transparency). In any event, deals became larger even if they www.gettingthedealthrough.com 3 BRAZIL Kincaid – Mendes Vianna Advogados Brazil

Camila Mendes Vianna Cardoso Kincaid – Mendes Vianna Advogados

Due diligence It is possible to obtain most public certificates armed only with the target company’s name and taxpayer’s number, but there are a 1 How does one demonstrate title to or legal ownership of a vessel few tax certificates that require a power of attorney issued by the registered under the laws of your jurisdiction? target company, preventing a silent due diligence. The title is demonstrated by registry of ownership with the relevant port captaincy, in case of vessels under 100 GT, and with the 5 Can the shareholders or other equity interest holders, directors Admiralty Court, in case of vessels over 100 GT. and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search 2 How can one determine whether there are any liens recorded over of a public registry? If not, how are these parties customarily a vessel? identified? In case of in rem liens recorded over a Brazilian vessel registered It is possible to request a certificate from the Board of Trade stating with the Admiralty Court, it is possible to formally request a clear- the shareholders and their equity interest in the share capital, admin- ance certificate from the Admiralty Court, which asserts the exist- istrators and directors, as well as corporate name, headquarters and ence of in rem encumbrances. branches, Corporate Taxpayers’ Registry, date of beginning of the It is also possible to request a certificate from the operator of the activities, main corporate activities and share capital. However, this vessel to verify any employment debts to the crew. is valid for limited liability companies and other types of companies, However, there is no available certificate that states liens in con- but for corporations, it is only possible that their shareholders be nection with travelling expenses, or any general certificate showing determined through their corporate records. all the types of liens together. 6 What corporate or other entity action is necessary for an obligor 3 How does one determine whether there are any security to enter into or guarantee a debt obligation? When is action by agreements, liens, charges or other encumbrances granted the board of directors or other governing body required? Must by a vessel owner or affiliated party who might be a borrower, shareholders approve a guarantee? guarantor or other credit party in connection with a vessel finance There are no formal requirements imposed by Brazilian law for an transaction? obligor to enter into or guarantee a debt obligation. The require- In relation to liens upon the hull, as explained in question 2, it is ment of approval by the shareholders or board of directors varies possible to obtain a clearance certificate from the Admiralty Court in accordance with the obligor’s articles of association or by-laws. stating the existence of in rem encumbrances. It is also possible to obtain a certificate from the Registry of 7 Must foreign lenders qualify to do business in your jurisdiction Deeds and Documents (RTD) to verify the existence of a registered to extend credit to a borrower organised in your jurisdiction? finance transaction. However, it is not mandatory to register financ- Will foreign creditors be deemed resident as a consequence of ing agreements with the RTD, therefore, there might be financ- making a loan or other extension of credit to an obligor within your ing operations that will not be detected by means of the referred jurisdiction? certificate. There is no required qualification for foreign lenders to extend credit to borrowers organised in Brazil, however, in order to hold inter- 4 Can one determine whether an obligor registered in your est over a vessel or other in rem rights, a creditor must obtain a jurisdiction is duly organised and in good standing from a search Brazilian taxpayer identification number. of a public registry? Under Brazilian general permanency rules, a loan transaction Yes, it is possible to conduct a legal audit on the obligor’s businesses, does qualify the foreign entity as resident in Brazil. activities and its economic, financial and legal affairs, by means of a search in the public records of federal and state courts, as well Repayment as a search on the obligor’s bankruptcy proceedings and judicial management. 8 Is central bank or other regulatory approval required for repayment However, since the Brazilian legal system provides for state of a loan in foreign currency? courts and each state organises its courts separately, the listing of The financial conditions of operations of external loans between state claims against a particular company is not centralised in one parties resident or domiciled in Brazil or abroad are not subject to specific state court. In this sense, considering that it is not viable to prior approval from the Brazilian Central Bank, however, they must conduct a search in each state court (due to the large number of state be submitted to and registered with the Brazilian Central Bank. Such courts and the correspondingly high costs), the searches are usually registry is made through the Registry of Financial Operations. conducted only in states in which the companies have headquarters or branches.

4 Getting the Deal Through – Ship Finance 2014 Kincaid – Mendes Vianna Advogados BRAZIL

9 Do usury laws limit the interest payable to a lender in respect of a must have the required tonnage, namely, twice the tonnage under vessel financing? construction in a shipyard located in Brazil and half the tonnage of In accordance with the Brazilian Usury Law (Decree No. the Brazilian vessels already owned by the charterer. 22.626/1933), it is forbidden to establish in any contracts interest rates that are more than double the legal rate provided by the Ship mortgages and other liens over vessels Brazilian Central Bank. 14 What types of ship mortgages exist and what obligations may a However, the Usury Law is not applicable to financial institu- ship mortgage secure? Can contingent obligations, including swap tions; therefore, there are no limits imposed by law on the interests obligations, be secured? Are there standardised forms? established by banks in a financing agreement, and such interests might be freely stipulated between the parties. Brazilian law provides for mortgages and chattel mortgages (fiduciary sale) on vessels. 10 Are withholding taxes payable on principal or interest payments to The main difference between them is that while a mortgage is non-resident lenders? an in rem right of the creditor over the debtor’s property, a chattel mortgage provides for the transfer of some of the owner’s rights on Yes. There is withholding income tax (at 15 per cent) on the pay- the asset to the creditor. The debtor under a chattel mortgage is the ment of interest to non-resident lenders. The repayment of the prin- direct possessor and depositary of the vessel, and some of the own- cipal amount is exempted from withholding income tax. Loans may er’s rights over the vessel are transferred to the creditor. Therefore, also trigger tax on financial transactions. the creditor with a chattel mortgage over a vessel is not the registered owner of the vessel, but, in the event of default, the creditor Registration of vessels is allowed to take possession of the vessel, consolidate the property, 11 What vessels are eligible for registration under the flag of your and then carry out a private sale of the vessel. The mortgage subjects country? Are offshore drilling rigs or mobile offshore drilling units the creditor to public auction of the asset. considered vessels under the laws of your jurisdiction? What is The assignment of ownership also prevents the debtor from the effect of registration? using the asset until the debt is fully settled, while under a mortgage, Brazil has two vessel registration systems for Brazilian-flagged the use of the asset by the debtor, which in this case remains with the vessels: the Brazilian Vessel Ownership Registry and the Brazilian owner, is possible, with liens and encumbrances on the asset being Special Registry (REB). permitted. The Brazilian Vessel Ownership Registry is a compulsory reg- Mortgages or chattel mortgages may secure any debts, even con- istry for all seagoing vessels of over 20 GT and vessels of over 50 tingent or future debts. GT employed in inland waterways transport that are owned by There are no standardised forms required. However, see ques- Brazilian legal entities or individuals. This registry must be made at tion 15 regarding the requirements for a mortgage to be considered the Brazilian Admiralty Court with the purpose of establishing the valid under Brazilian law. nationality, validity and publicity of the vessel’s ownership. The REB is an optional registry for Brazilian vessels operated by 15 Give details of any required form for ship mortgages in your Brazilian shipping companies and foreign-flagged vessels bareboat jurisdiction. chartered to Brazilian shipping companies, with the temporary sus- To be considered valid and in effect under Brazilian law, all mari- pension of the foreign flag. time mortgages must be constituted through a public deed and reg- In accordance with Law No. 9.537/1997 and Navy Ordinances istered with the Maritime Notary Office, the relevant port captaincy Nos. 01, 02, 03 and 28, issued by the Department of Ports and and the Admiralty Court. In this sense, to create a mortgage on a Coast, the definition of vessel includes all floating structures – Brazilian-registered vessel, a public deed must contain the following: including fixed platforms when towed – that are capable of moving • the amount of credit (an estimate or maximum amount); on water, either by own means or not, and can transport people or • the term established for repayment; cargo. Therefore, the legal concept of Brazilian vessels does include • the applicable interest rate, if any; rigs (floating rigs and fixed rigs when towed). • the vessel’s specifications, such as gross tonnage, deadweight However, there have been administrative decisions contrary to tonnage and other identifying data; and this understanding whereby the tax authorities have claimed that the • the vessel’s insurance certificate. tax benefits applied to vessels were not applicable to rigs, since they do not perform transportation activities. 16 Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the 12 Who may register a vessel in your jurisdiction? effect of registration? Only Brazilian citizens or Brazilian residents and companies incor- The Admiralty Court maintains the register of mortgages over porated in Brazil are allowed to register vessels in Brazil. However, Brazilian-flagged vessels. Brazilian vessels operated by Brazilian shipping companies and In order to register a mortgage, it is also necessary to register foreign-flag vessels bareboat chartered to Brazilian shipping compa- the instrument constituting the mortgage, which contains all details nies, with temporary suspension of the foreign flag, are exceptionally and information. However, in case a clearance certificate is required accepted in the REB. See question 11. by the Admiralty Court, it shall only contain the name of the main creditor and the type of mortgage (first degree, second degree, etc). 13 Is there an alternate registry for international shipping The mortgage shall only be considered an in rem right, enforce- operations? able before third parties, after registration with the Admiralty Court. The REB is an optional registry for Brazilian vessels operated by Before registration, a mortgage is only considered a contractual obli- Brazilian shipping companies, and foreign-flagged vessels under gation and therefore only enforceable between the parties. bareboat charter to Brazilian shipping companies, with temporary suspension of the foreign flag. 17 Must the total amount of the mortgage be stated therein? Must There are two requirements for a foreign vessel chartered to a the mortgage contain a maturity date? Must the underlying debt Brazilian shipping company to be registered with the REB: (i) sus- instrument be filed with or attached to the recorded mortgage? pension of the original flag; and (ii) the Brazilian shipping company See question 15. www.gettingthedealthrough.com 5 BRAZIL Kincaid – Mendes Vianna Advogados

To be considered valid and in effect under Brazilian law, the However, Brazilian maritime law is currently being discussed in maritime mortgage has to be constituted through a public deed, a bill by the Brazilian Congress, which provides the possibility of which must state the amount of credit (an estimate or maximum arresting sister ships in case of privileged credits or maritime liens. amount) and the term for repayment, among other requirements. The underlying debt instrument may reflect the exact terms of 22 What maritime liens rank higher than a mortgage lien? the recorded mortgage or simply be attached to the mortgage. As per the ranking set out in question 21, the following maritime liens rank higher than a mortgage: 18 Can a mortgage be registered in the name of an agent or trustee • federal taxes; for the benefit of multiple lenders? • legal costs and expenses; Yes, it is possible to constitute a mortgage for the benefit of multiple • claims resulting from the employment of the master, crew and lenders. However, in Brazil a financing syndicate does not have legal ship personnel; personality and in those cases the agent is registered as lender or • indemnities due for salvage; representative. • general average contributions; • obligations undertaken by the captain outside the port of regis- 19 If the mortgagee is an agent or trustee for a lending syndicate, try for maintenance needs or continuation of the voyage; and must any filings be made upon transfer of a portion of the • indemnities due as a result of collisions, or any other sea accident. underlying debt among existing lenders or to a new lender? No, considering that it will be registered under the name of the agent. 23 May non-mortgage liens be recorded over a vessel? Although non-mortgage liens are recognised in Brazil, formally, it is 20 If the mortgagee transfers its interest to a new lender, agent or only possible to register in rem liens (such as mortgage and chattel trustee, what filings are required? Is the mortgagor’s consent mortgage) or judicial liens (established by a judicial decision) over required? vessels. Yes, the mortgagor’s prior consent is required. In addition, it will be necessary to execute an amendment to the mortgage instrument, to 24 Will mortgages on ‘foreign’ flag vessels be recognised in your be registered before the Admiralty Court. jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction? 21 What other maritime liens over vessels are recognised in It is not possible to register a mortgage over a foreign-flagged vessel your jurisdiction? Do these claims give rise to a right to arrest before the Admiralty Court. a vessel? In what circumstances may associated ships be For an instrument that creates a mortgage over a foreign vessel arrested? to be valid in Brazil, first of all, it is necessary to have its signatories’ The maritime liens recognised by Brazilian law are set out in the signatures certified by a notary, and, if there is any certification by Commercial Code of 1850, as well as the 1926 Brussels Convention, a foreign notary, the notary’s signature shall also be consularised in ratified by Brazil, and are ranked as below: the Brazilian consular office in the place of execution and a sworn • federal taxes; translation made in Brazil. After that, the document must be regis- • legal costs and expenses; tered with the appropriate Brazilian registry of deeds and documents • claims resulting from the employment of the master, crew and to be valid towards third parties. ship personnel; Where the creditor needs to execute a mortgage over a foreign • indemnities due for salvage; vessel, assuming such vessel is in Brazilian waters, it will be necessary • general average contributions; to follow the above-mentioned steps required to validate foreign • obligations undertaken by the captain outside the port of regis- documents in Brazil, as well as the procedures for the enforcement try for maintenance needs or continuation of the voyage; of foreign judicial decisions or arbitral awards. In short, these are to • indemnities due as a result of collisions, or any other sea seek ratification by the Superior Court of Justice, which will be pro- accident; vided as long as certain formal requirements are met, including the • ship mortgages; absence of any provisions contrary to Brazilian laws, public policy, • port dues; national sovereignty and good moral conduct). • outstanding payments due to depositaries, warehouse rentals, ship equipment; 25 What is the procedure for enforcing a mortgage in your jurisdiction • expenditures for the upkeep of the ship and her appurtenances; by way of foreclosure? Are interlocutory sales permitted? How • short delivery and cargo losses; long does a judicial sale take? What are the associated court • debts arising out of the construction of the vessel; costs and how are they calculated? • expenses incurred for repairs of the vessel and appurtenances; Mortgages on ships are enforced through judicial actions and a and forced sale at public auction. • the outstanding price of the vessel. The judicial sale of vessels follows the same general rules as asset bidding. Court bidding procedures are conducted by the public Where the creditor has a maritime lien over a vessel, its credit is auctioneer, whose fees amount to between 2 and 5 per cent of the considered as privileged if properly construed according to article I sale value. The minimum initial bid is set by the judge based on the of the 1926 Brussels Convention and, therefore, the creditor may accounting report. The vessel cannot be sold at the first auction for seek the arrest in rem of the vessel. an amount below its official appraisal. However, at the second auc- There are no specific provisions dealing with the arrest of sister tion (10 to 20 days after the first auction), the vessel may be sold ships in Brazilian law. If the claim is based on a privileged credit at any price that the court considers proper (within a limit of 40 (maritime lien) with effects in rem on the vessel, the creditors would per cent of the appraised value). The highest bidder deposits 20 per be unlikely to obtain the arrest of another vessel of the debtor’s fleet. cent of the bid in cash or by certified cheque immediately after the However, if the arrest is in personam, it may be possible to file a pre- auction, with the balance to be paid within a certain period. If the cautionary lawsuit against the shipowner in order to detain a sister residual amount is not paid, the auction may be aborted and the ves- ship and request security even if the obligation is not directly related sel offered to the next bidder. to such sister ship.

6 Getting the Deal Through – Ship Finance 2014 Kincaid – Mendes Vianna Advogados BRAZIL

Once the sale has been duly performed, the judge will release leasing agreement. However, this subject has been finally settled by an order of sale and the bidder will register ownership with the a general ruling issued by Brazilian Superior Courts in 2004. Now, Admiralty Court. the nature of the finance leasing can only be questioned if the legal Before seeking the judicial sale of the vessel, the creditor needs to requirements are not observed. obtain a final court decision for subsequent enforcement. Where the mortgage is over a foreign-flagged vessel, the creditor will need to 31 How is a security interest created over earnings of a vessel, follow the steps for the enforcement in Brazil of the foreign judicial charter contracts, insurances, etc? How are these security decision or arbitral award that recognises its credit and lien. interests perfected? Interlocutory sales are permitted as long as the creditor proves These security interests are created by means of private contracts, that the ship is subject to depreciation or deterioration or where which become perfected through communication to the debtor. the sale is advantageous, as per section 670 of the Brazilian Civil There is also the alternative of registering the contract with the RTD, Procedure Code. in order to be enforceable before third parties.

26 May a vessel be sold privately by a mortgagee? Will the sale 32 Must security interests against non-vessel collateral be registered discharge liens over the vessel? to be enforceable? If so, where are such filings made? As regards mortgages, it is not possible for the mortgage creditor As a general rule, only in rem rights, over vessels or real estate, must to privately sell the vessel, since the mortgage may only be enforced be registered to be enforceable, but each type of security may have through judicial actions and a forced sale at a public auction. By its own requirements to be fulfilled. means of a judicial sale the existing liens and encumbrances shall be discharged. See question 14. 33 How is a security interest over a deposit account established? Nevertheless, as regards chattel mortgages, this is possible, inas- How is a security interest perfected? much as the creditor has the right to seek relief through a search and seizure action whereby the debtor is forced to relinquish the asset In Brazil, it is mandatory to specify the amount over which the immediately and then is authorised to carry out a private sale of the pledge will apply. Therefore, it is not usual to have a pledge over asset, not following the public auction. In this case, any other liens monies or bank accounts; it is more common to have blocked or will follow the asset. escrow accounts. These are achieved through a contractual agreement among the debtor, creditor and bank, to block the operations of any referred bank account. 27 What are the limitations on rights of self-help by a mortgagee?

See question 26. As regards the mortgage, the creditor is not entitled 34 How are security interests in non-vessel collateral enforced? to any self-help and must have resort to the judicial system. The creditor is not permitted to take possession of the mortgaged vessel Procedures to enforce any security will depend on the type of security, in the event of default. Mortgage foreclosure proceedings provide namely, in rem, related to titles of credits, contractual (assignment of for the auction of the vessel and the creditor shall apply the proceeds earnings, for example). Some types of securities may be protested, of the sale to satisfy its credit and return the excess, if any, to the but as a general rule, all securities shall be enforced through court debtor. procedures, if no step-in rights are granted. In relation to the chattel mortgage, the creditor is entitled to carry out a private sale of the vessel, which grants greater speed and 35 How are share pledges for vessel financings established? Are security to the creditor in the event of default by the debtor. share pledges or share charges common in your jurisdiction? Is it very usual in Brazil to create a pledge over the shares of a com- 28 What duties does a mortgagee owe to an owner or third-party pany as collateral to a financing operation. creditors? For this purpose, it is necessary to follow the procedures to In the event of sale of the vessel, in a public auction or private sale, validate the pledge agreement in Brazil (notarise, consularise, offi- the creditor shall not accept an insignificant price, always looking cially translate it into Portuguese and register it with the RTD). for market value and good commercial terms for the sale of the Additionally, it is advisable to register an amendment to the arti- asset. Additionally, after the sale, the creditor is entitled to satisfy its cles of association of the pledged entity with the Board of Trade, to credit by presenting all accounts and evidence to owner and return- reflect the pledge created, if related to a limited liability company. ing any excess cash to the owner. Whether under public auction or In the case of a share pledge over shares of a corporation, the pres- bankruptcy procedures, other credits with preferential rights over entation of the share certificates is required and the pledge must be mortgagee may be satisfied before mortgagee. recorded in the company’s books.

36 Is there a risk that a pledgee, before or after exercise of the share Collateral pledge, may be exposed to debts or other liabilities of the pledged 29 May finance leases or other charters be recorded over vessels company? flagged under the laws of your jurisdiction? All debts and liabilities remain with the pledged company; there is Yes, it is possible to register financing agreements regarding no transference to the pledgee. Brazilian-flagged vessels with the RTD. In relation to charter agreements, it is mandatory to register Tax considerations for vessel owners bareboat charter agreements with the Maritime Notary Office and the Admiralty Court. 37 Is the income earned by the owners of vessels registered in your jurisdiction subject to domestic taxation? At what rate? 30 May finance leases be re-characterised by a court as a financing Yes. Two federal taxes (contribution to the National Integration contract? If so, is there any procedure for protecting the lessor’s Programme (PIS) and social contribution on gross revenues interest against third-party creditors? (COFINS)) are triggered by the company’s gross revenues, includ- There have been several lawsuits in the past that have questioned ing charter hire or freight revenues. The joint tax rate of PIS and the nature of the lease agreement due to prepayment of the residual COFINS is 9.25 per cent. amount. There was an argument that the prepayment of the residual Until 31 December 2014, charter hire or freight revenues are amount conferred the nature of a financing contract other than a subject to social security contribution at a tax rate of 1 per cent. www.gettingthedealthrough.com 7 BRAZIL Kincaid – Mendes Vianna Advogados

Gross revenue must also be included in the corporate taxable recovery plan for its finances, which must be accepted by most of basis for assessing income tax (IRPJ) and social contributions on net its creditors. Meanwhile, any lawsuits against the company are sus- profits (CSLL). The IRPJ tax is 25 per cent of the nominal rate on pended for 180 days. the adjusted taxable income (corporate tax rate is 15 per cent, how- A reorganisation plan can provide for extension of terms for ever, there is a 10 per cent surplus tax levied on all adjusted taxable payment of debts, sale of assets, merger, change of control, shared income exceeding 240,000 reais per year) and the CSLL tax rate is 9 administration among the debtor and creditors and so on. per cent, also on the adjusted taxable income. A credit originating from a ship mortgage is considered a secured Charter hire or freight paid from Brazilian payers to foreign credit. Secured creditors comprise a specific category and each owners are subject to withholding income tax at different tax rates secured creditor is listed in such category to the extent of the secu- between zero and 25 per cent. rity it holds. Any use or disposal of collateral by the debtor should be approved beforehand by the relevant secured creditor. Therefore, the 38 Is there an optional tonnage tax exempting vessel owners from secured creditors do not hold a different means of seeking remedies tax on income? for protection of their collateral, other than negotiating the payment No. Shipowners are taxed based on the general corporate tax rule. of the respective credit under the reorganisation plan. All categories See question 37. of creditors are paid according to the judicial reorganisation plan. In forced liquidation proceedings, secured credits (limited to the value 39 What special tax incentives are available to shipowners of the collateral) rank behind labour credits (limited to 150 times registering vessels in your jurisdiction? the minimum wage) and credits deriving from accidents at work, but ahead of tax credits and unsecured credits. Brazilian shipowners may register the vessels or hull with the REB, which grants tax incentives especially for building in Brazilian ship- 42 Will the courts of your jurisdiction respect the rulings of a foreign yards (exemption from import taxes and from sales taxes triggered court presiding over reorganisation or liquidation proceedings? by the delivery of the vessels) and exemption from the payment of a special social contribution for professional training for Brazilian For a foreign decision to be enforced in Brazil, it should be ratified crewmembers. by the Superior Court of Justice (STJ) to grant the exequatur, as There is no accelerated depreciation rule applicable to vessels. per the Brazilian Civil Code, Civil Procedural Code, Arbitration Act, The ordinary term for a vessel’s depreciation is 20 years. However, Resolution No. 9 of the STJ and other related legislation. companies can adopt accelerated depreciation for moveable assets However, in case of reorganisation or liquidation of a company based on their daily hours of operation, under the following with a branch and assets in Brazil, the STJ will not grant the exe- coefficients: quatur, in view of article 3 of Bankruptcy Law, which states that • x1 – for one shift of eight hours of operation; the competent court to process a bankruptcy and reorganisation is • x1.5 – for two shifts of eight hours of operation; and the Brazilian local court where the company has its main centre of • x2 – eight shifts of three hours of operation. activities.

It is not necessary to request permission from the Brazilian tax 43 What is the order of priority among creditors? In what authorities for adopting accelerated depreciation accounting. circumstances will creditors be required to disgorge payments However, if accelerated depreciation is adopted, the taxpayer may from an insolvent company? be requested, at any time, to justify such a procedure, under penalty In accordance with the Bankruptcy Law, creditors will be ranked of the depreciation relative to the normal rate being glossed over. according to the nature of their credit, namely: • labour creditors, encompassing all payments due by the busi- 40 Are there any other noteworthy tax provisions specifically ness owner to his employees (article 449, section 1 of the applicable to shipping, shipping income or ship finance? Consolidated Labour Laws) and indemnity for employment- Shipowners engaged in supporting activities related to the oil and related accidents; gas market may enjoy tax incentives on the importation of vessels, • secured creditors up to the limit of the encumbered asset; equipment and remotely operated vehicles on a temporary basis into • overdue tax or non-tax liability (article 186, section 2 of the Brazil and also for local construction. National Tax Code and article 4, section 4 of Law 6.830/80); The Brazilian government makes available subsidised inter- • creditors with special privilege; est rates and long-term repayment periods with a significant grace • creditors with general privilege; period before the start of repayment. Such incentives are available to • unsecured creditors; Brazilian companies and Brazilian shipyards for vessels to be built or • creditors holding right to contractual fines or pecuniary penal- reformed in Brazil. In those cases financing is made using resources ties for violation of administrative or criminal law; and from the Merchant Marine Fund through one of the authorised • subordinated creditors. banks. The most frequently used of the authorised banks are the National Bank for Economic and Social Development and the Bank Brazilian Bankruptcy Law states that the seven types of transaction of Brazil. set out below are considered ineffective with regard to the bankrupt estate, whether or not the contracting party was aware of the debt- Insolvency and restructuring or’s difficulties and whether or not the debtor intended to defraud creditors. In these cases, creditors may be required to disgorge pay- 41 Is there a general scheme of reorganisation or insolvency ments from the insolvent company. administration in your jurisdiction? • payment by the debtor within the legal term of debts not yet The Brazilian Bankruptcy Law (11.101/2005) provides for a proce- fallen due, by extinguishment of the credit right, including dis- dure called judicial reorganisation as a system to save the entity. The count of the actual instrument; objective is to preserve the company facing financial difficulties, its • payment made within the legal term of debts fallen due and employees and the creditors’ interests and to preserve the continuity enforceable, in any way not provided under the contract; of the business. • constitution of an in rem guarantee, including a lien, within the A Brazilian company facing financial difficulties may, after judi- legal term, in case of a debt contracted previously. If the assets cial permission, present an economic feasibility study with a detailed given in mortgage are the object of other subsequent mortgages,

8 Getting the Deal Through – Ship Finance 2014 Kincaid – Mendes Vianna Advogados BRAZIL

44 May a vessel owner provide security on behalf of other related Update and trends or unrelated companies? What are the requirements for it to be enforceable? A new Project of Law (PL 1572/2011) (the Project) that aims to Brazilian law admits that a vessel owner provides security on behalf establish a new Brazilian Commercial Code is currently under of another company, by personally guaranteeing satisfaction of an review before the National Congress. The Brazilian Commercial Code currently in force dates from obligation assumed by the debtor. Such guarantee must be in writ- 1850 and has been partially revoked by the Brazilian Civil Code ing and is considered valid regardless of the consent of the debtor of 2002, but a considerable part of the old Commercial Code still or its will. remains in effect, including some provisions pertaining to maritime To be directly enforceable in court, the personal guarantee must law. The Project aims to update and concentrate in one single be provided by public document or private agreement. codified law the provisions related to commercial law that are currently regulated either by the old Commercial Code, the Civil 45 Is there a law of fraudulent transfer that permits a third-party Code or various other legislation. creditor to challenge, for example, the grant of a mortgage In summary, the Project brings provisions related to the because of insolvency of the mortgagor or insufficient different aspects of commercial activity, but most importantly, aims to improve provisions to make them more efficient, regarding ship consideration received by the mortgagor in exchange for the grant arrest, arrest of bunkers and sister ships, for example. of the mortgage? While the Project will still be subject to the necessary There is no specific law related to fraudulent transfer in Brazil. legislative process before the National Council of Justice, industry organisations and professionals of the maritime industry are However, the Brazilian Civil Code and the Civil Procedure Code looking for an opportunity to amend the original draft of the Project provide that, in some situations, it is possible to challenge a transac- to insert new and updated provisions. tion realised by a debtor who is already insolvent or is reduced to insolvency by such transaction. Additionally, it is possible to challenge the sale of an asset granted as guarantee of a debt. the bankrupt estate shall receive the part that should apply to The Brazilian Bankruptcy Law also declares as invalid some the creditor of the revoked mortgage; transactions considered as fraudulent realised by the insolvent com- • acts performed free of charge during the two years preceding the pany, even before the declaration of bankruptcy. decree of bankruptcy; • waiver of inheritance or legacy during the two years preceding 46 How may a creditor petition the courts of your jurisdiction to the decree of bankruptcy; declare a debtor bankrupt or compel liquidation of an insolvent • sale or transfer of an establishment without the express consent obligor? of or payment to all creditors existing at the time, sufficient To declare a debtor bankrupt, the creditor must prove the debtor’s assets not having remained to the debtor to settle his liabilities, default on a judicially enforceable instrument the value of which unless, within 30 days, there is no opposition by creditors after is equivalent to 40 minimum wages. Or, without proof of lack of being notified, either judicially or by a deeds and documents reg- payment, the creditor must also produce a list of criteria provided istry officer; and by law that serves to demonstrate the impossibility of the debtor • registry of in rem rights and of property transfer inter vivos, for complying with his obligations. a consideration or free of charge, or an annotation of real prop- Further, in order for the creditor to hold legal standing to file for erty made after the decree of bankruptcy, unless there is a previ- a debtor’s bankruptcy, the law stipulates that debtor must be notified ous annotation. in advance of the protest.

The ineffectiveness may be declared by the judge on his own initia- 47 Has your jurisdiction adopted the Model Netting Act of the tive, alleged in defence or claimed under a specific action or inciden- International Swaps and Derivatives Association (ISDA)? If not, tally during the proceedings. may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency? Brazil has adopted the Model Netting Act through specific legislation for financial institutions operating in Brazil. However, there is also case law supporting close-out netting even in the event of insolvency or bankruptcy.

Camila Mendes Vianna Cardoso [email protected]

Av Rio Branco, 25, 1st, 2nd & 15th floors Tel: +55 21 2276 6200 Centro, Rio de Janeiro Fax: +55 21 2253 4259 20090-003 www.kincaid.com.br Brazil

www.gettingthedealthrough.com 9 CHINA Wintell & Co China

James Hu, Lawrence Chen, Mervyn Chen and Jasmine Liu Wintell & Co

Due diligence decided at a meeting of the board of directors, a shareholders’ meeting or the shareholders’ assembly. If the articles of association pre- 1 How does one demonstrate title to or legal ownership of a vessel scribe any limit on the total amount of the guarantees or on the registered under the laws of your jurisdiction? amount of a single guarantee, the aforesaid total shall not exceed In China, title or legal ownership of a vessel is demonstrated by the that limited amount. If a corporation intends to provide a guaran- certificate of ownership. tee to a shareholder or actual controller of the corporation, it shall make a resolution through a shareholders’ meeting or assembly. 2 How can one determine whether there are any liens recorded over The shareholder or the shareholder dominated by the actual control- a vessel? ler shall not participate in voting on the matter. In such a case, the Under Chinese law, neither a possessory lien nor a maritime lien can affirmative votes of more than half of the other shareholders attend- be recorded over a vessel. However, one may file an application to ing the meeting are required. the courts to access such information. 7 Must foreign lenders qualify to do business in your jurisdiction 3 How does one determine whether there are any security to extend credit to a borrower organised in your jurisdiction? agreements, liens, charges or other encumbrances granted Will foreign creditors be deemed resident as a consequence of by a vessel owner or affiliated party who might be a borrower, making a loan or other extension of credit to an obligor within your guarantor or other credit party in connection with a vessel finance jurisdiction? transaction? Any party that plans to establish a solely foreign-funded bank or Such information is private and confidential and if a party does not a Sino-foreign joint equity bank, or a foreign bank that plans to voluntarily disclose it, others generally have no access to such infor- establish a branch or representative office shall satisfy the following mation. However, if the mortgage of the vessel is duly registered, it qualifications: could be verified through the local registry authorities of Maritime • it has the capability of making profits continuously, a good Safety Administration. credit standing and does not have any record of serious violation of any law or regulation; 4 Can one determine whether an obligor registered in your • the shareholder that plans to establish a solely foreign-funded jurisdiction is duly organised and in good standing from a search bank, the foreign shareholders of a foreign-funded equity joint of a public registry? bank, and the foreign bank that plans to establish a branch or Yes, the State Administration of Industry and Commerce (SAIC) representative office shall have international financial experience; provides access to the public for searches and enquiries into com- • it has an effective anti-money laundering system; pany registration information and operation status. • the shareholder that plans to establish a solely foreign-funded bank, the foreign shareholders of a Sino-foreign joint equity 5 Can the shareholders or other equity interest holders, directors bank, and a foreign bank that plans to establish a branch or and officers or other authorised signatories of an obligor representative office shall be under the effective supervision of organised in your jurisdiction be determined from a search the financial regulatory authority of the country or region where of a public registry? If not, how are these parties customarily it is located, and its application shall have been approved by the identified? financial regulatory authority of the country or region where it Any person or entity may apply to the SAIC to obtain the basic regis- is located; try information of an obligor organised in China. The public registry • it shall have a perfect financial regulatory system, and its finan- file contains information, inter alia, regarding the shareholders and cial regulatory authority shall have a good mechanism of super- their ratio of contributions, the legal representative of the company vision and cooperation with the banking regulatory institution and a list of the executives. Generally, the authorised signatories of the State Council; and would be the legal representative of the enterprise. The name and • other prudent conditions as prescribed by the banking regula- identity of the legal representative would be recorded on the busi- tory institution of the State Council. ness licence accordingly. The creditors would not be deemed resident as a consequence of 6 What corporate or other entity action is necessary for an obligor making a loan or other extension of credit to an obligor. to enter into or guarantee a debt obligation? When is action by the board of directors or other governing body required? Must shareholders approve a guarantee? Where a corporation intends to provide a guarantee for others, it shall, according to the provisions of its articles of association, be

10 Getting the Deal Through – Ship Finance 2014 Wintell & Co CHINA

Repayment In terms of the Maritime Code, a vessel means seagoing ships and other mobile units. Offshore drilling rigs and mobile offshore drill- 8 Is central bank or other regulatory approval required for repayment ing units may be considered vessels under Chinese law in some of a loan in foreign currency? cases where the unit features self-navigability and could maintain The State Administration of Foreign Exchange would supervise a seagoing state. In these instances, the unit may fall into the cat- the repayment of a loan in foreign currency. All foreign exchange egory of ‘other mobile units’ as stipulated by the Maritime Code. receipts of domestic entities for current account transactions shall Nevertheless, this issue is still controversial in the judicial practices. be repatriated and shall not be deposited abroad in violation of the No acquisition, transference or extinction of the ownership of a relevant government regulations without authorisation. Meanwhile, ship shall act against a third party unless registered. all foreign exchange receipts for current account transactions shall be sold to the designated foreign exchange banks in accordance with 12 Who may register a vessel in your jurisdiction? the regulations issued by the State Council on the sale and purchase Pursuant to the Regulations on the Registration of Ships, the fol- of foreign exchange and making payments in foreign exchange, and such receipts may also, upon approval, be deposited in the foreign lowing citizens or companies may apply to register a ship in China: exchange account at the designated banks for foreign exchange • Chinese citizens whose residences or principal places of business operations. are located within the territory thereof; • enterprises or companies with legal-person status established 9 Do usury laws limit the interest payable to a lender in respect of a under the laws of China and whose principal places of business vessel financing? are located within the territory thereof, provided that where foreign investment is involved, the proportion of registered capital In China, there is no specific law preventing usury. However, the contributed to by a Chinese investor or investors shall not be less interest rate is managed and monitored by the general headquar- than 50 per cent; and ters of the People’s Bank of China. Any major adjustment to the • Chinese governmental institutions whose ships are to be engaged interest rate shall be submitted to the State Council for approval. Meanwhile, according to the judicial interpretation promulgated in public services and institutions with legal-person status. by the Supreme Court, the private lending rate may be higher than central bank interest rates to an appropriate extent, but shall not In addition, the MSA may determine other ships that are subject to exceed four times that of the central bank rate over the same period. registration in China. The registration of military ships, fishing ves- Beyond such limit, the part of interest would not be protected by sels and sporting vessels is governed by other regulations. Chinese law. 13 Is there an alternate registry for international shipping 10 Are withholding taxes payable on principal or interest payments to operations? non-resident lenders? There is currently no alternate registry for international shipping Withholding taxes are payable on the interest payments to non- operations. Nevertheless, in recent years, China’s ship registration resident lenders. Pursuant to the Corporate Income Tax Law, a non- system has embarked on the process of reform, highlighted by resident enterprise that does not have any establishment or place the issuance of the duty-free policy of ship registration system for of business within China or that has an establishment or place of Yangshan Bonded Port, which aims to encourage vessels to register business in China but whose income is not effectively connected under Chinese nationality. with such establishment or place of business, shall pay corporate income tax on its China-sourced income. In this regard, the inter- Ship mortgages and other liens over vessels est payments to non-resident lenders shall be deemed China-sourced 14 What types of ship mortgages exist and what obligations may a income. The tax rate applicable to non-resident enterprises deriving ship mortgage secure? Can contingent obligations, including swap income shall be 20 per cent. Corporate income tax payable by a obligations, be secured? Are there standardised forms? non-resident enterprise on the income shall be withheld at source and the payer shall be the withholding agent. The withholding agent There are no specific types of ship mortgages prescribed in Chinese shall withhold the tax from the amount paid or payable at the time law. Ship mortgages exist as a general concept. When the mortgagor the amount is paid or becomes due. fails to pay his debt to the mortgagee, the right of preferred compensation enjoyed by the mortgagee of that ship from the proceeds of Registration of vessels the auction sale made in accordance with law is secured.

11 What vessels are eligible for registration under the flag of your 15 Give details of any required form for ship mortgages in your country? Are offshore drilling rigs or mobile offshore drilling units jurisdiction. considered vessels under the laws of your jurisdiction? What is the effect of registration? Where a mortgage is established in respect of a ship of 20 GT or more, the following documents are required: As required by the Regulations on the Registration of Ships, the fol- • written application signed by both mortgagee and mortgagor; lowing vessels are eligible for registration under the flag of China: • certificate of ship’s ownership or shipbuilding contract; and • vessels owned by Chinese citizens who have residence or their • contract of ship mortgage and principal contract. principal place of business in China; • vessels owned by corporate legal persons that have been estab- If there are other mortgages that have already been established on lished in accordance with Chinese law and have their principal the ship, the relevant certificates shall also be submitted place of business in China, provided, however, that where the Where a mortgage is established on a jointly owned ship, the registered capital of the legal person has foreign investment, the joint owners shall, in addition, submit a document evidencing the amount of investment of the Chinese investor shall not be less agreement by the joint owners holding more than two-thirds (or a than 50 per cent; contractually agreed proportion) of shares thereof. • vessels used for public service in China; and • other vessels that the China Maritime Safety Administration (MSA) deems should be registered. The registration of military vessels, fishing vessels and sporting vessels in China is governed by other regulations. www.gettingthedealthrough.com 11 CHINA Wintell & Co

16 Who maintains the register of mortgages? What information does A maritime lien is the right of the claimant, according to the pro- it contain and where are such filings to be made? What is the visions of article 22 of the Maritime Code, to take priority in com- effect of registration? pensation against shipowners, bareboat charterers or ship operators The MSA records the following information: with respect to the vessel that gave rise to the said claim. The follow- • the name and address of the mortgagee and the mortgagor of a ing maritime claims shall be entitled to maritime liens: ship; • payment claims for wages, other remuneration, crew repatria- • the name and nationality of the mortgaged ship and the authori- tion and social insurance costs made by the master, crew mem- ties that issued the certificate of ownership and the certificate bers and other members of the ship’s complement in accordance number thereof; and with the relevant labour laws, administrative rules and regula- • the amount of debt secured the interest rate and the period for tions or labour contracts; repayment of the debt. • claims in respect of loss of life or personal injury occurring in the operation of the ship; No mortgage shall be effective against a third party unless registered. • payment claims for ship’s tonnage dues, pilotage dues, harbour dues and other port charges; 17 Must the total amount of the mortgage be stated therein? Must • payment claims for salvage payment; and the mortgage contain a maturity date? Must the underlying debt • compensation claims for loss of or damage to property resulting instrument be filed with or attached to the recorded mortgage? from tortious act in the course of the operation of the ship. Yes, the total amount of the mortgage would be stated therein. The applicant needs to fill in the maturity date while registering the mort- Ship repairers and shipbuilders shall have the right of possessory lien gage with the MSA. The mortgage contract and the principal con- over a vessel repaired or built by them on the condition that when tract must be attached to the recorded mortgage. they exercise the right of possessory lien, the vessel is in their possession. In addition, the towing party and salvor are also entitled to the right of possessory lien on the vessel towed or salvaged by them on 18 Can a mortgage be registered in the name of an agent or trustee the condition that when they exercise the right of possessory lien, the for the benefit of multiple lenders? vessel is in their possession. These claims would give rise to a right The current Chinese law has no prohibitive provision in this regard. to arrest a vessel. Usually, when a mortgage is to be registered, the principal contract, The maritime court may arrest another ship or ships, which, contract of mortgage and other related documents shall be provided when the arrest is effected, are owned by the shipowner, demise to the registration authority, and the mortgagee shall be the creditor charterer, time charterer or voyage charterer who is liable for the stated in the principal contract. maritime claim, except for claims with respect to ownership or possession of a ship. 19 If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the 22 What maritime liens rank higher than a mortgage lien? underlying debt among existing lenders or to a new lender? According to article 25 of the Maritime Code, a maritime lien shall The mortgagee cannot be an agent or trustee for a lending syndicate have priority over a possessory lien, and a possessory lien shall have (see question 18). If a portion of the underlying debt is to be trans- priority over a ship mortgage. ferred among existing lenders or to a new lender, relevant documents such as a contract of the transference of the creditor’s right shall be 23 May non-mortgage liens be recorded over a vessel? filed with the registration authority. Non-mortgage liens may not be recorded over a vessel. 20 If the mortgagee transfers its interest to a new lender, agent or 24 Will mortgages on ‘foreign’ flag vessels be recognised in your trustee, what filings are required? Is the mortgagor’s consent jurisdiction? If so, do they share the same priority as those on required? vessels registered under the laws of your jurisdiction? A security contract shall be subordinate to the principal contract, thus the mortgagee’s interest to the mortgage shall be transferred In Chinese legal practice, where a mortgage on a foreign-flagged ves- to a new lender, agent or trustee when the principal debt is trans- sel is confirmed by an enforceable legal instrument and this legal ferred to a new lender, agent or trustee; the mortgagee’s interest instrument (such as a civil judgment or arbitral award) has been to the mortgage cannot be transferred separately. If the mortgagee acknowledged by a Chinese court, this mortgage will be recognised. transfers its interest to a new lender, agent or trustee, he shall file the relevant underlying contract which stipulates the transfer of the 25 What is the procedure for enforcing a mortgage in your jurisdiction creditor’s right from the mortgagee to a new lender, agent or trustee by way of foreclosure? Are interlocutory sales permitted? How and the previous security contract to the authority in charge of the long does a judicial sale take? What are the associated court registration and alteration of the interest to the mortgage, which is costs and how are they calculated? the MSA in the vessel’s port of registry. To enforce a mortgage on a vessel, first, the mortgagee shall apply to Except where otherwise provided for by relevant laws or agree- a maritime court for arrest of vessel and then apply to the court for ments between the parties, where the mortgagee transfers its inter- auction sale of the vessel. est, the mortgagor’s consent is not required, but the mortgagee shall There is no concept of interlocutory sale under Chinese law. notify the mortgagor about the transference. According to article 70 of the Supreme Court’s Interpretation on Several Issues Concerning the Application of Guarantee Law, where 21 What other maritime liens over vessels are recognised in the act of the mortgagor may devalue the mortgage and the mortga- your jurisdiction? Do these claims give rise to a right to arrest gee’s request for reinstatement or security is rejected, the mortgagee a vessel? In what circumstances may associated ships be is entitled to demand that the debtor repay the debt, or request to arrested? enforce the mortgage in advance. Therefore, theoretically, interlocu- Besides a mortgage, maritime liens and possessory liens are also tory sales of vessels are permitted, but in judicial practice, we seldom recognised. see such sales.

12 Getting the Deal Through – Ship Finance 2014 Wintell & Co CHINA

Usually, a judicial sale would take at least three months, mainly 33 How is a security interest over a deposit account established? depending on how many rounds of auctioning it takes for the vessel How is a security interest perfected? to be sold. A security interest over a deposit account can be established by There are no associated court costs that will be incurred, but mutual agreement of the parties and can be perfected by means of auction costs, including the auctioneer’s fees, auction venue rental, applying to a court for freezing of the account and enforcement, but security cost, watch-keeping fees, commission, survey fees, evalua- it cannot be enforced against a third-party creditor. tion fees and berthing fees would be incurred. The commission shall be calculated at 3 per cent of the auction proceeds and other fees, 34 How are security interests in non-vessel collateral enforced? especially the berthing fees, would vary from case to case. Such security could not be enforceable against a third party; the creditor’s right secured by the non-vessel collateral is actually an 26 May a vessel be sold privately by a mortgagee? Will the sale ordinary creditor’s right. Thus, the claimant may apply to the court discharge liens over the vessel? for attachment of property, and after the claimant has obtained a The mortgagee is not allowed to sell the vessel privately, nor will judgment or arbitral award, he may apply to the court for enforce- the sale of a vessel discharge possessory liens or maritime liens over ment of the same. the vessel. 35 How are share pledges for vessel financings established? Are 27 What are the limitations on rights of self-help by a mortgagee? share pledges or share charges common in your jurisdiction? The current Chinese law does not have any provision on the right of According to the SAIC Registration Methods on Share Pledge, the self-help by a mortgagee. items to be registered include the following: the names of the pledgor and pledgee; the name of the company whose share is to be pledged; 28 What duties does a mortgagee owe to an owner or third-party and the amount of the share to be pledged. creditors? When applying for share pledge establishment registration, the There is no such provision in this regard so far. following documents shall be filed: • an application for registration of share pledge establishment, Collateral signed or stamped by the applicant; • a copy of a limited liability company’s list of shareholders that 29 May finance leases or other charters be recorded over vessels records the name of the pledgor and his amount of shareholding, flagged under the laws of your jurisdiction? or a copy of the share certificate held by the pledgor (all of which According to the stipulations of article 6 of the Vessel Registration must be stamped by the company); Ordinance, the establishment, transference or extinction of a ship • the pledge contract; mortgage or bareboat chartering shall be registered at the Ship • copies of the business certificates of the pledgor and pledgee or, Registration Administration, no mortgage or bareboat chartering in the case of a natural person, his or her ID card (stamped by shall act against a third party unless registered. Thus, finance leases the company or signed by the natural person); and or other charters are not compulsorily requested to be recorded over • other materials requested by the SAIC. the vessel, but if the establishment, transference or extinction of a ship mortgage or bareboat charter serves to act against a third party, While the shares are under pledge, the shareholder’s right to make it shall be recorded in the vessel’s certificate of ownership. decisions will not be affected, but the transference of the shares is not allowed. 30 May finance leases be re-characterised by a court as a financing As far as we know, share pledges or share charges are not very contract? If so, is there any procedure for protecting the lessor’s common in China. interest against third-party creditors? According to the Supreme People’s Court’s Explanation on the 36 Is there a risk that a pledgee, before or after exercise of the share Applicable Laws Issued with respect to the Trial of Finance Leasing pledge, may be exposed to debts or other liabilities of the pledged Contract Disputes, the court shall, in accordance with the stipula- company? tion of article 237 of the Contract Law, take the character and value There is no risk that the pledgee be exposed to the debts or other of the subject matter, constitution of the rental and the contractual liabilities of the pledged company, but if the pledged company’s state rights and obligations of the parties into consideration to determine of operation is not very good, there is a risk that the pledgee’s credi- whether a finance leasing legal relation is constituted. As to a finance tor’s right may not be fully secured. leasing contract, it does not actually constitute a legal relationship of finance lease and consequently the court shall deal with it in accord- Tax considerations for vessel owners ance with the legal relations it does constitute. Therefore, it is possible that a finance lease may be re-characterised by a court as a 37 Is the income earned by the owners of vessels registered in your financing contract. jurisdiction subject to domestic taxation? At what rate? There is no relevant provision regarding the procedure for pro- Yes. If the vessels are engaged in domestic transportation, the owners tecting the lessor’s interest against third-party creditors. Finance should pay VAT at 11 per cent. However, if the owners are regis- leasing is an emerging industry in China, thus the related legislation tered in the Yangshan and Dongjiang bonded port areas, the VAT is not very sound, but this situation is improving. paid by the owners should be returned simultaneously. If the vessels are engaged in international transportation and transportation 31 How is a security interest created over earnings of a vessel, between Hong Kong, Macao and Taiwan, the owners are entitled to charter contracts, insurances, etc? How are these security an exemption from VAT. interests perfected? This kind of security interest cannot be created, nor can it be 38 Is there an optional tonnage tax exempting vessel owners from perfected. tax on income? No. In China, tonnage tax and the tax on income are different, and 32 Must security interests against non-vessel collateral be registered the tonnage tax could not exempt vessel owners from tax on income. to be enforceable? If so, where are such filings made? All the vessels that enter the domestic ports of China from overseas Security interests against non-vessel collateral cannot be registered. ports shall pay vessel tonnage tax in accordance with the Interim www.gettingthedealthrough.com 13 CHINA Wintell & Co

42 Will the courts of your jurisdiction respect the rulings of a foreign Update and trends court presiding over reorganisation or liquidation proceedings? No. Such rulings cannot be directly enforced in China. Where such On 29 September 2013, the China (Shanghai) Free Trade Zone a ruling involves a debtor’s property within the territory of China was established, which will inevitably bring new opportunities for and the court applies to or requests the Chinese court to recognise the ship finance industry. According to the corresponding series of policies, the finance companies registered in the Free Trade and enforce it, the Chinese court shall go through the reorganisation Zone may set up SPVs without any minimum registered capital and enforcement proceeding and conduct an examination according restrictions and both the finance companies and the SPVs have to the relevant international treaties that China has concluded or the right to enjoy the export tax rebate policy. In addition, the acceded to or on the basis of the principle of reciprocity. Only when finance companies may operate the factoring business related it believes that the ruling in question does not violate the basic prin- their major finance business simultaneously. All those policies are attractive and beneficial for finance companies. Furthermore, the ciples of the laws of China, jeopardise the sovereignty and security banks registered in the Zone will be able to develop cross-border of the state or public interest, or undermine the legitimate rights and investment and financing activities, and the Chinese-funded banks interests of the creditors within the territory of China, may the court may operate offshore business, which means the banks may decide to recognise and enforce the ruling. provide overseas and foreign-related ship finance business. With the investment and financing channels being various and the interest being more and more market-oriented, both the 43 What is the order of priority among creditors? In what banks, finance companies and the shipping companies have more circumstances will creditors be required to disgorge payments choices. This will inevitably have an influence on the future wording from an insolvent company? of contracts and more laws and regulations will be needed to regulate and develop the new situation. The order of priority among creditors is as follows: • a creditor who is in debt to the debtor before the application for bankruptcy is accepted. The creditor may lodge a claim with the administrator for offsetting the debts. However, the debts speci- Regulation on Vessel Tonnage Tax. The tax is mainly used for the fied in article 40 of the Enterprise Bankruptcy Law shall not be construction, management and maintenance of the ports. offset; • a creditor secured by the specific property of the bankrupt; and 39 What special tax incentives are available to shipowners • after the expenses for bankruptcy proceedings are defrayed and registering vessels in your jurisdiction? the debts incurred for the common interests of creditors are There are no national tax incentives available to shipowners reg- repaid first, the bankruptcy property will be liquidated in the istering vessels in China. However, some local governments offer following order: special tax incentives to shipowners registering vessels in the port • the wages, subsidies for medical treatment, injuries and dis- in their jurisdiction. For instance, the shipowners registering vessels ability and the pensions for the disabled and the families in Tianjin Dongjiang bonded port area could get financial support of the deceased that the bankrupt owes, the basic old-age from the local government against their business tax amount in the insurance premiums and the basic medical insurance pre- first three years after their inception. Nevertheless, there are limita- miums that he owes and fails to enter in the employees’ tions on foreign investors seeking to register their vessels in China personal accounts, and the compensations that should be (see question 12). paid to the employees as prescribed by relevant laws and administrative regulations; 40 Are there any other noteworthy tax provisions specifically • the social insurance premiums that the bankrupt fails to pay, applicable to shipping, shipping income or ship finance? other than those specified in the preceding sub-bullet, and the taxes that the bankrupt fails to pay; and Shipping and ship finance companies registered in Shanghai Free • the common bankruptcy claims. Trade Zone enjoy a series of incentives. For instance, a shipping finance company can establish special purpose vehicles (SPVs) without the minimum registered capital restrictions and ship finance Where the bankruptcy property is not sufficient to satisfy the companies and SPVs are entitled to benefit from the export tax demands for repayment that are arranged in the same group, it shall rebate policy. be distributed on a pro rata basis. If individual creditors obtained the payment of debts after a Insolvency and restructuring people’s court accepted an application for bankruptcy, such payment should be disgorged, unless the same is paid under the circumstance 41 Is there a general scheme of reorganisation or insolvency specified in articles 14–16 of Several Provisions of the Supreme administration in your jurisdiction? People’s Court on Application of the Enterprise Bankruptcy Law. Yes. The Enterprise Bankruptcy Law deals with the general scheme In addition, if the individual creditors obtained the payment of of reorganisation and insolvency administration. Both debtors and debts by offsetting, however, then such claims could not be offset creditors could directly make an application to the people’s courts under article 40(2) and(3), such payment should also be disgorged. for the reorganisation of the debtor. During the period of reorganisation, the exercise of the security right over the specific property of a 44 May a vessel owner provide security on behalf of other related debtor shall be suspended. However, in the case of possible damage or unrelated companies? What are the requirements for it to be or marked depreciation of value of the security, which may impair enforceable? the secured creditor’s right, the secured creditor may apply to the The vessel owner can provide security on behalf of other related or people’s courts for the resumption of the exercise of his security unrelated companies. However, if the vessel owner provides security right. Such a scheme also applies to ship mortgages. The law does for and on behalf of the companies registered outside China or the not specify whether the procedure for enforcement shall be sus- foreign financial institution in China, such security is invalid unless pended when the people’s court only accepts an application for reor- the same has been approved or registered by the Foreign Exchange ganisation. However, after a people’s court accepts an application Administration. for bankruptcy, the procedure for enforcement shall be suspended If the vessel owner provides security in the form of a mortgage or and payment of debts made by the debtor to individual creditors pledge whose effect is subject to registration with the Administration shall be invalid. of Exchange Control as required by relevant laws and regulations,

14 Getting the Deal Through – Ship Finance 2014 Wintell & Co CHINA such security is enforceable when the same is registered and may judicial practice. However, according to the Enterprise Bankruptcy act against a third party. If the security is provided in another form, Law, if the obligor is under an insolvency procedure, the swap pro- there are no particular requirements. vider may not exercise its close-out netting rights under an ISDA master agreement in China. 45 Is there a law of fraudulent transfer that permits a third-party In accordance with article 18 of the Law, the administrator shall creditor to challenge, for example, the grant of a mortgage have the right to decide to either rescind or continue to perform a because of insolvency of the mortgagor or insufficient contract that was concluded before the acceptance of an applica- consideration received by the mortgagor in exchange for the grant tion for bankruptcy, but that has not been fulfilled. This means the of the mortgage? administrator may choose to only continue the contracts that may Yes. According to article 74 of the Contract Law, the third-party benefit the obligor. Such an option is different from the automatic creditor could file a claim before the competent court to challenge termination right of the close-out netting system. Further, according and nullify the fraudulent transfer actions taken by the debtor. to article 40 of the Law, the swap provider as the creditor has the right to lodge a claim with the administrator for offsetting the debts, 46 How may a creditor petition the courts of your jurisdiction to but such debts should be those that occurred before the application declare a debtor bankrupt or compel liquidation of an insolvent for bankruptcy is accepted. However, the debts under the close-out obligor? netting may not satisfy the requirement. Moreover, according to article 32 of the law, the close-out netting may mean that the obligor According to article 7 of the Enterprise Bankruptcy Law, where the makes a repayment to an individual creditor, and then the adminis- debtor cannot pay off his debts due, the creditor may make an appli- trator shall have the right to request the court to nullify it. cation to the people’s court at the place where the debtor resides for Therefore, we are of the view that the close-out netting rights the debtor’s bankruptcy liquidation. may not be automatically applied and enforceable under Chinese law. 47 Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency? No. The Enterprise Bankruptcy Law does not specify the effect of the close-out netting right, and there is no such precedent in Chinese

Mervyn Chen [email protected]

Rm 1901–1905 Tel: +86 21 6854 4599 Chamtime International Financial Centre Fax: +86 21 6854 5667 No. 1589 Century Avenue, Pudong [email protected] Shanghai 200122 [email protected] China www.wintell.cn

www.gettingthedealthrough.com 15 FRANCE Stephenson Harwood AARPI France

Alain Gautron and Ezio Dal Maso Stephenson Harwood AARPI

Due diligence 4 Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search 1 How does one demonstrate title to or legal ownership of a vessel of a public registry? registered under the laws of your jurisdiction? There are no certificates of good standing for French companies. To Title to a vessel in France must be published in a public register. determine whether a French company is in good standing, the fol- The procedure of registration of a vessel in France is a twofold lowing documents will be required: process involving: • a ‘K-Bis’ certificate issued by the Registry of Commerce and • the registration with the French Maritime Administration, Companies; and which deals with safety and technical regulations; and • a non-bankruptcy certificate issued by a commercial court or a • the ‘francisation’ of the vessel, which is the actual registration civil court. of title that is completed by the delivery of a certificate of francisation, which will usually be accepted as evidence of title of a These certificates would reveal whether there is any record of the French vessel. opening of insolvency proceedings, the appointment of a bankruptcy administrator or the termination of operations. In France there are six registers available to shipowners, which differ in terms of the tax and social regimes applicable to them. The two most important registers are: 5 Can the shareholders or other equity interest holders, directors • the First Register, operated by the French customs authorities in and officers or other authorised signatories of an obligor various ports of France; and organised in your jurisdiction be determined from a search • the French International Register (RIF). of a public registry? If not, how are these parties customarily identified? The name of the port marked on the stern and the bow of the ship A K-Bis certificate will provide details of the directors and author- might not coincide with the place of francisation because the loca- ised officers of a French company. However – unless the company is tion of the relevant office of the French Maritime Administration listed or it is a partnership-like form, such as a general partnership might be different from the Customs Office where the documents – the identity of shareholders is usually not available to third parties relating to the ownership and the mortgage are kept. and their details will have to be disclosed by providing the register Although the same principal legislation applies throughout of the shareholders. France, local rules may apply to the minor registers in the French overseas territories. Therefore, in this chapter ‘registration’ means 6 What corporate or other entity action is necessary for an obligor the procedure of ‘francisation’ in the First Register or in the RIF and to enter into or guarantee a debt obligation? When is action by our analysis is limited to those registers. the board of directors or other governing body required? Must shareholders approve a guarantee? 2 How can one determine whether there are any liens recorded over The corporate actions required to validly enter into a debt obliga- a vessel? tion may vary depending on the form of business entity and the The French Customs Office holds a register of liens over a vessel by-laws of the company. A public limited company requires a prior and a certificate of encumbrances can be obtained. On the date it is board approval to issue a third-party guarantee. On the other hand, issued this certificate will reveal whether any encumbrance is regis- shareholders’ resolutions are not normally required to approve a tered. In addition, the vessel registration certificate is annotated with guarantee. the mortgages registered over a vessel; however, as this document is All guarantees must be in the best interest of the grantor of the kept on-board the ship, it may not be completely up to date. security. In the event of security granted for a parent or sister company, the following conditions must be satisfied: 3 How does one determine whether there are any security • the French guarantor and the primary obligor must belong to agreements, liens, charges or other encumbrances granted the same group and such group must be a coherent economic by a vessel owner or affiliated party who might be a borrower, entity with real commercial and economic ties and not just a guarantor or other credit party in connection with a vessel finance mere conglomerate resulting only from the existence of common transaction? shareholdings or directors; In France, except for certain specific corporate securities, a company • the granting by the French guarantor of the security must be in search will not reveal whether a company has granted a charge. the common interest of all the companies in the group (from an Therefore, a French company will have to disclose any charge. With economic, labour or financial point of view) in accordance with respect to assets registered on a public register (such as a ship), a a policy defined for the group as a whole; third party can request a certificate of encumbrances from the spe- • the security must not be in the sole interest of the dominant com- cific relevant registry. pany or its majority shareholders and it must result in overall

16 Getting the Deal Through – Ship Finance 2014 Stephenson Harwood AARPI FRANCE

benefits (financial, industrial or otherwise) for the group as a and follow a separate registration procedure. In practice the decision whole rather than an individual benefit which each company in as to whether a structure (such as a drilling unit) is a vessel is made the group could have realised in isolation; and by a surveyor of the French Maritime Administration. However: • the financial burden imposed on the French guarantor must be • the French Maritime Administration will not be bound by any for consideration and it must not upset the balance between the earlier decision of a foreign register; and respective financial undertakings and commitments of the com- • a French court will not be bound by the decision of a French panies concerned, and it must not be in excess of the financial Maritime Administration surveyor on whether a structure is a capabilities of the French guarantor. vessel.

7 Must foreign lenders qualify to do business in your jurisdiction Commercial ships, pleasure boats and fishing vessels can be regis- to extend credit to a borrower organised in your jurisdiction? tered in France. Will foreign creditors be deemed resident as a consequence of Upon registration, a vessel will be entitled to fly the flag of making a loan or other extension of credit to an obligor within your France; French legislation will apply with respect to the tax, labour jurisdiction? and crewing aspects of the operation of the ship and the vessel will enjoy the protection of the French navy. Pursuant to article L511.10 of the French Monetary and Financial Code, credit institutions must obtain prior a banking licence issued 12 Who may register a vessel in your jurisdiction? by the Bank of France before they can carry out their business in France. This provision does not apply if such business is occasional A vessel can be registered in France if: it satisfies all applicable tech- or not habitual. EU or EEA banks have a simplified procedure nical and safety requirements; it has been built or imported in an EU requiring a notification by their banking authorities to operate in member state and all custom duties have been declared in that EU France. member state; and either one of (i), (ii) or (iii) below applies: Unless they have local establishments, foreign lenders will not be (i) more than 50 per cent of the ownership belongs to one or more deemed resident, domiciled or carrying on any commercial activity persons residing in an EU member state or EEA state. The owner or business in France or subject to tax in France as a result of only must elect domicile in France for administrative and judicial making the loan available to the borrower. matters if it resides in France for less than six months; (ii) more than 50 per cent of the ownership belongs to one or more Repayment bodies corporate whose registered office or main office is either in France, an EEA state or an an EU member state and with 8 Is central bank or other regulatory approval required for repayment respect to the first two, only the ship is directed and controlled of a loan in foreign currency? from a permanent establishment situated on the French territory. Currently no central bank or other regulatory approval is required If the office of the owner is not in an EEA state, the ship for repayment of a loan in a foreign currency. A framework for can be registered in France if such state has ratified a bilateral exchange control is still in existence in France whereby the govern- convention with France and the ship is directed and controlled ment could, in exceptional circumstances, impose pre-authorisation from a permanent establishment situated in France; or and reporting requirements for financial operations between France (iii) the majority of the ownership of the ship belongs to, jointly: and foreign countries. • persons residing in an EU member state or an EEA state and all other conditions set out in (i) above are satisfied; and 9 Do usury laws limit the interest payable to a lender in respect of a • body corporates whose registered office is in an EU member vessel financing? State or an EEA state and all other conditions set out in (ii) The legislation on usury does not apply to loans advanced to above are satisfied. commercial companies and professionals, but only to consum- Notwithstanding the above special permission may be given by the ers. However, as a general principle, interest on interest (including French government on condition that: default interest) payable pursuant to a contract is recoverable only if • with respect to (i) above, the owners’ nationality requirement the contractual interest is at least one year overdue. can be reduced to 25 per cent of the ownership of the vessel if the ship is managed by a co-owner who is residing in an EU 10 Are withholding taxes payable on principal or interest payments to member State or EEA state; or non-resident lenders? • in case of a bareboat charter registration, the bareboat charterer French withholding tax only applies to payments of revenues by a satisfies the conditions set out in (i) and (ii) above, the ship is French borrower to a foreign lender. Capital repayments made by directed and controlled from a permanent establishment situ- a French borrower to foreign lenders are accordingly not subject ated on French territory, and the applicable foreign law permits to withholding tax. Under the current legislation, interest is exempt the ship to be flagged-out under a bareboat charter. from withholding tax under article 125 A of the French General Tax Code. Withholding tax will apply only on interest payments where 13 Is there an alternate registry for international shipping the lender is established in an ‘uncooperative’ jurisdiction (as defined operations? in article 238-0 A of the French General Tax Code). In this case, the The RIF is the French international register. Subject to the other tax rate would be 75 per cent (applicable to interest only). requirements applicable to the owner, ships destined to international trade and cabotage, and commercial yachts whose length exceeds 24 Registration of vessels metres are eligible to be registered in the RIF. 11 What vessels are eligible for registration under the flag of your All ship and mortgage registrations are processed through the country? Are offshore drilling rigs or mobile offshore drilling units Marseilles office of the RIF. considered vessels under the laws of your jurisdiction? What is The following ships are not eligible to be registered in the RIF the effect of registration? and must be registered in the First Register: • passenger ships in regular service between EU member states; Under French law there is no codified definition of ‘vessel’. A vessel • ships exclusively operated in national cabotage services; is normally a seagoing floating unit, not permanently moored and • ships operating in port assistance (such as tugs, dredge and which is able to move independently. Vehicles exclusively used for pilots); and navigation on lakes, rivers or inland waters do not qualify as vessels • professional fishing ships. www.gettingthedealthrough.com 17 FRANCE Stephenson Harwood AARPI

Ship mortgages and other liens over vessels 21 What other maritime liens over vessels are recognised in your jurisdiction? Do these claims give rise to a right to arrest 14 What types of ship mortgages exist and what obligations may a a vessel? In what circumstances may associated ships be ship mortgage secure? Can contingent obligations, including swap arrested? obligations, be secured? Are there standardised forms? France is a party to the Brussels International Convention for the In France there is no statutory or standard form of ship mortgage. Unification of Certain Rules of Law Relating to Maritime Liens, To be valid a ship mortgage must: be in writing; satisfy the provi- 10 April 1926 (the 1926 Convention), which lists the maritime liens sions of Law No. 67-5 of 3 January 1967; and be registered. The that would be recognised in France (see question 22). parties are in principle free to determine the obligations that the With respect to the arrest of a ship in France, the applicable source mortgage secures (including the repayment of principal and swap of law will either be the Brussels Convention of 10 May 1952 on liabilities) and the covenants undertaken by the owner. Although it the Arrest of Sea-going ships (the 1952 Convention) or Decree No. is not a direct condition of validity, a mortgage must be written in 67-967 and the French Transport Code. French to be registered. Under the 1952 Convention, a vessel can be arrested only in Mortgages typically contain language creating the charge over respect of a ‘maritime claim’ as defined by its article 1. If the ves- the vessel and covenants relating to the vessel and her insurances. sel flies the flag of a non-contracting state to the 1952 Convention, the vessel may be arrested in respect of any of the maritime claims 15 Give details of any required form for ship mortgages in your as well as for any other claim for which the law of the contracting jurisdiction. state permits arrest. In such case, under French law a ship may be See question 14. arrested for any claim pursuant to an ex parte request, as long as the claim appears to have some foundation and the claimant argues the 16 Who maintains the register of mortgages? What information does urgency of an order of arrest. it contain and where are such filings to be made? What is the According to recent decisions of the French courts, the arrest of effect of registration? sister ships would be possible only if the claimant is able to ‘pierce The register of mortgages is kept by the Customs Office and, save for the corporate veil’ by demonstrating that different companies are vessels registered in the RIF, the registration of a mortgage shall be under the same control and decision-making. made at the relevant local office of registration of the vessel. The date of registration of a mortgage determines its order of 22 What maritime liens rank higher than a mortgage lien? priority with respect to subsequent mortgages. If two mortgages are Under article 5114-8 of the Transport Code the following liens in registered on the same day, they will rank pari passu. relation to a vessel will rank above any mortgage in the distribution The registration of a ship mortgage will lapse after 10 years and of the proceeds of sale: must be renewed to be enforceable. The renewal does not require • court costs incurred to procure the sale and the distribution of any cooperation or consent from the mortgagor and it will be suf- the proceeds of sale; ficient that the mortgagee (or its attorney) files with the relevant • costs incurred in port (including, but not limited to harbour dues French register an application substantially in the same form as that and other public taxes, pilotage dues and preservation costs); filed at the time of the first registration. • unpaid crew costs; The register of mortgages will provide details of the date of the • remuneration for assistance and salvage, and the contribution in registration of the mortgage, its amount and details of the mortgagee. general average; • claims arising from indemnities for collision or other accident 17 Must the total amount of the mortgage be stated therein? Must of navigation (eg, damage caused to port structures), indemni- the mortgage contain a maturity date? Must the underlying debt ties for personal injury and indemnities for loss of or damage to instrument be filed with or attached to the recorded mortgage? cargo or baggage; and The amount secured by the mortgage must be stated in the mortgage • costs incurred by the master for the preservation of the vessel or and in the registration form. It is not necessary that the maturity date the continuation of its voyage. is indicated in the mortgage but such date shall be ascertainable by reference to the underlying debt instrument which should also be 23 May non-mortgage liens be recorded over a vessel? attached to the recorded mortgage. Non-mortgage liens can be recorded.

18 Can a mortgage be registered in the name of an agent or trustee 24 Will mortgages on ‘foreign’ flag vessels be recognised in your for the benefit of multiple lenders? jurisdiction? If so, do they share the same priority as those on Although French law has in recent years introduced the fiducie, a vessels registered under the laws of your jurisdiction? concept analogous to trusts, its use is not widespread for the grant- A mortgage duly granted and validly registered in a public register ing of security. Other techniques of parallel debt are also used. in accordance with the laws of a contracting state shall be regarded Generally, however, the practice is to grant security in the name of as valid and respected in France under the terms of the 1926 all lenders. Convention. The order of priority of the liens will be determined in accord- 19 If the mortgagee is an agent or trustee for a lending syndicate, ance with the order of priority set out in article 5114-8 of the must any filings be made upon transfer of a portion of the Transport Code (see question 22). underlying debt among existing lenders or to a new lender? It is preferable to register any change of lenders. In such case, the 25 What is the procedure for enforcing a mortgage in your jurisdiction consent of the mortgagor will also be required. by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court 20 If the mortgagee transfers its interest to a new lender, agent or costs and how are they calculated? trustee, what filings are required? Is the mortgagor’s consent To enforce a mortgage the creditor must be in possession of an required? enforceable title (such as a judgment enforceable in France evidenc- See question 19. ing that the payment is due). The mortgagee will need to instruct a bailiff who will serve on the shipowner an order to pay. If the

18 Getting the Deal Through – Ship Finance 2014 Stephenson Harwood AARPI FRANCE payment is not made in 10 days, the bailiff will issue attachment 33 How is a security interest over a deposit account established? minutes, which will have to be notified to the relevant register of How is a security interest perfected? ships within seven days, and appoint a custodian. Registration duties An account pledge is perfected either by way of: corresponding to 0.5 per cent of the claim will have to be paid. • an agreement between the chargor and secured parties with a Then, a writ of summons will have to be served on the ship- subsequent notice to the account bank; or owner and the registered creditors to appear at a hearing where the • a tripartite agreement between the chargor, the secured parties court will determine the conditions of the auction sale. and the account bank, which would constitute notice of the The timing and costs of the procedure will depend on a num- pledge. ber of factors, for example, whether the ship is registered under the French flag or another flag. The court costs in connection with the 34 How are security interests in non-vessel collateral enforced? sale will be determined by the judgment given by the court. The costs Self-help remedies are not available in France and therefore if the will usually reflect the fees incurred in relation to the ship’s detention debtor does not cooperate, the assistance of the courts will be and the expenses incurred in the course of court proceedings. required. A creditor can obtain an interim measure if it can demonstrate 26 May a vessel be sold privately by a mortgagee? Will the sale on a preliminary basis that it is entitled to terminate the agreement discharge liens over the vessel? creating its rights (ie, a loan agreement). Such an action results in the It is not possible for a mortgagee to arrest or repossess a vessel in assets (or money) being arrested and placed under the control of the France without the assistance of the courts. A judicial sale will dis- court. This is the first step of the process that must be followed by an charge the liens over the vessel sold. action on the merits, which may not necessarily take place in France. As a prerequisite to enforcing a security interest, it is neces- 27 What are the limitations on rights of self-help by a mortgagee? sary that the creditor obtains an enforceable order to pay a sum of As indicated above, self-help remedies are not available in France. money. In this context it is important to note that a French court has the power to: 28 What duties does a mortgagee owe to an owner or third-party • postpone payments by a debtor for up to two years; creditors? • reduce the applicable interest rate to the official interest rate in The sale of a vessel will be made by the court, which will determine France; its conditions, supervise the overall procedure, distribute the pro- • order that any amount paid thereafter by a debtor be allocated ceeds of sale among the creditors and deal with any dispute between to the principal amount in priority over any other amounts them. owed by such debtor; and • grant any such measures subject to the debtor’s granting security to assure the payment of the overdue indebtedness or taking Collateral measures to facilitate the payment of such overdue indebtedness. 29 May finance leases or other charters be recorded over vessels flagged under the laws of your jurisdiction? After obtaining the enforceable order, and the sufficient time for pay- Bareboat charters can and should be recorded in the French registers. ment has elapsed, the equipment can then be arrested by a bailiff and be subject to a judicial sale. The sale proceeds would then be 30 May finance leases be re-characterised by a court as a financing applied to the debt of the counterparty to the lender(s) in preference contract? If so, is there any procedure for protecting the lessor’s and priority, subject to any liens and mortgages having preference. interest against third-party creditors? A French court will usually order that the documents enforced in France be translated into French. In France, a lease with a purchase option whose price takes into Notwithstanding the above, pledges over bank accounts may consideration the rent already paid may qualify as a finance lease. provide for set-off rights which would simplify the realisation of the In such a case, the finance lease can be recorded at the corporate security. registry of the lessee.

35 How are share pledges for vessel financings established? Are 31 How is a security interest created over earnings of a vessel, share pledges or share charges common in your jurisdiction? charter contracts, insurances, etc? How are these security interests perfected? Share pledges are common in the context of financing granted to special purpose companies but they are rare in relation to operating Charter contracts can be assigned by way of delegation, namely, by companies. a tripartite agreement between the borrower, the lenders and the A share pledge must comply with the provisions of article L211-20 assigned party. The assignment of the insurance is done by way of of the Monetary and Financial Code. Upon execution of the agree- a delegation agreement between the assignor, the assignee and the ment, the pledgor will have to complete and sign a declaration of insurers. pledge which shall be registered by the company in the register of the shareholders. 32 Must security interests against non-vessel collateral be registered Share certificates need not be delivered to the secured party as to be enforceable? If so, where are such filings made? these no longer exist in France. Security interest against non-vessel collateral will follow specific Normally, until the security is enforced, the shareholder is enti- rules as to whether registration is required or not. Generally, if the tled to exercise his vote. asset is registered in a public register a process for registration of security may exist. If there is no register for such assets, there may 36 Is there a risk that a pledgee, before or after exercise of the share be ways of recording the security interest with the competent com- pledge, may be exposed to debts or other liabilities of the pledged mercial court for the registered office of the French company. This company? registration would constitute notice to third parties, including a If the pledgee exercises the share pledge and either the pledgee or a bankruptcy trustee, of the security interest. Registration is also pos- third-party purchaser becomes a shareholder of the company, it will sible in the tax office to irrevocably prove the date of granting a be exposed to debts or other liabilities under the same conditions security. that would apply to a shareholder of the company. www.gettingthedealthrough.com 19 FRANCE Stephenson Harwood AARPI

Tax considerations for vessel owners • ships used for sea rescue and sea assistance; and • delivery, lease, repair and maintenance operations relating to 37 Is the income earned by the owners of vessels registered in your items to be embedded in these ships or used for operating them jurisdiction subject to domestic taxation? At what rate? at sea. If the owner is a French resident company the applicable corporate tax rate would be 33.33 per cent. Such rate may, depending on the Territorial economic contribution (CET) level of profit and turnover, be increased by some surtaxes (the rate CET is a tax due by entities domiciled in France. The CET is made may be as high as 38 per cent in 2014 and 34.43 per cent as of 2015 up of two elements: the company land contribution (CFE) and the onward). value added contribution (CVAE). The CET is due by persons or If the owner is domiciled in an EU member state or an EEA entities exercising a professional activity in France. member state and it operates the ship via a permanent establishment The CFE tax base is made up of the lease value of the assets lia- or a dependent agent situated in France, in this case pursuant to the ble to land tax that the company holds during the reference period. application of the relevant bilateral convention between France and With respect to the CVAE, shipping companies that carry out such state the profits should be taxed in the state where the owner activities in France and abroad need to take into account the added has its effective place of management. value resulting from operations of vessels carried out in France alone For these purposes, operations where the point of embarkation 38 Is there an optional tonnage tax exempting vessel owners from and disembarkation are in France are considered to be operations tax on income? carried out within the limits of the national territory. The French tonnage tax regime would be available to companies where at least 75 per cent of the turnover is derived from the use of Contribution to social funds commercial vessels. A shipowner will need to exercise an option to If 25 per cent or more of the crew are EU citizens, the following will submit its vessels to the tonnage tax regime that, once made, will be apply: irrevocable for 10 years. Operations that are eligible to fall within • a reduction of employer’s contributions to 11.6 per cent (instead the application of the tonnage tax regime would be taxed by apply- of 35.6 per cent) relating to the social protection of seafarers for ing the following scale applicable per day to each vessel based on the crew residing in France; units of 100 GT: • social security in the country of residence for crew residing abroad; and Tonnage in GT €/100 GT • exemption from income tax for seamen domiciled in France Up to 1,000 0.93 who are aboard ships for more than 183 days in any 12 con- secutive months. 1,000–10,000 0.71 10,000–25,000 0.47 Insolvency and restructuring More than 25,000 0.24 41 Is there a general scheme of reorganisation or insolvency The profit derived from operations that are not eligible would be administration in your jurisdiction? taxed at the standard corporate tax rate. Under French law, there are different schemes of reorganisation available to a company, such as safeguard proceedings, which were 39 What special tax incentives are available to shipowners based on Chapter 11 of the US Bankruptcy Code. registering vessels in your jurisdiction? Safeguard proceedings are available to a company that has not A tonnage tax regime is available in France. See question 38 for ceased payments and that intends to reorganise its structure by con- details. tinuing its activity and maintaining employment. The procedure is Vessels (including second-hand vessels) can be fully amortised formal and involves a court decision, a period of observation by over eight years according to the declining balance depreciation a judge (of a maximum duration of six months, renewable once, method provided by article 39 A of the General Tax Code, which, and exceptionally twice) and the appointment of an expert who is however, would be applicable only if the vessel is outside the ton- charged to assist the court before the plan is approved by creditors. nage tax regime. A vessel may be depreciated using this method by Upon opening of the proceedings, all individual actions are sus- each of its successive owners as long as the depreciation period is of pended, irrespective of their rank, save for limited exceptions relat- at least eight years in each case. ing to certain security interests. A vessel may be amortised at the end of the financial year pre- At any time during the observation period, if the court is not ceding the delivery date provided that keel laying occurred before satisfied that the conditions imposed by the law were met by the that date irrespective of the fact that the ownership of the vessel has debtor, it can convert the safeguard proceedings into the more severe not yet been transferred to the shipowner. This method is known as rehabilitation proceedings or judicial liquidation. the keel-laying depreciation. The depreciation may only be calculated on the amount of expenses incurred and paid on that date, but 42 Will the courts of your jurisdiction respect the rulings of a foreign the basis for the depreciation cannot then exceed 50 per cent of the court presiding over reorganisation or liquidation proceedings? vessel cost price. Under European Regulation No. 1346/2000 on insolvency proceedings (the Regulation), if an insolvency proceeding is opened in an 40 Are there any other noteworthy tax provisions specifically EU member state (other than Denmark) (participating states) its applicable to shipping, shipping income or ship finance? effects are, in principle, automatically recognised in the other par- VAT ticipating states, including France. However, certain exclusions to A VAT exemption applies to the following activities: the automatic recognition may apply: for instance, the opening of • delivery, repair, alteration, maintenance, chartering and lease insolvency proceedings in a participating state does not affect certain operations relating to: third-party rights in rem over the debtor’s assets located in another • commercial vessels sailing on the high seas; participating state at the time of the opening of the proceedings. • ships used for exercising an industrial activity on the high If insolvency proceedings are opened in another state outside the seas; EU, the rulings of such foreign court presiding would be recognised • ships used for professional fishing activities; and in France either pursuant to a bilateral convention between France

20 Getting the Deal Through – Ship Finance 2014 Stephenson Harwood AARPI FRANCE

If insolvency proceedings are opened, the grant of a mortgage (as Update and trends well as other transactions such as voluntary disposals of assets, contracts pursuant to which the debtor undertook disproportionate The major French banks are active in a variety of shipping obligations and payments of unexpired debts) in the previous 18 financings both directly to owners as well as to operating lessors. months can be challenged by the trustee in bankruptcy if not granted The financing structures and security packages are similar or for valuable consideration. equivalent to other mature banking markets such as New York and London and will continue to play an important part in the continued growth of shipping and ship finance. A growing issue is 44 May a vessel owner provide security on behalf of other related the availability of alternative sources of funds (equity funds, bond or unrelated companies? What are the requirements for it to be issuances, private placements, etc). enforceable? A shipowner can provide security on behalf of other related companies. For details of the conditions of the security see question 6. and such state or pursuant to the rules on the recognition of foreign judgments. 45 Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage 43 What is the order of priority among creditors? In what because of insolvency of the mortgagor or insufficient circumstances will creditors be required to disgorge payments consideration received by the mortgagor in exchange for the grant from an insolvent company? of the mortgage? In France, the debts of insolvent companies are paid in the follow- Yes. See question 43. ing order: • the ‘super-privileged’ claims of employees (such as wages and 46 How may a creditor petition the courts of your jurisdiction to miscellaneous allowances owed to the employees for the last 60 declare a debtor bankrupt or compel liquidation of an insolvent days of work (with a limit of €12,516 per employee)). Social obligor? security charges do not fall into this category; A creditor can apply to a commercial court for the opening of insol- • legal costs falling due after the judgment opening the insolvency vency proceedings if he can prove that: proceedings; • the debtor is insolvent; • repayment of ‘new money’ in the context of a conciliation proce- • no other insolvency proceedings have been opened; and dure. Creditors who agreed to participate to a restructuring plan • the credit is due and immediately payable. approved by a commercial court (conciliation) before the opening of the insolvency proceedings are entitled to be paid after the 47 Has your jurisdiction adopted the Model Netting Act of the super-privileged claims of employees and the judicial costs; International Swaps and Derivatives Association (ISDA)? If not, • the debts secured by securities over immoveable and moveable may a swap provider exercise its close-out netting rights under an assets; ISDA master agreement despite an obligor’s insolvency? • the debts that have arisen after the judgment opening the insol- According to the information available from ISDA, netting legisla- vency proceedings and which are privileged under article L622- tion has been adopted by France. 17 of the French Commercial Code; and • all other claims.

Alain Gautron [email protected] Ezio Dal Maso [email protected]

19, place Vendôme Tel: +33 1 44 15 80 00 75001 Paris Fax: +33 1 44 15 80 09 France [email protected] www.shlegal.com

www.gettingthedealthrough.com 21 GERMANY Ehlermann Rindfleisch Gadow Germany

Stefan Rindfleisch Ehlermann Rindfleisch Gadow

Due diligence The typical corporate form of a shipowning company in Germany is a limited partnership (KG) whose general partner with 1 How does one demonstrate title to or legal ownership of a vessel unlimited liability is a company with limited liability (GmbH). registered under the laws of your jurisdiction? The extract of the commercial register of a KG shows, inter alia, The best evidence is the documentation an owner receives when it who the unlimited partner(s) and who the limited partner(s) of the acquires a vessel. KG are. In doing so, it also shows who the legal representative of According to section 15 of the German Law on Registered the KG is because the unlimited partner of a KG is, by law, its legal Seagoing Vessels and Vessels under Construction (SchRG) the party representative. being registered in the German ship registry is assumed to be the The extract of the commercial register of a GmbH also identifies, legal owner of the respective vessel. The ship registry also issues a inter alia, the legal representative or representatives of the GmbH. certificate of ownership. However, neither the registration nor the A GmbH is legally represented by its managing director. Where the certificate of ownership provide evidence of legal ownership as GmbH has more than one managing director, the managing direc- under German law legal ownership to a German-registered vessel tors represent jointly, unless an entry is made in the Companies can be transferred by oral agreement. Section 16 SchRG protects the Registry that one or more managing directors are authorised to rep- buyer of a German-registered vessel: the buyer can rely on the cor- resent the company alone. rectness of the ship register unless an objection against the entry is recorded or the buyer knows about the incorrectness. 6 What corporate or other entity action is necessary for an obligor 2 How can one determine whether there are any liens recorded over to enter into or guarantee a debt obligation? When is action by a vessel? the board of directors or other governing body required? Must shareholders approve a guarantee? Liens are not registered over a vessel (see question 23). The only way to determine whether there are any liens recorded over a vessel is to In principle, all personally liable partners of a KG (usually, the man- conduct due diligence. aging directors of the GmbH) can enter into legally binding agreements and guarantees without the consent of a governing body like 3 How does one determine whether there are any security a shareholders’ meeting. Although there may be internal restrictions agreements, liens, charges or other encumbrances granted with respect to the managing directors’ powers, those restrictions do by a vessel owner or affiliated party who might be a borrower, not have any effect on the validity of the agreements and guarantees guarantor or other credit party in connection with a vessel finance entered into. transaction? Encumbrances are neither recorded over a vessel with the ship reg- 7 Must foreign lenders qualify to do business in your jurisdiction istry nor over the grantor of such encumbrance with the relevant to extend credit to a borrower organised in your jurisdiction? commercial register. The only way to find out whether there are any Will foreign creditors be deemed resident as a consequence of security agreements, non-recordable liens, charges or other encum- making a loan or other extension of credit to an obligor within your brances granted is to conduct due diligence. jurisdiction? According to section 32 of the German Banking Act lenders usually 4 Can one determine whether an obligor registered in your need a banking licence awarded by the Federal Financial Supervisory jurisdiction is duly organised and in good standing from a search Authority. This would be the case, for instance, where a lender proof a public registry? vides loans or other financial services to the extent that its business Only the registered address of the company, its corporate form is considered commercial or on a scale that requires a commercially and the identities of its authorised representatives and sometimes organised business undertaking. A lender’s business would always its shareholders can be determined from the German Commercial be considered commercial if it was regularly involved in the lending Register. A company will not be registered if it is evidently not duly business and if it was conducted for the purpose of generating profit. organised. However, the concept of ‘good standing’ does not exist Foreign creditors may not be deemed resident purely as a con- under German law. sequence of making a loan or other extension of credit to an obligor within another jurisdiction. However, this does not mean they 5 Can the shareholders or other equity interest holders, directors would be exempt from paying withholding tax. and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search Repayment of a public registry? If not, how are these parties customarily identified? 8 Is central bank or other regulatory approval required for repayment Most of the above information can be determined from a search of of a loan in foreign currency? the German Commercial Register. The scope of the information var- No. ies depending on the form of the respective corporate entity.

22 Getting the Deal Through – Ship Finance 2014 Ehlermann Rindfleisch Gadow GERMANY

9 Do usury laws limit the interest payable to a lender in respect of a 12 Who may register a vessel in your jurisdiction? vessel financing? According to section 3 of the SchRegO merchant vessels and other Statute law limits the interest under a loan agreement. According to vessels designated for seafaring are to be registered with a German section 138 of the German Civil Code interest clauses in loan agree- ships register where they are allowed to fly the German flag. ments are void if the payable interest is against public policy (contra A vessel is allowed to fly the German flag if it is owned by one bonos mores) compared with the usual market interest rate. Such or more German citizens with permanent residence in Germany violation of bonos mores would usually be assumed if there was (section 1 paragraph 1 of the Maritime Flag Law (FlaggRG)). In a significant disproportion between the performance of the lender terms of section 1 paragraph 2 of the FlaggRG, the same applies for and the consideration paid. The Federal Supreme Court considers vessels being owned by unlimited partnerships, limited partnerships, as disproportionate an interest rate that exceeds the effective mar- GmbHs and joint-stock companies (AGs) having their registered ket rate relatively by 100 per cent or absolutely by 12 percentage office in Germany, provided that in case of unlimited and limited points. When considering this question, one would not only have to partnerships the majority of the personally liable shareholders and look at the interest rate, but also take into account all fees and other the legal representatives are German and the German shareholders amounts paid and payable by the borrower to the lender under and must hold the majority of the votes according to the relevant part- in connection with the loan agreement. nership agreement; and in case of GmbHs and AGs the majority of In the usual case of a commercial borrower, for the interest the managing directors (GmbH) or board members (AG), respec- clause to be void, the lender additionally would need to act in bad tively, are German. faith by intentionally abusing the weaker position of the borrower. According to section 2 of the FlaggRG, vessels owned by a resident of the European Union or of a country that has a bilateral 10 Are withholding taxes payable on principal or interest payments to agreement with Germany or the European Union may be registered non-resident lenders? in the German ship register and fly the German flag. Interest payments by a German (nonbank) debtor to a non-resident lender are usually not subject to German limited liability-entity taxa- 13 Is there an alternate registry for international shipping tion and are therefore not subject to any withholding tax. There are, operations? however, two exemptions. No, there is no alternate registry for international shipping opera- First, interest payments at a fixed interest rate on loans secured tions. There is, however, the German International Shipping Register by a ship mortgage are subject to withholding tax and second, inter- (GIS) which is maintained by the German Federal Maritime and est payments on profit participating loans and other hybrid struc- Hydrography Agency. Registration in the GIS is voluntary and is not tures are also subject to withholding tax, regardless of whether the a substitute for registration in a ship register. Once a ship is regis- loan is secured or not. The withholding tax rate is 25 per cent unless tered in the GIS, the shipowner can pay foreign seafarers on board a lower rate is applicable under a double taxation treaty. Even if a according to their foreign, national contract conditions. double taxation treaty was applicable, the German debtor would have to prove that the non-resident lender fulfils the requirements for Ship mortgages and other liens over vessels getting the tax reduction in the foreign country that is party to the 14 What types of ship mortgages exist and what obligations may a double taxation treaty. In particular, the non-resident lender apply- ship mortgage secure? Can contingent obligations, including swap ing for the tax reduction must have some kind of substance in the obligations, be secured? Are there standardised forms? foreign country that is party to the treaty. Section 50d paragraph 3 of the German Income Tax Act sets forth certain conditions that A German ship hypothec is a security over a vessel entitling the must be fulfilled. Only once a certificate is issued by the German beneficiary of such hypothec to seek satisfaction for an existing tax authority may interest be paid without withholding being appli- receivable by way of a judicial sale or auction. The hypothec is not a cable. Specific tax planning ideas exist to avoid this additional tax mortgage in the sense of common law. It does not constitute a legal burden. title against the shipowner nor does it entitle the beneficiary to sell the vessel or to take possession of the vessel. Registration of vessels There are basically three different types of ship hypothecs as set out below. 11 What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units Hypothec to secure a certain amount considered vessels under the laws of your jurisdiction? What is The hypothec can be granted to secure any debt. In most cases the the effect of registration? hypothec is granted to secure an abstract acknowledgement of debt In this question and all others concerning vessels, we refer only to being an abstract obligation of the shipowner to be given in notari- seagoing vessels and not to inland waterways vessels. ally acknowledged form. The connection between the legally inde- According to section 3 of the German Regulation on Ships pendent obligation under the abstract acknowledgement and the Registries (SchRegO), merchant vessels and other vessels designated specific debt, for instance, the repayment claim under a loan agree- for seafaring and in excess of 15 metres in length are to be registered ment, is normally established by an agreement on the purpose of with a German ship register provided their owners fulfil the relevant the security which in most cases is incorporated in the loan agree- legal requirements (see question 12). ment. This type of hypothec is very frequently used in ship financing A vessel under construction can be registered in a German ship transactions. registry for the purpose of recording a mortgage over it. Offshore drilling rigs or mobile offshore drilling units may be Hypothec to secure a maximum amount considered ‘vessels’ and as such can be registered in a German ship The hypothec on a limited amount is a hypothec securing a maxi- registry. mum amount of debt up to a set amount. This amount can also The effect of the registration is that according to section 15 of include future debt. This type of hypothec is rarely used in ship the SchRG the registered owner is assumed to be the legal owner of financing transactions. the vessel. However, the registration does not provide evidence of legal ownership (see question 1). Joint ship hypothec A joint ship hypothec is a hypothec on more than one vessel. It can also be provided if the vessels belong to different owners. The www.gettingthedealthrough.com 23 GERMANY Ehlermann Rindfleisch Gadow advantage is that all vessels secure the whole claim jointly and sev- transfer automatically because it is, by law, an accessory (see section erally without the need to separately provide a hypothec for every 51 paragraph 1 SchRG). In such case, the parties’ mutual consent single ship securing a part of or the whole claim. regarding the transfer needs to be recorded in the relevant ship registry (section 51 paragraph 3 SchRG) for the transfer to become 15 Give details of any required form for ship mortgages in your effective. jurisdiction. Creating a hypothec requires the owner’s written approval, executed 20 If the mortgagee transfers its interest to a new lender, agent or before a notary public, and the owner’s application for filing the trustee, what filings are required? Is the mortgagor’s consent same with the ship registry. required? In order to assign the hypothec to another party, the underlying debt, 16 Who maintains the register of mortgages? What information does (usually the abstract acknowledgement of debt) has to be transferred it contain and where are such filings to be made? What is the and the parties’ mutual consent regarding the transfer of the under- effect of registration? lying debt (see question 19) has to be recorded in the ship registry A ship hypothec is registered with the ship registry in which the rele- (section 51 paragraph 3 SchRG). The approval of the shipowner is vant ship is registered. The ship registry is decentralised in Germany. not required for such a transfer. There are about five large, more important ship registries. Each ship registry is maintained with the local lower civil court. The location 21 What other maritime liens over vessels are recognised in of the vessel’s home port determines the competence of the respec- your jurisdiction? Do these claims give rise to a right to arrest tive ship registry. a vessel? In what circumstances may associated ships be Upon an application being filed, the registrar will enter the arrested? hypothec into the registry. The entry will show in concise language Pursuant to section 596 paragraph 1 of the German Commercial the beneficiary, the amount secured, the interest secured (if any) and Code (HGB) a maritime lien shall attach to the vessel for the fol- will make reference to the owner’s written application to the regis- lowing claims: tration of the hypothec. • wages due to the master and other members of the vessel’s crew; The hypothec only becomes effective upon its registration. • public dues linked to the vessel, shipping dues, port dues and pilotage dues; 17 Must the total amount of the mortgage be stated therein? Must • claims in respect of loss of life or personal injury as well as in the mortgage contain a maturity date? Must the underlying debt respect of loss of or damage to property occurring in direct con- instrument be filed with or attached to the recorded mortgage? nection with the operation of the vessel; except for claims in The beneficiary, the amount of the secured debt and the interest rate respect of loss of or damage to property capable of being based (if any) must be recorded. on contract or also based on contract; The ship hypothec does not contain a maturity date. • claims for salvage or extra allowance including salvage costs; The underlying debt instrument cannot be filed with or attached contribution of the vessel or its freight in general average; claims to the recorded hypothec. in respect of wreck removal; and • claims of social insurance agencies including unemployment 18 Can a mortgage be registered in the name of an agent or trustee insurance against the owner of the vessel. for the benefit of multiple lenders? Under German law a maritime lien gives rise to a right to arrest the The hypothec can be registered in the name of a security agent or a respective vessel regardless of who the vessel’s owner is. Maritime security trustee, however, the hypothec is accessory in its legal nature liens cease to exist if one year has elapsed since the creation of the to the secured debt. That means the hypothec is strictly linked to the claim secured by a maritime lien without the vessel having been existence, the extent and the enforceability of the secured claims and arrested on the basis of such maritime lien. is therefore not independent or abstract. In case a hypothec is sup- An associated or sister ship may only be arrested where the posed to secure the rights of a bank under an abstract acknowledge- associated or sister ship is owned by the same person or company ment of debt, such hypothec must be registered in favour of the same against which the claim exists. The arrest of a vessel owned by a bank and not in favour of another party which is not beneficiary sister or affiliated company of the person or company against which of the abstract acknowledgement of debt. Consequently, in case a the claim exists is not possible. consortium of banks wishes to have the hypothec to be registered in favour of a single bank that is acting as security agent or as security 22 What maritime liens rank higher than a mortgage lien? trustee for all banks, the security agent or security trustee must also include the creditor or claimant under the abstract acknowledge- Under German law the beneficiary of a ship hypothec generally has ment of debt. a preferred right over and above other creditors. However, according to section 602 HGB this does not apply to all maritime liens. 19 If the mortgagee is an agent or trustee for a lending syndicate, Maritime liens prevail over all other liens and hypothecs on the ship. must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender? 23 May non-mortgage liens be recorded over a vessel? Usually, a German ship hypothec secures the beneficiary’s rights Only hypothecs and a few other encumbrances, such as reservation under the abstract acknowledgement of debt (see question 14). and beneficial interest, are recordable. Provided the abstract acknowledgement of debt is granted in favour of a security agent or trustee and the security agent or trustee’s rights 24 Will mortgages on ‘foreign’ flag vessels be recognised in your under the abstract acknowledgement of debt are not transferred, the jurisdiction? If so, do they share the same priority as those on underlying debt under the loan agreement may be transferred from vessels registered under the laws of your jurisdiction? one lender to another or to a new lender without affecting the valid- Ship mortgages or hypothecs duly established under a foreign juris- ity of the hypothec. diction are generally accepted in Germany subject to the principle Where the security agent or trustee transfers its rights under of public policy (see article 6 of the Introductory Law of the Civil the abstract acknowledgement of debt, the hypothec follows this Code (EGBGB)). According to articles 43 and 46 of the EGBGB the

24 Getting the Deal Through – Ship Finance 2014 Ehlermann Rindfleisch Gadow GERMANY priority of the foreign mortgages is determined by the lex rei sitae, to and in favour of the financier. The concept of perfection of security the law of the country where the ship is currently located. If German is unknown under German law. It is recommended, however, that law therefore applies, the priority of a foreign mortgage or hypothec the relevant debtor (ie, the charterer) is notified of the assignment. is determined by the sequence of creation. 32 Must security interests against non-vessel collateral be registered 25 What is the procedure for enforcing a mortgage in your jurisdiction to be enforceable? If so, where are such filings made? by way of foreclosure? Are interlocutory sales permitted? How Except for land charges, security interests against non-vessel collat- long does a judicial sale take? What are the associated court eral do not have to be registered to be enforceable. costs and how are they calculated?

Where the beneficiary of a hypothec or mortgage decides to enforce 33 How is a security interest over a deposit account established? the ship hypothec or mortgage, the respective vessel will first have How is a security interest perfected? to be arrested. A security interest over accounts is established by pledging the rel- An auction can only take place in case the arresting party is the evant account and by notifying the relevant account holder about beneficiary of an enforceable title against the owner of the arrested the pledge. The concept of perfection of security is unknown under vessel. The beneficiary of a German hypothec is usually the benefi- German law. Once the pledge is notified to the account holder, it is ciary of a deed of submission into immediate enforcement in notari- a valid security. ally attested form, which constitutes such an enforceable title. In many cases, foreign mortgages also fulfil the requirements for an enforceable title against the shipowner. 34 How are security interests in non-vessel collateral enforced? Under normal circumstances, the entire procedure from arrest to Security interests in non-vessel collateral are normally enforced by auction by the German court takes between three and four months. notifying the relevant debtor about the forthcoming enforcement Under exceptional circumstances, shorter periods are possible. and granting him a reasonable period of time before the enforce- Interlocutory sales are not permitted under German law. ment action commences. The type of enforcement is dependent on The court costs are calculated according to sections 54 and 56 of the security granted. the Law on Court Costs and depend on various factors, for instance on the amount of the winning bid. 35 How are share pledges for vessel financings established? Are share pledges or share charges common in your jurisdiction? 26 May a vessel be sold privately by a mortgagee? Will the sale The types of and the formalities for share pledges differ. They are discharge liens over the vessel? dependent on the nature of the entity whose shares are to be pledged. A German ship hypothec does not entitle the beneficiary to sell the The pledge may be subject to prior approval. In ship finance transac- vessel privately or to take possession of the vessel or have it operated tions share pledges are usually not demanded by German banks as in the beneficiary’s own name. The concept of ‘mortgagee in posses- collateral. sion’ is unknown in German law. 36 Is there a risk that a pledgee, before or after exercise of the share 27 What are the limitations on rights of self-help by a mortgagee? pledge, may be exposed to debts or other liabilities of the pledged The beneficiary of a German hypothec does not have any self-help company? rights to protect its interest by individual enforcement of its rights. A pledgee, after the exercise of the share pledge, may – under spe- According to Section 39 paragraph 1 SchRG the beneficiary may set cial circumstances – be exposed to certain liability of the pledged a period of time for the owner to keep the vessel in good condition company, for instance where it makes use of voting rights under its and repair the vessel and then, after fruitless expiry of such period, pledge or it becomes the company’s shareholder in the course of an accelerate the loan and enforce the hypothec by arresting and auc- enforcement of the pledge. tioning the vessel. Tax considerations for vessel owners 28 What duties does a mortgagee owe to an owner or third-party creditors? 37 Is the income earned by the owners of vessels registered in your The beneficiary of the hypothec does not owe any specific duties to jurisdiction subject to domestic taxation? At what rate? the owner or to third-party creditors based on the fact that it is the German corporate income tax or German individual income tax are beneficiary of the hypothec. directly imposed on owners and the limited partners of a shipowning KG. Other than that, the KG is tax transparent, namely, its lim- Collateral ited partners are taxable rather than the KG itself. Depending on 29 May finance leases or other charters be recorded over vessels who the limited partner is and what its legal form is, either corporate flagged under the laws of your jurisdiction? or individual income tax is imposed on the income. Partners of a limited partnership that are resident outside Germany are liable to No. limited taxation where the vessel is registered in a German ship register; this is frequently the case to allow companies to benefit from 30 May finance leases be re-characterised by a court as a financing the tonnage tax. German trade tax is directly imposed on the KG. contract? If so, is there any procedure for protecting the lessor’s The trade tax burden of KGs varies between 7 and 19 per cent of interest against third-party creditors? the income, depending on the applicable local tax rate. Finance leases may be characterised or re-characterised as a financ- The limited partners are taxed at their individual rate of income ing contract. Structures exist that allow the lessor to record an tax, namely, a maximum of 45 per cent plus a solidarity surcharge hypothec in its favour. of 5.5 per cent of the assessed income tax plus (if applicable) church tax. 31 How is a security interest created over earnings of a vessel, Expenses standing in relation to the investment, such as con- charter contracts, insurances, etc? How are these security struction supervision costs and advisers’ fees, are additional acquisi- interests perfected? tion costs’ and therefore not immediately deductible. They can only Usually, the security interest over a vessel’s earnings is established by be depreciated over the lifetime of the investment. All income has to the shipowner assigning all earnings and other income of the vessel be taxed by the tax rate mentioned above if the limited partner is an www.gettingthedealthrough.com 25 GERMANY Ehlermann Rindfleisch Gadow individual and at a tax rate of up to 32 per cent where the limited After filing for insolvency with the competent court, the court partner is a corporation. will issue an order pursuant to which a preliminary insolvency administrator is appointed. The authority of the preliminary insol- 38 Is there an optional tonnage tax exempting vessel owners from vency administrator varies depending on the court order. In cases of tax on income? shipowners’ insolvencies, the courts often order that any asset dis- Where the KG has applied for German tonnage tax according to posals shall require the prior consent of the preliminary insolvency section 5a of the German Income Tax Code (EStG) and provided it administrator. Such an order has no impact on the enforceability of qualifies for the application of such tax, its taxable income is calcu- the ship hypothec. lated on the basis of a deemed profit. Under German insolvency law, the beneficiary of the ship The deemed profit is the product of the vessel’s net tonnage hypothec remains entitled to enforce its rights under the hypothec multiplied by an amount set forth in section 5a EStG as follows: separately and independently of the insolvency proceedings. The • €0.92 for each net tonne up to 1,000 NT; beneficiary has a right for preferred satisfaction with respect to the • €0.69 for each tonne in excess of 1,000 NT up to 10,000 NT; vessel. Any proceeds generated by the auction of the vessel will not • €0.46 for each tonne in excess of 10,000 NT up to 25,000 NT; be part of the insolvent estate and will not distributed to all creditors and equally but will be for the beneficiary of the hypothec to the extent • €0.23 for each ton in excess of 25,000 NT. its claim exists and is secured by the hypothec. Alternatively, the beneficiary of the hypothec can agree with the insolvency administrator A shipowner qualifies for German tonnage tax, according to section that the vessel is sold by the insolvency administrator. In such case, 5a EStG, provided: it has applied for tonnage tax; it operates a mer- the insolvency administrator will release the sale proceeds, less a chant ship in international traffic; and it has a qualifying presence contribution payable to the estate, to the beneficiary. in Germany. The shipowner’s application to tonnage tax is voluntary, though 42 Will the courts of your jurisdiction respect the rulings of a foreign irrevocable. It must be filed in the business year during which the court presiding over reorganisation or liquidation proceedings? vessel is acquired with effect from the beginning of such business Pursuant to article 3 of Council Regulation (EC) No. 1346/2000 year. The owner is bound to the tonnage tax regime for 10 years. German courts will recognise the commencement of all those foreign A ship is defined as a merchant ship operated in international insolvency proceedings that are ordered by a court of a member state traffic in terms of section 5a EStG if it is mainly registered in a of the European Union. The decision to commence insolvency pro- German ship register during a business year and if it is predomi- ceedings by the court of one member state can only be reviewed by nantly used for transportation to or between foreign ports or the the courts of the same member state and not by the courts of another High Seas. There exist exemptions for tug boats, salvage boats and member state due to the principle of community mutual trust (as others. spelled out in the opening parts of the Treaty on the Functioning of A shipowner has a qualifying presence in Germany in terms of the European Union). section 5a EStG if its management is located in Germany and all The commencement of insolvency proceedings ordered by a its commercial and strategic management services are conducted in court in a country that is not a member state of the European Union Germany. will in general be recognised by the German courts provided the The German tonnage tax is regarded as a very attractive regime courts of the state where the commencement of the proceedings was because it allows shipowning KGs and their limited partners a ordered have jurisdiction in accordance with German law and fur- nearly tax-free income. ther provided the recognition would not be manifestly incompatible with major principles of German law, in particular with basic rights 39 What special tax incentives are available to shipowners under the German Constitution (see section 343 InsO). registering vessels in your jurisdiction? Currently, there are no further tax incentives except for the tonnage 43 What is the order of priority among creditors? In what tax (see question 38). circumstances will creditors be required to disgorge payments from an insolvent company? 40 Are there any other noteworthy tax provisions specifically The creditors of the company are satisfied in the following order: applicable to shipping, shipping income or ship finance? • insolvency estate creditors whose claims are satisfied during the None. ongoing insolvency proceedings; • secured creditors who have a security interest such as a hypothec Insolvency and restructuring or a pledge; and 41 Is there a general scheme of reorganisation or insolvency • regular creditors who have non-preferred claims that are satis- administration in your jurisdiction? fied if and to the extent the remaining liquidity is distributed at the end of the insolvency proceedings. The ordinary German insolvency proceedings consist of two different phases: the preliminary insolvency proceedings and the main The secured creditors have a right to separate satisfaction (see ques- insolvency proceedings. While the preliminary insolvency proceed- tion 41), which is a permissible preferential treatment of creditors. ings serve the purpose of preliminarily securing all assets remaining Creditors with a security interest in property of the debtor have no and determining whether the insolvency estate is sufficient to com- right in the collateral itself, but only in its value and only up to the mence the main insolvency proceedings. The purpose of the main amount of their secured claims. Such creditors can only request pref- insolvency proceedings is to either liquidate all remaining assets of erential or separate satisfaction from the security collateral prior to the company or to reorganise the insolvent company. all other creditors of the debtor. Separate satisfaction requires reali- In general, filing for insolvency does not prevent the creditor sation of the collateral, which is subject to the creditor’s right to from enforcing debt obligations or a hypothec by auctioning the rel- separate satisfaction. The creditor is entitled to the resulting pro- evant vessel. However, any execution against the company’s assets ceeds up to the amount of its secured claim. forming part of the insolvency estate during the last month preced- Where the collateral is a vessel, creditors are entitled to sepa- ing the filing for insolvency or after such filing become legally invalid rate satisfaction when they have a ship hypothec over the vessel (see once the insolvency proceedings are commenced (see section 88 of question 41). the German Insolvency Act (InsO)).

26 Getting the Deal Through – Ship Finance 2014 Ehlermann Rindfleisch Gadow GERMANY

All creditors must file their claim for registration with the insol- 45 Is there a law of fraudulent transfer that permits a third-party vency schedule. creditor to challenge, for example, the grant of a mortgage The insolvency administrator may contest certain payments and because of insolvency of the mortgagor or insufficient other distributions of the company that have been made prior to consideration received by the mortgagor in exchange for the grant the opening of insolvency proceedings where those payments and of the mortgage? distributions constitute an unjustified preference in relation to other Third-party creditors have no right to challenge the grant of a creditors and have an adverse effect on insolvency creditors as a hypothec or a mortgage or any other security or satisfaction. whole. Particularly sensitive are payments and distributions made within three months before the filing for insolvency as well as all 46 How may a creditor petition the courts of your jurisdiction to transactions carried out between the filing and the opening of pro- declare a debtor bankrupt or compel liquidation of an insolvent ceedings because they can be contested easily. Subject to the nature obligor? of the payment or distribution and provided the recipient was aware A creditor may petition for the commencement of insolvency proof the insolvency situation, much longer contesting periods of up to ceedings if it has a legal interest therein and it can evidence its ten years exist. claim and the legal reason why insolvency proceedings should be commenced. 44 May a vessel owner provide security on behalf of other related The legal reasons for the commencement of insolvency proceed- or unrelated companies? What are the requirements for it to be ing are over-indebtedness and lack of liquidity. Over-indebtedness enforceable? is assumed where the company’s liabilities exceed the company’s A vessel owner has the right to provide security on behalf of third assets, unless the continuation of the business during the current parties. Such a security of the insolvent owner is enforceable if the and the next business year is highly probable. Lack of liquidity is security is provided according to the general requirements of the assumed where the company is not able to pay within three weeks respective security and if it cannot be challenged by the insolvency at least 90 per cent of its debts provided the debts are due and have administrator according to the above-mentioned principles (see ques- been seriously demanded by the relevant creditors. tion 43). Especially, any security that was provided by the insolvent owner during the last three months before the filing for insolvency 47 Has your jurisdiction adopted the Model Netting Act of the can be contested where the owner was not liquid on the date of International Swaps and Derivatives Association (ISDA)? If not, the transaction and where the creditor was aware of this. Likewise, may a swap provider exercise its close-out netting rights under an security that has been provided after the filing for insolvency can be ISDA master agreement despite an obligor’s insolvency? contested if the creditor was aware of the debtor’s insolvency. Germany has implemented the guidelines and principles of the Model Netting Act by introducing the German Master Agreement for Financial Derivative Transaction.

Stefan Rindfleisch [email protected]

Ballindamm 26 Tel: +49 40 3748140 20095 Hamburg Fax: +49 40 37481430 Germany www.erg-legal.com

www.gettingthedealthrough.com 27 GREECE V&P Law Firm Greece

John Papapetros, Christina Economides and Dimitris Manolopoulos V&P Law Firm

Due diligence 6 What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by 1 How does one demonstrate title to or legal ownership of a vessel the board of directors or other governing body required? Must registered under the laws of your jurisdiction? shareholders approve a guarantee? This may be demonstrated by a certificate of ownership that is This depends on the constitutional documents of the obligor and issued by the ship registry of the vessel’s home port. Legal ownership the powers granted to its governing bodies. In principle, obtaining is also stated in the vessel’s certificate of nationality which is issued a unanimous decision of the shareholders or the partners would be upon the vessel’s registration. the safest option. For Greek public limited companies (SAs) there are certain limitations by law to the provision of a guarantee or 2 How can one determine whether there are any liens recorded over the assumption of a debt obligation in favour of a third party for a vessel? securing obligations of entities ‘exercising control’ over the intended Recordable liens and enforcement actions are registered in the guarantor. mortgage register or (as the case may be) the books of arrest maintained at the port of the vessel’s registration, or both. A search at 7 Must foreign lenders qualify to do business in your jurisdiction the relevant registry or a certificate of encumbrances issued by the to extend credit to a borrower organised in your jurisdiction? competent authority will allow one to determine whether there are Will foreign creditors be deemed resident as a consequence of registered liens. making a loan or other extension of credit to an obligor within your jurisdiction? 3 How does one determine whether there are any security agreements, liens, charges or other encumbrances granted Not unless acting through local branches. by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance Repayment transaction? 8 Is central bank or other regulatory approval required for repayment There is no general securities registry. Mortgages are registered in of a loan in foreign currency? the mortgage register and assignments of rights are notified to the Not for ship finance facilities. relevant debtor to become effective. Certain types of pledges may be recorded in the pledge registry located in the district of the regis- 9 Do usury laws limit the interest payable to a lender in respect of a tered seat of the pledgor (for foreign pledgors in the Athens Pledge vessel financing? Registry), though this is rare due to registration costs. Interest Limitations are imposed on interest payable under nonbank loan 4 Can one determine whether an obligor registered in your facilities. Such limitations apply likewise to bank loan facilities to jurisdiction is duly organised and in good standing from a search the extent that the loan documentation does not set out in advance of a public registry? criteria for interest calculation purposes that are clear, reasonable In order to determine whether an obligor is duly organised and in and objective for the borrower. Nevertheless, if one incorporates good standing a search can be carried out at the relevant public reg- customary provisions for interest determination that follow the cur- istry and the relevant certificates, which depend on the type of com- rent market practice, this will rarely be an issue. pany, may be requested from the competent authorities. Default interest 5 Can the shareholders or other equity interest holders, directors A limit is imposed on the default interest rate payable under banking and officers or other authorised signatories of an obligor loan facilities, which is 2.5 per cent a year in excess of the applicable organised in your jurisdiction be determined from a search interest rate under such facility. of a public registry? If not, how are these parties customarily identified? 10 Are withholding taxes payable on principal or interest payments to This depends on the type of the company. In any event one would non-resident lenders? be able to obtain the name of the person appointed as the legal rep- This will depend on the applicable double taxation treaties (if any) resentative of the obligor towards official authorities. To the extent between the countries of the tax residency of each relevant borrower that the interested party is a financial institution or a member of a and each relevant lender. professional body that abides by anti-money laundering procedures and requirements, further information would have to be obtained from the obligor pursuant to customary know-your-customer procedures.

28 Getting the Deal Through – Ship Finance 2014 V&P Law Firm GREECE

Registration of vessels mortgage over a vessel, neither the name nor the port of registration thereof may be changed without the written consent of the mortga- 11 What vessels are eligible for registration under the flag of your gee. Moreover, any sale of the vessel resulting in the change of the country? Are offshore drilling rigs or mobile offshore drilling units vessel’s nationality is null and void in the absence of the mortgagee’s considered vessels under the laws of your jurisdiction? What is consent; a general prohibition of sale without the mortgagee’s con- the effect of registration? sent, applicable also to sales not resulting to change of nationality, In principle, all types of vessels including floating rigs in excess may be included in the mortgage. of 5,000 GRT and floating refineries and oil storages in excess of 15,000 GRT may be registered as ships. Registering a vessel under 17 Must the total amount of the mortgage be stated therein? Must the Greek flag confers Greek nationality on it, meaning that Greek the mortgage contain a maturity date? Must the underlying debt law will apply to and on the vessel (including, for example, man- instrument be filed with or attached to the recorded mortgage? datory manning requirements) subject to limitations of the interna- A mortgage must set out the total sum of the mortgage and its matu- tional law of the sea. rity date. Although it is common practice, it is not necessary for the 12 Who may register a vessel in your jurisdiction? underlying debt instrument to be filed or attached; the key provisions thereof may be incorporated in the mortgage deed directly. Greek citizens or legal entities; foreign legal entities controlled by Greek interests; and citizens or legal entities of the EU/EEA that have 18 Can a mortgage be registered in the name of an agent or trustee established their presence in Greece as per EU law, owning more for the benefit of multiple lenders? than 50 per cent of a vessel may apply to have such vessel registered under the Greek flag. Greek law does not recognise the concept of trust and trustee, with the exception of the bondholders’ agent in instances of bonds issued 13 Is there an alternate registry for international shipping by Greek SAs. In certain circumstances a mortgage can be registered operations? in the name of an agent if the document contains a ‘parallel debt’ mechanism, which is often met in civil law countries. Typically, a No. Greek mortgage will be made in favour of all lenders in syndicated Ship mortgages and other liens over vessels financing.

14 What types of ship mortgages exist and what obligations may a 19 If the mortgagee is an agent or trustee for a lending syndicate, ship mortgage secure? Can contingent obligations, including swap must any filings be made upon transfer of a portion of the obligations, be secured? Are there standardised forms? underlying debt among existing lenders or to a new lender? Greek law recognises three types of mortgages: No. • the preferred mortgage for vessels exceeding 1,500 GRT and registered under the Greek flag in accordance with the provi- 20 If the mortgagee transfers its interest to a new lender, agent or sions of Legislative Decree 2687/1953; trustee, what filings are required? Is the mortgagor’s consent • the preferred mortgage of Legislative Decree 3899/1958, which required? may be recorded on Greek-flagged vessels in excess of 500 GRT; A transfer of a right by mortgage leads to the concurrent transfer and of the mortgage without any filings being strictly necessary for the • a ‘simple ship mortgage’ that may be recorded on Greek-flagged validity of the mortgage; however, in the absence of a filing attest- vessels in general. ing the transfer, the transferor and the transferee are liable for any A mortgage may secure obligations of the relevant vessel’s owner in damage caused to a third party by such omission. A notarial deed general – including future or contingent obligations such as swaps or a court order is necessary for making the relevant entry at the – up to the amount secured by the mortgage. There is no standard ship’s registry. There is no requirement to obtain the mortgagor’s form of mortgage; the mortgage is comprehensive and the body of consent to the transfer in the absence of a contractual provision to the mortgage includes the covenants and other relevant provisions, the contrary. typically following an English-style deed of covenant. 21 What other maritime liens over vessels are recognised in 15 Give details of any required form for ship mortgages in your your jurisdiction? Do these claims give rise to a right to arrest jurisdiction. a vessel? In what circumstances may associated ships be The mortgage document needs to be in the form of a notarial deed. arrested? All provisions of the mortgage are included in the deed, which is Greece is party to the 1952 Arrest Convention and the provisions recorded at the registry. thereof apply to vessels flying the flag of member states. Vessels flying the flag of countries that are not party to the 16 Who maintains the register of mortgages? What information does Convention (and Greek vessels, to the extent the claimant has its it contain and where are such filings to be made? What is the principal place of business in Greece), may be arrested for any in effect of registration? personam claim against their owner or for claims against their dis- The mortgage register is maintained at the port of the vessel’s regis- ponent owner (demise charterer) that are related to such vessels (and tration by the local mortgage registrar. The register entry contains a under limited circumstances against the time-charterer). vessel’s particulars, the mortgage ranking, the secured debt, details of In this respect, an attempt to pierce the corporate veil of ship- the relevant mortgagor and mortgagee, details of the relevant notar- owning companies may be considered for the purpose of arresting ial deed for the granting of the mortgage, any registered mortgage associated vessels, though the chances of success are very limited. assignments and any conservatory or compulsory arrests. The relevant notarial deed and a summary thereof are also filed; these will, 22 What maritime liens rank higher than a mortgage lien? in addition to the above, also typically provide for the debt maturity In accordance with article 205 of the Code on Private Maritime and the appointed agent for the service of process residing in the Law, the following claims secured ipso jure by maritime privileges jurisdiction of the mortgage register. The mortgage comes into effect rank higher than claims secured by maritime mortgages: upon its registration; this will also determine its ranking with regard • court expenses, tonnage dues, lightering or harbour dues, pilot- to subsequent mortgages. In addition, following the registration of a age dues and other public taxes and charges; www.gettingthedealthrough.com 29 GREECE V&P Law Firm

• cost of watching and preservation of the vessel in the last port • €1 for each deadweight tonne of the vessel plus certain other and claims of master, crew and other persons hired on board; amounts to the tax authorities; and • salvage remuneration and wreck removal costs; and • lawyers’ fees. • indemnities and damages for collision. As the mortgage constitutes an enforceable title, no interlocutory In terms of preferred mortgages granted pursuant to the instru- sale can be contemplated. Generally, the ability for a sale pendente ments of approval of the registration of vessels in accordance with lite is provided for under Greek law to avoid deterioration of an Legislative Decree 2687/1953, only claims entitled to a maritime lien asset and to protect its value. Greek courts will generally not recog- under the International Convention for the Unification of Certain nise a ship as being of a perishable nature. However, a vessel may be Rules of Law relating to Maritime Liens and Mortgages of 1926 sold at auction by the port authority where the vessel poses a risk to that are also recognised under article 205 of the Greek Code on navigation and the owner (or the creditors in case of arrest) do not Private Maritime Law will rank higher than the mortgage. comply with the port authority’s instructions to resolve the issue.

23 May non-mortgage liens be recorded over a vessel? 26 May a vessel be sold privately by a mortgagee? Will the sale Other than mortgages, conservatory or compulsory arrests and limi- discharge liens over the vessel? tations to ownership may be recorded in the relevant ship registry, A vessel may be sold privately by a mortgagee if such right is pro- maritime mortgage registry or books of arrest. vided for in a preferred mortgage granted pursuant to Legislative Decree 3899/1958, or in the case of a preferred mortgage granted 24 Will mortgages on ‘foreign’ flag vessels be recognised in your pursuant to the provisions of a deed of approval issued in accord- jurisdiction? If so, do they share the same priority as those on ance with Legislative Decree 2687/1953. Following a private sale, vessels registered under the laws of your jurisdiction? a lien persists if it is so recognised by court order against the new Greece is not a party to the International Convention for the owner, provided the relevant petition is filed and served within three Unification of Certain Rules relating to Maritime Liens and months as from the registration of the sale agreement at the registry Mortgages 1967 or to the International Convention on Maritime (or within one year in the case of master’s and crew claims connected Liens and Mortgages 1993. with their employment contract or the relevant rights of the Greek In case of a mortgage on an EU member-state-flagged vessel, Seamen’s Pension Fund). However, pursuant to article 479 of the EU Regulation 44/2001 (and after 10 January 2015, EU Regulation Greek Civil Code, in the case of transfer of the sole or a significant 1215/2012) applies for the recognition thereof as an enforceable title asset of a company, the transferee is deemed to have assumed the in Greece. The regulation primarily calls for such mortgage to have obligations of the transferor up to the value of such asset. been formally drawn up or registered as an authentic instrument (as defined therein). In this case, enforcement of the mortgage may be 27 What are the limitations on rights of self-help by a mortgagee? refused or stayed, if it would be manifestly contrary to Greek public Pursuant to the terms of a preferred mortgage, the mortgagee may, policy. by tendering notice that needs to be accepted, take possession of the In the case of non-EU mortgages, in the absence of bilateral vessel and trade it on its account, insure the vessel, or have the vessel or international conventions regulating the matter ad hoc, the rel- sold privately or by way of judicial sale. However, it is important to evant mortgage may be declared enforceable in Greece, provided note that in case the relevant notice for taking possession is rejected, it is enforceable in the country of origin and it does not contravene the mortgagee shall need to seek a court judgment. Generally, self- ethics or public policy. help is prohibited under Greek law. The law of the flag state will determine the existence of a mortgage and the extent or preference of the security provided. The pro- 28 What duties does a mortgagee owe to an owner or third-party ceeds of a judicial sale of a vessel in Greece shall be distributed in creditors? accordance with Greek law. Generally, a mortgagee should be acting in good faith. In the case of 25 What is the procedure for enforcing a mortgage in your jurisdiction preferred mortgages under Legislative Decree 3899/1958, after tak- by way of foreclosure? Are interlocutory sales permitted? How ing possession of the vessel, a mortgagee must perform any voyage long does a judicial sale take? What are the associated court commenced prior to such action; the mortgagee should not commit costs and how are they calculated? the vessel to obligations exceeding one year from the date the debt became due; likewise the mortgagee should exercise due care while Upon the occurrence of a default and based on an enforceable mort- in possession of the vessel. gage title, a writ for immediate payment of the debt may be issued and served by a court bailiff on the vessel’s owner or the vessel’s Collateral master and also (if applicable) on the vessel’s potential possessor (eg, a bareboat charterer) or the vessel’s master in the absence of the 29 May finance leases or other charters be recorded over vessels potential possessor; after 24 hours the vessel is compulsorily arrested flagged under the laws of your jurisdiction? by the court bailiff by drawing up the relevant report and guards are Greece has only enacted Law 1665/1986 to regulate financial leases placed on-board the vessel. The court bailiff further undertakes to of assets and such law expressly excludes vessels from its scope. arrange for the stipulations and the relevant announcements of the Other than that, the Code on Private Maritime Law provides that seizure as prescribed by law; the judicial sale by auction takes place in the case of a bareboat charter a relevant notation is made in the before a notary public (appointed by the bailiff) of the jurisdiction relevant vessel’s ship register, in the absence of which the shipowner of the port of seizure on a Wednesday (being a business day) falling is presumed to be the user of the ship. at least 40 days after the vessel’s seizure. A rough breakdown of the costs and expenses involved is as 30 May finance leases be re-characterised by a court as a financing follows: contract? If so, is there any procedure for protecting the lessor’s € • approximately 3,500 for court bailiff’s fees and expenses interest against third-party creditors? (assuming the auction proceeds as originally scheduled); • €1,500 plus 1 per cent of the auction price plus VAT at the rate See question 29. of 23 per cent for auction costs (including the fees of the notary public);

30 Getting the Deal Through – Ship Finance 2014 V&P Law Firm GREECE

31 How is a security interest created over earnings of a vessel, 40 Are there any other noteworthy tax provisions specifically charter contracts, insurances, etc? How are these security applicable to shipping, shipping income or ship finance? interests perfected? Tax incentives, commonly found in traditional shipping countries Such security interests are created by virtue of assignments of the are in place in Greece. Subject to minor limitations concerning relevant rights under such contracts; notice of assignment needs to coastal passenger vessels, foreign companies exclusively engaged in be tendered to the relevant contractual counterparties for the perfec- the management, commercial exploitation, brokerage, insurance, tion of such assignment. or average adjustment of Greek or foreign-flagged vessels in excess of 500 GRT may establish an office in Greece and enjoy tax ben- 32 Must security interests against non-vessel collateral be registered efits. The relevant tax benefits include income tax exemption and to be enforceable? If so, where are such filings made? exemption from certain fees and duties. To be eligible, the relevant This depends on the type of the collateral. company must comply with certain limited requirements (such as importing into Greece the equivalent of at least US$50,000 a year to 33 How is a security interest over a deposit account established? pay for operational expenses). How is a security interest perfected? In general, income deriving from the exploitation of Greek- flagged ships or foreign-flagged ships under the management of Laws enacted in Greece, enhancing the position of financial institu- companies having established an office in Greece and trading abroad tions (including by reference the EU Collateral Directive as enacted in is exempt from taxation. Greece by Law 3301/2004 (as amended and in force) and Legislative In addition, special provisions of Greek legislation expressly Decree 17.7/13.8.1923), generally side-step usual requirements for exempt shipowning and ship-management companies from a num- establishing or perfecting a pledge over a deposit account. For pledg- ber of duties normally payable in obtaining financing and registering ing a bank account of a security party held with the relevant creditor, securities such as mortgages in Greece. a written agreement to this effect will suffice. However, in case the Notwithstanding the above, recent developments, associated deposit account is held by a third party, a relevant notice to the latter with the current financial situation in Greece, have led to the imposi- is required. tion of certain levies. As such, foreign-flagged ships under the management of companies established in Greece are nowadays required 34 How are security interests in non-vessel collateral enforced? to pay tonnage tax. However, any tonnage or similar tax paid to A financial institution may swiftly enforce certain types of collateral the foreign flag state is credited against the Greek tax. Furthermore, by setting off obligors’ funds in its possession against its obligations; additional, but temporary, levies on shipowning companies (render- selling, assigning or obtaining title to receivables of the obligor; or, as ing the relevant ship-managers jointly liable) as well as on the rest the case may be, by proceeding with the auction of certain types of of the companies establishing an office in Greece as discussed above pledged assets in periods shorter than normally required. have been imposed. These levies are calculated on the basis of the tonnage tax imposed in the case of the former and on the basis of 35 How are share pledges for vessel financings established? Are funds imported to Greece in the case of the latter. However, it is share pledges or share charges common in your jurisdiction? questionable whether such levies are valid, as provisions regarding Pursuant to the applicable legislation (see question 33), a share long-lasting shipping incentives are expressly protected in the Greek pledge is established by an agreement to this effect in writing and Constitution; this applies particularly to ships registered under the delivery of the shares. For listed companies, certain notices are made Greek flag in accordance with Legislative Decree 2687/1953. to the Athens Stock Exchange. Bearer share certificates are generally allowed and it is possible to have the pledgor exercise voting rights Insolvency and restructuring until an event of default occurs. Share pledges are not uncommon in 41 Is there a general scheme of reorganisation or insolvency Greece, subject to the limitations set out in question 36. administration in your jurisdiction? Typically, following the declaration of bankruptcy, the debtor is 36 Is there a risk that a pledgee, before or after exercise of the share ipso jure divested of the management of its assets and, to the extent pledge, may be exposed to debts or other liabilities of the pledged not otherwise expressly permitted, creditors may not enforce their company? rights individually, but rather by joining the bankruptcy proceed- As a general point not strictly limited to Greek law and mostly asso- ings. Nevertheless, until the ‘unification of the creditors’, namely, the ciated with the nature of shipping; by exercising rights conferred by ascertainment of all debtors’ claims and of the potential inability law, such as voting rights, the pledgee may be perceived to be in con- to pass a reorganisation plan (as described below), creditors hav- trol of the company and this could expose the pledgee to liabilities. ing obtained security in rem over specific assets of the debtor may In the case of bearer shares it may be even more difficult to disclaim enforce their rights under such security separately and irrespective ownership of the shares. of the bankruptcy procedure. This is subject to the following limitations (which do not apply to securities granted pursuant to the EU Tax considerations for vessel owners Collateral Directive as enacted in Greece by Law 3301/2004): 37 Is the income earned by the owners of vessels registered in your • claims of the secured in rem creditors do not become due ipso jurisdiction subject to domestic taxation? At what rate? jure upon the declaration of bankruptcy but rather fall due as contractually agreed; and Greek-flagged vessels are subject to tonnage tax and the relevant • for a period of 10 months, claims may not be enforced against income from the exploitation of the vessels is accordingly exempted assets operationally and directly connected with the business from taxation. activity or the production unit of the debtor pending the ratification of any potential reorganisation plan, or pending the con- 38 Is there an optional tonnage tax exempting vessel owners from vocation of a creditors’ assembly, following the ascertainment of tax on income? the creditors’ claims, to decide on continuation of bankruptcy Tonnage tax is mandatory. proceedings (note that if such assembly resolves to sell the business as a whole, the enforcement is suspended indefinitely). 39 What special tax incentives are available to shipowners registering vessels in your jurisdiction? Further to the above overview, Greek law does provide for both pre- See question 37. and post-bankruptcy reorganisation. www.gettingthedealthrough.com 31 GREECE V&P Law Firm

Pre-bankruptcy reorganisation the enforcement of such ruling would be manifestly contrary to pub- Before bankruptcy, persons or entities eligible for bankruptcy may lic policy (in particular, to fundamental principles or constitutional apply to the competent bankruptcy court in case of an actual or rights and liberties). imminent risk of inability to comply with their financial obligations. For non-EU court rulings, Law 3858/2010 adapting to the The purpose of the application is to reach a restructuring (rehabili- UNCITRAL Model Law on Cross-Border Insolvency (1997) tation) agreement with their creditors and ensure their viability. The applies. Accordingly, subject to the provisions of international or court, assessing the validity of the pleadings and the chances of suc- bilateral treaties, foreign proceedings (whether judicial or adminis- cess may initiate the relevant process (which should normally not trative) appointing a foreign court or receiver for reorganisation or exceed two months) and may concurrently (or subsequently) take liquidation may be recognised in Greece upon application by the precautionary measures to safeguard the same (eg, by freezing any foreign court or receiver unless such proceedings are contrary to enforcement actions against the debtor (and in case of considerable public policy. The foreign proceedings shall be recognised as main business or social reasons) against any guarantors or co-debtors). proceedings if they take place in the state where the debtor has its The restructuring agreement may be reached in various ways; main interests or as secondary proceedings if they take place in a the agreement may be in form of a pre-packaged solution negotiated state where the debtor simply maintains an establishment. with creditors before applying to the court; or, following the com- To the extent that foreign proceedings may not fall under the mencement of the procedure, in the form of a real-time negotiation provisions of the above provisions, it is suggested that the Greek during a general assembly of the creditors or by separate negotia- Code of Civil Procedure regulating the recognition of foreign court tions with individual creditors. rulings will apply, which calls for: Where an agreement is reached (which shall enjoy the consent • the jurisdiction of the court issuing the judgment, which should of the majorities prescribed by law), the agreement will be submit- be determined in accordance with the provisions of the law ted to the bankruptcy court for approval and, in case of ratification, applied by such court on the merits; the plan becomes binding on all creditors including any dissenting • the application by the foreign court of the substantive law appli- or abstaining creditors and such creditors may enforce their rights cable to the matter, as determined under Greek private interna- against the debtor as per the ratified plan. However, the plan may tional law; and not restrict dissenting creditors from enforcing their rights for a • whether the ruling contravenes ethics or public policy. period exceeding three months from the ratification of the agreement, while any dissenting creditors may in any event pursue their 43 What is the order of priority among creditors? In what full rights against guarantors or co-debtors. circumstances will creditors be required to disgorge payments from an insolvent company? Post-bankruptcy reorganisation In the event that the mortgagee does not enforce the ship mortgage Post-bankruptcy, the reorganisation plan may be submitted by the separately, following liquidation by the receiver, the expected general debtor concurrently with filing for bankruptcy (in form of a pre- order of priority is as follows: pack solution agreed with main creditors) or within four months of (i) court expenses, insolvency administration expenses (including being declared bankrupt. In the absence of such filing, the receiver receiver’s compensation), and any outstanding debts arising fol- may also submit a reorganisation plan within three months follow- lowing bankruptcy (eg, from agreements entered into by the ing the lapse of the four-month period. The reorganisation plan may receiver); include provisions for debt haircut of up to 90 per cent for plans (ii) claims secured by general privileges such as: submitted until the end of 2014 and 80 per cent thereafter. The • claims from financing or from the provision of goods and plan’s provisions must designate creditor groups as provided at law services (excluding capital increases) for the continuation of (eg, secured creditors (to the extent the plan prejudices their rights) the business based on the rehabilitation or reorganisation will form a different group to unsecured creditors) and members of plan and, to the extent provided in the rehabilitation plan, each group should be treated equally. The reorganisation plan may during the period from the commencement of the rehabilita- not include provisions regarding security conferred pursuant to Law tion procedure to the ratification of the relevant agreement; 3301/2004. Additionally, in accordance with the law, ‘the rights of and secured creditors, such as mortgages […] may not be prejudiced, • to the extent applicable, hospital or funeral expenses of the unless otherwise provided for in the plan.’ debtor, the debtor’s spouse and children if they arose within Following an initial pre-clearance of the plan by the court, same six months before the declaration of bankruptcy; wages and is submitted to a special creditors’ assembly for approval. At that lawyers’ fees up to two years prior to the declarations of time the debtor or the receiver may apply to the court for an interim bankruptcy; taxes in connection with the liquidation prod- order to freeze any sale of assets. If the plan is passed at the assembly uct); and pension fund dues for the 24-month period prior (which shall enjoy the consent of the majorities prescribed by law), to the declaration of bankruptcy; the plan needs to be ratified by the bankruptcy court. In case of court (iii) claims secured in rem by virtue of, for example, a mortgage, ratification, the plan becomes binding on all creditors including any pledge or special lien; and dissenting or abstaining creditors and such creditors may enforce (iv) unsecured claims. their rights against the debtor as per the ratified plan. However, any dissenting creditors may still pursue their full rights against guaran- The proceeds from encumbered assets (as per (iii) above) are distrib- tors or co-debtors. uted as follows: Notwithstanding the above, given the higher statutory power • one-third goes to creditors holding general privileges; and conferred to Legislative Decree 2687/1953, there should be no limi- • two-thirds go to the secured creditors. tations in enforcing preferred mortgages granted pursuant thereto. However, to the extent creditors with in rem security or privileges 42 Will the courts of your jurisdiction respect the rulings of a foreign (such as a mortgage) commence enforcement proceedings before the court presiding over reorganisation or liquidation proceedings? unification of creditors (see question 41), the order of priority sepa- Pursuant to EC Regulation 1346/2000, any judgment opening insol- rately applicable to such security will apply (see question 22). vency proceedings by a court of an EU member state that has jurisdiction is recognised in Greece without a requirement for further formalities; however, such recognition may be refused if its effects or

32 Getting the Deal Through – Ship Finance 2014 V&P Law Firm GREECE

Additionally, in case of bankruptcy, a court may deem certain Update and trends transactions occurring before the declaration of bankruptcy as null and void by operation of law or after examining the merits of The economic situation in Greece and in Europe more generally particular transactions effected by the obligor during the ‘suspect and the condition of the banking system are extensively period’. The suspect period is the time between the day of cessation intertwined. One of the issues that may affect ship finance of payments (which is determined by the bankruptcy court and may regulation is the ongoing recapitalisation of the banks. Requirements are being imposed on the banks to have a larger predate the declaration of bankruptcy by up to two years) and the capital allocation leading to more stringent lending. The European date of the declaration of bankruptcy. Central Bank’s asset quality review of the Greek banks is now The following transactions will be declared null and void by more than ever playing a role in the re-evaluation of the cost and operation of law: terms of providing ship finance. Furthermore the new shareholders of the banks are more institutionalised and internal banking • any unilateral act by the obligor having the effect of reducing its processes are becoming increasingly complicated. Banks are assets (including, donations, waiving debts and granting inter- also required to meet stricter know-your-customer and anti-money est-free loans) and any premature payments and payments of laundering requirements. The provisions of the international debts other than in cash or commercial paper during the suspect regulatory framework for banks (Basel III), which build on and period; and further expand the existing regulatory base and include more requirements, have been introduced for gradual implementation by • any mortgage or pledge over any asset of the bankrupt party 2019. granted during the suspect period as security for existing indebtedness.

In practice, creditors receiving payments by the receiver follow- Transactions in these categories will be declared null and void ing bankruptcy proceedings, will not be required to disgorge same. without considering arguments to the contrary. Certain other However, see also question 45. transactions entered into up to five years before the declaration of bankruptcy may be declared null and void by the bankruptcy court 44 May a vessel owner provide security on behalf of other related if it is concluded that they were effected with a malicious intent to or unrelated companies? What are the requirements for it to be prevent creditors from satisfying their bona fide claims. enforceable? A vessel owner may guarantee obligations of third parties (subject 46 How may a creditor petition the courts of your jurisdiction to to issues such as fraudulent transfer, as discussed in question 45) declare a debtor bankrupt or compel liquidation of an insolvent and grant ancillary security. Certain limitations are imposed on the obligor? granting of guarantees to secure obligations of entities controlling Merchants and legal entities pursuing economic purposes and hav- the grantor in the case of specific types of companies. Notably, the ing the centre of their main interests in Greece may be declared approval deeds governing the registration of Greek-flagged vessels bankrupt in Greece if they are unable to perform their due obliga- in accordance with Legislative Decree 2687/1953 specifically pro- tions generally and permanently. A creditor may petition the compe- vide that a preferred mortgage granted in accordance therewith may tent multi-member court to make such a declaration. secure loans and obligations of companies or persons related or unrelated to the owners. 47 Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, 45 Is there a law of fraudulent transfer that permits a third-party may a swap provider exercise its close-out netting rights under an creditor to challenge, for example, the grant of a mortgage ISDA master agreement despite an obligor’s insolvency? because of insolvency of the mortgagor or insufficient With respect to over-the-counter derivatives, in case of insolvency, consideration received by the mortgagor in exchange for the grant the setting-off of mutual claims, including multilateral netting and of the mortgage? clearing netting under relevant transactions is permitted provided Greek law enables creditors to challenge any transfers made by that one of the parties to the transactions is a credit institution or the obligor to their detriment provided the balance of the obligor’s the Greek state; and the right to set-off is provided for in a writ- assets does not suffice for settling its debts. ten agreement of an ascertained date from before the declaration of

John Papapetros [email protected] Christina Economides [email protected] Dimitris Manolopoulos [email protected]

15, Filikis Etaireias Square Tel: +30 210 720 6900 106 73 Athens Fax: +30 210 723 1462 Greece [email protected] www.vplaw.gr

www.gettingthedealthrough.com 33 GREECE V&P Law Firm bankruptcy or the commencement of any other collective measure provisions are enforceable notwithstanding the commencement or or procedure. continuation of winding-up proceedings or reorganisation measures Additionally, setting-off claims arising from transfer orders on in respect of the debtor. payment and securities settlement systems are valid if the transfer The above should be taken into account at the stage of prepara- orders were introduced in a system prior to the commencement of tion of the finance documents so as to tackle the issues regarding the insolvency proceedings. close-out netting rights under ISDA master agreements accordingly. Reference should be made to Law 3301/2004 as amended and in force. Under a financial collateral arrangement close-out netting

34 Getting the Deal Through – Ship Finance 2014 Clifford Chance HONG KONG Hong Kong

Alastair MacAulay Clifford Chance

Due diligence is registrable. Once registered, such information will be publicly available. 1 How does one demonstrate title to or legal ownership of a vessel A charge over shares (fully paid shares) is not among the list registered under the laws of your jurisdiction? of registrable charges under section 334(1) of the CO, However, in Pursuant to the Merchant Shipping (Registration) Ordinance most cases the HKRC accepts the registration of share charges. (MSRO), the ownership of a Hong Kong-flagged vessel can be regis- Pursuant to section 334(3)(b) of the CO, which was imple- tered with the Registrar of Ships in Hong Kong (Registrar of Ships) mented in early 2014, an account charge is not to be regarded as where a ‘representative person’ is appointed in relation to the vessel a charge over book debts of the company and is therefore not reg- and where either the majority interest is owned by a ‘qualified per- istrable. However, if and to the extent that such a charge is or can son’ or the vessel is operated pursuant to a demise charter by a body be characterised or re-characterised as a floating charge, it will be corporate being a ‘qualified person’. See question 12 in respect to registrable. Therefore, it is prudent practice to register an account the criteria for a qualified person. A representative person is either: charge with the HKRC within one month of the date of creation of a qualified person and the owner or part-owner of the vessel; or a such account charge. Hong Kong-incorporated company engaged in managing or acting as an agent for ships (section 68 MSRO). 4 Can one determine whether an obligor registered in your A certificate of ownership may be issued by the Registrar of jurisdiction is duly organised and in good standing from a search Ships upon application, showing the current owner or owners of a of a public registry? particular vessel registered under the Hong Kong flag, but this alone is not evidence of title. A search can be conducted at the HKRC, which will show whether an obligor is a company incorporated under Hong Kong law or is a Part 16 Company. A search can also be conducted to determine 2 How can one determine whether there are any liens recorded over whether any compulsory winding-up petitions have been lodged a vessel? against a Hong Kong-incorporated company or Part 16 Company Hong Kong does not maintain a register of liens over vessels that at the Hong Kong Official Receiver’s Office. arise by operation of law. Mortgages are registrable with the It is possible to obtain a Hong Kong certificate of continuing Registrar of Ships, and a search at the Marine Department or a registration or certificate of existence from the HKRC upon applica- Transcript of Register issued by the Registrar of Ships will reveal tion and fee payment, which attests to the relevant company’s exist- details of any registered mortgage. ence and implies, as it has not been struck off, its good standing If an in rem action (which can be in respect of statutory liens, and compliance with Hong Kong law. However, the HKRC does not maritime liens or other cause of action) has commenced in Hong issue certificates of good standing. Kong courts against a vessel, such information will be on public record. 5 Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor 3 How does one determine whether there are any security organised in your jurisdiction be determined from a search agreements, liens, charges or other encumbrances granted of a public registry? If not, how are these parties customarily by a vessel owner or affiliated party who might be a borrower, identified? guarantor or other credit party in connection with a vessel finance A company incorporated in Hong Kong or a Part 16 Company is transaction? required to maintain (i) a register of members, (ii) a register of direc- If a statutory mortgage (MO 742) issued by the Marine Department tors, (iii) a register of the company’s secretary, and (iv) to file an in respect of a vessel registered under the Hong Kong flag is entered annual return that includes updates on the shareholders and officers into by the vessel owner, that mortgage is registrable with the (including directors and company secretaries appointed from time Registrar of Ships. Once registered, such information will be pub- to time) of the company. Upon payment of the relevant fee to the licly available. HKRC, one may inspect the registers and the annual returns. All registrable charges and mortgages entered into by a Hong Kong-incorporated company or an overseas company that is reg- 6 What corporate or other entity action is necessary for an obligor istered as a non-Hong Kong company (a Part 16 Company) under to enter into or guarantee a debt obligation? When is action by Part 16 of the Companies Ordinance (CO) should be registered with the board of directors or other governing body required? Must the Hong Kong Registrar of Companies (HKRC). shareholders approve a guarantee? In practice, most legal practitioners in Hong Kong will register the full security package (including the account charge, charge over Every director of a company has a fiduciary duty to act in the inter- shares, general assignment, statutory mortgage and deeds of cov- ests of the company. In cases of a guarantee, particularly in respect enants) with the HKRC, irrespective of whether the subject interest of upstream or cross-stream guarantees, corporate benefit has to be www.gettingthedealthrough.com 35 HONG KONG Clifford Chance established. For guarantees in respect of obligations of other par- • if an annual rate of interest exceeds 48 per cent it is presumed to ties, the benefit is usually indirect and may be more difficult to dem- be extortionate under section 25 of the MLO; and onstrate. If there is doubt about the existence of corporate benefit, • where the loan agreement requires for the payment of a higher shareholders’ approval is required to avoid subsequent challenges by rate of interest on an obligor’s default, it may be unenforceable shareholders on the basis of the lack of corporate benefit. as a penalty. The provision of guarantees may still be challenged by other parties (such as creditors) even if shareholders’ approval is obtained. 10 Are withholding taxes payable on principal or interest payments to In addition, guarantees provided to assist the company to purchase non-resident lenders? its own or its holding company’s shares are prohibited in general Hong Kong does not levy withholding tax on interest. (subject to certain exceptions). Registration of vessels 7 Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organised in your jurisdiction? 11 What vessels are eligible for registration under the flag of your Will foreign creditors be deemed resident as a consequence of country? Are offshore drilling rigs or mobile offshore drilling units making a loan or other extension of credit to an obligor within your considered vessels under the laws of your jurisdiction? What is jurisdiction? the effect of registration? Pursuant to the Banking Ordinance any ‘banking business in Hong Any vessel capable of navigating in water and that is not propelled Kong’ must be carried out by an institution authorised by the Hong by oars (including any ship, boat or craft and an air-cushion vehicle Kong Monetary Authority and where the bank is based overseas, it or similar craft used wholly or partly in navigation in water) is eligi- must establish a branch in Hong Kong meeting the various require- ble for registration in Hong Kong. ments, including a threshold share capital value, so as to apply for Even if a ship is registrable, the Registrar of Ships may not regis- authorisation to conduct ‘banking business’. ter a ship if he considers it inappropriate to register the ship of that Banking business means receiving from the general public money class or type. According to the Notice (GN 4653 of 16 September on current, deposit, savings or other similar accounts repayable on 2005) given in relation to section 22(4) of the Merchant Shipping demand or within less than three months or at a call or notice of less (Registration) Ordinance, mobile offshore drilling units are not than three months; or paying or collecting cheques drawn or paid registrable. in by customers. By registering the vessel under the Hong Kong flag, the ves- Pursuant to the Money Lenders Ordinance (MLO), where the sel will be subject to the requirements of the Marine Department. lender is not an ‘authorised institution’ carrying out ‘banking busi- Benefits of operating vessels under the Hong Kong flag include: the ness’, it is required to obtain a money lender’s licence unless it is absence of nationality or residential requirements for officers and an exempted person or the loan is an exempted loan. Furthermore, crew; the general exemption of income derived from the interna- a foreign lender that is not an authorised institution can extend tional operation of vessels under the Hong Kong flag from profits credit to a borrower registered or incorporated in Hong Kong with- tax; and reduced port dues at certain ports. out obtaining a money lender’s licence if either of the following is applicable: 12 Who may register a vessel in your jurisdiction? • the lender is recognised as a bank by the relevant banking super- A vessel owned by one or more qualified persons or a vessel char- visory authority and is carrying on a banking business in the tered by demise by a qualified person (other than an individual) can place where such authority is located; or be registered under the Hong Kong flag. A qualified person means: • the loan is secured by mortgage or charge registered or to be an individual who has a valid Hong Kong identity card and who is registered under the CO. ordinarily resident in Hong Kong; a company incorporated in Hong Kong; or a Part 16 Company. Although a foreign lender that is not an authorised institution should not be deemed a resident for tax purposes solely by virtue of 13 Is there an alternate registry for international shipping extending a credit facility to a borrower in Hong Kong, that foreign operations? lender should review its tax and compliance positions on a case-by- No. case basis. Ship mortgages and other liens over vessels Repayment 14 What types of ship mortgages exist and what obligations may a 8 Is central bank or other regulatory approval required for repayment ship mortgage secure? Can contingent obligations, including swap of a loan in foreign currency? obligations, be secured? Are there standardised forms? A borrower incorporated or registered in Hong Kong is not required A mortgage created in respect of a vessel registered under the Hong to seek any central bank or regulatory approval from any Hong Kong flag must be in the specified form (Form RS/M1). The transac- Kong governmental authority in respect of its repayment obligations tions, documents and obligations secured by the mortgage can be under a credit facility in a foreign currency. set out in the mortgage form and most practitioners prefer to set out the finance or security documents applicable to the ship finance 9 Do usury laws limit the interest payable to a lender in respect of a transaction. The mortgage form must be executed under seal or by vessel financing? an attorney and witnessed. The usury principles in Hong Kong are split over several ordinances, A deed of covenants supplements the mortgage form. While the which provide that: deed of covenants is not registrable with the Registrar of Ships, the • where no express or implied rate of interest is fixed, the rate shall deed should be registered with the HKRC if the mortgagor is a Hong not exceed 8 per cent per annum (or such lower rate as may be Kong-incorporated company or a Part 16 Company. awarded by the court); The deed of covenants and the secured obligations defined in the • in the event of an annual rate of interest exceeding 60 per cent security documents usually includes present or future, actual or con- then the person lending or offering to lend commits a prosecut- tingent obligations of the obligors. The validity and enforceability able offence; of such deed of covenants will be determined by its governing law.

36 Getting the Deal Through – Ship Finance 2014 Clifford Chance HONG KONG

15 Give details of any required form for ship mortgages in your 21 What other maritime liens over vessels are recognised in jurisdiction. your jurisdiction? Do these claims give rise to a right to arrest The Marine Department has a prescribed form of mortgage (Form a vessel? In what circumstances may associated ships be RS/M1). arrested? In rem proceedings can be commenced in respect of: 16 Who maintains the register of mortgages? What information does • claims relating to the possession of a vessel or a share therein; it contain and where are such filings to be made? What is the • questions arising between co-owners of a vessel as to the posses- effect of registration? sion, employment or earnings of that vessel; The register of mortgages over a vessel registered under the Hong • claims in respect of a mortgage or charge on a vessel in relation Kong flag is maintained by the Registrar of Ships. to any share therein; Information available in relation to a mortgage registered with • claims for the forfeiture or condemnation of a vessel or goods the Registrar of Ships includes: carried therein; and • the name and address (and place of incorporation) of the • claims for restoration of a vessel or any goods after seizure and mortgagor; damage received by a vessel. • the official number and name of the ship; • the name and address (and place of incorporation) of the mort- Other than the above, in rem proceedings can also be commenced gagee; and in respect of maritime liens and statutory liens. Sister ship arrest can • particulars of any documents or transactions, the obligations in also be invoked for such liens. Maritime liens include damage done respect of which are secured by the mortgage. by a vessel, salvage, seamen’s wages, master wages and disbursements and bottomry. Statutory liens include: Registration of the mortgage with the Registrar of Ships determines • loss of life and personal injury due to a defect in a vessel; the priority of the mortgages created over a vessel. All registered • owners, charterers or persons in possession of a vessel; mortgages will have priority over any prior unregistered mortgages. • loss or damage to goods on a vessel; Information available in relation to the mortgage and the deed • agreements relating to the carriage of goods on a vessel or the of covenants (where there is a registrable charge) registered with the use of the vessel; HKRC includes: • general average, towage, pilotage, supply of goods or materials • the name of the mortgagor; to a vessel for her operation and maintenance; • a description and date of creation of the instrument creating or • the construction or repair of a vessel; and evidencing the mortgage; • ship or dock dues and disbursements made on account of a • the amount secured under the mortgage; vessel. • particulars of the mortgagee; • short particulars of the property mortgaged; and • the date of acquisition of the property mortgaged. 22 What maritime liens rank higher than a mortgage lien? Generally, the priority of maritime liens (following any costs incurred A mortgage and the deed of covenants (where there is a registrable by the Director of Marine) is as follows: charge) created by a Hong Kong incorporated company or a Part 16 • salvage; Company are registrable charges under the CO. Registration must • collision damage (ie, damage caused by the vessel); be made with the HKRC within one month of the date of creation • crew’s wages; and of such mortgage or deed. The mortgage and the deed of covenants • master’s wages and ‘disbursements on account of the ship’. will be void against any liquidator and creditor of the company if the registrations were not made. 23 May non-mortgage liens be recorded over a vessel?

17 Must the total amount of the mortgage be stated therein? Must No. However, a person with a claim against the vessel or its proceeds the mortgage contain a maturity date? Must the underlying debt can enter into a caveat against release. The caveator can therefore be instrument be filed with or attached to the recorded mortgage? warned before the arresting party attempts to release the vessel from arrest (after the claim is settled). The Registrar of Ships does not require the amount or maturity date to be stated in the mortgage form. 24 Will mortgages on ‘foreign’ flag vessels be recognised in your The HKRC requires the amount secured to be stated in the reg- jurisdiction? If so, do they share the same priority as those on istration form (NM1). However, it is not uncommon for the amount vessels registered under the laws of your jurisdiction? to be stated as ‘not applicable’. A certified copy of the mortgage is required to be filed together with the form NM1. No distinction is made procedurally and in the in rem proceedings in Hong Kong between vessels registered under the Hong Kong flag 18 Can a mortgage be registered in the name of an agent or trustee and a foreign flag. for the benefit of multiple lenders? Yes. 25 What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How 19 If the mortgagee is an agent or trustee for a lending syndicate, long does a judicial sale take? What are the associated court must any filings be made upon transfer of a portion of the costs and how are they calculated? underlying debt among existing lenders or to a new lender? An action in rem is commenced by way of a writ in rem (which usu- No filings are required if the mortgagee (as agent or trustee) remains ally only has a general endorsement rather than a full statement of the same. claim) issued against the owners of the vessel. This writ is usually submitted together with an affidavit and a 20 If the mortgagee transfers its interest to a new lender, agent or request that the court issues a warrant of arrest. The writ and the trustee, what filings are required? Is the mortgagor’s consent warrant of arrest, once issued, can be served on the vessel. The vessel required? will then be in the custody of the court and put in the possession of A transfer of mortgage, in prescribed form, should be executed and a bailiff. The defendant may accept service and put up bail or money registered with the Registrar of Ships. The mortgagor’s consent is into court in lieu of bail. not required by law. www.gettingthedealthrough.com 37 HONG KONG Clifford Chance

For uncontested actions, the claimant can continue with pro- 31 How is a security interest created over earnings of a vessel, ceedings by way of default judgment and apply for the vessel to be charter contracts, insurances, etc? How are these security sold before judgment. After the appraised value has been fixed, the interests perfected? court may direct the vessel to be sold by public auction or private Rights to the receivables (including earnings of a vessel and insur- treaty. After the vessel is sold, proceeds of sale will be paid into the ance proceeds) and the rights under a charter party are usually court. A hearing to determine the priorities and claims against the assigned in favour of the creditor under the general assignment. The vessel will take place 90 days after such payment. The proceeds of assignor should notify the charterer and the insurer of such assign- sale will be distributed only after this hearing. ment by way of notice (and such notice to the insurer should include The court filing fees for each writ, notice of motion, applica- a loss payable clause). Letters of undertaking from the insurer and tion of hearing and sealing of orders are about HK$1,045 each. The mutual insurance association are usually provided to the assignee. bailiff’s costs and expenses may differ depending on the vessel but it A fixed charge over the earnings account will also be required. is not uncommon for the bailiff’s costs and expenses to be between The general assignment and the fixed charge created by a Hong HK$3,500 to HK$10,000 per day. On the sale of a vessel, there Kong-incorporated company or a Part 16 Company should be regis a fee of HK$15 for each HK$1,500 of the sale price. We have istered with the HKRC within one month of the date of creation of highlighted certain court fees relevant to the key stages of the arrest such assignment or charge. proceedings, however, there are other miscellaneous court fees that may be incurred. 32 Must security interests against non-vessel collateral be registered to be enforceable? If so, where are such filings made? 26 May a vessel be sold privately by a mortgagee? Will the sale If the security interests against the non-vessel collateral are created discharge liens over the vessel? by a Hong Kong-incorporated company or a Part 16 Company and The vessel can be sold privately by a mortgagee. The sale does not such security interest created is a registrable charge or mortgage discharge liens over the vessel. under the CO, registration of such charge or mortgage shall be made with the HKRC within one month of the date of its creation. See 27 What are the limitations on rights of self-help by a mortgagee? question 3 for the registration requirements for a typical security Self-help remedies (ie, repossession without the need for court pro- package in a ship finance transaction. ceedings) are theoretically available. It will, however, be advisable to commence in rem proceedings if the repossession may be conten- 33 How is a security interest over a deposit account established? tious. In the event that the defendant or person in possession of the How is a security interest perfected? vessel refuses to surrender the possession of the vessel, forced access A security interest can be created by way of a fixed charge over the onto the vessel may be regarded as an action of trespass. bank account. The charge will usually have provisions restricting the rights of the chargor to make any withdrawals from the account. If, 28 What duties does a mortgagee owe to an owner or third-party in practice, control is not exercised by the charge, the fixed charge creditors? can be re-characterised as a floating charge. On enforcement of the mortgage and unless otherwise provided for As explained in question 3, it is regarded as prudent practice to in the relevant security documents, a mortgagee has a duty to miti- register the account charge with the HKRC within one month of the gate its loss, and will be liable as mortgagee in possession for liabili- date of such account charge. ties incurred to third parties. On sale of the vessel, the mortgagee will have the duty to act fairly and in good faith and to take reasonable 34 How are security interests in non-vessel collateral enforced? steps to obtain a ‘proper price’. Chargees of a fixed account charge can collect monies from the account or alternatively, appoint a receiver to collect the monies Collateral from the account, and apply the proceeds in accordance with the relevant finance documents. 29 May finance leases or other charters be recorded over vessels A chargee of a share charge can complete the instrument of flagged under the laws of your jurisdiction? transfer and transfer ownership of the shares to itself or to a third The Registrar of Ships does not maintain a register of leases or party or alternatively, appoint a receiver to sell the shares and apply charters. the proceeds in accordance with the relevant finance documents. Unless the vessel registered under the Hong Kong flag is reg- Assignees of an assignment can collect the monies and step into istered on the basis of a demise charter to a qualified person, the the shoes of the assignor or alternatively, appoint a receiver to do charter or lease (which should be a charter party by which a ship is so and apply the proceeds in accordance with the relevant finance chartered or let by demise and under which the relevant charterer documents. has the possession of the ship and has control of all matters relating to the navigation and operation of the ship (including employ- 35 How are share pledges for vessel financings established? Are ment of the master and crew)) does not need to be provided to the share pledges or share charges common in your jurisdiction? Registrar of Ships. A creditor can have a security interest over the shares by way of a legal mortgage or an equitable charge. To take a legal mortgage, 30 May finance leases be re-characterised by a court as a financing title to the shares is transferred to the creditor, subject to a right contract? If so, is there any procedure for protecting the lessor’s of redemption upon satisfaction of the debt. To take an equitable interest against third-party creditors? charge, title to the shares does not transfer when the charge is cre- Re-characterisation originates from the benefits a debtor has under ated. The chargee has a right to appropriate the shares and receive insolvency regimes in certain jurisdictions. Hong Kong does not have the proceeds of sale upon enforcement or on certain events pre- a Chapter 11 equivalent regime and hence, there are fewer concerns scribed under the charge. about the need for and arguments relating to the re-characterisation The signed ancillary documents customarily required for a share of finance leases. mortgage or charge include the original share certificates, instru- Hong Kong courts will look at the substance of a transaction. ments of transfer and contract notes, letters of resignation from the The labels arties have given to the transaction or document are not directors and secretaries, letters of authority from the directors and determinative.

38 Getting the Deal Through – Ship Finance 2014 Clifford Chance HONG KONG secretaries, letter of proxy, a letter of undertaking given by the direc- 40 Are there any other noteworthy tax provisions specifically tors and board resolutions. applicable to shipping, shipping income or ship finance? Note that a private limited company is required under the laws No. Hong Kong generally does not operate on the basis of targeted of Hong Kong to have restrictions on the transfer of shares in its tax concessions to specific industries. articles of association. It is customary to require (in the case of an equitable charge) signed but undated board resolutions and letters Insolvency and restructuring of resignation to address any potential difficulties with the transfer of shares upon enforcement. An alternative approach would be 41 Is there a general scheme of reorganisation or insolvency to amend the articles of association on the restriction of transfer administration in your jurisdiction? by including an exemption (ie, to curtail the directors’ discretion to Hong Kong does not have a statutory corporate rescue regime. refuse registration where such registration relates to the enforcement If the company and most creditors of the company would like of security). to have a court-approved compromise or arrangement that is binding on the company and all of its creditors (including minority 36 Is there a risk that a pledgee, before or after exercise of the share creditors), a scheme of arrangement can be used. No moratorium pledge, may be exposed to debts or other liabilities of the pledged is applicable but the scheme provides a procedure which allows the company? company to restructure its debt with its members and all of its credi- As a general principle, the liabilities of the pledged company should tors without the need to have unanimous consent from all creditors not extend to its shareholders (as the legal title-holder of the shares) and members. as to do so would amount to piercing the corporate veil. There may be tax concerns if the pledgee becomes the legal title- 42 Will the courts of your jurisdiction respect the rulings of a foreign holder of the shares of the pledged company and together with other court presiding over reorganisation or liquidation proceedings? liabilties’ concerns, it is customary for creditors to have equitable If the principal insolvency proceedings are commenced in a foreign charges over shares (as opposed to a legal mortgage). court, the Hong Kong courts will generally review the position with regard to the principal proceedings. This is demonstrated by Tax considerations for vessel owners winding-up proceedings in Hong Kong that are ancillary in nature (such proceedings deal with Hong Kong assets, as opposed to assets 37 Is the income earned by the owners of vessels registered in your worldwide). An example of Hong Kong courts taking into account jurisdiction subject to domestic taxation? At what rate? foreign proceedings relating to reorganisation includes Modern The profits tax rate in Hong Kong is 16.5 per cent on assessable Terminals (Berth 5) Ltd v States Steamship Co [1979], where the profits. Generally, profits arising from the employment of a vessel plaintiff sued a Nevada company that had an order made in its registered in Hong Kong and engaged in international trade are non- favour by a US district court under Chapter 11 of the US Bankruptcy taxable. There are certain exceptions to this, for example if the vessel Act to protect it from creditor action pending restructuring. The is owned as stock-in-trade and upon sale the profits from the sale are Hong Kong courts granted summary judgment and a stay of execu- deemed to be assessable profits arising from the trade of the owner. tion. This preserved the jurisdiction and control of the courts of the A person carrying on business as owner of a vessel will be sub- United States and retained the status of the defendant as trustee of ject to the Hong Kong tax regime (a ‘taxable person’). A person that the creditors of the property. is incorporated in Hong Kong and has a business managed or controlled in Hong Kong, or has ships calling at a location within the 43 What is the order of priority among creditors? In what waters of Hong Kong (excluding calls of a casual nature), will be circumstances will creditors be required to disgorge payments deemed to be a taxable person (section 23B of the Inland Revenue from an insolvent company? Ordinance). Not all the income of a taxable person will fall within assess- Pursuant to the CO, secured creditors (other than floating charge able profits. A taxable person is only taxed on the percentage of its holders) are entitled to be paid ahead of other creditors. The general Hong Kong shipping income relevant to its total income (includ- order of payment after the secured creditors is as follows: ing international shipping income). Income: derived from carriage • the expenses of the winding-up (including the liquidator’s undertaken by a Hong Kong-registered vessel (proceeding to waters remuneration); beyond Hong Kong); derived from carriage undertaken by a vessel • the preferential debts (including unpaid wages, severance pay- of any flag (where carriage is conducted solely outside the waters of ments, long-service payments and unpaid taxes) and the com- Hong Kong); and where the person would have benefited from tax pany’s unsecured creditors pari passu (provided that preferential relief under recognised reciprocal exemption agreements (includ- debts rank ahead of any debt under a floating charge); and ing the Republic of Korea, Chile and New Zealand) is generally • the shareholders of the company. excluded from the assessable profits of such taxable person. Hong Kong has double tax agreements and arrangements with There are four types of transactions that may be set aside in the various countries (including the United Kingdom, the United States event of liquidation of a company: and China). This provides relief to vessel owners from double taxa- • transactions or security interests created by the company tion on certain shipping income. (entered into within six months prior to the commencement of winding-up proceedings or if such transaction or security inter- 38 Is there an optional tonnage tax exempting vessel owners from est is granted in favour of an associate of that company, within tax on income? two years prior to the commencement of winding-up proceed- Hong Kong does not have an optional tonnage tax regime. ings), which has given a preference to a pre-existing creditor over the other creditors and such transaction or security interest 39 What special tax incentives are available to shipowners was entered into at the time when the company was insolvent; registering vessels in your jurisdiction? • a transaction entered into with the company under extortionate terms within three years prior to the commencement of winding- Income derived from the international operation of vessels registered up proceedings; under the Hong Kong flag is generally exempted from profits tax, • a floating charge created by the company within 12 months and Hong Kong-registered vessels are subjected to reduced port dues prior to the commencement of winding-up proceedings, unless in certain ports. www.gettingthedealthrough.com 39 HONG KONG Clifford Chance

the company is solvent at the time when the charge is created, 46 How may a creditor petition the courts of your jurisdiction to subject to certain conditions; and declare a debtor bankrupt or compel liquidation of an insolvent • a disposition of property by such company with the intent to obligor? defraud creditors. A creditor may instigate a winding-up petition against an insolvent obligor on the grounds of the obligor’s inability to pay its debts. An 44 May a vessel owner provide security on behalf of other related obligor that has been served with a statutory demand for the debt or unrelated companies? What are the requirements for it to be and fails to pay the debt after three weeks of the demand will be enforceable? deemed unable to pay its debts. Therefore, most creditors will serve Yes. The directors of the vessel-owning company must, however, as a statutory demand upon the obligor in advance of a winding-up part of their fiduciary duties, consider whether such transaction is in petition. the best interest of the company and act in the best interest of the company. Corporate benefit may be difficult to demonstrate in situa- 47 Has your jurisdiction adopted the Model Netting Act of the tions where security is granted by the company to secure obligations International Swaps and Derivatives Association (ISDA)? If not, of other unrelated companies. may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency? 45 Is there a law of fraudulent transfer that permits a third-party Hong Kong has not adopted the Model Netting Act. creditor to challenge, for example, the grant of a mortgage A contractual provision for netting will generally be effective because of insolvency of the mortgagor or insufficient and binding on an obligor unless and until the obligor is wound-up. consideration received by the mortgagor in exchange for the grant In the event that an obligor is wound-up, mutual debts and credits of the mortgage? will be taken into account and can be set-off under the insolvency A liquidator or any creditor may apply to set aside a fraudulent rules (section 35 of the Bankruptcy Ordinance) and a contractual disposition of property under section 60 of the Conveyancing and provision for netting will be effective only if and to the extent that Property Ordinance. The burden of proof rests on the person apply- such netting provision is not inconsistent with the insolvency rules. ing to set aside the transaction.

Alastair MacAulay [email protected]

27th Floor Tel: +852 2825 8888 Jardine House Fax: +852 2825 8800 One Connaught Place www.cliffordchance.com Hong Kong

40 Getting the Deal Through – Ship Finance 2014 S Friedman & Co, Advocates ISRAEL Israel

Michael Safran S Friedman & Co, Advocates

Due diligence 6 What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by 1 How does one demonstrate title to or legal ownership of a vessel the board of directors or other governing body required? Must registered under the laws of your jurisdiction? shareholders approve a guarantee? All vessels registered under Israeli law are registered in the Register The corporate action required for entry into various transactions Book (the Register), which is maintained by the Israeli Registrar of will be set forth in the articles of the company. Commonly, guarantee Vessels (the Registrar) in his office at Haifa. Such registration con- or debt obligation requires the resolution of the board of directors. tains the main details of each vessel, name and address of owner In certain cases the articles provide that the approval of the share- and registered liens. The Register is open to the public against pay- holders is required, however, it is not a requirement of law. A careful ment of certain fee. Hence, title is demonstrated by reference to the examination of the articles of the relevant company is recommended Register. so as to verify the exact approval bodies and procedures. 2 How can one determine whether there are any liens recorded over 7 Must foreign lenders qualify to do business in your jurisdiction a vessel? to extend credit to a borrower organised in your jurisdiction? By inspection of the Register. Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your 3 How does one determine whether there are any security jurisdiction? agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, Foreign lenders do not need to be qualified to do business in Israel guarantor or other credit party in connection with a vessel finance to extend loans or credit facilities to Israeli-registered entities or indi- transaction? viduals. Foreign lenders will not be deemed residents as a result of the mere making of a loan or credit facilities to Israeli-registered All charges, pledges or other security agreements that in fact serve entities or individuals. It should be noted that by law, Israelis are as a charge or pledge (excluding security interest created by way of prohibited from carrying on business with certain lenders who are deposit of the charged asset with the creditor or with a guardian registered or owned by certain identified enemies of the state (cur- on its behalf), made by an Israeli registered company are perfected rently Iran, Syria and Lebanon). (and accordingly are effective towards third parties) only if filed for registration with the Israeli Registrar of Companies within 21 days Repayment of execution (or with the Registrar of Pledges, if made by an Israeli registered partnership or individual). Hence, examination (search) of 8 Is central bank or other regulatory approval required for repayment the relevant company’s file (or partnership file) will show all regis- of a loan in foreign currency? tered charges, pledges and liens. No central bank or other regulatory approval is required for repayment of a loan in foreign currency. 4 Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search 9 Do usury laws limit the interest payable to a lender in respect of a of a public registry? vessel financing? One can determine whether an obligor registered in the Israeli juris- Israeli usury laws limit the interest payable to a lender in any finance diction is duly organised and existing (and not restricted) from a or credit transaction, including in respect of a vessel financing. search of a public registry (‘good standing’ is not a defined status in Israel). 10 Are withholding taxes payable on principal or interest payments to non-resident lenders? 5 Can the shareholders or other equity interest holders, directors In general there is withholding tax on interest payable to foreign and officers or other authorised signatories of an obligor lenders – subject to any treaty or convention between Israel and organised in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily the foreign lender’s state and to exemptions under law. There is an identified? exemption from such withholding from interest payable to a banking or financing institution in respect of loans to finance the acquisi- The law requires that the Companies Registry need only identify the tion of vessels carrying goods in international trade provided the shareholders and directors of the company, accordingly these can be respective vessel is mortgaged to secure such loan. determined from a search at the Companies Registry. Officers and authorised signatories are commonly determined by an incumbency certificate, secretary certificate or a certificate by the company’s counsel. www.gettingthedealthrough.com 41 ISRAEL S Friedman & Co, Advocates

Registration of vessels 15 Give details of any required form for ship mortgages in your jurisdiction. 11 What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units The deed of mortgage is a bilateral document to be signed by the considered vessels under the laws of your jurisdiction? What is mortgagor (owner) and the mortgagee, and is on a set form (to the effect of registration? which may be added special terms and conditions). The deed contains the names and addresses of the mortgagor and mortgagee, Any vessel designed to navigate, excluding vessels propelled only by name and main particulars of the vessel, the amount and nature of oars and including floating docks is eligible for registration in Israel. the debt, repayment dates, undertaking to repay the debt, to pay There is no official age limit for vessels, which will be approved for interest and default interest, declaration of title and absence of prior registration based on ownership and seaworthiness (each vessel charges or liens by the mortgagor and a provision that the mortgage must possess all safety and other customary certificates). The effect can be foreclosed if the mortgagor is in default in payment or fails to of registration is that the vessel is duly registered in the Register and abide by the terms of the mortgage. is allowed to fly the Israeli flag. The registration does not guarantee title, however, where a person, in good faith and for valuable consid- 16 Who maintains the register of mortgages? What information does eration, has acquired a registered vessel from a person who, accord- it contain and where are such filings to be made? What is the ing to the entry in the Register, was permitted to transfer the vessel, effect of registration? the acquisition shall not be invalidated simply because the transferor did not in fact have the right to transfer the vessel. The register of mortgages is maintained by the Registrar and any filing of mortgage for registration should be made to the Registrar. 12 Who may register a vessel in your jurisdiction? The entry states the main particulars of the statutory form of the mortgage deed and the date and time of registration. The mortgage, A vessel (including a floating dock) that is majority-owned (ie, more once registered by the Registrar in the Register, is deemed to be a than 50 per cent) by the Israeli state or by an Israeli citizen or by an perfected charge over the vessel and all her parts for securing the Israeli corporation is eligible for registration in the Register and any repayment of the mortgage debt, interest thereon and all other pay- vessel that is eligible for registration must be so registered. ments secured under the terms of the mortgage. It should be noted A vessel under construction in Israel or abroad that complies that registration of the mortgage with the Registrar does not exempt with the eligibility conditions mentioned above may be registered the owner of the vessel from filing the mortgage charge with the in Israel in accordance with certain prescribed rules set forth in the Registrar of Companies (see question 3). regulations. Notwithstanding the foregoing, the Minister of Transport and 17 Must the total amount of the mortgage be stated therein? Must Road Safety (the Minister) may inform the Registrar that any ves- the mortgage contain a maturity date? Must the underlying debt sel is not eligible for registration in Israel if he has special reasons instrument be filed with or attached to the recorded mortgage? for doing so, such reasons being connected with the ownership of the shares not owned by the state, an Israeli citizen or an Israeli The total amount of the loan secured by the mortgage, the rate of corporation. interest thereon and the repayment dates should be specified (or may Where a vessel does not comply or has ceased to comply with be included by reference to the underlying transaction documents). the above-mentioned conditions for eligibility (mainly vessels owned There is no requirement for the underlying debt instrument to be by foreigners), the Minister may, if he is satisfied that a sufficient link filed or attached to the mortgage, however, it is customary to make exists between the vessel and Israel, permit the owner of that vessel reference to and attach the underlying debt instrument to the special to register the vessel in the Register subject to conditions or uncon- terms and conditions (regarding the deed of mortgage, see question ditionally, as he may think fit. What constitutes a ‘sufficient link’ 14). appears to be open to the Minister’s interpretation. In past cases a permit was given to a foreign entity who bareboat chartered its 18 Can a mortgage be registered in the name of an agent or trustee vessel to an Israeli corporation and to a foreign entity whose shares for the benefit of multiple lenders? were owned by an Israeli corporation. A mortgage may be registered in the name of an agent or trustee for the benefit of multiple lenders (eg, in a syndicated financing). 13 Is there an alternate registry for international shipping operations? 19 If the mortgagee is an agent or trustee for a lending syndicate, There is no alternate registry for international shipping operations. must any filings be made upon transfer of a portion of the Bareboat registration is not permitted in Israel. underlying debt among existing lenders or to a new lender? Unless the terms of the mortgage specify otherwise, where the Ship mortgages and other liens over vessels mortgagee is an agent or trustee for a lending syndicate, there is no requirement for filings upon transfer of a portion of the underlying 14 What types of ship mortgages exist and what obligations may a debt among existing lenders or to a new lender. ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardised forms? 20 If the mortgagee transfers its interest to a new lender, agent or Mortgage over an Israeli-flagged vessel is created and perfected by trustee, what filings are required? Is the mortgagor’s consent execution of a deed of mortgage and its registration with the Register required? (and its filing with the Registrar of Companies if the mortgagor is an A deed of transfer of mortgage (in the form prescribed by the law) Israeli-registered company (see questions 3 and 16)). There is only will have to be executed by the transferor and the transferee and one type of mortgage, which may secure an existing, future or con- filed and registered with the Registrar (and also with the Registrar tingent debt (including swap obligations). The deed is on a set form of Companies). Unless otherwise specified in the mortgage (or in the (similar to the English statutory form) and may contain special terms respective special terms and conditions) the mortgagor’s consent is and conditions (which are like a deed of covenant). The special terms not required. and conditions are attached to the deed of mortgage as an integral part thereof.

42 Getting the Deal Through – Ship Finance 2014 S Friedman & Co, Advocates ISRAEL

21 What other maritime liens over vessels are recognised in the vessel to have been arrested by another third party based on a your jurisdiction? Do these claims give rise to a right to arrest different cause of action in respect of which the Court has jurisdic- a vessel? In what circumstances may associated ships be tion. Nevertheless, in light of the ruling referenced in question 24, arrested? one may claim that the jurisdiction of the Court to enforce a foreign The other maritime liens that are recognised under Israeli law are for mortgage over a foreign vessel, is not subject to the precondition the following debts: of the Admiralty Court Acts that the vessel must be under arrest (i) expenses incurred in judicial sale and distribution of before the institution of in rem proceeding for the enforcement of proceeds; the mortgage. (ii) port dues, fees and other payments; The Court has the power to make an order for the sale of the (iii) expenses of guarding and maintaining the vessel from her vessel, either in a public auction or in any other way it deems fit (ie, entry into the last port until her sale; private sale), either before or after final judgment. (iv) master, crew, and other employed persons’ claims for wages, The Court is also authorised to appoint a receiver or a manager damages and otherwise; for the vessel and confer on him the powers that will enable him to (v) salvage and general average; conduct the enforcement of the vessel. (vi) death and personal injuries on board; The sale of a vessel can be carried out fairly quickly – in about (vii) collision and certain other property-damage claims; and three months from its arrest – in light of the high expenses that may (viii) payments in connection with supplies or services provided be required for the vessel’s day-to-day maintenance and anchorage. to the vessel. As to the associated court costs, court fees calculated as a percentage of the amount claimed will be chargeable (2.25 per cent of Any of the above debts give rise to a right to arrest a vessel. Under the amount claimed, and an additional 1 per cent for any amount Israeli law, an associated ship may not be arrested. claimed above approximately 24 million shekels).

22 What maritime liens rank higher than a mortgage lien? 26 May a vessel be sold privately by a mortgagee? Will the sale The maritime liens set out in (i) to (vii) in question 21 rank higher discharge liens over the vessel? than a mortgage lien. The Court has the power and discretion to make an order for the sale of the vessel, in a public auction or in any other way it deems 23 May non-mortgage liens be recorded over a vessel? fit (such as private sale). A vessel, when sold as aforesaid in accord- Non-mortgage liens may not be recorded over a vessel. ance with the Court’s order, shall be sold free from any liens and encumbrances. 24 Will mortgages on ‘foreign’ flag vessels be recognised in your 27 What are the limitations on rights of self-help by a mortgagee? jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction? Under Israeli law, a vessel’s mortgagee has no self-help rights in rela- Mortgages on ‘foreign’ flag vessels will be recognised in Israel, and tion to foreclosure, which may be conducted only by and in accord- will share the same priority as those on vessels registered under the ance with the Court’s order. laws of Israel. This issue was dealt with (on appeal) by the Israeli Supreme Court in 1990 within the framework of a claim for the 28 What duties does a mortgagee owe to an owner or third-party enforcement of a mortgage over a foreign vessel and various other creditors? claims of creditors of the vessel that were allegedly secured by a Unless otherwise provided in the mortgage and subject to the terms maritime lien. contained therein, the mortgagee has no legal duties towards the The Supreme Court ruled (by majority) that the validity and owner or third-party creditors. existence of a maritime lien will be determined by the lex causae governing the merits of the claim in the same manner as the validity Collateral of the mortgage. The rank, priority and preference of the liens, being 29 May finance leases or other charters be recorded over vessels classified as being of procedural nature, will be determined by the flagged under the laws of your jurisdiction? law of the forum (in accordance with the principles of the rules of choice of private international law). No finance leases or other charters may be recorded over vessels flagged under the laws of Israel. 25 What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How 30 May finance leases be re-characterised by a court as a financing long does a judicial sale take? What are the associated court contract? If so, is there any procedure for protecting the lessor’s costs and how are they calculated? interest against third-party creditors? A mortgage can be enforced in case the debtor has not fulfilled any Finance leases may be re-characterised by a court as a financing con- one of the conditions of the mortgage the non-fulfilment of which, tract. The procedure for protecting the lessor’s interest against third- according to the terms thereof, confers the right of enforcement. party creditors is entry into, execution and registration of a charge To commence foreclosure proceedings, the mortgagee should file over the asset that is the subject matter of the transaction in favour with the Admiralty Court of Israel (which is the District Court of of the lessor. Haifa in its capacity as the Admiralty Court) an action in rem for the enforcement of the mortgage. 31 How is a security interest created over earnings of a vessel, In this respect it should be mentioned that basically, the admi- charter contracts, insurances, etc? How are these security ralty law and practice in Israel are still based on the provisions of the interests perfected? British Admiralty Court Acts of 1840 and 1861 and the rules of pro- A security interest over, for example, the earnings of a vessel, charter cedure as set out in the Vice-Admiralty Rules of 1883. Accordingly, contracts (or contracts for the transportation of cargo or passengers) the above laws and procedures will govern the proceedings for and insurances may be created by way of assignment. Such assign- enforcement of a foreign vessel’s mortgage before the Court. Under ment (which serves as security) needs to be filed for perfection with those rules, the commencement of in rem proceedings based on a the Registrar of Companies (see question 3). claim in respect of a mortgage over a foreign-flagged vessel requires www.gettingthedealthrough.com 43 ISRAEL S Friedman & Co, Advocates

32 Must security interests against non-vessel collateral be registered Israel on income from the carriage of passengers and cargo loaded to be enforceable? If so, where are such filings made? in Israel at the applicable rates. Nevertheless, such foreign shipown- In order to have effect towards third parties, any security interest ers may be exempted from tax in Israel on such income if they are given by an Israeli company must be registered as a charge with the residents of a state that has signed an agreement or a tax treaty with Registrar of Companies, and if given by a partnership or individual, Israel providing an exemption from tax on such income. the registration should be registered with the Registrar of Pledges (see question 3). 38 Is there an optional tonnage tax exempting vessel owners from tax on income? 33 How is a security interest over a deposit account established? There is no tonnage tax applicable in Israel. A White paper pro- How is a security interest perfected? posing the imposition of tonnage tax on income of Israeli shipping A security interest over a deposit account (eg, an earnings account, companies was submitted a few years ago to the Israeli legislative retention account or collateral account) may be established by a authority and there is still uncertainty regarding the prospect of this pledge or charge over the account and the funds therein. Regarding proposal. perfection of security interests, see question 32. 39 What special tax incentives are available to shipowners registering vessels in your jurisdiction? 34 How are security interests in non-vessel collateral enforced? Israeli legislation offers several tax incentives with regard to the In general, security interests in non-vessel collateral may be enforced owners of vessels registered in Israel, including a special depreciation by an order of a competent court or by a chief execution officer, who deduction up to the original cost of the vessel, submission of consoli- appoints a receiver for that purpose. dated reports for tax purposes of companies operating the vessels in international transportation, tax exemption on interest paid on a 35 How are share pledges for vessel financings established? Are financing obtained for the purchase or construction of a vessel and share pledges or share charges common in your jurisdiction? on the charter of a vessel, and tax incentive in the re-exchange of a Share pledges or share charges are common in Israel. Share pledges vessel. In addition to the above, there is a zero VAT rate for various are established by entering into and execution of a pledge or charge services rendered with regards to transportation of cargo by vessels. over the shares and any rights deriving from the shares. The ancillary documents that are customarily required are: an undated executed 40 Are there any other noteworthy tax provisions specifically share transfer instrument; an undated and executed resignation let- applicable to shipping, shipping income or ship finance? ter of directors and officers; directors’ memorandum confirming the Some of the double taxation treaties signed between Israel and other notation of the security interest in the register of shareholders of states provide exclusive arrangements for the taxation of revenues the respective company; and irrevocable proxy and power of attor- from the operation of vessels in international traffic. The basic ney. To the extent the share certificates serve only as an evidence for arrangement provides for these revenues to be taxed at the state in title, it is not necessary to deliver the physical share certificates to which the place of effective management of the enterprise operating the chargee. Under Israeli law, bearer share certificates are allowed. the vessel is situated. Commonly, banks and financial institutions require that the physical Other tax regulations allow seamen employed on a vessel sailing share certificates will be deposited with them and sometimes require in international waters for at least 50 days in one tax year, to deduct that they be registered as a shareholder in the company’s sharehold- for tax purposes foreign-currency payments paid by their employer, ers’ registry, and in such cases, unless the charge instrument provides up to an amount specified in the regulations. otherwise, it is common that a power of attorney will be granted to the shareholder for voting purposes. It is customary to provide that Insolvency and restructuring as long as there is no default, the shareholder may exercise its powers under the shares. 41 Is there a general scheme of reorganisation or insolvency administration in your jurisdiction? 36 Is there a risk that a pledgee, before or after exercise of the share Section 350 of the Israeli Companies Law 1999 deals, inter alia, with pledge, may be exposed to debts or other liabilities of the pledged the reorganisation of a company’s debts to its creditors (including company? of an insolvent company). Once the court has been provided with a In general, the exposure of shareholders of a limited liability com- request to order the convening of creditors’ meetings for approval pany is limited to the face value of the shares held by them (to the of a suggested creditor’s arrangement or settlement, the court has extent such amount has not been transferred by them to the com- the discretion to order a ‘freeze of proceedings’ against the company, pany) and, subject to exclusions in accordance with the local law, the restricting the commencement or continuation of any proceedings shareholder is not exposed to the debts and liabilities of the pledged against the company, other than with the permission of the court, for company. a period that shall not exceed nine months (a freeze of proceedings order). Subject to specific exclusions provided by the Law, during Tax considerations for vessel owners the period of the freeze of proceedings order, no secured creditor of the company, including the vessel’s mortgagee, may act to enforce its 37 Is the income earned by the owners of vessels registered in your security (except with the court’s approval). jurisdiction subject to domestic taxation? At what rate? Income tax in Israel is levied on a personal basis, according to which 42 Will the courts of your jurisdiction respect the rulings of a foreign Israeli residents are subject to taxation in Israel on their worldwide court presiding over reorganisation or liquidation proceedings? income. Foreign residents are subject to taxation in Israel only on The issue of whether Israeli courts will respect the ruling of foreign income from sources within Israel. Currently companies are subject courts on civil matters (including on reorganisation or liquidation to a corporate tax of 26.5 per cent (with effect from 1 January 2014) proceedings) is governed by the Foreign Judgments Enforcement and individuals are subject to progressive income tax rates of 10 to Law 1958. The Law provides for either enforcement or recognition 48 per cent and to an additional 2 per cent for income exceeding (direct or incidental) of a foreign judgment. 800,000 shekels a year. The Law provides various conditions, all of which must be Consequently, foreign-resident owners of vessels registered in met, for ordering the enforcement or for recognition of a foreign Israel (foreign shipowners) are generally subject to income tax in judgment.

44 Getting the Deal Through – Ship Finance 2014 S Friedman & Co, Advocates ISRAEL

With respect to the enforcement of a foreign judgment, the Law Subject to certain exclusions, the order of priority between stipulates that, subject to specified time limitations, Israeli courts the above four creditors shall be determined by the chronologi- may enforce a foreign final executory judgment in a civil matter cal order of the creation of the respective security interest; obtained after due process before a competent court according to • the liquidator – with respect to liquidator’s fee and liquidation the laws of the state in which judgment is given and the rules of expenses; private international law currently prevailing in Israel, the laws of • preferred creditors under law (eg, wage debts to employees, which do not prohibit the enforcement of judgment of Israeli courts. income tax and obligatory payments to local authorities, certain This is provided that: landlord’s payments, etc); • the judgment is enforceable in the state in which it was given; • creditors having a floating charge not including a limitation • adequate service of process has been effected and the defendant clause; and has had a reasonable opportunity to present his arguments and • other creditors. evidence; • the judgment and the enforcement thereof are not contrary to A creditor may be exposed to a requirement to disgorge payments the law, public policy, security or sovereignty of Israel; from an insolvent company in case of fraudulent transfer (see ques- • the judgment was not obtained by fraud and does not conflict tion 45) and in relation to a transaction that was conducted after the with any other valid judgment in the same matter between the liquidation commencement date and under circumstances governed same parties; by the general law and relating to the respective transaction. • an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted 44 May a vessel owner provide security on behalf of other related in the foreign court; and or unrelated companies? What are the requirements for it to be • the judgment is no longer appealable and the judgment is execu- enforceable? tory in the country in which it was given. A vessel owner may provide security on behalf of other related or unrelated companies, which customarily will include the vessel- With respect to a direct recognition of the foreign judgment, the con- owning entity guarantee for the respective debt of the third-party ditions of the law focus on the question of whether there is a treaty debtor. The requirement for enforceability is perfection of the secu- or agreement with the state in which the foreign judgment was given rity interest. that applies to such judgment and on the contents thereof. The incidental recognition of a foreign judgment can be declared 45 Is there a law of fraudulent transfer that permits a third-party by the court for the purpose of a specific matter heard by it and inci- creditor to challenge, for example, the grant of a mortgage dental thereto, even if the conditions for the direct recognition have because of insolvency of the mortgagor or insufficient not been met, on the condition that the court deems it proper to do consideration received by the mortgagor in exchange for the grant so in the interests of law and justice. of the mortgage? Israeli law includes provisions concerning the possibility of can- 43 What is the order of priority among creditors? In what celling transactions that were conducted by an insolvent company circumstances will creditors be required to disgorge payments before (or after) the liquidation commencement date (the date on from an insolvent company? which the request for its liquidation was submitted to the court). The general rule with respect to order of priority among debtors and A transaction (which may be a sale of an asset of the company, creditors of a company is as follows (in order of priority): creation of a mortgage on an asset of the company, payments to • first-priority creditors (usually governmental authorities with a third parties or any other actions that reduce the property rights mandatory priority); of the company) conducted during the three months preceding the • lien holders; liquidation commencement date may be considered as ‘fraudulent • (i) secured creditors; (ii) holders of floating charges with a clause transfer’ under certain circumstances described by the law. limiting the debtor’s right to create new subsequent charges; (iii) holders of a caveat registered in the land registry regarding a 46 How may a creditor petition the courts of your jurisdiction to written undertaking made by the owner (or holder of the rights) declare a debtor bankrupt or compel liquidation of an insolvent in a certain real estate property to carry out or to refrain from obligor? carrying out a transaction in such property; and (iv) the Tax To petition an Israeli court to compel a debtor’s liquidation, the cred- Collector with respect to certain charges incurred with respect itor should submit to the court a liquidation request (set form) sup- to moveables which transfer is subject to registration under law. ported by an affidavit, within which the liquidation cause of action

S Friedman & Co, Advocates

Michael Safran [email protected]

9 Andrei Sakharov Street Tel: +972 4 8546 666 PO Box 15065 Fax: +972 4 8546 688 Haifa 3504809 [email protected] Israel www.friedman.co.il

www.gettingthedealthrough.com 45 ISRAEL S Friedman & Co, Advocates is specified (a copy must be served to the debtor and the General 47 Has your jurisdiction adopted the Model Netting Act of the Receiver). The creditor should deposit with the General Receiver a International Swaps and Derivatives Association (ISDA)? If not, fixed fee in an amount set by the regulations to cover the General may a swap provider exercise its close-out netting rights under an Reciever’s expenses. ISDA master agreement despite an obligor’s insolvency? Before the hearing, a certificate from the Registrar of Companies The Israeli Financial Assets Agreement Law 2006 confirms the or a court official that has been authorised by the Registrar of enforceability of the close-out netting provisions under the ISDA Companies should be provided to the court confirming that the Master Agreement, in spite of an obligor’s insolvency and therefore creditor has fulfilled all the requirements concerning the request for a swap provider may exercise his close-out netting right in such case. liquidation (such as the publication in public records and one news- paper of an announcement concerning the request and the date set by the court for the hearing thereof).

46 Getting the Deal Through – Ship Finance 2014 Yoshida & Partners JAPAN Japan

Norio Nakamura Yoshida & Partners

Due diligence officers or other authorised signatories of an obligor organised in Japan are neither registered nor determined. 1 How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction? 6 What corporate or other entity action is necessary for an obligor Vessels are registered at a competent office of the Legal Affairs to enter into or guarantee a debt obligation? When is action by Bureau. Registration of vessels is intended to announce the legal the board of directors or other governing body required? Must position (rights and obligations) of the parties involved in vessels in shareholders approve a guarantee? view of private law. Vessels are also recorded at a competent office of the Transport Bureau, for the purpose of administrative supervision. Any guarantee to secure debts or obligations of the principal must National certificates of vessels are issued by the Transport Bureau be given in writing pursuant to the civil law and be made before the upon the vessel being duly registered and recorded. principal debts or obligations cease to exist. Title to or legal ownership of a vessel is demonstrated by a If the guarantee is made by a corporation, a certain internal transcript of the ship register issued by the Legal Affairs Bureau, in procedure is required. If the amount of guarantee to be made by a which the name and address of the shipowners and the date and the corporation would result in it falling into ‘a large amount of debt’ cause of acquisition of the title are stated. stipulated in the corporation law, prior approval by the board of directors is required. A company may devolve the authorisation for such approval to a resolution of the shareholders’ meeting if it speci- 2 How can one determine whether there are any liens recorded over fies the provision in the articles of incorporation. a vessel?

A mortgage on a vessel can be recognised in a transcript of the ship 7 Must foreign lenders qualify to do business in your jurisdiction register, but there are no means of determining whether there are any to extend credit to a borrower organised in your jurisdiction? liens over a vessel because non-registered liens (eg, maritime liens or Will foreign creditors be deemed resident as a consequence of other liens on a vessel) are not entered in the ship register. making a loan or other extension of credit to an obligor within your jurisdiction? 3 How does one determine whether there are any security Foreign lenders (banks and other lenders) are required under the agreements, liens, charges or other encumbrances granted banking law to qualify to do business in Japan to extend credit to by a vessel owner or affiliated party who might be a borrower, a borrower organised in Japan if the finance is made there as in the guarantor or other credit party in connection with a vessel finance course of business. transaction?

We can determine the nature and amount of credit that has been Repayment secured by a mortgage upon viewing a transcript of the ship registry. However, security agreements, liens, charges or other encumbrances 8 Is central bank or other regulatory approval required for repayment are neither registered in the ship register nor disclosed to the public of a loan in foreign currency? by the Legal Affairs Bureau. Repayment of a loan is effective in a currency designated in a loan agreement. If the agreement designates a foreign currency for repay- 4 Can one determine whether an obligor registered in your ment, no particular regulatory approval is required other than a jurisdiction is duly organised and in good standing from a search certain requirement under the foreign exchange and foreign trade of a public registry? control law, such as an ex post facto report. From the certified commercial register it is possible to determine whether an entity has been duly organised and is in good standing. 9 Do usury laws limit the interest payable to a lender in respect of a A transcript of the commercial register can be obtained by anyone at vessel financing? the Legal Affairs Bureau with an application fee of ¥600. If the Japanese law is designated as a governing law of a finance agreement, the interest rate restriction law is applied. It limits the 5 Can the shareholders or other equity interest holders, directors interest to up to 15 per cent per annum where the amount of the and officers or other authorised signatories of an obligor principal credit is more than ¥1 million. organised in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily 10 Are withholding taxes payable on principal or interest payments to identified? non-resident lenders? Only the name and address of the representative director and the Non-resident lenders are required to pay a withholding tax, in prin- name of other directors of an entity in question can be determined ciple, at 20 per cent on the interest to be earned from the domes- by viewing a transcript of the commercial register issued by the tic borrower. Where the tax convention is applied, the rate may be Legal Affairs Bureau. Shareholders or other equity interest holders, reduced. For the period of 25 years from 2013 to 2037, withholding www.gettingthedealthrough.com JAPAN Yoshida & Partners tax of 20.42 per cent is payable due to the requirement for the spe- • the date of filings; cial reconstruction income tax. • the secured credit; • the kind of mortgage; Registration of vessels • the amount of the secured credit at the time of register; and • the name and address of a mortgagee and debtor. 11 What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units Upon a mortgage on the vessel being registered, it keeps a priority considered vessels under the laws of your jurisdiction? What is over rights of the third party such as subordinated mortgages or the effect of registration? new owners of the vessel but is behind maritime lines created on Vessels more than 20 gross tons are eligible for registration. Vessels the vessel. less than 20 gross tons and those solely or mainly propelled by oars are excluded from the requirement to register under the ship law. 17 Must the total amount of the mortgage be stated therein? Must Offshore drilling rigs or mobile offshore drilling units, which the mortgage contain a maturity date? Must the underlying debt are not intended to be used for carriage of passengers or cargo, are instrument be filed with or attached to the recorded mortgage? excluded from the concept of a vessel. If objects are taken as out The amount of a credit secured by the mortgage is stated for the of the vessel concept, they are deemed to be structures on land or standard mortgage and the maximum amount of the mortgage is moveable properties, where the owners of the object are not entitled stated for the revolving mortgage. A maturity date is not recorded to limitation of liability as shipowners and maritime lien over the in the mortgage. The underlying debt instrument such as the loan vessel is not created. agreement and the mortgage deed must be provided to the Legal Affairs Bureau in filing the mortgage but these instruments are not 12 Who may register a vessel in your jurisdiction? filed with or attached to the recorded mortgage. The following parties may register a vessel: • the Japanese government or a Japanese government authority; 18 Can a mortgage be registered in the name of an agent or trustee • a Japanese national; or for the benefit of multiple lenders? • a legal entity incorporated under Japanese law of which the rep- A mortgage cannot be registered in the name of an agent or trustee resentative director and two-thirds of executive officers must be for the benefit of multiple lenders and the mortgagee must be the Japanese nationals. creditor of the secured credit.

13 Is there an alternate registry for international shipping 19 If the mortgagee is an agent or trustee for a lending syndicate, operations? must any filings be made upon transfer of a portion of the There is no alternate registry in Japan for international shipping underlying debt among existing lenders or to a new lender? operations, such as an offshore register, for foreign owners to have The mortgagee must be the creditor of the secured credit and the their vessels registered. agent or trustee for a lending syndicate cannot be registered as a mortgagee. If an agent or trustee for a lending syndicate wishes to Ship mortgages and other liens over vessels be registered as a single mortgagee, all of the underlying debt must 14 What types of ship mortgages exist and what obligations may a be obtained and transferred from the lending syndicate to the agent ship mortgage secure? Can contingent obligations, including swap or the trustee. obligations, be secured? Are there standardised forms? Japan has two types of ship mortgage: 20 If the mortgagee transfers its interest to a new lender, agent or (i) the standard mortgage, which secures a specified credit together trustee, what filings are required? Is the mortgagor’s consent with its interest which has fallen due in the last two years; and required? (ii) a revolving mortgage, which secures unspecified credits created in If the mortgagee assigns the credit secured by the mortgage to a a specific contracts with the obligor for continuous transactions third party, the mortgage is also assigned to such party following or created in a certain kinds of transactions with the obligor. the transfer of the secured credit and the mortgagor’s consent is not required. Contingent obligations or swap obligations may be secured by a In order to perfect the assignment of the credit, the notice of standard mortgage as far as the obligation is specified when the the assignment or the acknowledgement of the assignment must be mortgage is provided. Unspecified obligations may be the target made attaching a fixed-date certificate. Under the civil law, assign- of the revolving mortgage and are subject to the condition of (ii) ment of a claim may not be accepted by the obligor or any other above. There are no particular standardised forms for registry of third party unless the assignor gives a notice to the obligor or the the mortgage and a comprehensive English-style deed of covenants obligor has acknowledged the same, and such notice or acknowl- is not required. edgement must have the fixed date to be effective against the third party other than the obligor. A fixed-date certificate is obtainable 15 Give details of any required form for ship mortgages in your by either a content-certified mail or certification by a notary public. jurisdiction? As mentioned in question 14, there is no particular required form. 21 What other maritime liens over vessels are recognised in In a mortgage deed, creditors, debtors and the secured credit must at your jurisdiction? Do these claims give rise to a right to arrest least be identified. The principal amount is to be applied in Japanese a vessel? In what circumstances may associated ships be currency. arrested? The following claims would create a maritime lien, by which the 16 Who maintains the register of mortgages? What information does vessel may be arrested: it contain and where are such filings to be made? What is the • costs incurred from the auction sales of the vessel after the auc- effect of registration? tion procedure is commenced; The register of mortgages is maintained by the competent Legal • costs to maintain the vessel at the last port; Affairs Bureau. The register of mortgage contains: • tax and other dues for her voyage;

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• pilotage and towage; settling lien-claims while any liens are discharged through a judicial • salvage and general average; auction sale. Thus, if it is expected that the vessel may be subject a • claims arisen out of necessity to continue her voyage; lien, financers must bear risks of a lien in selling a vessel by a private • crew’s claim under the employment contract; sale. • claims arisen out of ship sales, construction, equipment but before her departure and claims for equipment, provisions or 27 What are the limitations on rights of self-help by a mortgagee? bunker for her last voyage; and A mortgagee is allowed to bid for and purchase a vessel by itself in • claims under the Japanese COGSA or the law concerning limita- the same way as the law normally requires and there is no particular tion of liability of shipowners or the law concerning compensa- limitation on the right of self-help. tion for damage from oil pollution by ship. 28 What duties does a mortgagee owe to an owner or third-party Associated ships may be arrested by way of ‘provisional attach- creditors? ment’, similar to the Mareva injunction under English law, but not A mortgagee does not obtain any possession of the vessel and the on maritime liens. Provisional attachment is only to preserve assets owner is allowed to use the vessel. Thus, a mortgagee does not owe (eg, vessels) of the debtor as owner from being disposed of until the any duties or responsibility to the owner or other third-party credi- judgment or arbitration award becomes enforceable. The arrestor tors in connection with the use of the vessel. must provide a counter security to the court in cash or by a bond issued by a bank or a foreign bank admitted by Japanese laws. Collateral

22 What maritime liens rank higher than a mortgage lien? 29 May finance leases or other charters be recorded over vessels Maritime liens on the vessel mentioned in question 21 have a prior- flagged under the laws of your jurisdiction? ity over the ship mortgage even if they are created after the mortgage Rights that can be registered over vessels under Japanese law are is registered. ownership, mortgage and lease only. In a certain scheme for finance lease, (i) where a finance lessor holds the right of ownership of the 23 May non-mortgage liens be recorded over a vessel? vessel, he or she is registered as owner and the right to lease of the We have no means of recording non-mortgage liens over a vessel. vessel may be registered in the name of a lessee, and (ii) where a finance lessee obtains the right of ownership of the vessel, he or she is 24 Will mortgages on ‘foreign’ flag vessels be recognised in your registered as owner but the lessor’s credit is not registered as security jurisdiction? If so, do they share the same priority as those on because there are no means to register such interests in Japan. The vessels registered under the laws of your jurisdiction? title to lease by a bareboat charter may be recorded as a lease if it falls in the meaning of ‘lease’ under Japanese law. There is a legal dispute on the issue of whether the mortgage on foreign flag vessels is recognised in Japan. Japanese courts have in fact 30 May finance leases be recharacterised by a court as a financing accepted enforcement of the foreign ship mortgage in many ship- contract? If so, is there any procedure for protecting the lessor’s arrest cases but a few courts refuse to recognise by reason that it interest against third-party creditors? does not have any ground of Japanese law. If the foreign ship mortgage is recognised, it has the same priority as those registered under A judgment of the Supreme Court in 1995 mentioned, in a dispute Japanese law. under the corporate reorganisation proceedings, with regard to a finance lease contract with full-payout scheme, that monthly pay- 25 What is the procedure for enforcing a mortgage in your jurisdiction ment for lease by the lessee was not valued to monthly use of the by way of foreclosure? Are interlocutory sales permitted? How leased object and the substantial nature of this finance lease was to long does a judicial sale take? What are the associated court give the lessee financial benefits. costs and how are they calculated? It is thought in the proceedings of a lessee’s bankruptcy, civil rehabilitation or corporate reorganisation that unpaid credits for If a debtor is in default under the loan agreement or other contracts, finance lease may be categorised in a secured claim, not an unse- the mortgagee may apply for judicial auction sale of the vessel. The cured claim. mortgagee first needs to arrest a vessel in Japan as a precondition for the court to order the commencement of the judicial auction 31 How is a security interest created over earnings of a vessel, sale proceedings, for which a vessel must be put in a possession of charter contracts, insurances, etc? How are these security the court-marshal. After the court orders the commencement of the interests perfected? proceedings, the vessel is physically maintained by a ship-manager appointed by the court until she is sold. In the meantime, the court Assignment of a charter contract (eg, earning of a vessel or charter inspects and makes a valuation of the vessel to determine the mini- hire) or insurance is often created as security interests by a contract mum price for bidding. A judicial auction is made by way of open between the financer and the owner. bids or tender bids upon consultation with the financer as mortgagee. Charterparty or charter hire may be assigned by the assignor Interlocutory sales are not provided for under Japanese law. It with a notice of assignment issued by the assignor to the assignee usually takes several months to have a judicial sale. Costs that the and an acknowledgment by the assignee. In order to perfect the applicant must bear are the deposit ordered by the court for the said assignment, a notice of the assignment by the assignor or an vessel’s expected maintenance and preservation costs or expenses, acknowledgement by the assignee must have a fixed-date certificate including port charge, crew wages, insurance, bunker, etc, for several (see question 20). months until the vessel is sold. Security interests over the insurance can be created by a pledge or a mortgage by transfer. To perfect the pledge or mortgage by 26 May a vessel be sold privately by a mortgagee? Will the sale transfer of the insurance, a notice of pledge or transfer from the discharge liens over the vessel? pledger to the insurer or an acknowledgment by the insurer, having a fixed-date certificate, is required (see question 20). A title of the A vessel may be sold out of court privately by a mortgagee according pledge or the mortgage by transfer can be registered at the Legal to the terms and conditions provided in a mortgage deed. However, Affairs Bureau, in which case a notice by the pledgor or an acknowl- in a private sale, liens over the vessel are not discharged without edgment by insurer is not required to have perfection. www.gettingthedealthrough.com JAPAN Yoshida & Partners

32 Must security interests against non-vessel collateral be registered 38 Is there an optional tonnage tax exempting vessel owners from to be enforceable? If so, where are such filings made? tax on income? One of the typical security interests against non-vessel collateral for Japan adopted the tonnage tax regime from 2008 replacing the ship finance other than mortgage is a pledge of corporate shares standard corporate tax regime. A tax base of tonnage tax is calcu- which the borrower owns (for registration see question 35). lated on the net tonnage of the trading vessels and its rate is (i) if it In Japan, financers often require a borrower to provide a per- pays at each entry to open ports, ¥16 per net tonnage, and (ii) in case sonal guarantee issued by directors of the borrower or a corporate of a lump-sum payment for one year, ¥48 per tonnage. guarantee issued by affiliated companies. No register filings are required. 39 What special tax incentives are available to shipowners registering vessels in your jurisdiction? 33 How is a security interest over a deposit account established? Japan’s tonnage tax regime is applicable only to Japanese flagged How is a security interest perfected? vessels. A security interest over a deposit account may be established by way of a pledge agreement between a financer as pledgee and a borrower 40 Are there any other noteworthy tax provisions specifically as pledgor. In order to perfect the said pledge of a deposit account, applicable to shipping, shipping income or ship finance? a notice of the assignment by a pledgor or an acknowledgement by There is no particular tax regime favorable to shipowners incorpo- a bank of the said deposit account, having a fixed-date certificate, is rated in other jurisdictions. required (see question 20). Insolvency and restructuring 34 How are security interests in non-vessel collateral enforced? 41 Is there a general scheme of reorganisation or insolvency Security interests in non-vessel collateral are enforceable according administration in your jurisdiction? to the contracts between the financier and the borrower or by a law of a place where each security interest exists or is located. Procedures for re-organisation or insolvency are stipulated in dif- A share pledge is enforceable by the law under which the com- ferent laws. For example, the Bankruptcy Law provides for bank- pany is incorporated, details of which are mentioned in question 35. ruptcy of an individual or a corporation who wishes to close its business. The Civil Rehabilitation Law provides for rehabilitation 35 How are share pledges for vessel financings established? Are of an individual or a corporation and the Corporate Reorganisation share pledges or share charges common in your jurisdiction? Law provides for reorganisation of a corporation only. In the former proceedings, the current executives may continue to keep manage- Share pledges or transferable mortgages over the share are avail- ment of the company but in the latter proceedings, the management able for financers as security of the loan credit. It is construed under of the company is fully succeeded by the trustee. the international conflict law of Japan that share pledges for vessel In bankruptcy proceedings or civil rehabilitation, the credits financings may be established by the law under which the company secured by a ship mortgage are enforceable at any time out of the is incorporated and Japanese law is applicable when it is designated proceedings, but in a corporate reorganisation, even the ship mort- as governing law of the share pledges. gage must follow the reorganisation plan and may not be enforced In Japan, share pledge is established (i) by physical delivery of voluntarily out of the proceedings. the share certificate if it is issued by the company, (ii) by recording the pledgee in the book-entry transfer form if the share certificate is not issued by the company but the book-entry transfer system is 42 Will the courts of your jurisdiction respect the rulings of a foreign adopted, or (iii) by recording the pledgee in the shareholder list of court presiding over reorganisation or liquidation proceedings? the company if such company neither issues the share certificate nor Japan has legislation concerning recognition and assistance for adopt the book-entry stock system. foreign insolvency proceedings following the model law for recognition and assistance of the foreign insolvency proceedings formu- 36 Is there a risk that a pledgee, before or after exercise of the share lated by United Nations Commission on International Trade Law pledge, may be exposed to debts or other liabilities of the pledged (UNCITRAL). company? Tokyo District Court has exclusive jurisdiction over this mat- A pledgee would not be exposed to a risk of having debt or liabilities ter and the applicant is required to put up a deposit decided by the of the pledged company beyond the value of the shares before or court. The court may order suspension of the attachment or other after exercise of the share pledge. proceedings over the property in Japan and, if necessary, may prohibit disposal of the property to assist the foreign proceedings. Tax considerations for vessel owners 43 What is the order of priority among creditors? In what 37 Is the income earned by the owners of vessels registered in your circumstances will creditors be required to disgorge payments jurisdiction subject to domestic taxation? At what rate? from an insolvent company? The parties who are allowed ownerhip of Japanese flagged vessels The following claims are given priority to recover from the bank- is limited to the Japanese government, Japanese nationals or a com- ruptcy estate before the liquidating distribution is made to relevant pany incorporated by Japanese law as mentioned in question 12. bankruptcy creditors: Assuming a Japanese vessel make a profit, the owners as a corporate • expenses for court proceedings performed for the common body (they must be a Japanese entity) are to bear (i) a fixed property interest of bankruptcy creditors; tax for vessels, a corporation inhabitance tax or a business income • expenses for the administration, realisation and liquidating dis- tax as local taxes and also (ii) a corporate tax as a national tax. A tribution of the bankruptcy estate; rate of a corporate tax is presently 25.5 per cent and the total effec- • tax, etc arising from a cause that has occurred before the com- tive tax rate is 35.64 per cent after 1 April 2015. mencement of the bankruptcy proceedings, for which, by the time of commencement of the bankruptcy proceedings, the due

Getting the Deal Through – Ship Finance 2014 Yoshida & Partners JAPAN

date of payment has not yet arrived or one year has not yet • acts conducted by the debtor having knowledge that the said elapsed after the due date of payment; and acts would prejudice creditors, or acts which prejudice creditors • claims arising from an act conducted by a bankruptcy trustee and have been conducted after the payment was suspended or with respect to the bankruptcy estate. filing of the bankruptcy proceedings had taken place; • gratuitous acts or onerous acts equal to gratuitous acts con- Bankruptcy claims, for which a general statutory lien or any other ducted by the debtor after or six months before the payment general priority exists over property that belongs to the bankruptcy was suspended; or estate, have a priority over other general bankruptcy claims, such as: • acts conducted to give security for a debt or to settle a debt after • tax etc arising from a cause that has occurred before the com- the debtor became insolvent or the bankruptcy proceedings mencement of the bankruptcy proceedings, for which, by the were filed provided that a creditor must knew the fact that the time of commencement of the bankruptcy proceedings, the due debtor was insolvent, payment has been suspended or the bank- date of payment has elapsed more than one year after the due ruptcy proceedings was filed. date of payment; • unpaid fees for a pension insurance or health insurance; and The above rights of avoidance may not be exercised after two years • unpaid wages. have elapsed since the bankruptcy proceedings were commenced.

A creditor may be required to disgorge payments from an insolvent 46 How may a creditor petition the courts of your jurisdiction to company if he or she knew the fact that receiving payment in prefer- declare a debtor bankrupt or compel liquidation of an insolvent ence would prejudice other creditors. obligor? Any creditors may apply for a debtor bankrupt upon putting up a 44 May a vessel owner provide security on behalf of other related deposit to the court. The court will order much higher deposit than or unrelated companies? What are the requirements for it to be a debtor application for bankruptcy case. The applicant creditor enforceable? must make prima facie proof as to the applicant’s credit and debtor’s An owner of a vessel may provide security on behalf of other related insolvency. The court will hold a hearing with both the applicant or unrelated companies and no particular relation between the and the debtor before declaring the commencement of the bank- owner and debtor or borrower is required. To enforce the mortgage ruptcy proceedings. on the vessel in such cases, upon the event of default having been occurred on the principal debtor or borrower, the vessel must first 47 Has your jurisdiction adopted the Model Netting Act of the be arrested by the mortgagee as creditor in Japan to put her in the International Swaps and Derivatives Association (ISDA)? If not, possession of the court-marshal. may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency? 45 Is there a law of fraudulent transfer that permits a third party Japan has not adopted the Model Netting Act of the International creditor to challenge, for example, the grant of a mortgage Swaps and Derivatives Association (ISDA). However, there are some because of insolvency of the mortgagor or insufficient provisions that reflect the netting regime for certain transactions in consideration received by the mortgagor in exchange for the grant the bankruptcy law, the civil rehabilitation law, the corporate reor- of the mortgage? ganisation law and the special law called the Law on Collective The bankruptcy law provides legal effects when a fraudulent trans- Liquidation of Specified Transaction Conducted by Financial fer (prejudicial act to creditors) has been made by a debtor, mort- Institutions. These provisions are applicable to the netting between gagor or others. The following acts may be avoided by a bankruptcy two parties but not among multiple parties. trustee after the commencement of the bankruptcy proceedings is declared:

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www.gettingthedealthrough.com Liberian International Ship and Corporate Registry and Norton Rose Fulbright LIBERIA Liberia

Zaharoula (Hara) Gisholt and Brad L Berman Liberian International Ship and Corporate Registry and Norton Rose Fulbright

Due diligence 5 Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor 1 How does one demonstrate title to or legal ownership of a vessel organised in your jurisdiction be determined from a search registered under the laws of your jurisdiction? of a public registry? If not, how are these parties customarily Upon registration of a vessel under the Liberian flag, a certificate of identified? registry, provisional or permanent, is issued to the owner. An unex- Liberia does not maintain a public registry for the filing of the name pired provisional certificate of registry has the same validity and and contact details of the officers, directors or shareholders (mem- legal standing as a permanent certificate of registry, and is prima bers or partners) of a business entity organised under the Liberian facie evidence that the vessel to which it has been issued is registered Associations Law, Title 5. The Liberian Registry therefore will only under the laws of the Republic of Liberia in the name of the regis- be able to produce such information if the entity voluntarily files this tered owner. information with the Registry or with the LISCR Trust Company, as Moreover, a third party may request a certificate of ownership exclusive registered agent. and encumbrance (COE) that will set forth the name of the registered owner. 6 What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by 2 How can one determine whether there are any liens recorded over the board of directors or other governing body required? Must a vessel? shareholders approve a guarantee? The Liberian Ship Registry is a public registry and anyone may In accordance with the Liberian Business Corporation Act, a guar- request a COE. A COE will set forth all mortgages recorded against antee must be approved by a corporation’s board of directors. If the a vessel. The COE will provide the inquiring party with information guarantee is not in furtherance of corporate purposes, the guarantee such as the name of the registered owner, the total amount of the must be approved by two-thirds of a corporation’s shareholders. mortgage (if any), as well as the ship’s details (gross and net tonnage, call sign, etc). 7 Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organised in your jurisdiction? 3 How does one determine whether there are any security Will foreign creditors be deemed resident as a consequence of agreements, liens, charges or other encumbrances granted making a loan or other extension of credit to an obligor within your by a vessel owner or affiliated party who might be a borrower, jurisdiction? guarantor or other credit party in connection with a vessel finance transaction? It is not necessary that a foreign lender be licensed, qualified or otherwise entitled to carry on business in Liberia in order to enforce its Only preferred ship mortgages may be recorded with the Liberian rights under a loan document or for the execution, delivery and per- Registry against a Liberian-flagged vessel. formance of a loan document. A foreign lender will not be deemed to be resident, domiciled, carrying on business or subject to taxation 4 Can one determine whether an obligor registered in your in Liberia by reason only of the negotiation, preparation, execution, jurisdiction is duly organised and in good standing from a search performance or the enforcement or receipt of any payment due from of a public registry? a Liberian entity under a loan document. A certificate of good standing issued by the Ministry of Foreign Affairs may be ordered through the Liberian International Ship and Repayment Corporate Registry (LISCR) to confirm the existence and current status of a Liberian non-resident entity. A certificate of good stand- 8 Is central bank or other regulatory approval required for repayment ing will confirm: of a loan in foreign currency? • the name of the entity; No. • the date of incorporation or registration; • the registration number; 9 Do usury laws limit the interest payable to a lender in respect of a • the name and address of the registered agent; and vessel financing? • that the entity remains a subsisting entity in good standing. While Liberia does have usury laws, such laws do not generally limit the interest payable to a lender in respect of a vessel financing.

www.gettingthedealthrough.com 47 LIBERIA Liberian International Ship and Corporate Registry and Norton Rose Fulbright

10 Are withholding taxes payable on principal or interest payments to A preferred Liberian mortgage follows the American model and is a non-resident lenders? unilateral document made by the owner in favour of the mortgagee A non-resident Liberian entity is not required or entitled to make or mortgagees. There is no prescribed standardised form. any withholding or deduction with respect to any tax from any payment that it is or may be required to make on principal and interest 15 Give details of any required form for ship mortgages in your payments to non-resident lenders. jurisdiction. Mortgages submitted for recordation in Liberia must be in English. Registration of vessels For a mortgage to be in ‘recordable form’ the following should be mentioned: 11 What vessels are eligible for registration under the flag of your • name of the vessel and official number; country? Are offshore drilling rigs or mobile offshore drilling units • names of parties to the mortgage and their interest in the vessel; considered vessels under the laws of your jurisdiction? What is • interest in the vessel transferred or affected; the effect of registration? • evidence of debt; The Liberian Maritime Law, Title 21, section 51, allows for seagoing • recording clause, setting out the total amount of the mortgage; vessels of more than 500 NT that are engaged in foreign trade to be • recording details of any senior mortgage or mortgages when a registered in Liberia. The Commissioner or Deputy Commissioner junior or subordinate mortgage is recorded; of the Maritime Authority may grant an application for waiver of • the intended effect of the instrument; and the minimum tonnage requirement. • any separate discharge amount. Generally, vessels should be not more than 20 years old at the time of registration; however, vessels that are more than 20 years 16 Who maintains the register of mortgages? What information does old may be granted a waiver for registration on application by the it contain and where are such filings to be made? What is the owner accompanied by advice from the vessel’s classification society effect of registration? confirming that the vessel is in class and that the society is willing to issue all statutory certificates to the vessel. The Liberian Maritime Law, in accordance with the International Offshore drilling rigs and mobile offshore drilling units are con- Convention on Maritime Liens and Mortgages, 1993, provides for sidered vessels according to Liberian maritime law and regulations. the maintenance of a public register at which documents, including Liberia has adopted Marine Notice INT-001 Rev 06/12, the 2009 Liberian mortgages, may be registered. Registration may be carried MODU Code’s definition of a vessel, which was in turn adopted out through LISCR at the Office of the Deputy Commissioner of by IMO Resolution A.1023(26). The definition states in part that a Liberia Maritime Affairs located in New York, which is the central ‘[m]obile offshore drilling unit (MODU) or unit is a vessel capable office of the relevant index or at any other location appointed for of engaging in drilling operations for the exploration for or exploi- this purpose by the Liberian Maritime Authority from where elec- tation of resources beneath the seabed such as liquid or gaseous tronic access may be made to the relevant index for the purpose of hydrocarbons, sulphur or salt.’ recordation and inspection. Registration of a Liberian preferred ship mortgage entitles the parties to receive a COE and certified extracts of the preferred mort- 12 Who may register a vessel in your jurisdiction? gage index as official evidence of recordation, containing the time, A vessel may only be registered in the name of a non-resident date, book and page number of recordation, the name of the vessel, Liberian entity (ie, corporation, partnership or limited liability the names of the parties, and the amount secured by the mortgage company). A waiver of such ownership requirement is customar- instrument. ily granted to permit registration by a non-Liberian entity, provided Registration also gives notice to creditors, purchasers, suppliers that the registered owner files in Liberia as a foreign maritime entity. and other third parties of the underlying transactions, and furnishes an internationally enforceable structure for the protection of legal 13 Is there an alternate registry for international shipping rights afforded to concerned parties with respect to Liberian-flagged operations? vessels. Preferred status accorded to a mortgage gives priority to the LISCR LLC, a US-owned and operated company, has an exclusive lender’s mortgage lien over those of certain other claimants. agreement with Liberia to administer the registration of all vessels under the Liberian flag engaged in international trade. 17 Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt Ship mortgages and other liens over vessels instrument be filed with or attached to the recorded mortgage? 14 What types of ship mortgages exist and what obligations may a For a mortgage to be in registrable form the instrument must con- ship mortgage secure? Can contingent obligations, including swap tain a sum certain total amount. Obligations to be secured repre- obligations, be secured? Are there standardised forms? senting portions of the total amount can be separately described (for example currency or interest rate swap obligations). In certain A Liberian preferred ship mortgage may, among other rights, secure: circumstances a maturity date is not required. The material terms • debts owed to a party, including an entity, other than the vessel of the mortgage (principal amount, interest rate, repayment term owner; and schedule) need to be set forth in the mortgage. There is no • contingent obligations (including swap obligations); requirement that the underlying instrument evidencing the owner’s • future advances, and future debts; indebtedness has to be filed or be attached to the recorded mort- • a pledge or assignment of monies or rights, either actually owed gage. However, most practitioners strongly recommend attaching or to become due in future; the underlying instrument of indebtedness. • revolving credit facilities, including multiple advances and repayments; • amounts denominated in one or more currencies, as well as 18 Can a mortgage be registered in the name of an agent or trustee options to fund mortgage payments in one or more alternate for the benefit of multiple lenders? currencies; and In the case of a consortium or syndicate of lenders, one such lender • currency losses arising from fluctuations between designated may act as a mortgagee and hold the mortgage on behalf of the currencies where a unit of account is altered. lenders (including itself). A Liberian mortgage is a title instrument and should be held directly by the lenders or by a trustee. Most

48 Getting the Deal Through – Ship Finance 2014 Liberian International Ship and Corporate Registry and Norton Rose Fulbright LIBERIA practitioners take the view that an agent does not have standing to 25 What is the procedure for enforcing a mortgage in your jurisdiction hold legal title. Nevertheless, the Deputy Commissioner’s Office will by way of foreclosure? Are interlocutory sales permitted? How accept the recording of a mortgage if there is an express agreement long does a judicial sale take? What are the associated court giving that lender the authority to sign and hold security on behalf costs and how are they calculated? of the other lenders. Liberia is not traditionally used as a jurisdiction for enforcing ship mortgages. A creditor would normally enforce in the jurisdiction 19 If the mortgagee is an agent or trustee for a lending syndicate, where the vessel is located. must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender? 26 May a vessel be sold privately by a mortgagee? Will the sale It is not compulsory under Liberian law to make any filings upon discharge liens over the vessel? transfer of the underlying debt among existing lenders or to a new A Liberian preferred mortgage may provide for a vessel to be sold lender. privately by a mortgagee. A private sale will not discharge liens over the vessel. 20 If the mortgagee transfers its interest to a new lender, agent or trustee, what filings are required? Is the mortgagor’s consent 27 What are the limitations on rights of self-help by a mortgagee? required? Liberian law does not limit the rights of self-help by a mortgagee. Any transfer of a mortgage to a new secured party must be filed with the Liberian Deputy Commissioner’s office. The written consent of 28 What duties does a mortgagee owe to an owner or third-party the existing mortgagee(s) is required when a junior, new, or subor- creditors? dinate mortgage is recorded or assigned. No new mortgage shall be Liberian law does not set out any particular duties a mortgagee owes recorded unless the written consents of all current preferred mortga- to an owner or to third-party creditors. gees are also presented. The mortgagor’s consent is not required for the transfer of a recorded mortgage. Collateral

21 What other maritime liens over vessels are recognised in 29 May finance leases or other charters be recorded over vessels your jurisdiction? Do these claims give rise to a right to arrest flagged under the laws of your jurisdiction? a vessel? In what circumstances may associated ships be Financing charters may not be recorded over vessels flagged under arrested? the Liberian flag at this time. An amendment allowing for the The Liberian Maritime Law, Title 21, section 83(3) provides that all recording of financing charters has been submitted to the Liberian unpaid annual taxes, fees, penalties and other charges arising under legislature for consideration. Title 21 or under Liberian Maritime Regulations constitute a mari- Section 85, Title 21 of the Liberian Maritime Law allows for time lien on the vessel in respect of which such amounts are due. In the recording of a bareboat charter party where parties seek to have addition, liens for damages arising out of tort; liens under section a vessel dually registered. In essence, while registered pursuant to a 83(3) of Title 21 as mentioned above; liens for crew’s wages, general bareboat charter party, a vessel is allowed, with the consent of its average and for salvage (including contract salvage); and expenses owner’s state of registry, to fly the Liberian flag for two years, with and fees allowed and costs taxed by the court are recognised in the possibility of extensions, or, if for a shorter time, by the term Liberia. fixed in the bareboat charter party. Each of the above-mentioned liens will give rise to the right to arrest a vessel. There is no mechanism for recording ‘notices of 30 May finance leases be re-characterised by a court as a financing claim’ or similar obligations. contract? If so, is there any procedure for protecting the lessor’s Sister ship arrest is not recognised in Liberia. interest against third-party creditors? With respect to the above, Liberia does not preclude foreign Not applicable. courts’ recognition of liens for necessaries and other similar liens. 31 How is a security interest created over earnings of a vessel, 22 What maritime liens rank higher than a mortgage lien? charter contracts, insurances, etc? How are these security According to Liberian Maritime Law, Title 21, section 113, preferred interests perfected? mortgage liens have priority over all claims against the vessel, except Security interests created over earnings of a vessel, charter parties liens that arose before the recording of the preferred mortgage; liens and insurances are generally assigned to the lender or mortgagee for damages arising out of tort; liens under section 83(3) of Title 21 by agreement. These agreements are traditionally not governed by as mentioned in question 21; liens for crew’s wages, general average Liberian law and are perfected in accordance with the governing and for salvage (including contract salvage); and expenses and fees laws of such agreements. allowed and costs taxed by the court. 32 Must security interests against non-vessel collateral be registered 23 May non-mortgage liens be recorded over a vessel? to be enforceable? If so, where are such filings made? Liberia does not maintain a public registry for the recording or filing Security interests against non-vessel collateral are traditionally not of notices of claims or liens against Liberian-flagged ships. governed by Liberian law and are perfected in accordance with the governing laws of such assignments. 24 Will mortgages on ‘foreign’ flag vessels be recognised in your jurisdiction? If so, do they share the same priority as those on 33 How is a security interest over a deposit account established? vessels registered under the laws of your jurisdiction? How is a security interest perfected? A Liberian court should recognise a mortgage on a foreign-flagged Security interests created over a deposit account (eg, an earnings vessel. account, retention account or collateral account) are generally established by an assignment to the lender or mortgagee. These assignments are traditionally not governed by Liberian law and are perfected in accordance with the governing laws of such assignments, www.gettingthedealthrough.com 49 LIBERIA Liberian International Ship and Corporate Registry and Norton Rose Fulbright or the location of the accounts or jurisdiction of the debtor’s princi- 39 What special tax incentives are available to shipowners pal place of business. registering vessels in your jurisdiction? See question 37. 34 How are security interests in non-vessel collateral enforced? See question 31. Security interests in non-vessel collateral are 40 Are there any other noteworthy tax provisions specifically enforced in accordance with the governing law of the security agree- applicable to shipping, shipping income or ship finance? ment covering the non-vessel collateral, as well as in accordance No. Non-resident Liberian entities are not subject to tax in Liberia with the law of the location of such collateral. on income from shipping.

35 How are share pledges for vessel financings established? Are Insolvency and restructuring share pledges or share charges common in your jurisdiction? 41 Is there a general scheme of reorganisation or insolvency Pledges of the shares of a Liberian entity are accomplished by a administration in your jurisdiction? pledge agreement traditionally governed by the law of another jurisdiction. The ancillary documents customarily required to perfect the Liberia does not have a bankruptcy or debtor and creditor law. The share pledge include undated director and officer resignations, an Liberian Insolvency Law is limited to a simple ‘assets versus liability’ undated stock power and an irrevocable proxy. Physical delivery of test. the share certificate, if certificated, is required to perfect. Liberian law permits the issuance of bearer share certificates. 42 Will the courts of your jurisdiction respect the rulings of a foreign Shares need to be released by the pledgee in order to be voted upon court presiding over reorganisation or liquidation proceedings? by the shareholder. Share pledges are common in the financing of A final, non-appealable, judgment of a foreign court should be Liberian-flagged ships. admissible as evidence and enforceable in Liberia without a retrial on the merits if: 36 Is there a risk that a pledgee, before or after exercise of the share • the court rendering the judgment had jurisdiction over the per- pledge, may be exposed to debts or other liabilities of the pledged sons and the subject-matter; company? • the judgment is for a definite sum of money and is final and While indemnified by the owner, there is a risk that a pledgee, before non-appealable in the jurisdiction in which the judgment was or after exercise of the share pledge, may be exposed to debts or rendered; other liabilities of the pledged company, especially if the pledgee • the defendant was present in person or by a duly appointed rep- exercises control over the entity. resentative and the judgment was not a default judgment; • the judgment was not obtained by fraud; and Tax considerations for vessel owners • the judgment does not offend the principles of Liberia as to due process, natural justice or public policy. 37 Is the income earned by the owners of vessels registered in your jurisdiction subject to domestic taxation? At what rate? 43 What is the order of priority among creditors? In what Under section 804(b) of the Liberian Revenue Code of 2000, as circumstances will creditors be required to disgorge payments amended, non-resident Liberian entities are not subject to taxation from an insolvent company? in Liberia. Generally, secured creditors have priority over unsecured creditors. Since transaction documents traditionally are not governed by 38 Is there an optional tonnage tax exempting vessel owners from Liberian law (other than a Liberian mortgage), in most cases these tax on income? issues are governed by various foreign laws. For a vessel to be registered under the Liberian flag, and in order to retain its registration, an annual tonnage tax payable to the government of Liberia is imposed. The rate of taxation follows a formula based on the net tonnage of the registered vessel.

Zaharoula (Hara) Gisholt Brad L Berman [email protected] [email protected]

99 Park Avenue, Suite 1830 666 Fifth Avenue New York 10016 New York 10103-3198 United States United States Tel: +1 212 697 3434 Tel: +1 212 318 3000 Fax: +1 212 697 5655 Fax: +1 212 318 3400 www.liscr.com www.nortonrosefulbright.com

50 Getting the Deal Through – Ship Finance 2014 Liberian International Ship and Corporate Registry and Norton Rose Fulbright LIBERIA

44 May a vessel owner provide security on behalf of other related 46 How may a creditor petition the courts of your jurisdiction to or unrelated companies? What are the requirements for it to be declare a debtor bankrupt or compel liquidation of an insolvent enforceable? obligor? A Liberian corporation may provide security on behalf of other Any such claim may be filed with the regular courts. related or unrelated companies if an obligation is undertaken and authorised by two-thirds of its shareholders. 47 Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, 45 Is there a law of fraudulent transfer that permits a third-party may a swap provider exercise its close-out netting rights under an creditor to challenge, for example, the grant of a mortgage ISDA master agreement despite an obligor’s insolvency? because of insolvency of the mortgagor or insufficient Liberia has not adopted the Model Netting Act of the International consideration received by the mortgagor in exchange for the grant Swaps and Derivatives Association (ISDA). We know of no reason of the mortgage? why a swap provider could not exercise its close-out netting rights No. See question 41. The parties look to the governing law of the under an ISDA master agreement before a Liberian court. finance documents.

www.gettingthedealthrough.com 51 MALAYSIA Joseph & Partners Malaysia

Melanie Mishra Pillai Joseph & Partners

Due diligence 4 Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search 1 How does one demonstrate title to or legal ownership of a vessel of a public registry? registered under the laws of your jurisdiction? To determine whether an obligor is registered and in good stand- The persons whose names appear as owner in the register will, for ing or is ‘solvent’ as defined in Malaysia, the party seeking such the purposes of the Merchant Shipping Ordinance 1952 (MSO), be information can obtain it from a corporate financial search of the considered the owners of the ship. Title or legal ownership of the Companies Commission of Malaysia. There is also a private agency, vessel may be established by submission of a builder’s certification CTOS, a credit-reporting agency that provides background informa- naming the applicant for documentation as the person for whom tion and creditworthiness of a person or a company. the vessel was built or to whom the vessel was first transferred and a description of the vessel and the time and place where she was 5 Can the shareholders or other equity interest holders, directors built. In the case of a previously owned vessel, the applicant must and officers or other authorised signatories of an obligor present bills of sale or other evidence showing transfer of the vessel organised in your jurisdiction be determined from a search from the person who last documented, titled or registered the vessel, of a public registry? If not, how are these parties customarily or to whom the vessel was transferred on a builder’s certification or identified? manufacturer’s certificate of origin. A search on the Companies Commission of Malaysia will provide 2 How can one determine whether there are any liens recorded over information on the company profile; company name; company reg- a vessel? istration number and check digit; previous name and date of change; total authorised and total issued; directors, managers, shareholders In Malaysia it is not possible to register a lien over the vessel. As a and officers; company charges; and summary of the latest financial general practice, a person purchasing the vessel obtains a letter of information. indemnity from the owner of the vessel for any claims that may arise from liens that are attached to the vessel before the sale the vessel. 6 What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by 3 How does one determine whether there are any security the board of directors or other governing body required? Must agreements, liens, charges or other encumbrances granted shareholders approve a guarantee? by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance The borrowing powers of an obligor and its ability to stand guar- transaction? antee for obligations of a third party is covered under the Third Schedule of the Companies Act 1965 (the Companies Act). It pro- In Malaysia it is necessary for any lender or interested party hold- vides for the company ‘To borrow or raise or secure the payment ing the vessel as security to safeguard its financial interest to regis- of money in such manner as the company may think fit.’ It further ter its mortgage with the Malaysian Ship Registry (the Registry) to provides for the company to: ascertain its priority of the mortgage over other interested parties. As stated under section 42 of the MSO, where a registered mortgage Guarantee and give guarantees or indemnities for the payment of is discharged, the registrar shall make an entry in the register book money or the performance of contracts or obligations by any person to that effect and the property (if any) shall revert to the mortgagor. or company; to secure or undertake in any way the repayment of Therefore, unless discharged by the mortgagor, the mortgage will moneys lent or advanced to or the liabilities incurred by any person remain recorded in the books of the Registrar General of Ships (the or company; and otherwise to assist any person or company. Registrar). If one wishes to verify any recorded mortgage over the vessel, they are advised to check with the Registry. Therefore, under the Companies Act, there is no restriction on the As stated above, for a mortgage to take priority over other obligor to borrow or stand guarantee for the indebtedness of a third prospective claimants, it must be registered with the Registrar, fail- party. This is so unless explicitly excluded or restricted in the mem- ing which, the lien will only rank in equity and may be unsecured orandum or articles of association of the company. Although the thereby subject to pari passu in rank. Section 41 of the MSO pro- Companies Act does not explicitly state the requirement of share- vides that a registered ship or the share therein may be made in holders’ approval for the company to act as the guarantor, com- security for a loan or other valuable consideration. It further states panies are encouraged to follow the guidelines proposed by the that the Registrar shall record them in the order in which they were Malaysian Code of Corporate Governance 2012, which provide produced to him. That said, some liens such as maritime liens can- guidelines to strengthen the relationship between the company and not be recorded and the mortgagee or the subsequent purchaser will its shareholders and recommends improved participation by the run the risk of claims that may arise from such lien, except after a shareholders. judicial sale.

52 Getting the Deal Through – Ship Finance 2014 Joseph & Partners MALAYSIA

7 Must foreign lenders qualify to do business in your jurisdiction Once the ship is registered, it will establish the identity of the to extend credit to a borrower organised in your jurisdiction? shipowner as well as proof of flag state and the registration state Will foreign creditors be deemed resident as a consequence of of a ship. Registration also allows recording or registering of infor- making a loan or other extension of credit to an obligor within your mation related to mortgages where the ship is pledged as security. jurisdiction? Furthermore, registered ships can claim privileges and sovereign Currently, foreign equity participation in Malaysian banking and protection from the flag state where the ship is registered. Non- financial institutions can be up to 70 per cent in investment banks, registration will also hinder the transferring of ownership or financ- insurance companies and Islamic banks and up to 30 per cent in ing of the sale and purchase of the ship, because a certificate of conventional commercial banks. registration is required for such transaction.

Repayment 12 Who may register a vessel in your jurisdiction? Pursuant to section 11 of the MSO, a ship may be registered in 8 Is central bank or other regulatory approval required for repayment Malaysia provided it is wholly-owned by: of a loan in foreign currency? • Malaysian citizens; or Under the Exchange Control Act 1953, resident companies are free • corporations: to obtain any amount of foreign currency borrowing from: • that are incorporated in Malaysia; • licensed onshore banks; • that have their principal office and the management of the • non-resident non-bank-related companies; and corporation is carried out mainly in Malaysia; • resident related companies. • that have the majority of their shareholding held by Malaysian citizens free from any trust or obligation in Foreign currency borrowing by resident companies from non- favour of non-Malaysians; and resident banks and other non-resident companies (non-related) is • of which the majority of the directors are Malaysian citizens. subject to a prudential limit of 100 million ringgit equivalent in aggregate on a corporate group basis. Foreign currency borrowing 13 Is there an alternate registry for international shipping by resident individuals from licensed onshore banks and any non- operations? residents is subject to an aggregate limit of 10 million ringgit equiva- The Malaysian International Ship Registry (MISR) is located at the lent. Malaysian investors borrowing in foreign currency, exceeding Marine Department Federal Territory of Labuan and deals with the aggregate of 5 million ringgit equivalent will need approval from international shipping operations. the Central Bank. Under section 66B of MSO, irrespective of where the ship was built, a ship can be registered in the MISR if the ship is owned by a 9 Do usury laws limit the interest payable to a lender in respect of a corporation: vessel financing? • that is incorporated in Malaysia; The lending rates are governed by legislation or as prescribed by • with an office established in Malaysia; and Bank Negara Malaysia in conjunction with the Financial Services • the majority of the shareholding of which is not held by Act 2013 and the Islamic Financial Services Act 2013. Malaysian citizens.

10 Are withholding taxes payable on principal or interest payments to It must, be noted, however, that under section 66D(1) of the MSO, a non-resident lenders? ship shall not be registered in the MISR unless the corporation has Withholding tax would be applicable in relation to interest pay- a minimum paid-up capital of 10 per cent of the value of the ship or ments made to non-residents who do not carry out business in 1 million ringgit, whichever is higher. Malaysia. Failure to comply with the withholding tax would result The application for registration in the MISR is through the in the imposition of late-payment penalty. Registrar. To register a ship in the MISR, the ship must meet the following criteria: Registration of vessels • equipped with mechanical propulsion system; • not less than 1,600 GT; 11 What vessels are eligible for registration under the flag of your • not more than 15 years old if it is a tanker or a bulk carrier; and country? Are offshore drilling rigs or mobile offshore drilling units • not more than 20 years old if it is other than above. considered vessels under the laws of your jurisdiction? What is the effect of registration? Ship mortgages and other liens over vessels Under the provisions of the MSO in West Malaysia, the MSO 14 What types of ship mortgages exist and what obligations may a (Sarawak) 1960, and the MSO (Sabah) 1960 as amended by the ship mortgage secure? Can contingent obligations, including swap Merchant Shipping (Amendment) Act 1998, which now provides obligations, be secured? Are there standardised forms? for a Malaysian International Ship Registry, vessels are eligible for registration under the Malaysian flag if they are wholly-owned by Ships can be mortgaged either through statutory means or equity. Malaysian citizens or Malaysian corporations. Under section 66E of Under section 41 of the MSO, a registered ship or a share in it can the MSO no ship shall be registered unless: be mortgaged for a loan or other valuable consideration. There are • it is fitted with mechanical means of propulsion; two kinds of mortgages, one to secure a loan of a principal sum with interest and another to secure a current account or similar transac- • it is not less than 16,000 GT; tions. The application to register a mortgage must be accompanied • the age of ship is not more than 15 years if it is a tanker or a bulk with the appropriate mortgage forms and an original or certified carrier; and true copy of the deeds of covenant. There are fees to be paid, which • the age of ship is not more than 20 years if it is of a type other are calculated based on the tonnage of the ship. Contingent obliga- than a tanker or bulk carrier. tions including swaps can be secured provided the wording in the security agreement is sufficiently wide. Offshore drilling rigs or mobile offshore drilling units to be consid- An equitable mortgage may be created when a mortgage in a ered as ship or vessel will depend on their intended function, where statutory form is executed but not registered or by depositing the the function is to be performed, the degree of attachment to the sea- ship’s documents of title with the mortgagee. This means that there bed and the extent as well as frequency of any movement. www.gettingthedealthrough.com 53 MALAYSIA Joseph & Partners was no transfer of legal title of the ship from the mortgagor to the specified in the mortgage form. The supporting documents as evi- mortgagee for the debt secured on the ship. An equity mortgage can dence of the mortgage debt will need to be provided at the time of be used for foreign-owned or unregistered ships. That said, an equity mortgage registration. mortgage stands lower in priority when compared to a statutory mortgage. 18 Can a mortgage be registered in the name of an agent or trustee The rights of the mortgagee are not unlimited. As provided for the benefit of multiple lenders? under section 44 of the MSO, the mortgagee shall not by reason of Yes, a trustee or security agent can be used in the Malaysian jurisdic- the mortgage be deemed to be the owner of the ship or the share- tion for the purpose of holding and administering the security. holder. In other words the mortgagee shall have only such rights as may be necessary to make the mortgaged ship available as security 19 If the mortgagee is an agent or trustee for a lending syndicate, for the purpose of preservation and enforcement of the mortgagee’s must any filings be made upon transfer of a portion of the security interest in the ship. The preliminary remedies available to underlying debt among existing lenders or to a new lender? the mortgagee include: Although it is not necessary to make any fresh filing on transfer of • possession; a portion of the underlying debt among existing lenders to a new • interception of freight; lender, as a matter of good practice, financial instructions usually • arrest; amend their filings to accommodate such modifications. • foreclosure; or • sale. 20 If the mortgagee transfers its interest to a new lender, agent or trustee, what filings are required? Is the mortgagor’s consent For these remedies to be exercised by the mortgagee, it will be neces- required? sary to ascertain whether the right to these remedies has arisen and The MSO does not prescribe consent from the mortgagor when the whether the enforcement of these rights will interfere with third- mortgagee transfers its interest to a new lender, agent or trustee. party rights and who can restrain the enforcement of these remedies Section 48 states that: or be liable to them in any way. [W]here the interest of the mortgage in a ship or share is transferred, 15 Give details of any required form for ship mortgages in your otherwise than by a transfer under this Ordinance, the person to jurisdiction. whom the interest of the mortgage in the ship or share is trans- Form 11a is used for registering a ship mortgage in Malaysia. ferred shall make a declaration in a manner as may be prescribed by the Ministry, supported by the same evidence as required by this 16 Who maintains the register of mortgages? What information does Ordinance. it contain and where are such filings to be made? What is the effect of registration? 21 What other maritime liens over vessels are recognised in The Register of Mortgages is maintained by the Ship Registry, which your jurisdiction? Do these claims give rise to a right to arrest has offices in Port Klang, Labuan, Kuching and Penang. a vessel? In what circumstances may associated ships be The information the Register contains is a description of the type arrested? of mortgage being registered. It can either be a mortgage to secure a Ships can be arrested in Malaysia for claims arising out of a mari- principal sum and interest or a mortgage to secure a current account. time lien.They include crew wages, master’s wages and his disburse- The registrar of the ship’s port of registry shall record mortgages ments incurred on account of the ship, salvage claims and claims for in the register book. Under section 41(2) of the MSO, on production damage done by ship. As a general principle, these claims cannot be of the instrument to the registrar of the ship’s port of registry, the enforced against sister ships. registrar shall record such instrument in the register book and when there is more than one mortgagee, in the order in which they were 22 What maritime liens rank higher than a mortgage lien? produced to him and by memorandum notifying each mortgagor of Crew wages, master’s wages and his disbursements incurred on the mortgage recorded by him. account of the ship, salvage claims and claims for damage done by Under section 108 of the Companies Act, where the mortgagor ship will rank ahead of a mortgage lien. is a Malaysian company, the salient particulars of the mortgage will need to be registered with the Registrar of Companies within 30 23 May non-mortgage liens be recorded over a vessel? days of creation; otherwise it will be void in relation to the liquidator in the event of liquidation. Non-mortgage liens cannot be recorded over the vessel. The instrument of mortgage must be submitted upon registration, together with the document of title of ownership and a letter 24 Will mortgages on ‘foreign’ flag vessels be recognised in your from the previous port of registry (if any) to state that the vessel is jurisdiction? If so, do they share the same priority as those on free from any encumbrance. vessels registered under the laws of your jurisdiction? Once the mortgage has been registered, the mortgagee will take Mortgages over foreign-flagged ships will be treated as equitable priority as a secured creditor in the order they were submitted and mortgages. Equitable mortgages will have lower priority than a reg- will take precedence over any equitable mortgage. Where there is istered mortgage. more than one person registered in respect of the same ship or share, a subsequent mortgagee may not, except under an order of a com- 25 What is the procedure for enforcing a mortgage in your jurisdiction petent court, sell the ship or share without the agreement of every by way of foreclosure? Are interlocutory sales permitted? How prior mortgagee. long does a judicial sale take? What are the associated court costs and how are they calculated? 17 Must the total amount of the mortgage be stated therein? Must The mortgagee has the right to enforce the mortgage either by stat- the mortgage contain a maturity date? Must the underlying debt ute or incorporating terms in the covenant to that effect. Pursuant instrument be filed with or attached to the recorded mortgage? to admiralty law, once the mortgagee arrests the vessel, it has an in There is no specific requirement for the total amount of the mort- rem right against the vessel or other property for claims against the gage to be mentioned; however, as a general practice, the loan defaulting mortgagor. amount is included in the mortgage form. The maturity date is not

54 Getting the Deal Through – Ship Finance 2014 Joseph & Partners MALAYSIA

In Malaysia, the power and jurisdiction of the High Court in Collateral admiralty matters is governed by section 24(b) of the Courts of 29 May finance leases or other charters be recorded over vessels Judicature Act 1964, which provide that Malaysia shall have the flagged under the laws of your jurisdiction? same jurisdiction and authority of an English High Court under the Supreme Court Act 1981. Section 20(7) of the Supreme Court Act No. 1981 provides that a right in rem accrues insofar as it relates to mortgages and charges, to all mortgages and charges, whether reg- 30 May finance leases be re-characterised by a court as a financing istered or not or whether legal or not. Section 45 of the MSO pro- contract? If so, is there any procedure for protecting the lessor’s vides that every registered mortgagee may, on the foreclosure of the interest against third-party creditors? mortgage, dispose of the ship or share in respect of which she is reg- There is no precedent in Malaysia on whether a financial lease will istered, and give effectual receipts for the purchase money. Although be re-characterised by a court as a financing contract. section 44 of the MSO does recognise the mortgagee as the owner of the ship whenever necessary to avail the property as security and 31 How is a security interest created over earnings of a vessel, foreclosure is essentially a relief in the realisation of the security. The charter contracts, insurances, etc? How are these security specific procedure for foreclosure proceedings is not provided for, in interests perfected? particular the manner of perfecting the title of the enforcing mort- These types of security interest can be perfected by registering them gagee in the Register. with the Registrar of Companies as a debenture having a fixed or Under the Rules of the Court 2012, Order 70, Rule 22 the courts floating charge depending on the nature of the security. Although have power to make an order for appraisement and sale pending liti- in the case of Malaysia National Insurance Berhad & Anor v gation. However, this is to be exercised in conjunction with Order 29, Suruhanjaya Syarikat Malaysia & Anon [2004], the High Court Rule 4, regarding goods – including ships – which are likely to dete- found that a charge over insurance proceeds was not a book debt riorate if kept. There is no fixed time span within which the judicial and thus not registrable. sale should take place, but it normally takes about between two and three months. 32 Must security interests against non-vessel collateral be registered A commission is payable on the gross amount realised upon to be enforceable? If so, where are such filings made? the sale of ship in execution or otherwise under the direction of the Security interests over a non-vessel collateral can be registered and court, namely: 5 per cent of the first 1,000 ringgit and 2.5 per cent made enforceable and such filings are to be made with the compa- of the subsequent amount. Where the sale is made by a private con- nies’ registrar. tract, only half the commission will be payable.

33 How is a security interest over a deposit account established? 26 May a vessel be sold privately by a mortgagee? Will the sale How is a security interest perfected? discharge liens over the vessel? Security interests over non-vessel collateral will fall under section A vessel can be sold privately by a mortgagee provided the mort- 108 of the Companies Act, which can be registered as a fixed or gagee is in fact entitled to sell, but that sale will not discharge other a floating charge and these filings are to be registered with the liens, especially a maritime lien attached to the vessel at the time of Registrar of Companies. sale. It is also a common practice for mortgagees to appoint receivers and managers to exercise their right of sale over the vessel provided 34 How are security interests in non-vessel collateral enforced? under a debenture as security for a financial or other consideration. In the event of default, the creditor will have to issue a notice of 27 What are the limitations on rights of self-help by a mortgagee? demand to the defaulting party and if the party does not rectify the default thereafter, the creditor can take possession of the property. Although it is possible for the mortgagee to sell the ship privately, In the case of floating charges, they will crystallise to a fixed charge it may be more conducive to arrange for a private sale of a ship upon the event of default. The secured party may dispose of the col- where the borrower is cooperative. The mortgage will provide the lateral by exercising a power of sale. Before the sale, the secured bank with the power to sell the vessel, which right also exists in party undertaking enforcement must give a notice of the intended common law. A private sale by a mortgagee is not the most favour- disposal to the grantor and other secured parties with a higher prior- able mode of sale as the borrower’s creditors may stake a claim for ity security interest. The notice must include particulars of the col- their liabilities, which will then have to be settled by the mortgagee lateral, the enforcing secured party and the manner of sale. before the sale. The secured party exercising its power of sale has a duty to obtain market value for the price of the collateral or otherwise 28 What duties does a mortgagee owe to an owner or third-party obtain the price that is reasonably obtainable. creditors? The purchaser takes the collateral free of the security interests As between the mortgagor and a mortgagee, the collateral deed may of the grantor and all subordinate security interests as well as the expressly create a trust. However, in the absence of such provision grantor of the security interest. The proceeds of the sale are distrib- the mortgagee will be a constructive trustee of any surplus left after uted among secured parties in the order of priority with any residual discharge of all mortgages. Under section 44 of the MOS, unless the proceeds given to the grantor. collateral deed provides otherwise, the mortgagee cannot interfere with the owner’s operation or employment of ship. His right to pos- 35 How are share pledges for vessel financings established? Are session only arises when the mortgagor is in default of the mortgage share pledges or share charges common in your jurisdiction? or when the security is being impaired or when the right otherwise A share pledge agreement is signed by the pledgor and the pledgee arises under the terms of the collateral deed. This means that where a and usually provides that, in order to perfect the security created mortgagee, while in possession, has chartered the vessel, a mortgagee under the pledge, the following documents will be delivered to the cannot interfere with the rights of a charterer. pledgee at the same time as the agreement is signed: • the original share certificate(s) representing the pledged shares; • an undated blank instrument of transfer of the shares duly signed by the pledgor in favour of the pledgee; www.gettingthedealthrough.com 55 MALAYSIA Joseph & Partners

• an irrevocable proxy and power of attorney in respect of the vessels that fall under the exclusion clause are ferries, barges, tug- pledged shares from the pledgor; boats, supply vessels, crew boats, lighters, dredgers, fishing boats or • undated, signed letters of resignation from the company secre- other similar vessels. tary and each director; Pursuant to subsection 54A(1) of the ITA, where a person who • a certified copy of a resolution from the board of directors of is resident in Malaysia during the assessment year carries on the the company approving the pledge of the shares under the share qualifying business of transporting passengers or cargo by sea on a pledge agreement and the transfer of the shares to the pledgee (in Malaysian ship, or letting out on charter a Malaysian ship owned by the event that the pledge is enforced); and him on a voyage or time charter basis, he will then be exempt from • a letter of authority and undertaking from the company secre- up to 70 per cent of statutory income tax (for the year 2014). tary and each director. There is no capital gains tax in Malaysia. Nor, at present, is there any goods and service tax or VAT applicable in Malaysia. However, Section 57 of the Companies Act prohibits the issue of bearer shares Malaysia has a regime of sales and service tax in relation to certain Furthermore, it is no longer a commercial practice for companies to taxable goods and services. issue bearer shares. The transfer of shares other than bearer shares is regulated by transfer procedures that are provided for in the 40 Are there any other noteworthy tax provisions specifically Companies Act and in the company’s constitution. applicable to shipping, shipping income or ship finance? Share pledges or share charges are common in Malaysia Where there is more than one Malaysian ship involved in determin- provided: ing the income of a person exempt under section 54A of the ITA • the articles of association of the company whose shares are to be 1967, the business income derived from all the Malaysian ships shall pledged allow the granting of such a security and there are no be treated as one source. specific restrictions; The income of any person derived from exercising an employ- • all appropriate corporate approvals and board resolutions have ment on board a Malaysian ship is exempted from tax. Income been obtained; received by non-residents from the rental of ISO containers to • there are no other charges or encumbrances registered against Malaysian shipping companies is also exempted from income tax. the pledged shares; and • the pledged shares are fully paid up at the time of taking the Labuan tax structure security. Labuan, which is part of Federal Territory of Malaysia has an international offshore financial centre. Labuan is a free port and there- 36 Is there a risk that a pledgee, before or after exercise of the share fore charges no indirect taxation such as sales tax, import duties, pledge, may be exposed to debts or other liabilities of the pledged surtax, excise duties and export duties. company? Companies that operate in Labuan are governed by the Labuan The liability if any, before or after exercising of the share pledge by Offshore Business Activity Act 1990 and, for taxation purposes, the the pledgee will be limited to the value of the shares. Labuan Business Activity Tax Act 1990. The relevant tax provisions are: Tax considerations for vessel owners • an elective tax on Labuan trading activities of either: • 3 per cent of net profits as per audited accounts; or 37 Is the income earned by the owners of vessels registered in your • 20,000 ringgit; jurisdiction subject to domestic taxation? At what rate? • withholding tax exemption on dividend and interest payments The income of a resident person from the business of transporting made to non-residents; passengers or cargo is taxable within the scope of subsection 4(a) • no stamp duty on all instruments relating to offshore business of the Income Tax Act 1967 (ITA), unless it qualifies for exemption activities including share transfer; under paragraph 54A(1) of the ITA. Ships that do not qualify for • no import duty or sales tax; tax exemption include ocean liners, petroleum or oil tankers, LNG • no foreign exchange controls; carriers, container ships and chemical tankers. • no capital gains tax or inheritance tax; As the income tax rate for companies is 25 per cent under para- • double tax agreements between Malaysia and over 70 countries; graph 2 Part 1 of the Schedule 1 to the Act, this will require the • 50 per cent tax abatement for expatriate professionals and man- deduction of income tax rate at 1.25 per cent from the gross freight agers employed under Labuan companies; and income derived from Malaysia by the non-resident sea transport • 100 per cent exemption from director’s fees received by non- operator. In the case of countries that have signed a double tax treaty citizen directors of Labuan companies. with Malaysia, such treaty will have provisions for the income of an enterprise of that country from operation of ships in international Insolvency and restructuring traffic to be taxable only in their home country. Similarly, income from participation in a pool, a joint business or 41 Is there a general scheme of reorganisation or insolvency an international operating agency is also to be taxed in the country administration in your jurisdiction? of residence of the enterprise (article 9 of the Malaysia Tax Treaty). Section 176 of the Companies Act provides for a statutory mechanism to facilitate a court-sanctioned compromise that binds dissent- 38 Is there an optional tonnage tax exempting vessel owners from ing participants as long as the statutory majority has been achieved. tax on income? This overcomes the difficulty of a company trying to implement an There is no annual tonnage tax in Malaysia. informal compromise with all its creditors since it would require unanimous agreement and the company would have to approach 39 What special tax incentives are available to shipowners each and every creditor. registering vessels in your jurisdiction? In the case of winding-up of a company, a debtor can avoid transfers made within 90 days before the filing of the petition to To qualify as a Malaysian ship under the ITA, a vessel has to be a a creditor on account of a pre-existing debt, if such a transfer has seagoing ship that goes beyond port limits besides being registered allowed the creditor to receive more than it would have received as a Malaysian ship under the MSO. In addition, it should not fall compared with other creditors. A debtor can also avoid fraudulent within the exclusion clause of subsection 54(A) of the ITA. The transfers made within one year before the filing of the petition. In

56 Getting the Deal Through – Ship Finance 2014 Joseph & Partners MALAYSIA this context, a fraudulent transfer is one that is made with the intent 45 Is there a law of fraudulent transfer that permits a third-party to hinder, delay or defraud a creditor. creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient 42 Will the courts of your jurisdiction respect the rulings of a foreign consideration received by the mortgagor in exchange for the grant court presiding over reorganisation or liquidation proceedings? of the mortgage? The courts in Malaysia will respect the ruling of a foreign court pre- Anyone prejudiced or capable of being prejudiced by a fraudulent siding over reorientation and liquidation proceedings, provided there transfer can apply to the court to have the transaction set aside. This is a court order enforceable in Malaysia by virtue of the Reciprocal can be invoked when the administrator or the liquidator refuses to Enforcement of Judgments Act 1958 (REJA). For the order to be take action either under section 238 or section 423 of the IA or enforceable, it must be from a superior court of the country listed in where the company is neither in liquidation nor administration. the First Schedule of the REJA and has to be registered. The coun- However, the victim will need to prove that the company is trying to tries include Brunei, Hong Kong, India, New Zealand, Singapore, Sri make its assets out of reach so as to prejudice a claim that the victim Lanka and the United Kingdom. may be making against the company in the future.

43 What is the order of priority among creditors? In what 46 How may a creditor petition the courts of your jurisdiction to circumstances will creditors be required to disgorge payments declare a debtor bankrupt or compel liquidation of an insolvent from an insolvent company? obligor? In determining the priorities between mortgages, it is necessary to Any creditor or creditors, including a contingent or prospective ascertain whether the mortgage is equitable or legal and if the ship creditor can petition the court to declare the debtor bankrupt. But concerned is a foreign ship or a Malaysian ship. The general prin- if it is a prospective debt and is subject to a bona fide dispute, then ciple is that a legal mortgage will prevail in the order of their crea- it may not support a winding-up petition. The petition must be veri- tion. If the legal mortgage is obtained for value without notice of the fied by affidavit and if it is in respect of several debts due to different equitable mortgage, then clearly by the operation of the doctrine of creditors, then the debt of each creditor must be separately filed. The a bona fide purchaser, the legal mortgage will take priority. However, proceedings will be as per the Companies (Winding-Up) Rules 1972. if the legal mortgagee had notice of the equitable mortgage before the creation of his mortgage then he may run into some difficulty. 47 Has your jurisdiction adopted the Model Netting Act of the Where the equity is equal, equitable mortgages will rank in the order International Swaps and Derivatives Association (ISDA)? If not, of their creation. Under sections 238 and 239 of the Insolvency Act may a swap provider exercise its close-out netting rights under an 1986 (IA), creditors may be required to disgorge payment from an ISDA master agreement despite an obligor’s insolvency? insolvent company if the transaction was undervalued at the time of Although there is a certain statutory protection for netting, there transfer or given as a result of fraudulent preference. The condition is no Model Netting Act in Malaysia. A mandatory set-off is avail- for the exercise of power conferred by this section in relation to such able upon insolvency, provided such provisions are incorporated in a transaction or preference are that: the transaction or preference the agreement. However, in certain circumstances close-out netting must have been undertaken at a time when the company was unable may not be enforceable, especially during moratoria pursuant to the to pay its debts; the time must be within a relevant period; and the Danaharta Act 1998 and the Deposit Insurance Corporation Act company must subsequently have gone into, and still be in liquida- 2005. Otherwise, the scope of counterparties, (excluding insurance tion or administration. companies) and transactions are fairly wide.

44 May a vessel owner provide security on behalf of other related or unrelated companies? What are the requirements for it to be enforceable? Yes, provided the constitutional documents of the company do not restrict the vessel owner from providing security to related or unrelated companies.

Melanie Mishra Pillai [email protected]

Suite J-7-2, Solaris Mont Kiara Tel: +603 6203 7877 Jalan Solaris Fax: +603 6203 7876 50480 Kuala Lumpur [email protected] Malaysia www.jnplaw.my

www.gettingthedealthrough.com 57 MALTA Fenech & Fenech Advocates Malta

Mark Fenech and Lara Saguna Axiaq Fenech & Fenech Advocates

Due diligence 5 Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor 1 How does one demonstrate title to or legal ownership of a vessel organised in your jurisdiction be determined from a search registered under the laws of your jurisdiction? of a public registry? If not, how are these parties customarily The registration of a vessel under the Malta flag in the Registry of identified? Shipping and Seamen at Transport Malta (the Registry) is not con- After conducting searches in the Registry of Companies, one will be clusive evidence of legal title or ownership, but provides prima facie in a position to ascertain the identity of the shareholders, directors evidence that the registered owner holds legal title over the vessel and officers of a Maltese registered company or legal entity. and the burden of proof is on the person alleging ownership. Within one month from provisional registration (which period may be 6 What corporate or other entity action is necessary for an obligor extended by another two months), the registered owner of the vessel to enter into or guarantee a debt obligation? When is action by must file (inter alia) the original builder’s certificate, the bill of sale, the board of directors or other governing body required? Must or both, with the Registry. In the absence of fraud or bad faith, the shareholders approve a guarantee? execution and registration of the bill of sale would grant good title. The execution of a debt obligation by a Maltese corporate entity, whether as principal debtor or surety, will require the prior sanction 2 How can one determine whether there are any liens recorded over of the directors of such corporate entity pursuant to the execution a vessel? of resolutions by the board of directors. Whether or not a guarantee Maltese law does not recognise the concept of maritime liens. The is also to be approved by the shareholders of the corporate entity existence or otherwise of encumbrances registered over a vessel would largely depend on whether the provisions of its memorandum (other than encumbrances created by operation of law) may be and articles of association so require. When, however, a guarantee determined by carrying out searches at the Registry or from an for the obligations of a third party by a Maltese corporate entity is updated version of the transcript of register of a vessel issued by the made on a purely gratuitous basis with no corporate benefit being Registry, which would list such encumbrances therein. derived therefrom by the said entity, Maltese law makes it mandatory that the consent of the shareholders for the execution of the 3 How does one determine whether there are any security guarantee is also sought. agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, 7 Must foreign lenders qualify to do business in your jurisdiction guarantor or other credit party in connection with a vessel finance to extend credit to a borrower organised in your jurisdiction? transaction? Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your The existence of security agreements to which a vessel owner is a jurisdiction? party as principal debtor or surety may be determined from the Foreign lenders require no consents, approvals, orders or authorisa- wording on the face of the mortgage deed and from the wording of tions of, or publications with, or notice to any governmental body or an updated transcript of register of the vessel. In such context, it is authority in Malta to extend credit to a borrower within the Maltese to be noted that although a mortgage deed itself is registered with jurisdiction. the Registrar of Ships (the Registrar), it is not available for public Furthermore, foreign lenders will not be deemed to be resident, inspection. On the other hand, the existence or otherwise of a pledge domiciled or carrying on business in Malta by reason only of the of shares held in a Maltese company may be determined following negotiation, preparation, execution, registration, performance or the carrying out of searches in the Registry of Companies at the enforcement of, or receipt of any payment under a loan agreement Malta Financial Services Authority (the Registry of Companies). or extension of credit from an obligor within the Maltese jurisdiction. Moreover, they are not and will not be deemed to be resident, 4 Can one determine whether an obligor registered in your domiciled, carrying on business or subject to taxation in Malta by jurisdiction is duly organised and in good standing from a search reason of the negotiation, execution, performance, enforcement of of a public registry? and receipt of any payments due under a mortgage or other security. One may establish the good standing or otherwise of a corporate entity registered in Malta by carrying out searches in the Registry Repayment of Companies. 8 Is central bank or other regulatory approval required for repayment of a loan in foreign currency? Further to the implementation of amendments to the External Transactions Act, the repayment of loans in foreign currencies may be carried out without restriction.

58 Getting the Deal Through – Ship Finance 2014 Fenech & Fenech Advocates MALTA

9 Do usury laws limit the interest payable to a lender in respect of a 12 Who may register a vessel in your jurisdiction? vessel financing? A Maltese-flagged vessel may be registered in the ownership of: (i) a As a general rule, contractual provisions for the charging of interest Maltese individual or company; (ii) a citizen of a member state of the in excess of 8 per cent a year are null and void in terms of the Civil European Union residing in Malta; or (iii) an international owner, Code. being a citizen of a member state of the European Union not residing In terms of the Interest Rate (Exemption) Regulations (Legal in Malta or a non-Maltese corporate body or entity that enjoys legal Notice 142 of 2009), however, it is made clear that the provisions of personality in terms of the law under which it has been established the Civil Code or of any other law insofar as they limit or restrict the or constituted. charging of interest and the compounding of interest do not apply to any debts and other obligations secured by a mortgage registered or 13 Is there an alternate registry for international shipping recognised under the Merchant Shipping Act. operations? Furthermore, such Civil Code provisions do not apply to any The only maritime register in Malta that also permits the reg- debts and other obligations where (i) such obligations arise under istration of Maltese-flagged vessels in the ownership of non- a contract governed or otherwise regulated by the law of a country Maltese individuals or entities, is the Registry of Shipping and other than Malta; (ii) the agreed rate of interest or compounding Seamen, which forms part of the state-owned entity Transport of interests are in accordance with international market conditions Malta and is situated in the port of Valletta. prevailing at the time that the debt or the obligation has been contracted; and (iii) the payor of interest is not a natural person. Ship mortgages and other liens over vessels Moreover, any security governed by Maltese law (including guarantees, suretyships, indemnities and other similar undertakings, 14 What types of ship mortgages exist and what obligations may a pledges, privileges, hypothecs, mortgages and any other collateral ship mortgage secure? Can contingent obligations, including swap arrangements, whether by way of title transfer or otherwise) which obligations, be secured? Are there standardised forms? is entered into for the purpose of, or in connection with, any transac- Under Maltese law, a debt or other obligation may be secured over tion arising under a contract governed or otherwise regulated by the a vessel by: (i) a mortgage; (ii) a general hypothec; or (iii) a special law of a country other than Malta is similarly exempted from the privilege. Any debt or other obligation may be secured by means of provisions of the Civil Code relating to prohibition of charging of a mortgage over a Malta-flagged vessel and the Merchant Shipping interest in excess of 8 per cent. Act, while not specifically referring to swap obligations, does not exclude them. 10 Are withholding taxes payable on principal or interest payments to Considered to be a special charge over a vessel or share therein, non-resident lenders? a mortgage may be drawn up to secure the payment of a principal Under the laws of Malta, a debtor is not required to make any sum and interest, or an account current (ie, an indebtedness arising deduction or withholding in respect of any tax, duty, levy, impost, and determinable in accordance with an underlying obligation) as charge or otherwise, from any payment in respect of principal or well as the performance of any other obligation – including a future interest which it may make under, or pursuant to the terms of any obligation – due by a debtor to a creditor. loan agreement or the transactions contemplated thereby. A Maltese mortgage ranks in the order in time in which it is produced to the Registrar. If there is more than one mortgage registered Registration of vessels over a ship, the mortgagees will be entitled in priority according to the date and time at which each mortgage is recorded in the Register. 11 What vessels are eligible for registration under the flag of your It must also be said, however, that a mortgage deed can prohibit the country? Are offshore drilling rigs or mobile offshore drilling units registration of further mortgages over the vessel without the prior considered vessels under the laws of your jurisdiction? What is written consent of the mortgagee. In this case, it will not be possible the effect of registration? for the Registrar to accept the registration of further mortgages over Pleasure boats, commercial yachts, tankers, container and other the vessel unless the said prior written consent is forthcoming. commercial vessels, pontoons, barges, floating production, storage A general hypothec attaches to all the assets of a debtor includ- and offloading vessels, installations and structures and offshore oil ing a vessel owned by the said debtor. rigs or drilling units are all eligible for registration under the Maltese Special privileges arise in virtue of article 50 of the Merchant flag. A vessel of less than six metres in length is, however, not eligible Shipping Act, a number of which rank before any registered Maltese for Maltese-flag registration. or foreign mortgage (see question 22). As a general rule, vessels that are 25 years and over are not eli- The mortgage form takes a specific statutory format under gible to be registered under the Maltese flag while those vessels that Maltese law. This is then generally accompanied by a deed of cov- fall between the 20–24 years old bracket may be registered under enant and any additional security documents, including assignments the Maltese flag following the positive outcome of a pre-registra- of insurances or earnings and pledge documentation as relevant. tion inspection carried out by an authorised flag inspector. Vessels falling within the 15–19 years old bracket are, however, obliged to 15 Give details of any required form for ship mortgages in your submit to such inspection within one month following Maltese flag jurisdiction. registration. The Second Schedule of the Merchant Shipping Act provides for one Furthermore, vessels may only be registered under the Maltese standard form of mortgage. flag as long as evidence of seaworthiness is established by one of the internationally recognised classification societies (ie, IACS members). 16 Who maintains the register of mortgages? What information does Upon registration, ships and other vessels are deemed to consti- it contain and where are such filings to be made? What is the tute a particular class of moveables: they are considered as separate effect of registration? and distinct assets within the estate of their owners for the security A mortgage is registered by the Registrar in the vessel’s register and of actions and claims to which a vessel is subject such that in case of all entries are available for public inspection. bankruptcy of the owner of a ship, all actions and claims, to which The registration of a mortgage over a vessel or share therein reg- the ship may be subject, shall have preference on the said ship over istered under the Maltese flag creates a right over the said vessel in all other debts of the estate. rem in favour of the mortgagee. Furthermore, the registration of the www.gettingthedealthrough.com 59 MALTA Fenech & Fenech Advocates mortgage is deemed to be an executive title where: (i) the obligation 21 What other maritime liens over vessels are recognised in is certain, liquidated and due and not consisting in the performance your jurisdiction? Do these claims give rise to a right to arrest of an act; or (ii) where a maximum sum secured thereby is expressly a vessel? In what circumstances may associated ships be stated in the mortgage and such figure is recorded in the register for arrested? public notice. Mortgage entries include details of the mortgagee, the The concept of a maritime lien is not, as such, recognised by Maltese date and time of registration, the ranking and a short description of law. The Merchant Shipping Act, however, provides for the creation the purpose of the mortgage. of certain special privileges (in addition to mortgages) in terms of which a creditor may obtain security over a vessel. It is noted how- 17 Must the total amount of the mortgage be stated therein? Must ever, that special privileges arise in virtue of law and no debt or other the mortgage contain a maturity date? Must the underlying debt obligation other than those specified at law may be secured by a instrument be filed with or attached to the recorded mortgage? special privilege. A list of special privileges is found in article 50 of An indication of the monetary value of the indebtedness in the mort- the Merchant Shipping Act. The special privileges listed therein can gage deed is not necessary unless it is intended to secure a future also form the basis of a claim for the arrest of a vessel. obligation, in which eventuality a maximum sum by way of princi- Generally speaking, sister ships may be the subject of an arrest pal for which the mortgage is granted must be expressly stated in the with respect to: mortgage deed following which the Registrar is to record the said • contracts of sale; maximum sum in the register of the mortgaged vessel. It is, however, • damages received or caused by a ship; a further condition of Maltese law that a mortgage to secure a future • loss of life or personal injury caused by a ship; obligation can only be registered in favour of a credit institution • an agreement for the carriage of goods or use or hire of a ship; resident in a country which is a signatory to the Organisation for • salvage; Economic Co-operation and Development. • environmental damage caused by the ship; The mortgage contains no maturity date and attaches to a ves- • wrecks; sel until it is discharged. If, however, a mortgaged vessel has been • towage and pilotage; forfeited according to law and it is proved that the mortgagee has • supplies and services rendered to the ship; authorised, consented to or conspired in the act, failure or omission • construction, repair, conversion or equipping of a ship; that has led to the said forfeiture, the interest of the mortgagee in the • port, dock and harbour dues; mortgage shall terminate. • crew claims for wages and repatriation; When a vessel is sold pursuant to a court order, the interest of • disbursements made; the mortgagee will pass on to the proceeds of the sale. • commissions, brokerage and agency fees; The statutory mortgage deed is the only document filed with the • general average; Registrar for registration of the mortgage and no further security • bottomry; documents are filed or registered. • forfeiture of the ship; • insurance premiums; and • registry and tonnage dues. 18 Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders? 22 What maritime liens rank higher than a mortgage lien? A mortgage can be executed and registered in favour of a security Pursuant to article 54A of the Merchant Shipping Act, the following trustee appointed or acting under a trust for the benefit of a creditor are the special privileges that rank before a mortgage: or multiple creditors, which security trustee will be recognised as the mortgagee of the particular mortgage. (a) judicial costs incurred in respect of the sale of a vessel and the distribution of the proceeds thereof; 19 If the mortgagee is an agent or trustee for a lending syndicate, (b) fees and other charges due to the registrar of Maltese ships aris- must any filings be made upon transfer of a portion of the ing under the Merchant Shipping Act; underlying debt among existing lenders or to a new lender? (c) tonnage dues; A mortgagee who is a security trustee is the recognised mortgagee (d) wages and expenses for assistance, recovery of salvage, and for and is granted all rights in relation to a mortgage as are accorded to pilotage; mortgagees by Maltese law. The transfer of a portion of an under (e) the wages of watchmen, and the expenses of watching the vessel lying debt to an existing lender or to a new lender would therefore from the time of her entry into port up to the time of sale; be regulated by the agreement previously entered into among the (f) rent of the warehouses in which the vessel’s tackle and apparel existing lenders and hence no filings will be required. are stored; (g) the expenses incurred for the preservation of the vessel and of her tackle including supplies and provisions to her crew 20 If the mortgagee transfers its interest to a new lender, agent or incurred after her last entry into port; trustee, what filings are required? Is the mortgagor’s consent (h) wages and other sums due to the master, officers and other required? members of the vessel’s complement in respect of their employ- The transfer of a registered mortgage is effected pursuant to the exe- ment on the vessel, including costs of repatriation and social cution by the mortgagee as transferor in the presence of, and attested insurance contributions payable on their behalf; by, a witness, of an instrument of transfer (found on the transfer (i) damages and interest due to any seaman for death or personal section on the reverse side of the original mortgage deed) and the injury and expenses attendant on the illness, hurt or injury of registration in the vessel’s register of the name of the transferee as any seaman; new mortgagee of the vessel or share therein. Following registration, (j) moneys due to creditors for labour, work and repairs previously the Registrar must also by memorandum under his hand notify on to the departure of the ship on her last voyage; the instrument of transfer that such transfer has been recorded and (k) possessory lien or privilege; and must state the day and hour of the record. The consent of the mort- (l) ship agency fees due for the vessel after her last entry into port, gagor for the transfer of the mortgage is not required. in accordance with port tariffs, and any disbursements incurred during such period not enjoying a privilege in paragraphs (a) to (i), though in any case for a sum in the aggregate not in excess of four thousand units.

60 Getting the Deal Through – Ship Finance 2014 Fenech & Fenech Advocates MALTA

23 May non-mortgage liens be recorded over a vessel? Furthermore, on the strength of EC Regulation 805/2004 of Special hypothecs are registered and recorded in the Public Registry 21 April 2004, it is also possible to render a mortgage registered while seller’s privilege deeds are registered over vessels in the Registry over a Malta flag vessel enforceable in Malta pursuant to the sale of Ships. of the defendant vessel on the basis of a European enforcement order (EEO) in any other EU member state where the vessel may be 24 Will mortgages on ‘foreign’ flag vessels be recognised in your located. Conversely, it will also be possible for a mortgagee to obtain jurisdiction? If so, do they share the same priority as those on an EEO from another EU member state and to proceed to enforce vessels registered under the laws of your jurisdiction? the same EEO before the Maltese courts, and to have the vessel sold judicially. Naturally, the vessel must be in Maltese waters for this to Maltese law provides for the recognition of a non-Maltese mortgage be possible. as a mortgage having the status, rights and powers of a Maltese Maltese law does provide for the possibility of interlocutory mortgage. Such recognition may take place if the non-Maltese mort- sales of vessels and a creditor may file an application before the gage has been validly recorded in the registry of ships of the country courts to request the pendente lite sale of an arrested vessel. A court under the laws of which a vessel is documented, which registry of will, however, only accede to such a request if it is satisfied that the ships must be a public registry which clearly documents the registra- debtor is insolvent or otherwise unlikely to be able to continue trad- tion of a mortgage and in which such mortgage is granted a prefer- ing and maintaining the vessel. Maltese law provides that in reach- ential and generally equivalent status as a Maltese mortgage. ing its decision, the court should consider all the circumstances at Once the above requirements are satisfied, and on the condition hand and should pay particular attention to the nature of the appli- that the vessel is within the territorial waters of Malta (and therefore cant creditor’s claim, the defence raised against such claim (if any), giving the Maltese courts ground for jurisdiction), the foreign mort- as well as any measures which the debtor may have taken to provide gage may be enforced in Malta. alternative security for the creditor’s claim or to preserve the vessel in a good state and condition. There is very limited case law in 25 What is the procedure for enforcing a mortgage in your jurisdiction respect to this aspect of the law and, so far, Maltese courts have by way of foreclosure? Are interlocutory sales permitted? How taken a very cautious approach. long does a judicial sale take? What are the associated court Once a creditor obtains an executive title against the vessel or costs and how are they calculated? its owner (such as a final judgment or when a mortgagee renders Maltese law lists the rights that a mortgagee may exercise on the a mortgage enforceable), it may proceed to enforce its legal rights occurrence of an event of default of any one or more of the terms against the vessel on the strength of one of two enforcement proce- or conditions of a registered mortgage or of any document or agree- dures: (i) by means of a judicial sale by auction; or (ii) by virtue of ment referred to therein (such as, for example, a loan agreement or a court-approved private sale. In both instances, the new purchasers the deed of covenants collateral to a mortgage). Once a debtor is in would acquire a clean title over the vessel as ships sold through the default, a mortgagee will, upon giving notice in writing to the mort- courts are transferred free and unencumbered. gagor, be entitled to: With respect to judicial sales by auction, executing creditors will • take possession of the vessel; be liable to pay court expenses of approximately €500 on filing of • sell the vessel privately; the application requesting the auction together with a statutory fee • carry out, in the name of the owner, those actions that may be owed to the court-appointed auctioneer of 0.2 per cent of the total required in order to maintain the status and validity of regis- realised price of the sale (excluding the applicable 18 per cent due as tration of the vessel such as apply for extensions, pay fees and VAT). These amounts are recoverable as privileged claims in terms receive certificates; and of Maltese law. The executing creditor must also pay costs for the • demand a judicial sale by auction in Malta or request the court publication of the notice and advertisements. to approve a private sale. Any vessel sold pursuant to either of On the other hand, the purchaser will be required to pay court these enforcement mechanisms is transferred to the new pur- registry fees amounting to 1 per cent of the realised purchase price. chaser free and unencumbered. There will also be some judicial fees and expenses in relation to the deposit of the funds with the court. The purchaser must also pay When enforcing a mortgage over a vessel that happens to be within fees owed to the curator appointed by the court for execution of Maltese territorial waters, the first step would be to arrest the vessel the bill of sale in favour of the new owner. These fees are currently and Maltese law lists the grounds under which one may proceed to calculated as follows: arrest a vessel in rem within the territorial waters of Malta. One such ground would be in respect to ‘any claim in respect of a mortgage, Realised purchase price of the vessel Fee due (excluding 18% VAT) hypothec or charge on a ship or on any share therein’. This means Up to €200,000 €250 that any mortgagee may arrest a vessel in rem in Malta in order to protect its interests when attempting to enforce its mortgage security Up to €500,000 €300 rights and to foreclose on the mortgage. An arrest warrant can be Up to €1 million €400 issued within hours of the filing of the request before the Maltese Up to €1.5 million €450 courts. Up to €2 million €500 Maltese law considers a validly registered mortgage as an execu- Over €2 million €582.34 tive title. This essentially means that a mortgagee may immediately proceed to render a mortgage enforceable without the need for With respect to court-approved private sales, execution creditors lengthy or tedious court proceedings. The mortgagee must simply must first identify a potential buyer and then proceed to negotiate a file a judicial letter for payment in the court registry, calling upon price for the vessel and other terms associated with a ship sale with the debtor to settle all the outstanding indebtedness which judicial the prospective purchaser. To this effect, the parties generally enter letter must then be served on the vessel. If the due debts are not into a memorandum of agreement (MoA) for the sale of the ves- settled within two days from service of the judicial letter, the mort- sel, which will be drafted subject to the court’s approval of the sale. gage is immediately rendered enforceable. Following the lapse of the Execution creditors must also obtain two professional and inde- two days, the mortgagee will be free to proceed with a request for pendent valuations of the vessel attesting to its market value. The the judicial sale of the vessel through one of the two enforcement valuations must be concluded following physical inspections or sur- mechanisms available under Maltese law. veys of the vessel and therefore cannot be simple desktop valuations. www.gettingthedealthrough.com 61 MALTA Fenech & Fenech Advocates

With the MoA and valuations in hand, the executing creditor pursuant to a charter party agreement which will need to be filed may then file an application before the court with a request for the with the Registrar. This is possible provided the charterer pays fees approval of the private sale and will be required to produce evi- to the Registrar equal to those paid by the registered owner. The dence that the proposed price for the sale will be in the interest of charterer may, with the written consent of the registered owner, all creditors. request the release of Maltese vessel trading certificates in favour of The court usually fixes hearings within three to four weeks from the charterer indicating such capacity. Likewise, it is possible for a the date of the filing of the application. If the court is satisfied that finance lessor to register its interests as owner of the vessel while the the sale is in fact in the interest of all creditors and no objection finance lessee may register its interests as ‘charterer’ pursuant to the to the sale is forthcoming from any interested party, the court will finance lease agreement. Should a purchase option be exercised at approve the sale in accordance with the terms and conditions of the termination of the lease period, a transfer of ownership will be the MoA and the purchaser will then be expected to deposit the registered from the lessor to the lessee. approved purchase price in the court registry and the bill of sale executed by a court-appointed curator. 30 May finance leases be re-characterised by a court as a financing The executing creditor is liable to pay court expenses amount- contract? If so, is there any procedure for protecting the lessor’s ing to approximately €700 related to the filing of the application interest against third-party creditors? requesting the approval of the sale and will also be responsible for We are not aware of any court judgments that have dealt with paying about 2.5 per cent of the purchase price being statutory fees this point. In any case, Malta does not adopt a system of judicial due to the court registry, the creditor’s lawyer and legal procura- precedent. tor. There are also fees associated with the court-appointed curator which would amount to roughly 1 per cent of the realised purchase 31 How is a security interest created over earnings of a vessel, price of the vessel. This amount can be significantly reduced, how- charter contracts, insurances, etc? How are these security ever, if the executing creditor and the buyer agree a priori on the interests perfected? identity of an independent person to act as curator. In such cases, such curator’s fees would be in the region of €2,000–€3,000 (inclu- Assignments of earnings, insurances and requisition compensation sive of the applicable 18 per cent VAT) rather than 1 per cent of in favour of a mortgagee are created by means of specific contracts the purchase price. All the costs and expenses referred to above are for such purpose and are entered into between the secured party recoverable as privileged claims. and the party granting security. Unlike mortgages and certain special privileges, such assignments are not registered and are perfected 26 May a vessel be sold privately by a mortgagee? Will the sale when the assignment is acknowledged by the assignee. discharge liens over the vessel? 32 Must security interests against non-vessel collateral be registered A vessel may be sold privately on the strength of a court-approved to be enforceable? If so, where are such filings made? private sale. In such an eventuality, the new purchasers would acquire a clean title over the vessel in the same way as vessels sold An additional form of security can generally be granted by means of through the judicial sales by auction are transferred as free and a pledge over the shares in a company owning a vessel (if permitted unencumbered. by the statute of the company). When such company is registered in terms of Maltese law, the existence of a share pledge must be noti- 27 What are the limitations on rights of self-help by a mortgagee? fied within 14 days from the date of execution of the share pledge to As long as a mortgagee meets all the criteria established by law, there both the company itself and to the Registrar of Companies in Malta, are no prima facie limitations on rights of self-help. On the other who is then obliged to register the notice of such pledge with the hand, however, an interested third party cannot be hindered from Registry of Companies. attempting to stop a mortgagee from making use of such rights pur- Other forms of security, such as conventional hypothecs, are suant to the filing of an appropriate court application. Admittedly created by public deed and would require to be registered in the such a third-party request would be very difficult to justify. Public Registry and would only rank with effect from the date of such registration. 28 What duties does a mortgagee owe to an owner or third-party creditors? 33 How is a security interest over a deposit account established? How is a security interest perfected? Maltese law provides that, on the occurrence of an event of default, a mortgagee is duty-bound to give notice in writing to an owner Security over a bank deposit account is established on the strength before proceeding to enforce a mortgage by taking possession of a of the execution of a pledge agreement by the pledgor in favour of mortgaged vessel and selling it. the creditor or mortgagee. Such security is established as soon as Furthermore, in the context of a judicial sale of a vessel secured the pledge agreement is executed and is perfected when the holder by a mortgage registered to secure a future debt within an expressly of the deposit (usually a bank) is notified in writing that the deposit stated maximum, a mortgagee is duty bound by law to specify the account in question has been pledged and when the depositary bank amount due at the time of enforcement by means of an affidavit acknowledges such notification in writing. served on the mortgagor, which amount may however be contested by third-party creditors. 34 How are security interests in non-vessel collateral enforced? As far as transfers of mortgages are concerned, Maltese law pro- Enforcement is usually regulated by the pledge agreement. On the vides that such transfer will have no effect against any person other occurrence of a default, a notice of default is sent by the pledgee than the transferor (or its heirs) unless the transfer has been duly to the pledger stating that an event of default has occurred, setting registered. out the event of default and stating that the pledgee may henceforth exercise in relation to the pledged accounts all rights and remedies Collateral possessed by it under the pledge agreement or granted to it by law by applying all balances in such accounts in the manner described in the 29 May finance leases or other charters be recorded over vessels pledge agreement in the payment of the indebtedness. flagged under the laws of your jurisdiction? Where security is granted by way of a pledge of shares, in the The Maltese flag provides for the possibility of registering the event of a default, the pledgee, in addition to being entitled to apply interests of both the owner and charterer of a Maltese flag vessel

62 Getting the Deal Through – Ship Finance 2014 Fenech & Fenech Advocates MALTA for a judicial sale of the relevant shares, is, upon giving of notice to a tonnage-tax ship. Any dividends distributed by a shipping organi- both the pledgor and the company, entitled to dispose of the pledged sation to its shareholders out of such tax-exempt profits shall not be shares, or appropriate the said shares in settlement (in whole or in subject to Malta tax in the shareholders’ hands. part) of the debt due to it. A tax exemption is also available in relation to any gains realised upon the liquidation, redemption, cancellation, or any other disposal 35 How are share pledges for vessel financings established? Are of shares, securities or any other interest, including goodwill, held in share pledges or share charges common in your jurisdiction? any licensed shipping organisation owning, operating, administering Share pledge agreements with respect to shares in Maltese compa- or managing a tonnage-tax ship while she was a tonnage-tax ship. nies are established pursuant to the execution of a private writing Interest or other income accruing in relation to the financing of by the owners of the individual shares in a company as pledgor(s) operations of shipping organisations or the financing of any tonnage- in favour of the pledgee as mortgagee. As additional security, it is tax ship is likewise exempt from Maltese tax. customary for the share certificates to be annotated by the company As of 2009, the concept of a tonnage-tax ship has been extended secretary to the effect that the shares have been pledged in favour to cover foreign-flagged vessels, in particular those registered in an of the mortgagee and such annotated share certificates are then for- EU/EEA state, relative to which the Maltese tonnage tax has been warded to the mortgagee for the duration of the security period. It paid. is also customary for the directors of the pledgor company to sign undated resignation letters and for the shareholders of the pledgor 39 What special tax incentives are available to shipowners company to execute undated agreements for the transfer to the registering vessels in your jurisdiction? mortgagee of the shares held by them. Additional tax incentives include a transfer duty exemption. This is Although the actual pledge agreement is not registered with a wide-ranging duty exemption that applies to any instrument con- any authority, Maltese law provides that a notice of pledge must be nected with or involving the registration of a tonnage-tax ship, the delivered by the pledgor or by the pledgee to the Registrar within 14 sale or other transfer of a tonnage-tax ship or any share thereof, the days of the granting of the pledge. The share pledge will be effective assignment of any rights and interests or the assumption of obliga- in relation to third parties only after the registration of the notice of tions in respect of any ship or share thereof. The issue or allotment pledge is duly carried out. of any security or interest of a licensed shipping organisation, as well as the purchase, transfer, assignment or negotiation of any secu- 36 Is there a risk that a pledgee, before or after exercise of the share rity or interest of a licensed shipping organisation is also exempt. pledge, may be exposed to debts or other liabilities of the pledged Any instrument connected with or involving the registration of any company? mortgage or other charge over or in relation to any ship or licensed shipping organisation, any transfer or discharge thereof, any receipt Pursuant to the execution of a share pledge agreement, it is the shares relative thereto, and any assignments granted in connection there- owned by the individual shareholders that are pledged in favour of with, is likewise not subject to duty in Malta. a pledgee and not the company itself. The share pledge agreement Furthermore, where persons operating as officers or employees would usually contain provisions that would grant the pledgee full of a licensed shipping organisation are not resident in Malta, such control over the administration of pledged shares and the preserva- organisation shall be entitled to an exemption from the obligation to tion of their current value. pay social security contributions on their behalf.

Tax considerations for vessel owners 40 Are there any other noteworthy tax provisions specifically 37 Is the income earned by the owners of vessels registered in your applicable to shipping, shipping income or ship finance? jurisdiction subject to domestic taxation? At what rate? With effect from 1 January 2009, the tonnage tax regime has also The fact that a vessel is registered with the Malta Registry does not, been extended, subject to conditions, to ship managers licenced as of itself, create grounds for taxation. shipping organisations, being responsible for either or both of the The tax status of the owner of the vessel is to be ascertained. technical or crew management of tonnage-tax ships. Where the owner of the vessel is a company that is resident and domiciled in Malta for income tax purposes, it is taxable in Malta Insolvency and restructuring on income and chargeable gains on a worldwide basis. Should the 41 Is there a general scheme of reorganisation or insolvency company be either resident or domiciled but not both resident and administration in your jurisdiction? domiciled in Malta for income tax purposes, it shall be taxable in Shipowning companies are set up in terms of, and subject to the pro- Malta on all income and chargeable gains arising in Malta as well visions of the Merchant Shipping (Shipping Organisations – Private as on any foreign sourced income to the extent that it is remitted in Company) Regulations 2004 (the MS Regulations). These ad hoc Malta. regulations differ, sometimes substantially, from the provisions of Tax is payable on income, including chargeable gains, less the Companies Act which governs the setting up and governance deductible expenses and allowances, at the standard corporate tax of companies under Maltese law. The MS Regulations provide that rate of 35 per cent. upon appointment, a liquidator or provisional administrator would take all the property and rights of the company under his control, 38 Is there an optional tonnage tax exempting vessel owners from subject, however, to the provisionthat he shall not have the right to tax on income? dispossess a mortgagee in possession of a ship subject to a registered Malta operates an optional tonnage tax regime that provides for mortgage in his favour, or the holder of a possessory lien, or to do a blanket tax exemption for shipowners, charterers and financiers anything that would hinder or obstruct the exercise of the mortga- of Maltese ships over 1,000 NT. These ships qualify as ‘exempted gee’s rights, including the mortgagee’s right to take over possession ships’. of the vessel. A shipping organisation (which may, inter alia, be set up as a company) is exempt from tax on any income derived from shipping 42 Will the courts of your jurisdiction respect the rulings of a foreign activities and any income or gains derived from the sale or other court presiding over reorganisation or liquidation proceedings? transfer of a tonnage-tax ship or from the disposal of any rights to As a member of the European Union, Malta is subject to Council acquire a ship which, when delivered or completed, would qualify as Regulation (EC) 1346/2000 on insolvency proceedings of June 2000 www.gettingthedealthrough.com 63 MALTA Fenech & Fenech Advocates

43 What is the order of priority among creditors? In what Update and trends circumstances will creditors be required to disgorge payments from an insolvent company? Undoubtedly the greatest emerging trend is the extent to which As a general rule, all claims against a ship rank in priority with all other mortgagees are resorting to the court-approved private sale claims against the shipowning company. See questions 21 and 22 procedure in Malta, a procedure that has proved to be both cost and time-efficient. regarding the ranking of mortgages and special privileges. The MS Regulations as applicable to Maltese shipowning companies do not include provisions on fraudulent preference and the voidability of any and all security, payment or disposal of property done within six (the EU Regulation), which governs extraterritorial insolvency pro- months before the dissolution of the company, and there is therefore ceedings involving companies having their centre of main interests some uncertainty as to whether the fraudulent preference provisions in Malta. contained in the Companies Act would apply to shipping organisa- In accordance with the provisions of this Regulation, it is tion registered in terms of the MS Regulations. It should be noted, the courts of the member state that is the debtor’s centre of main however, that the Maltese courts would generally retain a general interests that have jurisdiction to open insolvency proceedings. remedy to annul actions tainted by fraud. In addition, the general Secondary proceedings may also be opened in other member states provisions of the actio pauliana rule under the Maltese Civil Code, within which the debtor has an establishment. in terms of which any creditor may impeach any act made by his It is the law of the EU member state within which main proceed- debtor in fraud of his claim, would also be expected to apply. ings have been opened that governs the opening, conduct and clo- sure of insolvency proceedings including the determination of any 44 May a vessel owner provide security on behalf of other related claims, such that where the relevant insolvent company is a Maltese or unrelated companies? What are the requirements for it to be company and main proceedings are opened in Malta, all insolvency enforceable? proceedings would be governed by Maltese law. Under Maltese law, for a mortgage over a vessel to secure third-party In a winding-up by the court, once a winding-up order has been obligations, there must be an obligation assumed by the mortgagor made in respect of the company, no action or proceeding, other than itself in respect of such third-party obligations and the mortgagor any action instituted by a holder of a registered mortgage or a privi- would enter into a document pursuant to which it would undertake leged creditor over a ship owned by the company being wound-up, to secure the obligations of a third party by means of the registration can be proceeded with or commenced against the company or its of the said mortgage. Such obligations of the mortgagor pursuant to property except by the leave of the court and subject to such terms such document would then be secured by the mortgage. The mort- as the court may impose. gage narrative itself must make specific reference to the obligations In terms of the EU Regulation, the Maltese courts are bound which are secured by the mortgage. to recognise a request for the recognition of the opening of foreign insolvency proceedings handed down by a court in any other EU 45 Is there a law of fraudulent transfer that permits a third-party member state. creditor to challenge, for example, the grant of a mortgage With respect to proceedings commenced outside the EU, since because of insolvency of the mortgagor or insufficient Malta is not a party to any other international insolvency treaty or consideration received by the mortgagor in exchange for the grant memoranda of understanding regulating cross-border insolvency of the mortgage? proceedings, the enforcement of any such claim or any effects arising from insolvency proceedings in respect of those claims as regards Under Maltese law, the insolvency of the mortgagor will not affect companies registered in Malta that are being wound-up in Malta is the right of the mortgagee to enforce his executive title over the ves- subject to applicable laws on the enforcement of foreign claims and sel and it is in fact provided that a registered mortgage will not be judgments. affected by the bankruptcy of the mortgagor or shipowner happen- ing after the date of registration of the mortgage. Such mortgage will also have preference on the vessel over all other debts, claims and interests of any other creditor of the bankrupt.

Mark Fenech [email protected] Lara Saguna Axiaq [email protected]

198, Old Bakery Street Tel: +356 2124 1232 Valletta VLT 1455 Fax: +356 2599 0642 Malta [email protected] www.fenechlaw.com

64 Getting the Deal Through – Ship Finance 2014 Fenech & Fenech Advocates MALTA

Maltese law, however, also provides that a privilege (and hence winding-up of the company by any creditor when such company is a mortgage) granted by a Maltese company within six months unable to pay its debts. A company is deemed to be ‘unable to pay before its dissolution is deemed to constitute a fraudulent preference its debts’, inter alia, if it is proved to the satisfaction of the court that against its creditors and may be declared null and void if such mort- the company is unable to pay its debts, account being taken also of gage constitutes a transaction at undervalue, unless the person in contingent and prospective liabilities of the company. Furthermore, whose favour the mortgage is registered proves that he did not know the debts due must be in excess of €23,000. or did not have reason to believe that the mortgagor company was likely to be dissolved by reason of insolvency. For the purposes of 47 Has your jurisdiction adopted the Model Netting Act of the this provision, a company is considered to have entered into a trans- International Swaps and Derivatives Association (ISDA)? If not, action at undervalue if: (i) the company enters into a transaction on may a swap provider exercise its close-out netting rights under an terms that provide for the company to receive no consideration; or ISDA master agreement despite an obligor’s insolvency? (ii) the company enters into a transaction for a consideration the The provisions of the Set-off and Netting on Insolvency Act, and the value of which, in money or money’s worth, is significantly less than regulations issued thereunder, allow for the enforcement of close-out the value in money or money’s worth of the consideration provided netting provisions, whether before or after bankruptcy or insolvency by the mortgagor company. in respect of mutual debts, credits or dealings which have arisen or occurred before the bankruptcy or insolvency of one of the parties, 46 How may a creditor petition the courts of your jurisdiction to against the other contracting party, a security provider, the liquida- declare a debtor bankrupt or compel liquidation of an insolvent tor and other creditors of the parties to the contract, such that the obligor? provisions of an ISDA master agreement would generally be enforce- A shipping company may be dissolved and wound-up by the able in Malta. courts following the filing of an application for the liquidation and

www.gettingthedealthrough.com 65 MARSHALL ISLANDS Vedder Price PC Marshall Islands

Francis X Nolan III Vedder Price PC

Due diligence in the companies register or as financing statements filed under the Uniform Commercial Code, for example, in the United States. 1 How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction? 4 Can one determine whether an obligor registered in your Marshall Islands law establishes requirements for the vessel owner jurisdiction is duly organised and in good standing from a search to demonstrate and affirm the facts of direct ownership of a vessel of a public registry? coming into the Marshall Islands flag. These requirements do not address ultimate or intermediate tiers of ownership, such as identifi- Generally speaking, this is possible. In practice, however, this is nor- cation of parent entities in ownership structures. mally addressed by requiring a certificate of good standing from the In order to register a vessel in the Marshall Islands, it is necessary Trust Company of the Marshall Islands, Inc through International for the owner to ‘furnish sufficient proof satisfactory to’ the Deputy Registries, Inc. Commissioner of Maritime Affairs demonstrating ownership of the vessel (Maritime Act, section 208). The Maritime Act, section 209(1) 5 Can the shareholders or other equity interest holders, directors requires that a written oath by sworn affidavit be submitted by an and officers or other authorised signatories of an obligor owner or owner’s authorised representative for registration ‘declar- organised in your jurisdiction be determined from a search ing [...]the name and residence of any other owner and his citizen- of a public registry? If not, how are these parties customarily ship, each owner’s proportion, and the name of the affiant and his identified? citizenship.’ Marshall Islands law does not, strictly speaking, require the disclo- Whenever a vessel operating under the Marshall Islands flag sure on the public record of shareholders, members or other equity is sold, the Maritime Act, section 225(1) requires that the sale or interest holders, directors, officers or other authorised signatories. transfer is evidenced ‘by a written instrument in the nature of a bill This issue is usually addressed in transactions by requiring incum- of sale to which is attached a true copy of the latest Certificate of bency certificates stating the identities and interests in the specific Registry’. For registration of a newbuilding, the registrant must pro- entity. Often there are additional disclosure requirements and sup- vide a builder’s certificate from the shipbuilder certifying, among porting documentation required, such as resolutions appointing other things, that the builder constructed the vessel and for whom it officers, elections to the board and inspection of the stock transfer was built and the date of delivery (Maritime Act, section 226). ledger, where relevant.

2 How can one determine whether there are any liens recorded over 6 What corporate or other entity action is necessary for an obligor a vessel? to enter into or guarantee a debt obligation? When is action by The only maritime liens that can be recorded against a vessel in the the board of directors or other governing body required? Must Marshall Islands registry are preferred mortgage liens. Marshall shareholders approve a guarantee? Islands law does not provide a vehicle for registration of other mari- All Marshall Islands corporations are empowered to guarantee time liens. the obligations of others unless specifically limited in the Business Corporation Act (BCA) or in the articles of incorporation of the 3 How does one determine whether there are any security corporation (BCA, section 15(g)) provided it is in furtherance of its agreements, liens, charges or other encumbrances granted corporate purposes. If that is not the case, or is in doubt or simply to by a vessel owner or affiliated party who might be a borrower, avoid any issue in that regard, BCA section 16 allows a corporation guarantor or other credit party in connection with a vessel finance to issue a guarantee regardless of whether it is in furtherance of its transaction? corporate purposes, by obtaining the affirmative vote of a majority One can determine whether there are any preferred mortgage liens of the outstanding shares in the corporation at a shareholders’ meet- registered against a specific vessel by searching the record, more ing. The same procedure can be used to authorise the corporation to practically by requesting a certificate of ownership and encumbrance secure the guarantee with a grant of a security interest in corporate from the Deputy Commissioner’s office. A lien or charge against a property (BCA, section 16). vessel arising from other than a preferred mortgage need not be filed under Marshall Islands law. In fact, there is no filing office for such 7 Must foreign lenders qualify to do business in your jurisdiction liens to be registered or recorded. Security agreements, liens, charges to extend credit to a borrower organised in your jurisdiction? or other encumbrances may be granted by an owner or disponent Will foreign creditors be deemed resident as a consequence of owner over charter hire, freights and other earnings of a vessel or making a loan or other extension of credit to an obligor within your other collateral such as stock and other ownership interests as credit jurisdiction? support in a ship finance transaction. These are usually recorded in There is no requirement for a foreign lender to qualify to do busi- the domicile of the assignor or pledgor, either as charges registered ness in the Marshall Islands in order to extend credit to Marshall

66 Getting the Deal Through – Ship Finance 2014 Vedder Price PC MARSHALL ISLANDS

Islands persons in respect of vessels registered under the Maritime are not a definite part of Marshall Islands law. There are, in fact, Act. Lenders seeking to make loans internally in the territory of the offshore drillships and mobile offshore drilling units registered as Marshall Islands must comply with local laws affecting banks and vessels under the Maritime Act. other business operations. 12 Who may register a vessel in your jurisdiction? Repayment Under the Maritime Act, a vessel may be documented if owned by 8 Is central bank or other regulatory approval required for repayment a citizen or national of the Marshall Islands or by a foreign mari- of a loan in foreign currency? time entity qualified in the Marshall Islands. Entities formed under the Associations Law (including the BCA) are considered nationals. There is no such requirement in Marshall Islands law with respect A qualification as a registered foreign maritime entity is achieved to non-resident domestic borrowers repaying loans outside the under Division 13 of the BCA. Essentially, these provisions allow Marshall Islands. In fact, section 310 of the Maritime Act permits foreign entities, otherwise empowered under their home jurisdic- obligations secured by a preferred mortgage to be denominated in tions to own vessels, to apply, register and then document Marshall any unit or units of account or currency as the parties may agree. Islands-flagged vessels. The Maritime Act and its implementing Maritime Regulations require applicants to provide information 9 Do usury laws limit the interest payable to a lender in respect of a on the nature and powers of the entity, its legal representatives, its vessel financing? address and principal place of business, management and similar Section 132 of the Maritime Act specifically provides that ‘a Preferred data. As a practical matter, the threshold for qualification is not sig- Mortgage may secure such interest, including interest on interest, on nificant and numerous Marshall Islands vessels are documented in an obligation secured by the mortgage as the parties may agree.’ This the names of qualified foreign maritime entities. provision is based on a similar provision in the US Ship Mortgage Act. Bearing in mind that few Marshall Islands-flagged vessels in for- 13 Is there an alternate registry for international shipping eign trade are arrested and foreclosed upon in the Marshall Islands operations? itself, it will generally fall to the jurisdiction where a vessel is arrested The dominant registry in the Marshall Islands is the open interna- to foreclose a preferred mortgage to determine whether this section tional registry. Chapter 2 of the Maritime Act governs the registra- 132 would be enforceable or against public policy in the place of tion and mortgaging of vessels in foreign trade. This registry dwarfs arrest. We know of no reported cases where a court has upheld a the purely domestic vessel registry in the Marshall Islands, which usury defence in the face of provisions such as section 132 of the is regulated by the Marshall Islands Domestic Watercraft Act (see Maritime Act. question 11). The international registry requires that the owner of a Marshall Islands vessel be a Marshall Islands entity (Maritime 10 Are withholding taxes payable on principal or interest payments to Act, section 203), but imposes no citizenship requirements on the non-resident lenders? ownership of such an entity. Moreover, the law was amended some There are no withholding taxes imposed by the Marshall Islands on years ago to permit ownership directly in Marshall Islands vessels by the repayment of principal or interest to non-resident lenders. This qualified foreign maritime entities. is not surprising as most, if not all, non-resident domestic corporate income is exempted from income tax (BCA, section 12). Ship mortgages and other liens over vessels

Registration of vessels 14 What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap 11 What vessels are eligible for registration under the flag of your obligations, be secured? Are there standardised forms? country? Are offshore drilling rigs or mobile offshore drilling units The Marshall Islands follows the American model of ship mortgage considered vessels under the laws of your jurisdiction? What is unifying the essential features of a mortgage grant with the covenants, the effect of registration? representations, warranties, events of default and other provisions. Pursuant to Chapter 9 of the Maritime Act, derived from the original While there are requirements to establish a preferred mortgage, there Domestic Watercraft Act, the Marshall Islands has one registry for is no required form as such. A Marshall Islands preferred mortgage vessels operated exclusively within Marshall Islands waters. Vessel is flexible enough to secure any obligation of the mortgagor debtor. documentation for internationally trading vessels is done through A preferred mortgage may secure a term loan, future advances and the Maritime Act, Part I. This registry is considered an open registry, contingent obligations, including guaranties, swap obligations, sometimes referred to as a flag of convenience. and other obligations, under present commitments or agreements The Maritime Act does set out minimum threshold requirements (Maritime Act, section 309). Under the financing charter provisions for registration under the Act. Any seagoing vessel engaged in for- enacted in the Marshall Islands in March 2013, the Marshall Islands eign trade is eligible, as are declared commercial fishing vessels of at became the first registry to permit the registered owner in a financ- least 24 metres in length, commercial yachts of at least 24 metres ing charter to record the bareboat charter as a species of preferred and private yachts of at least 12 metres. Additionally, there is a maxi- mortgage. These new provisions allow the registered owner, typi- mum age limit of 20 years (section 203), which can be waived under cally a financial institution or affiliate, to hold title and be deemed certain conditions. Section 203 also permits the registration of ves- a preferred mortgagee up to ‘the aggregate amount of the nominal sels under construction, provided the registrant has title to the vessel amount of all charter hire payments and purchase option amounts under construction and there is no restriction against such registra- payable, or which may become payable, under the charter as well tion in the jurisdiction where the vessel is being built. as any interest, indemnities, expenses or fees’ (Maritime Act, section The Maritime Act does not define the term ‘vessel’. Section 113 302A). The new law permits financing structures similar to those of the Maritime Act does contain a provision that adopts the general used for aircraft and railcar net lease financing. maritime law of the United States as the general maritime law of the Marshall Islands, to the extent it does not conflict with the Maritime 15 Give details of any required form for ship mortgages in your Act or any other provision of Marshall Islands law. The term ‘vessel’ jurisdiction. in US maritime law, once a part of the general maritime law of the There is no required form of Marshall Islands preferred mortgage, United States, was codified into statute in the mid-19th century, so as such. Marshall Islands mortgages follow the American model, that US definitions of ‘vessel’ may be useful or even persuasive, but www.gettingthedealthrough.com 67 MARSHALL ISLANDS Vedder Price PC similar in some respects to what a red-ensign system might include • maritime tort lien for damage caused by the vessel; in a deed of covenants. There are, however, elements that must be • maritime liens for ‘unpaid tonnage taxes, fees, penalties and included in a Marshall Islands mortgage in order for it to be deemed other charges arising under’ the Maritime Act or its implement- a ‘preferred mortgage’. ing regulations (Maritime Act, section 238); • crew wages; 16 Who maintains the register of mortgages? What information does • general average; it contain and where are such filings to be made? What is the • salvage (including contract salvage); and effect of registration? • ‘expenses and fees allowed and costs taxed by the Court’. All instruments of ‘sale, conveyance, hypothecation, mortgage or assignment of mortgage of any vessel’ as well as financing charters In addition, any maritime lien claim for necessaries which arose are recorded and maintained in the central office of the Marshall prior to the registration of the preferred mortgage would also have Islands Maritime Administrator in the United States (Maritime priority over the preferred mortgage (Maritime Act, Section 303(1)). Act, section 302 and 302A). As a practical matter, the functions Section 319(1) of the Maritime Act states that: of the Maritime Administrator are delegated to and performed by the Commissioner of Maritime Affairs and various deputy com- [w]hoever furnishes repairs, supplies, towage, use of drydock or missioners in New York, London and elsewhere around the world. marine railway, or other necessaries, to any foreign or domestic ves- However, the central repository of all document filings related to sel upon the order of the owner or person authorised by the owner, vessels is in the United States. shall have a maritime lien on the vessel.

17 Must the total amount of the mortgage be stated therein? Must These necessaries liens will rank in a subordinate position to any the mortgage contain a maturity date? Must the underlying debt preferred mortgage registered against the vessel before such liens instrument be filed with or attached to the recorded mortgage? arose. Section 302 of the Maritime Act requires that a mortgage state 22 What maritime liens rank higher than a mortgage lien? ‘the amount or amounts of the direct or contingent obligations [...] that are or may become secured by the mortgage’. In the case of A preferred maritime lien ranks higher than a preferred mortgage revolver facilities or committed facilities not fully drawn at clos- under the Maritime Act. These preferred maritime liens are those ing, the mortgage may either be stated as the maximum amount six categories set out in question 21 as well as any other maritime which may be drawn at any time or as the ‘aggregate of all possible liens that arise prior to registration of the preferred mortgage. As advances’ (Maritime Act, section 309). There is no stated require- between mortgages, the rule is ‘first in time, first in right,’ subject to ment to attach and file a copy of the agreement creating the obliga- any consensual subordination or intercreditor arrangement between tion secured. However, as a matter of practice, parties do normally mortgagees. attach the form of or a copy of the executed note, credit facility, guaranty or other evidence of the secured obligation. 23 May non-mortgage liens be recorded over a vessel? Only preferred mortgage maritime liens can be recorded against ves- 18 Can a mortgage be registered in the name of an agent or trustee sels in the Marshall Islands registry. There is no facility or procedure for the benefit of multiple lenders? to accept for filing evidence of any other type of lien, maritime or Mortgages are generally registered in favor of a security trustee act- otherwise, against a vessel. In practice, lawyers may file charges in ing on behalf of lenders in all transactions in which more than one the Companies Register or file UCC financing statements against a lender is or may become party to the credit agreement that the mort- foreign owner. Such filings are only in the nature of ‘belt and braces’ gage is intended to secure. efforts and are not expected to be relied upon.

19 If the mortgagee is an agent or trustee for a lending syndicate, 24 Will mortgages on ‘foreign’ flag vessels be recognised in your must any filings be made upon transfer of a portion of the jurisdiction? If so, do they share the same priority as those on underlying debt among existing lenders or to a new lender? vessels registered under the laws of your jurisdiction? By use of the security trustee, transfers of the underlying debt posi- The Maritime Act, section 317, provides that foreign mortgages, tions need not be registered in the Marshall Islands registry. hypothecations or similar charges ‘created as security upon any documented foreign vessel’ are also recognised in the Marshall Islands 20 If the mortgagee transfers its interest to a new lender, agent or courts as ‘preferred mortgages’ if they are ‘duly and validly executed trustee, what filings are required? Is the mortgagor’s consent and registered’ under the laws where the foreign vessels’ ownership is required? documented. Marshall Islands law does not distinguish between preferred mortgages on Marshall Islands vessels and foreign preferred The transfer of the mortgagee position by assignment is not required mortgages on foreign vessels either in terms of mortgage foreclosure to maintain the validity of the mortgage, but it should be done for procedures or in the ranking and priority of liens. Differences might protection of the assignee mortgagee’s rights with regard to the arise, however, based on treatment in the jurisdiction where liens assignor and also to avoid difficulties and delays in establishing the arose. This goes more to the question of whether a maritime lien is assignee’s right to foreclose on the mortgage at some time in the recognised in the place it is claimed to have arisen, such as bunker future. liens, which are not universally recognised.

68 Getting the Deal Through – Ship Finance 2014 Vedder Price PC MARSHALL ISLANDS significant numbers of Marshall Island flag vessels ever call at the the name and official number of the vessel, the date, the name and Marshall Islands during their service life. addresses of both parties and state the total ‘nominal amount of all charter hire payments and purchase option amounts payable, or 26 May a vessel be sold privately by a mortgagee? Will the sale which may become payable thereunder, exclusive of any interest, discharge liens over the vessel? indemnities, expenses, or fees’. The Maritime Act is silent on whether a mortgagee may sell a vessel It should be noted that merely registering or recording a docu- privately in the Marshall Islands and what effect that would have ment as a financing charter does not make it so. A court asked to on claims against the vessel. Section 318 of the Maritime Act pro- enforce a registered financing charter could determine based on the vides that a sale of a vessel in an in rem suit in the Marshall Islands evidence that the agreement is not a financing charter or does not High Court would terminate all pre-existing claims in the vessel. create a security interest in favour of the documented owner under The proceeds would be applied in payment of claims of creditors as applicable law. indicated in question 21. Section 302A also allows a documented owner under a financ- The Maritime Act, section 316(2) does provide that a preferred ing charter itself to mortgage the vessel under more conventional mortgage on a Marshall Islands vessel may be enforced ‘in rem in mortgages. In this manner, if a charter is found not to be a ‘financing admiralty or otherwise in any foreign country in which the vessel charter’ and therefore not a mortgage lien on the vessel, at least the shall be found’ and defers to the enforcement procedures in the conventional mortgage would secure debt on the vessel. country of arrest. Generally speaking, a vessel will be ‘free and clear’ of all liens 30 May finance leases be re-characterised by a court as a financing or claims whatsoever following an arrest and foreclosure sale in a contract? If so, is there any procedure for protecting the lessor’s public auction overseas. In the United States it is possible, but highly interest against third-party creditors? unusual, for a mortgagee to arrange a sale of a vessel privately after As noted in question 29, a court could determine that a charter reg- arrest subject to confirmation by a federal court. It is unclear at best istered as a ‘financing lease’ is not in fact a financing lease because whether such sales, even if valid in the United States, would be given of its economic characteristics and thereupon re-characterise the wide recognition in other countries. charter as a true lease, operating agreement or otherwise, leaving the documented owner to be characterised as the true owner and 27 What are the limitations on rights of self-help by a mortgagee? not a secured party. If the documented owner is found to be a true owner, its claim to the vessel would fall behind all creditors. In any Most nations insist on the sale of arrested vessels by or through case where this result would seem to be a significant risk, the par- specialised courts, admiralty or otherwise, as a predicate to the dis- ties should structure the deal at the outset to include back leverage charge of all liens and encumbrances. Resort to self-help remedies secured by conventional preferred mortgages. as an aid in advance of foreclosure has long been in use in many However, the concerns that drove the creation of section 302A countries in the enforcement of ship mortgages, including Marshall came from the opposite direction, the fears of a title-holder that his Islands preferred mortgages. charter would be re-characterised as an unperfected security interest. The first financing charter transaction making use of section 28 What duties does a mortgagee owe to an owner or third-party 302A was only closed in March 2014. creditors?

Marshall Islands law states notice requirements for the arrest and 31 How is a security interest created over earnings of a vessel, foreclosure of vessels by the High Court. These are set out in section charter contracts, insurances, etc? How are these security 316(1) of the Maritime Act, in the following language: interests perfected? These security interests are generally perfected by filing or other In addition to any notice by publication, actual notice of the com- action against the pledged asset where it is maintained or where mencement of suit shall be given by the libellant, in such manner as the payment debtor of the obligation is found. As far as charter the Court directs, to the master, other ranking officers, or caretaker hire, earnings and other revenue streams are concerned, a financial of the Vessel, and to any person who has recorded a notice of claim institution, lender or lessor, would generally require payment of all of an undischarged lien upon the vessel, unless after search by the receipts into a designated account controlled by the secured party libellant satisfactory to the Court such person is not found with the either from the start or pursuant to some springing mechanism upon [Marshall Islands]. Failure to give such notice shall not constitute a default. This usually, but not always, includes notice of the assign- jurisdictional defect, but the libellant shall be liable to such person ment given to the source of the payments and acknowledgement by for damages in the amount of his interest in the vessel terminated the payment obligor, such as the charterer, for example. Lessors and by the suit. lenders generally require payment in money centre banks and it is highly unlikely that a filing in the Marshall Islands would be needed The provision does not indicate where the libellant might search for to perfect a security interest in the accounts. any recorded notice of claims of lien. However, the Maritime Act, which provides for the registration of vessels and recordation of 32 Must security interests against non-vessel collateral be registered mortgages, does not provide for the recordation of claims of liens. to be enforceable? If so, where are such filings made? This will depend on a number of factors including the nature and Collateral location of the collateral or the obligor with respect to that collat- 29 May finance leases or other charters be recorded over vessels eral. In no case is the filing location likely to be in the Marshall flagged under the laws of your jurisdiction? Islands. International shipping operating under the Marshall Islands Since early 2013, Marshall Islands law has permitted the recordation flag will use money centre banks to deposit escrowed funds, col- of financing charters and elevated their status to a species of pre- lect charter hire and freights. These types of property will not touch ferred mortgage. Section 302A provides that a bareboat or demise the Marshall Islands. Pledges of shares or membership interests in charter can be registered for recordation by either the documented Marshall Islands shipowners will be perfected by delivery of certifi- owner or the charterer. In order for the charter to be registered, the cated shares or interests into the possession or control of the secured charter must be signed and acknowledged by both parties, include party, coupled with undated director resignations and powers of

www.gettingthedealthrough.com 69 MARSHALL ISLANDS Vedder Price PC attorney. In the US, by way of example, there is provision for filing the entity, asset tax, tax reporting requirement on revenues of the security interests in property owned by persons not present in the entity, stamp duty, exchange controls or other fees or taxes other US. than those imposed by sections 8 [filing fees for articles of incorporation and other documents] and 9 [annual entity registration fees] 33 How is a security interest over a deposit account established? [of the BCA]. How is a security interest perfected? Perfection on deposit accounts is not done in the Marshall Islands 38 Is there an optional tonnage tax exempting vessel owners from unless the account is established in a Marshall Islands bank. In real tax on income? life, the perfection of the security interest in a deposit account is There is a tonnage tax on vessels registered in the Marshall Islands. accomplished by a combination of pledge and some form of account However, this is not paid to gain an exemption from income tax, control agreement in which the pledgor, the deposit bank and the which generally does not apply to non-resident domestic or foreign secured party agree that: funds will not be released from the account companies. See question 37. without the consent of the secured party, either at any time or following an event of default; and in certain circumstances, particularly 39 What special tax incentives are available to shipowners default, the secured party is entitled to withdraw and apply the funds registering vessels in your jurisdiction? against the secured obligations. Where available in the account juris- Income earned by non-resident entities (either domestic or foreign) diction or the jurisdiction of the debtor, sometimes a filing statement from operation of Marshall Islands-flagged vessels registered under or charge may be registered. the Maritime Act is exempt from Marshall Islands taxation (BCA Section 12). 34 How are security interests in non-vessel collateral enforced? The method of enforcement will vary according to the collateral 40 Are there any other noteworthy tax provisions specifically type, the jurisdiction where the collateral is found and the powers applicable to shipping, shipping income or ship finance? that the collateral owner has contractually granted to the secured Not applicable in the Marshall Islands. party in the remedies provisions of the loan, pledge or guaranty documents. The remedies will normally include self-help remedies Insolvency and restructuring by statute or by contract as well as foreclosure through the courts, followed by public auction or other approved sale method. 41 Is there a general scheme of reorganisation or insolvency administration in your jurisdiction? 35 How are share pledges for vessel financings established? Are No, the Marshall Islands has no such procedure. We understand that share pledges or share charges common in your jurisdiction? it has an internal procedure in the nature of an assignment for the Pledges of shares or other ownership interests are established by the benefit of creditors but that it is not adequate to work through a grant normally included in a pledge agreement. As noted above, the shipping insolvency where worldwide jurisdiction over the debtor’s pledge is usually accompanied by delivery of the original certificates assets is critical to success. evidencing the pledged securities to the secured party together with undated resignation letters from the board or other management 42 Will the courts of your jurisdiction respect the rulings of a foreign body. If the securities are not certificated, provisions prohibiting the court presiding over reorganisation or liquidation proceedings? subsequent issuance of certificates is usually included in the pledge There is not much jurisprudence to say definitively but it is believed agreement or in a separate uncertificated securities agreement. that the Marshall Islands would respect such orders assuming the Pledges of membership interests in Marshall Islands entities are proceedings were not conducted in a manner that violates public very commonly required where loans are made to Marshall Islands policy. shipowners. 43 What is the order of priority among creditors? In what 36 Is there a risk that a pledgee, before or after exercise of the share circumstances will creditors be required to disgorge payments pledge, may be exposed to debts or other liabilities of the pledged from an insolvent company? company? The order of priority among creditors is not apparent since no sig- There is a risk of exposure where the pledgee assumes, in one way or nificant proceedings have occurred or are expected to occur in the another, the active management of the company whose shares have Marshall Islands since the statutory infrastructure for bankruptcy is been pledged. The law that determines that liability will often be that not present. applicable to the underlying tort or civil wrong that occurs, whether it is a vessel disaster, fraudulent conveyance, defaulted statutory obli- 44 May a vessel owner provide security on behalf of other related gation or other liability basis. or unrelated companies? What are the requirements for it to be enforceable? Tax considerations for vessel owners A Marshall Islands vessel owner may guarantee the obligations of 37 Is the income earned by the owners of vessels registered in your another entity or provide a security interest in the vessel owner’s jurisdiction subject to domestic taxation? At what rate? property, including a mortgage over the owner’s vessels, to secure Income earned by non-resident entities (either domestic or foreign) the obligations of another if it is in the business interest of the vessel from any source, including operation of Marshall Islands-flagged owner or, in any case, if the shareholders of the vessel owner approve vessels registered under the Maritime Act, is exempt from Marshall the guaranty or grant of security interest (see question 6). A lender or Islands taxation (BCA, section 12). The provision specifically identi- other guaranteed party should take care that any such guaranty or fies corporations, partnerships, trusts, unincorporated associations grant of security is both grounded in the guarantor’s business inter- and limited liability companies within the meaning of ‘entity’. The est and also approved by shareholders. The guaranty or grant should exemption applies to: recite with some particularity what the business interest is and the reliance of the guaranteed party or secured party on the guaranty or [A]ny corporate tax, net income tax on unincorporated businesses, security grant. corporate profit tax, income tax, withholding tax on revenues of Parties relying on the security interest in collateral should also be aware that other pre-existing creditors of the security interest

70 Getting the Deal Through – Ship Finance 2014 Vedder Price PC MARSHALL ISLANDS

effects occurred. A number of bankruptcy cases begun by Marshall Update and trends Islands companies have been filed and conducted in the US, and US law of fraudulent conveyance might apply. The commercial civil law The two new developments in the Maritime Act, provisions allowing of the Marshall Islands is in any event largely consistent with US law mortgages on vessels under construction and provisions allowing generally. In the unlikely event that a creditor challenged a trans- financing charters to be filed, recorded and enforced as preferred fer as fraudulent, there is no reason to believe the analysis or result mortgages, are significant developments intended to permit the development of alternative financing structures. Both provisions would be different than would occur in the US courts. are expected to undergo refinement in the next few years to enhance their accessibility and reliability for employment in new 46 How may a creditor petition the courts of your jurisdiction to financing structures. declare a debtor bankrupt or compel liquidation of an insolvent obligor? grantor could make arguments that the grant of a security inter- Confining this discussion to the activities of non-resident Marshall est could in certain circumstances constitute fraudulent conveyance, Islands shipping companies doing business with creditors around especially when there is no demonstrable benefit to the granting the world, it is highly unlikely that the troubled debtor or its pursu- entity and the assets of the grantor prove insufficient to satisfy other ing creditors would resort to the courts of the Marshall Islands. The creditors of the grantor entity. overwhelming evidence is that bankruptcy and insolvency proceedings in which survival or reorganisation is sought are brought in the 45 Is there a law of fraudulent transfer that permits a third-party US federal bankruptcy courts by filing of either a voluntary petition creditor to challenge, for example, the grant of a mortgage by the debtor or an involuntary petition by a group of creditors. because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant 47 Has your jurisdiction adopted the Model Netting Act of the of the mortgage? International Swaps and Derivatives Association (ISDA)? If not, may a swap provider exercise its close-out netting rights under an The applicable law of fraudulent conveyance will not likely be that ISDA master agreement despite an obligor’s insolvency? of the Marshall Islands. Since a challenge based on a fraudulent conveyance will no doubt come from an adversely affected creditor, the We have no information to indicate that Marshall Islands has applicable law might be that where the transfer took place or its adopted any version of the Model Netting Act of ISDA.

Francis X Nolan III [email protected]

1633 Broadway Tel: +1 212 407 6950 New York 10019 Fax: +1 212 407 7799 United States www.vedderprice.com

www.gettingthedealthrough.com 71 NIGERIA Adepetun, Caxton-Martins, Agbor & Segun Nigeria

Funke Agbor and Chisa Uba Adepetun, Caxton-Martins, Agbor & Segun

Due diligence responsibility of regulating the formation and management of companies. All corporate information pertaining to a company regis- 1 How does one demonstrate title to or legal ownership of a vessel tered in Nigeria are available at the CAC. registered under the laws of your jurisdiction? Companies are, however, not obliged to register unsecured Legal ownership of a vessel registered under the laws of Nigeria can loans, hence it may not be possible to determine the unsecured obli- be determined through the vessel’s certificate of registry issued by the gations of a company (from a search conducted at the CAC). Further Nigerian Ship Registration Office (NSRO). due diligence on the company by requesting for and reviewing the The NSRO is a department within the Nigerian Maritime company’s records would be necessary to determine whether the Administration and Safety Agency (NIMASA), Nigeria’s maritime company has unsecured obligations. regulatory authority. 5 Can the shareholders or other equity interest holders, directors 2 How can one determine whether there are any liens recorded over and officers or other authorised signatories of an obligor a vessel? organised in your jurisdiction be determined from a search One can determine whether there are liens recorded over a vessel of a public registry? If not, how are these parties customarily by conducting a search at the NSRO. Section 26 of the Merchant identified? Shipping Act 2007 (MSA) requires the NSRO to keep a record of The shareholders or other equity interest holders, directors and liens existing over a vessel. officers of an obligor may be determined from a corporate search conducted at the CAC. However, it would not be possible to deter- 3 How does one determine whether there are any security mine the authorised signatories of an obligor from a search at the agreements, liens, charges or other encumbrances granted CAC as it is not mandatory that resolutions appointing signatories by a vessel owner or affiliated party who might be a borrower, be filed at the CAC. guarantor or other credit party in connection with a vessel finance In order to determine the authorised signatories of an obligor, transaction? one may conduct a limited due diligence exercise on the obligor in One can determine whether there are security agreements, liens, order to determine all resolutions passed by the obligor and thereby charges or other encumbrances granted by a vessel owner by con- ascertain the authorised signatories of the obligor. ducting a search at the NSRO. This can also be determined by conducting a search at the Corporate Affairs Commission, Abuja 6 What corporate or other entity action is necessary for an obligor (CAC), which is Nigeria’s company registry, if the vessel owner is a to enter into or guarantee a debt obligation? When is action by company. Section 197(1) of the Companies and Allied Matters Act, the board of directors or other governing body required? Must 1990 (CAMA) provides that: shareholders approve a guarantee? This depends on what the constitutional documents of the obligor Subject to the provisions of this Part of the Act, every charge created provide. Thus, where the articles of association provide that a reso- by a company, being a charge to which this section applies, shall so lution of the board of directors is required to undertake a guarantee far as any security on the company’s property or undertaking is con- or debt obligation then such approval would be necessary. It is usual ferred be void against the liquidator and any creditor of the com- for the approval of the board of directors to be required in respect of pany, unless the prescribed particulars of the charge together with significant debt obligations for which limits of approval are set. Also, the instrument, if any, by which the charge is created or evidenced, the obligor’s articles or shareholders’ agreement, if any, would deter- have been or are delivered to or received by the Commission for mine whether a guarantee needs to be approved by the shareholders. registration in the manner required by this Act or by any enactment repealed by this Act within ninety days after the date of its creation 7 Must foreign lenders qualify to do business in your jurisdiction but without prejudice to any contract or obligation for repayment to extend credit to a borrower organised in your jurisdiction? of the money thereby secured, and when a charge becomes void Will foreign creditors be deemed resident as a consequence of under this section, the money thereby secured shall immediately making a loan or other extension of credit to an obligor within your become payable. jurisdiction? Foreign lenders do not need to qualify to do business in Nigeria 4 Can one determine whether an obligor registered in your in order to extend credit to a borrower organised in Nigeria. jurisdiction is duly organised and in good standing from a search Furthermore, creditors will not be deemed resident as a consequence of a public registry? of making a loan or other extension of credit to an obligor within The legal standing of an obligor in Nigeria may be determined by Nigeria. conducting a search at the CAC on the corporate records of such an obligor. The CAC is an autonomous body charged with the

72 Getting the Deal Through – Ship Finance 2014 Adepetun, Caxton-Martins, Agbor & Segun NIGERIA

Repayment • floating production, storage and offloading units and floating production and storage units. 8 Is central bank or other regulatory approval required for repayment

of a loan in foreign currency? Offshore drilling rigs do not fall within the definition of vessel under Approval of the central bank or any other regulatory authority is the MSA, which governs ship registration. The MSA defines vessel as not required for repayment of a loan in foreign currency provided ‘anything constructed or used for the carriage on, through or under that a certificate of capital importation was obtained at the time of water of persons or goods and includes a hovercraft and an aircraft importation of the loan amount. The laws regulating foreign invest- when waterborne’. Drilling ships are, however, considered vessels ment and the foreign exchange regime were liberalised in 1995 under the MSA. pursuant to the provisions of the Foreign Exchange (Monitoring The Coastal and Inland Shipping (Cabotage) Act of 2003 and Miscellaneous) Provisions Act and the Nigerian Investment (the Cabotage Act) also does not consider drilling rigs as vessels Promotion Commission Act. The key provisions of the two legisla- for the purposes of Nigerian cabotage. This was judicially deter- tions may be summarised as follows: mined in the case of Noble Drilling Nigeria Limited v Nigerian • A foreigner may now invest in any sector of the Nigerian Maritime Administration and Safety Agency and The Minister of economy except those appearing in the ‘negative list’, which Transportation (FHC/L/CS/78/2008) where the Nigerian Federal relates to the production of arms and ammunition and military High Court Lagos Division, in interpreting the Cabotage Act, held paraphernalia. that drilling rigs were not vessels under the Cabotage Act. The deci- • One hundred per cent foreign ownership and directorship of sion is however the subject of an appeal currently pending before the companies is now permitted. Nigerian Supreme Court. In contrast, as with the MSA, drilling ships • A foreign investor may buy shares in or invest funds in a are considered to be vessels under the Cabotage Act. Nigerian company or establish a Nigerian subsidiary in any It should also be noted that the Admiralty Jurisdiction Act 1991 convertible currency. The funds must be in foreign currency and expressly includes drilling rigs in its definition of vessel, hence off- must be brought into Nigeria through an authorised dealer (usu- shore drilling rigs and mobile drilling units are considered vessels ally a commercial bank licensed by the Central Bank of Nigeria under that law. Registration is not required under the Admiralty and converted into naira at the Autonomous Foreign Exchange Jurisdiction Act. Market. The authorised dealer through whom the foreign cur- Upon registration the vessel will be issued with a Nigerian regis- rency was imported will convert the foreign currency into naira tration certificate, acquire the status of a Nigerian ship and be enti- and issue the investor or lender with a certificate of capital tled to fly the Nigerian flag. importation within 48 hours of the conversion of the funds. • The certificate of capital importation evidences the imported 12 Who may register a vessel in your jurisdiction? capital for the stated purpose and discloses on its face the date The persons who may register a vessel in Nigeria are: of importation, the conversion rate and the Naira equivalent. It (i) Nigerian citizens; also facilitates unconditional transferability and repatriation of (ii) corporate bodies and partnerships established under and subject funds with regards to both earnings and capital. This includes to Nigerian law, with their principal place of business in Nigeria; all dividend (net of taxes), profits attributable to the investment and made, principal repayments and interest on loans (net of all (iii) such other persons as the Minister of Transport may prescribe. applicable taxes) or capital upon divestment from Nigeria. The repatriation of proceeds of investment capital must also be done There has been no prescription by the Minister pursuant to (iii) through an authorised dealer who is obliged to ensure that all above, thus currently only Nigerian citizens and Nigerian corporate relevant taxes are paid prior to remittance and that the remit- bodies or partnerships are entitled to register vessels in Nigeria. tance is with respect to capital actually imported.

13 Is there an alternate registry for international shipping 9 Do usury laws limit the interest payable to a lender in respect of a operations? vessel financing? No, there is no alternate registry for the registration of vessels for There are currently no usury laws that limit the interest payable to international shipping operations in Nigeria. a lender in respect of vessel financing. However, the Central Bank of Nigeria regulates lending rates for all deposit money banks in all Ship mortgages and other liens over vessels industries, including the shipping industry. 14 What types of ship mortgages exist and what obligations may a 10 Are withholding taxes payable on principal or interest payments to ship mortgage secure? Can contingent obligations, including swap non-resident lenders? obligations, be secured? Are there standardised forms? Yes, a withholding tax of 10 per cent is deductible from interest pay- Ship mortgages in Nigeria are in the form of a statutory mortgage. ments made to non-resident lenders. The obligations secured by a ship mortgage may be a loan or other valuable consideration. Registration of vessels Contingent obligations including swap obligations can be secured. 11 What vessels are eligible for registration under the flag of your Standardised forms obtainable from the NSRO, such as a mort- country? Are offshore drilling rigs or mobile offshore drilling units gage to secure account current form are used in Nigeria. The mort- considered vessels under the laws of your jurisdiction? What is gage to secure account current form is accompanied by the deed of the effect of registration? mortgage. The NSRO issues a mortgage certificate upon registration. The vessels eligible for registration under the Nigerian flag are: • merchant ships; 15 Give details of any required form for ship mortgages in your • fishing vessels; jurisdiction. • ships under construction; The forms required for ship mortgages in Nigeria are the mort- • ships on bareboat charter to Nigerians or to a Nigerian com- gage to secure account current form and the deed of mortgage. The pany, 100 per cent of whose equity shares are held by Nigerians mortgage to secure account current form sets out the basics of the without trust or obligation in favour of non-Nigerians; and www.gettingthedealthrough.com 73 NIGERIA Adepetun, Caxton-Martins, Agbor & Segun mortgage such as the mortgagee and the amount secured. The deed Usually the consent of the mortgagor will not be required unless of mortgage sets out the security covenants. the agreement provides otherwise. However, it will be necessary to give notice of such transfer. 16 Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the 21 What other maritime liens over vessels are recognised in effect of registration? your jurisdiction? Do these claims give rise to a right to arrest The register of mortgages is maintained by the Registrar of Ships a vessel? In what circumstances may associated ships be and contains particulars of the mortgagee and details of the mort- arrested? gage debt. The filings are made at the NSRO and copies of the fol- The following claims are recognised as secured by maritime liens on lowing are placed in the mortgaged vessel’s file: the vessel in Nigeria: • the mortgage deed; • wages and other sums due to the master, officers and other mem- • the certificate of mortgage; and bers of the ship’s complement in respect of their employment on • the mortgage to secure account current form. the ship; • disbursements of the master on account of the ship; Where the mortgagor is a company, the mortgage is also registered • claims in respect of loss of life or personal injury occurring at the Nigerian companies’ registry, the CAC. The information con- whether on land or on water in direct connection with the oper- tained in the CAC register is as follows: ation of the ship; • a description and date of creation of the instrument creating the • claims for damage done by a ship; mortgage; • claims for salvage, wreck removal and contribution in general • the amount secured under the mortgage; average; and • particulars of the mortgagee; • claims for ports, canals and other waterways, dues and pilotage • short particulars of the mortgaged vessel; and dues; • the date of acquisition of the mortgaged vessel. Associated ships cannot be arrested in Nigeria, only sister ships can The effect of the registration is that the mortgage would be a legal be arrested. mortgage with all the attendant rights of such a mortgage. 22 What maritime liens rank higher than a mortgage lien? 17 Must the total amount of the mortgage be stated therein? Must The maritime liens listed in question 21 all rank higher than a mort- the mortgage contain a maturity date? Must the underlying debt gage lien by virtue of section 67 of the MSA. The maritime liens have instrument be filed with or attached to the recorded mortgage? a lifespan of one year from the date of the incident creating the lien. The total amount secured must be stated on the mortgage documents. The mortgage does not have to contain a maturity date. 23 May non-mortgage liens be recorded over a vessel? There is no requirement that the underlying debt must be filed or Yes non-mortgage liens may be recorded over a vessel attached to the recorded mortgage. 24 Will mortgages on ‘foreign’ flag vessels be recognised in your 18 Can a mortgage be registered in the name of an agent or trustee jurisdiction? If so, do they share the same priority as those on for the benefit of multiple lenders? vessels registered under the laws of your jurisdiction? A mortgage can be registered in the name of an agent or trustee for Mortgages on foreign-flagged vessels are recognised in Nigeria. The the benefit of multiple lenders. It is common practice to appoint a foreign mortgage has the same priority as those on vessels registered security trustee for the purpose of holding the security in a syndi- under the laws of Nigeria where the mortgage is enforced in Nigeria. cated financing arrangement. 25 What is the procedure for enforcing a mortgage in your jurisdiction 19 If the mortgagee is an agent or trustee for a lending syndicate, by way of foreclosure? Are interlocutory sales permitted? How must any filings be made upon transfer of a portion of the long does a judicial sale take? What are the associated court underlying debt among existing lenders or to a new lender? costs and how are they calculated? To the extent that the value of the facility remains unchanged – that Enforcing a vessel mortgage by way of foreclosure in Nigeria is is, where there is no increase to the facility granted – there will be through an action at the Federal High Court, which is the Nigerian no need to pay additional stamp duties or undertake any further admiralty court. Before commencing the action the mortgagee registration; no further filings would be necessary. would usually, in the event of a default, require the mortgagor to remedy the default within a specified time. Where the mortgagor 20 If the mortgagee transfers its interest to a new lender, agent or fails to do so, the mortgagee will commence an action at the Federal trustee, what filings are required? Is the mortgagor’s consent High Court for a foreclosure of the mortgagor’s equity of redemp- required? tion. The mortgagee’s relief before the court would include an order If the mortgagee transfers its interest to another party, a copy of the for the sale of the mortgaged vessel. instrument creating the transfer will have to be filed at the NSRO A claim arising from a vessel mortgage is a proprietary maritime in accordance with section 58(2) of the MSA. Upon receipt of the claim under the Admiralty Jurisdiction Act and may be commenced transfer instrument the Registrar shall record the transfer by enter- in rem against the mortgaged vessel. The vessel would be arrested in ing in the register the name of the transferee as the mortgagee. The the proceedings as security for the claims. Where the relief is granted Registrar will also endorse and sign on the mortgage and instrument and the vessel sold as a result, the mortgagee has a duty to account to effecting the transfer, a memorandum stating that the transfer has the mortgagor for any amount realised in excess of the obligations. been so recorded, with the date and time of the record. Interlocutory sales are permitted in Nigeria. By Order 9, Rule 6(2) Where the mortgagor is a company and the mortgage is regis- of the Admiralty Jurisdiction Procedure Rules 2011, where the own- tered at the CAC, the instrument effecting the transfer shall also be ers of an arrested vessel fail to provide alternative security for release filed at the CAC further to the provisions of section 197(1) and (2) of the vessel within a period of six months from the date of arrest, of CAMA.

74 Getting the Deal Through – Ship Finance 2014 Adepetun, Caxton-Martins, Agbor & Segun NIGERIA the court may order a sale of the vessel upon the application of the 32 Must security interests against non-vessel collateral be registered arresting or any other interested party. to be enforceable? If so, where are such filings made? A judicial sale takes about two months on the average to con- Security interests for collateral do not have to be registered to be clude from the date of the order. enforceable. The costs associated with judicial sale are mainly the expenses of the admiralty marshal. 33 How is a security interest over a deposit account established? The Admiralty Jurisdiction Procedure Rules 2011 provides that How is a security interest perfected? the Admiralty Marshal’s expenses shall be 2 per cent of the proceeds A charge may be created over such an account. Generally, an account of sale. charge may be created by notice to the bank and an acknowledgement of such notice or by way of a tripartite arrangement between 26 May a vessel be sold privately by a mortgagee? Will the sale the bank, the obligor and the lender or security trustee. For the discharge liens over the vessel? charge to be enforceable against a liquidator, it must be registered By virtue of section 57(2) of the MSA a registered mortgagee has with the CAC. In order to perfect such a security interest, certain power to sell the mortgaged vessel or a share thereof without notice steps must be taken, namely: and give effectual receipts for the purchase money. • stamping – the security document (ie, the security agreement) Where, however, more than one mortgage is registered against a must be stamped as evidence of payment of stamp duties vessel, no subsequent mortgagee can sell the mortgage vessel with- imposed by the Stamp Duties Act. The duty paid on the security out the written consent of all prior mortgagees unless with an order document is ad valorem (depending on the value of the transac- of court. The private sale will not discharge liens over the vessel. tion); and • registration – the stamped security document must subsequently 27 What are the limitations on rights of self-help by a mortgagee? be registered at the CAC pursuant to section 197 of CAMA. A limitation on rights of self-help by a mortgagee is that the powers of sale can only be exercised for the purpose of realising its secu- 34 How are security interests in non-vessel collateral enforced? rity when the mortgagor is in default. Where there are more per- Generally, the mode of enforcement of a collateral is largely depend- sons than one registered as mortgagees of the same ship or share, ent on the mode of its creation. The nature of the security interest a subsequent mortgagee shall not except by the order of a court of and the available remedies will determine the procedure for enforce- competent jurisdiction, sell the ship or share without the consent of ment. For instance, in the case of a legal mortgage (where the power any prior mortgagee. of sale has arisen and becomes exercisable), the mortgagee may exercise such right without recourse to the court of law or any third 28 What duties does a mortgagee owe to an owner or third-party party. However, in the case of an equitable mortgage, the mortgagee creditors? will have to foreclose the mortgagor’s right of redemption. A secu- A mortgagee has a duty of good faith to an owner or third-party rity holder may also appoint a receiver to realise his security. creditors. 35 How are share pledges for vessel financings established? Are Collateral share pledges or share charges common in your jurisdiction? Share pledges for vessel financing can be established through the 29 May finance leases or other charters be recorded over vessels deed of share pledge. Where the share pledgor is a corporate body, a flagged under the laws of your jurisdiction? board resolution authorising the share pledge will be required. It is By virtue of section 26 of the MSA bareboat charters may be recorded not necessary to deliver the physical share certificates. Bearer share in the Nigerian Ships Register over Nigerian-flagged vessels. certificates are not allowed in Nigeria. Share pledges and share charges are common in Nigeria. There 30 May finance leases be re-characterised by a court as a financing is, however, no technical distinction between both interests. The contract? If so, is there any procedure for protecting the lessor’s extent of the rights and liabilities of the parties are dependent on the interest against third-party creditors? security document. Finance leases can be re-characterised as financing contracts by a court if such is proved to be the intention of the parties to the finance 36 Is there a risk that a pledgee, before or after exercise of the share lease. The process for protecting the lessor’s interest would depend pledge, may be exposed to debts or other liabilities of the pledged on the agreement made between the parties. The interests could be company? secured by a mortgage on the vessel, an assignment to the lender of There is a risk that the pledgee after exercise of the share pledge the demise charter, plus insurances, requisition, compensation and a may be exposed to debts or other liabilities of the pledged company. further assignment of the operating sub-charter. The exposure will, however, be limited to the extent of any amount outstanding on unpaid shares. 31 How is a security interest created over earnings of a vessel, charter contracts, insurances, etc? How are these security Tax considerations for vessel owners interests perfected? Security interests could take the form a deed of assignment of earn- 37 Is the income earned by the owners of vessels registered in your ings such as hire from a charter party, out of which the loan is to be jurisdiction subject to domestic taxation? At what rate? repaid. It could also be an assignment of insurances on the vessel The income earned by the owners of vessels is subject to income tax or a pledge on the shares of the shipowning company to give the at the rate of 30 per cent and education tax at 2 per cent. lender the alternative of selling the company instead of the vessel on a default. 38 Is there an optional tonnage tax exempting vessel owners from This is perfected by registering the deed of assignment over the tax on income? earnings of the vessel in the ship-owning company’s file at the CAC. There is no optional tonnage tax exempting vessel owners from tax on income.

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42 Will the courts of your jurisdiction respect the rulings of a foreign Update and trends court presiding over reorganisation or liquidation proceedings? Nigerian courts will respect the rulings and judgment of a foreign In line with its objectives of increasing local ownership of cabotage court in respect of a reorganisation or liquidation proceedings where vessels, the Cabotage Act set up a cabotage vessel financing fund the beneficiary of that order or judgment seeks to enforce or exe- (CVFF) for the purpose of financing the acquisition of cabotage vessels by Nigerian citizens engaged in the Nigerian coastal trade cute it in Nigeria. However, the Nigerian courts will only enforce at minimum interest rates. Sources of the fund include a 2 per the decision of a foreign court whose country reciprocally enforces cent surcharge on income from contracts performed by every judgments and rulings from Nigerian courts. vessel engaged in cabotage in Nigeria and all fees payable under Furthermore, Nigerian courts will not enforce decisions made the Cabotage Act for waivers, licences and so on. The CVFF is managed and disbursed by the NIMASA through selected banks. without jurisdiction. Only the Federal High Court of Nigeria can hear and rule on winding-up proceedings on a Nigerian company. Where a foreign court exercises such jurisdiction, the Nigerian court will decline to enforce the same on the ground that the decision was 39 What special tax incentives are available to shipowners made without jurisdiction. For the same reason of want of jurisdic- registering vessels in your jurisdiction? tion the Nigerian court will not enforce a foreign court’s decision on There are no tax incentives available to shipowners registering ves- immoveable property in Nigeria. sels in Nigeria. However, Nigerian-flagged vessels enjoy a 30 per Two statutes regulate the enforcement of foreign judgments in cent rebate on Nigerian Ports Authority tariffs. Nigeria, namely, the Foreign Judgments (Reciprocal Enforcement) Act 1990 and the Reciprocal Enforcement of Judgments Ordinance, 1958. 40 Are there any other noteworthy tax provisions specifically applicable to shipping, shipping income or ship finance? 43 What is the order of priority among creditors? In what The Coastal and Inland Shipping (Cabotage) Act 2003 provides for circumstances will creditors be required to disgorge payments a 2 per cent surcharge on the gross income from every contract per- from an insolvent company? formed by every vessel engaged in Nigerian coastal trade. Also the Nigerian Maritime Administration and Safety Agency The order of priority among creditors of an insolvent company is Act (NIMASA Act) provides for a 3 per cent levy to be paid on specified by sections 480 and 494 of CAMA and by Rule 167 of the freight coming in and out of Nigeria. Companies Winding-Up Rules 2001, and is as follows: • the holders of fixed charges are entitled to realise their security and to prove, together with other unsecured creditors, for any Insolvency and restructuring shortfall; 41 Is there a general scheme of reorganisation or insolvency • the costs, charges and expenses of the winding-up; administration in your jurisdiction? • preferential payments, such as taxes and certain unpaid wages; The general scheme of reorganisation and insolvency administration • floating charge creditors; in Nigeria is contained in the CAMA and in the Bankruptcy Act. The • unsecured creditors; relevant provisions of CAMA are applicable to the reorganisation • subordinated creditors; and and administration of insolvent companies while the Bankruptcy • shareholders. Act applies to individuals. These schemes, however, have limited impact on the enforce- 44 May a vessel owner provide security on behalf of other related ability of a ship mortgage because mortgage of ships in Nigeria is or unrelated companies? What are the requirements for it to be substantially governed by the provisions of the MSA, which requires enforceable? registration of the mortgages resulting in creation of a statutory A vessel owning company may provide security on behalf of other legal mortgage. A mortgage created pursuant to the MSA entitles the related or unrelated companies if permitted by its articles and mortgagee to sell the vessel or take possession of it towards satisfy- approved by its board of directors. ing the debt owed by the mortgagor upon the latter’s default.

Funke Agbor [email protected] Chisa Uba [email protected]

9th floor, St. Nicholas House Tel: +234 1 4622 094 / 4622 480 / 7406 743 Catholic Mission Street Fax: +234 1 4613 140 Lagos [email protected] Nigeria www.acas-law.com

76 Getting the Deal Through – Ship Finance 2014 Adepetun, Caxton-Martins, Agbor & Segun NIGERIA

The security that may be created includes a mortgage, charge or company based on the grounds stated in CAMA. A winding-up a guarantee. For a charge or mortgage to be enforceable against the order is made by the court upon the petition being proved after grantor of the security, it must be registered against the grantor of which the company enters into liquidation under the control of a the security at the CAC. liquidator approved by the court. An individual debtor may also be declared bankrupt where a 45 Is there a law of fraudulent transfer that permits a third-party creditor applies to court for an order declaring such a person bank- creditor to challenge, for example, the grant of a mortgage rupt. The application is brought by way of a petition to the Federal because of insolvency of the mortgagor or insufficient High Court in respect of an act of bankruptcy committed within consideration received by the mortgagor in exchange for the grant three months of the presentation of the petition. A bankruptcy order of the mortgage? is made by the court upon examining the debtor and satisfying itself There are laws relating to the fraudulent transfer of company assets on the grounds of the petition. Upon making the order a trustee particularly during a period of insolvency. By virtue of section 495 would be appointed for the administration of the interests, estate of CAMA: and financial affairs of the bankrupt.

[A]ny conveyance, mortgage, delivery of goods, payment, execution 47 Has your jurisdiction adopted the Model Netting Act of the or other act relating to property that would, if made or done by or International Swaps and Derivatives Association (ISDA)? If not, against individuals, be deemed, in his bankruptcy a fraudulent pref- may a swap provider exercise its close-out netting rights under an erence shall, if made or done by or against a company, be deemed ISDA master agreement despite an obligor’s insolvency? in the event of its being wound up, a fraudulent preference of its Nigeria has not adopted the Model Netting Act of the International creditors and be invalid accordingly. Swaps and Derivatives Association. A swap provider may exercise its close-out netting rights under an ISDA master agreement as a matter Section 498 of CAMA also invalidates a floating charge on the of contract. The principles underlying close-out nettings under ISDA undertaking or property of a company created within three months are similar to the Nigerian insolvency rules and it is most likely that of the commencement of winding-up proceedings unless it is proved the courts will enforce close-out netting rights. that the company immediately after the creation of the charge was solvent.

46 How may a creditor petition the courts of your jurisdiction to declare a debtor bankrupt or compel liquidation of an insolvent obligor? With regards to liquidation of an insolvent company, a petition is presented to the Federal High Court for the winding-up of the

www.gettingthedealthrough.com 77 NORWAY Wikborg, Rein & Co Advokatfirma DA Norway

Gaute Gjelsten, Henrik Hagberg and Solveig Frostad Wikborg, Rein & Co Advokatfirma DA

The Register of Business Enterprises issues certificates attesting that 10 Are withholding taxes payable on principal or interest payments to a company is duly registered. Confirmation that a company is not non-resident lenders? under bankruptcy proceedings can be obtained from the Register of No. Bankruptcies.

Registration of vessels 5 Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor 11 What vessels are eligible for registration under the flag of your organised in your jurisdiction be determined from a search country? Are offshore drilling rigs or mobile offshore drilling units of a public registry? If not, how are these parties customarily considered vessels under the laws of your jurisdiction? What is identified? the effect of registration? Directors, the managing director and authorised signatories of a Norwegian Ordinary Ship Register (NOR) company can be determined from the certificate of registration. To Any vessel, hovercraft, drilling rig and other mobile offshore unit obtain information about shareholders of a limited company, a copy that is not registered in another ship register, with a minimum length of the shareholder register may be obtained from the company. To of 15 metres and which is owned by either: a Norwegian national; obtain information about shareholders of a company with liability a shipping partnership where 60 per cent of the shares are owned (partnerships), this will appear in the certificate of registration, and by Norwegian nationals; a limited partnership where 60 per cent of for an internal partnership, this information is confidential. the shares are owned by Norwegian nationals; or another limited

78 Getting the Deal Through – Ship Finance 2014 Wikborg, Rein & Co Advokatfirma DA NORWAY liability company that is headquartered in Norway and of which There is no compulsory statutory form of mortgage. In practice, the majority of the board of directors (including the chairman) are a four-page form prepared by the Norwegian banks (English and Norwegian nationals or residents and Norwegian nationals own 60 Norwegian text editions are available) is commonly used, which is a per cent of the company’s shares. short form containing the minimum covenants and the remainder of the covenants are in the loan agreement. Norwegian International Ship Register (NIS) Any engine-driven passenger vessel, cargo vessel, hovercraft, drilling 15 Give details of any required form for ship mortgages in your rig and other mobile offshore units that is not registered in another jurisdiction. ship register and that: There is no compulsory statutory form of mortgage. The main (i) satisfies one of the nationality conditions above; documentation required is the executed mortgage itself, signed by (ii) is owned by a limited liability company headquartered in the mortgagor. The signatures must be witnessed. For Norwegian Norway; companies two witnesses are normally required, but only one where (iii) is owned by a shipping partnership whose managing owner is a lawyer, notary or certain other officials act as witness. The author- either a Norwegian national or resident or a company that is ity of the signatories must be supported by an original or certified based in Norway and of which a majority of the board of direc- copy of an up-to-date company certificate for the mortgagor, issued tors are Norwegian nationals and at least 60 per cent of the upon request by the Norwegian Registry of Business Enterprises or company’s shares are owned by Norwegian nationals; or a power of attorney. (iv) the owner, in the case of (i)–(iii) above, has appointed a pro- For foreign companies, a notary public must confirm the sig- cess agent that is either a Norwegian national or resident, or a natures and authority of the signatories to commit the mortgagor. company that is based in Norway and of which a majority of The notary’s signature must in most cases be legalised or certified by the board of directors (including the chairman) are Norwegian apostille by the foreign government. nationals and Norwegian nationals own 60 per cent of the company’s shares. 16 Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the The managing company of a vessel owned by a company falling effect of registration? under (ii)–(iv) must be a company headquartered in Norway. In The Norwegian Ship Register (comprising NOR, NIS and the practice it is sufficient that either the technical or the commercial Shipbuilding Register) maintains the register of mortgages over a management of the vessel is performed by a company headquartered vessel. Assignments of the mortgage and repayment of principal in Norway. (whether by instalment or in full) are only registered by application. Thus, the register may not always show the present mortgagee or 12 Who may register a vessel in your jurisdiction? the principal amount secured at all times, but only the maximum See question 11. amount of secured principal.

13 Is there an alternate registry for international shipping 17 Must the total amount of the mortgage be stated therein? Must operations? the mortgage contain a maturity date? Must the underlying debt The Norwegian International Ship Register allows foreign owner- instrument be filed with or attached to the recorded mortgage? ship of vessels, provided that a Norwegian national is appointed as The maximum amount must be stated in the mortgage. An elec- process agent for the owner and that the managing company of the tronic copy of the mortgage itself will be kept on file, but it is the vessel (technical or commercial) is headquartered in Norway. extract that is registered and not the entire mortgage.

Ship mortgages and other liens over vessels 18 Can a mortgage be registered in the name of an agent or trustee 14 What types of ship mortgages exist and what obligations may a for the benefit of multiple lenders? ship mortgage secure? Can contingent obligations, including swap There are no restrictions as to the identity of the mortgagee. Thus, obligations, be secured? Are there standardised forms? both individuals and legal entities such as companies, may be mort- There are two general types of mortgages: first, the ‘effective mortgagees, irrespective of nationality. gage’ document, which contains a full description of the financial In syndicated loans, it is possible to list all banks as mortga- terms (borrowed amount, repayment, additional secured amount gees, but this is not advisable as all banks will have to sign on the and also interest). Second, the ‘accommodation mortgage’, which mortgage deed in the event of, for example, amendments, waivers may formally appear as an effective mortgage document, but the and deletions. The general practice is to register only the agent as real relationship (the effective relationship) between the parties is mortgagee and cover the other banks through an agency agreement. different and will, typically, be found in a loan agreement where the mortgage provides third parties with information about the maxi- 19 If the mortgagee is an agent or trustee for a lending syndicate, mum amount secured thereunder. must any filings be made upon transfer of a portion of the In practice, the effective mortgage is very rarely used, as the underlying debt among existing lenders or to a new lender? accommodation mortgage is a simpler and more practical approach No. that is well suited to the needs of the commercial world. A ship mortgage may secure existing rights and claims for defi- 20 If the mortgagee transfers its interest to a new lender, agent or nite amounts and future rights or claims, or claims for indefinite trustee, what filings are required? Is the mortgagor’s consent amounts, always subject to the limit provided by the maximum required? amount of secured principal declared in the mortgage, and may be No consent is required, unless the parties have mutually agreed that used as security for a guarantee, as security for revolving debts and this is a requirement. In order to perfect such a transfer to a new swap obligations and as security for claims against others than the lender, the transfer requires registration with the Norwegian Ship mortgaging shipowner. Register.

www.gettingthedealthrough.com 79 NORWAY Wikborg, Rein & Co Advokatfirma DA

21 What other maritime liens over vessels are recognised in court-appointed assistant, and he or she shall as far as possible try your jurisdiction? Do these claims give rise to a right to arrest to follow the same procedures as in a normal commercial sale of a vessel? In what circumstances may associated ships be a vessel within the framework of the Norwegian Enforcement Act. arrested? The following are recognised as maritime liens: 26 May a vessel be sold privately by a mortgagee? Will the sale • claims against the shipowner for wages and other sums due to discharge liens over the vessel? the master and other crew members in respect of their employ- A mortgagee cannot independently take possession as part of a regu- ment on the vessel; lar enforcement procedure. In an enforcement situation, the mortga- • fees for port, canal and other waterway, as well as pilotage fees; gee is entitled to ask the court to appoint a manager for the vessel. • claims for damages in respect of loss of life or personal injury The manager will operate the vessel for the risk and account of the occurring in direct connection with the operation of the vessel; owners, but all income will be credited to the mortgagee. • claims for damages in respect of loss or damage to property occurring in direct connection with the operation of the vessel, 27 What are the limitations on rights of self-help by a mortgagee? provided that the claim cannot be based on contract; and The mortgagee has only two ways to enforce the mortgage: enforced • claims for salvage, compensation for wreck removal and general sale through judicial proceedings; or taking possession by asking the average contributions. court to appoint a manager. Any contractual commitment to sell the ship on a private basis is Right of retention invalid, unless entered into after the default in question materialised. A seller or shipbuilder who has transferred title to the new owner, In the latter event, the agreement itself will govern the sale. who in turn has registered his acquisition, may, depending on the circumstances, be able to exercise a right of retention against the 28 What duties does a mortgagee owe to an owner or third-party purchaser. creditors?

Possessory lien A mortgagee does not owe any duties to an owner or third-party A yard that has repaired or modified a vessel will have a possessory creditors prior to any enforcement. lien on the vessel against the owner and the party with whom the repair contract has been made. This lien will only survive as long as Collateral the yard maintains possession. Such liens will take priority over reg- 29 May finance leases or other charters be recorded over vessels istered mortgages, but in most cases not over maritime liens. flagged under the laws of your jurisdiction? A possessory lien does not in itself grant the holder the right No, charter parties may not be registered over the vessel, but pur- to sell the vessel. It is uncertain whether any judicial attachment chase options under charter parties may be registered. granted to the holder will have the same priority as the possessory lien, or only priority based on the date of assessment. 30 May finance leases be re-characterised by a court as a financing contract? If so, is there any procedure for protecting the lessor’s 22 What maritime liens rank higher than a mortgage lien? interest against third-party creditors? Maritime liens rank higher than a mortgage lien. Finance leases may be re-characterised by a court as a financing contract for tax purposes, but generally speaking not in any other 23 May non-mortgage liens be recorded over a vessel? respects although there are situations where, for instance, a bare- A maritime lien may not be recorded over a vessel, but will outrank boat charterer may be considered as the real owner in relation to mortgages and any other encumbrances, irrespective of the date of questions about liability and damages if the lease arrangement is registration. considered not to be genuine and real. There is no procedure for protecting the lessor against third-party creditors, but the risk is 24 Will mortgages on ‘foreign’ flag vessels be recognised in your rather nominal, as the lessor generally speaking will be considered jurisdiction? If so, do they share the same priority as those on as owner in any case. vessels registered under the laws of your jurisdiction? Yes, provided that the mortgage is established and registered in 31 How is a security interest created over earnings of a vessel, accordance with the laws of the country where the vessel is regis- charter contracts, insurances, etc? How are these security tered, that the registry and its documents are publicly available and interests perfected? that transcripts are obtainable and that the registry provides the A security interest over earnings of a vessel is created by an assign- mortgagees name, the amount secured by the mortgage and the date ment of earnings. Such security interest is perfected by notifying the of registry and other information which under local law decides the account debtor. priority of a mortgage. The priority of the mortgage is to be decided A security interest may also be created by entering into an according to the laws of the country where it is registered. agreement to pledge all receivables connected to the vessel to the mortgagee (factoringpant). Such agreement must be registered at 25 What is the procedure for enforcing a mortgage in your jurisdiction the Register of Moveable Goods to be protected against competing by way of foreclosure? Are interlocutory sales permitted? How creditors. long does a judicial sale take? What are the associated court It is generally not possible to create a valid security interest over costs and how are they calculated? a charter contract or other contracts as such, only the receivables An application for a forced sale must be submitted to the relevant may be pledged. court, and the claimant must substantiate that he or she has a valid basis for execution. The most common basis for execution is a regis- 32 Must security interests against non-vessel collateral be registered tered mortgage or a registered attachment. to be enforceable? If so, where are such filings made? A creditor with a final and binding court judgment or arbitral Factoringpants (see question 31) must be registered at the Register award cannot apply directly for a forced sale, but must first obtain of Moveable Goods to be protected against competing creditors. an attachment on the vessel before the judicial sale procedure can commence. The forced sale will be prepared and handled by the

80 Getting the Deal Through – Ship Finance 2014 Wikborg, Rein & Co Advokatfirma DA NORWAY

33 How is a security interest over a deposit account established? Insolvency and restructuring How is a security interest perfected? 41 Is there a general scheme of reorganisation or insolvency A security interest over an account is established by entering into administration in your jurisdiction? an agreement to pledge the bank deposits to the benefit of a named A debtor, who is not able to fulfil its obligations as they become mortgagee. The security interest is perfected by notifying the account due, may demand debt settlement proceedings with its creditors bank. in accordance with the rules of the Norwegian Bankruptcy Act. However, debt settlement proceedings are not common in Norway. 34 How are security interests in non-vessel collateral enforced? A debtor under debt settlement proceedings maintains the right Security interests in non-vessel collateral are enforced in the same of disposal of its business and finances, but is subject to the supervi- way as mortgages over a vessel (see question 25). sion of the debt settlement committee. The debtor may not incur debts without the debt settlement committee’s approval. Debt settle- 35 How are share pledges for vessel financings established? Are ment proceedings postpone any bankruptcy proceedings not com- share pledges or share charges common in your jurisdiction? menced before the demand of debt settlement proceedings. During Share pledges are established by entering into an agreement to pledge the first six months of debt settlement proceedings, a forced sale of the shares to the benefit of the mortgagee. There are no requirements the debtor’s assets is subject to the approval of the debt settlement to the form of the pledge agreement. For shares registered in a secu- committee. rities register, the pledge must be registered in the securities register. For shares that are not registered in a securities register, the pledge is 42 Will the courts of your jurisdiction respect the rulings of a foreign perfected by notifying the company. court presiding over reorganisation or liquidation proceedings? A share pledge shall in any event be recorded in the shareholder Yes, if the ruling is made in one of the Nordic countries (pursu- register. Share pledges are common in Norway. ant to the Nordic Bankruptcy Convention of 1933 (including latest amendment made in 1982)). Outside this convention Norwegian 36 Is there a risk that a pledgee, before or after exercise of the share insolvency law does not, as a general rule, recognise any foreign pledge, may be exposed to debts or other liabilities of the pledged insolvency or reorganisation proceedings. Thus, a Norwegian court company? will as a starting point not adhere to foreign proceedings and indi- There is no risk that a pledgee may be exposed to debts or other vidual measures may be taken in respect of any of the debtor’s assets liabilities of the pledged company, as a pledgee does not take on any in Norway. liability for the pledged company’s debts. 43 What is the order of priority among creditors? In what Tax considerations for vessel owners circumstances will creditors be required to disgorge payments from an insolvent company? 37 Is the income earned by the owners of vessels registered in your Secured creditors can claim from their security, subject to the follow- jurisdiction subject to domestic taxation? At what rate? ing priority payments: The registration of the vessels is not decisive for the taxation in • to cover the costs of proceedings, the insolvency estate has a Norway. However, owners resident in Norway for tax purposes or statutory first priority lien over assets pledged by the insolvent others who participate in a business in Norway will be subject to tax company and third parties as security for the insolvent com- on the income from the vessels. The tax rate is 27 per cent. There are pany’s obligations. The costs of the proceedings are limited to however, many details and exemptions that could apply. a maximum of 700 times the court fee. Currently, this means a maximum of 602,000 kroner; and 38 Is there an optional tonnage tax exempting vessel owners from • certain ordinary property-related taxes and duties. tax on income? Yes, there is a tonnage tax regime in Norway, whereby a Norwegian Unsecured debts will rank in the following order: limited liability company which only owns vessels operating in inter- • the remaining costs of running the insolvency estate and costs national traffic, is exempt from taxation on the income from the ves- incurred by the insolvency estate (after payment of the statutory sel. Financial income is not exempted. The regime has many details lien (see above)); which must be complied with, but the key feature is a full and final • certain employee debts, including: exemption on the income. • unpaid wages for six months prior to the insolvency (but not the unpaid wages of managing directors or employees that 39 What special tax incentives are available to shipowners own 20 per cent or more of the company); registering vessels in your jurisdiction? • holiday allowance for employees for 24 months prior to No special tax incentives in Norway related to registration of vessels insolvency; and • unpaid pension allowance for up to six months prior to in Norway. insolvency; • various taxes, including income tax and wealth tax (subject to 40 Are there any other noteworthy tax provisions specifically certain time limitations); applicable to shipping, shipping income or ship finance? • ordinary unsecured claims; In addition to the tonnage tax regime, there is a special rule for non- • interest on claims accrued after the opening of the insolvency Norwegians who participate in partnerships in Norway. If this part- proceedings; and nership owns a vessel which is operating in international traffic, the • subordinated claims. non-Norwegian owner of the partnership will normally be exempt from taxation in Norway. This rule attracts many non-Norwegians 44 May a vessel owner provide security on behalf of other related to participate in Norwegian vessel-owning partnerships. or unrelated companies? What are the requirements for it to be enforceable? A vessel owner may provide security on behalf of other related or unrelated companies, however, for limited liability companies intra- group transactions must be at arm’s length. www.gettingthedealthrough.com 81 NORWAY Wikborg, Rein & Co Advokatfirma DA

46 How may a creditor petition the courts of your jurisdiction to Update and trends declare a debtor bankrupt or compel liquidation of an insolvent obligor? Securing finance remains a considerable challenge in many A debtor’s creditors can file for insolvency proceedings provided that markets. Available financial opportunities for financing new and the debtor is insolvent, namely, where the debtor’s debts exceed the large ship and offshore projects are limited. Increasingly we have seen builders and suppliers offering seller’s credit facilities as a value of its assets and the debtor is unable to pay its debts as they fall means of easing the financial burden on buyers. At the same time due, and the situation is not temporary. in the sale–leaseback of ships, the seller’s credit can represent valuable security for the seller. The changes in the contracting 47 Has your jurisdiction adopted the Model Netting Act of the approach shown by Chinese shipyards facing harsh economic realities may create opportunities for buyers looking to build International Swaps and Derivatives Association (ISDA)? If not, vessels in China. New changes in the Norwegian taxation system may a swap provider exercise its close-out netting rights under an will be implemented to ensure its competitiveness while at the ISDA master agreement despite an obligor’s insolvency? same time protecting the Norwegian tax base. Norway has not adopted the ISDA Model Netting Act, but Norwegian law generally accepts contractual netting arrangements. Under the Norwegian Creditors’ Recovery Act, a creditor may, 45 Is there a law of fraudulent transfer that permits a third-party subject to certain exceptions, set off any claim it has on an insol- creditor to challenge, for example, the grant of a mortgage vent debtor against claims the insolvent debtor has against it. More because of insolvency of the mortgagor or insufficient extensive rights of set-off are included in the Norwegian Securities consideration received by the mortgagor in exchange for the grant Trading Act, Chapter 14 and the Norwegian Financial Collateral of the mortgage? Act, section 6 and will apply to transactions falling within the scope During debt settlement and insolvency proceedings, the court can thereof. set aside certain transactions that the debtor entered into before the opening of the proceedings, when it was in a distressed financial situation, to prevent the creditors being deprived of assets.

Gaute Gjelsten [email protected] Henrik Hagberg [email protected] Solveig Frostad [email protected]

Kronprinsesse Märthas plass 1 Tel: +47 22 82 75 00 0160 Oslo Fax: +47 22 82 75 01 Norway [email protected] www.wr.no

82 Getting the Deal Through – Ship Finance 2014 Arias, Fabrega & Fabrega PANAMA Panama

Jorge Loaiza III Arias, Fabrega & Fabrega

Apart from mortgages, court orders from the Panamanian courts Repayment or a promise to sell, there would be no direct means to ascertain the existence of such other obligations. 8 Is central bank or other regulatory approval required for repayment of a loan in foreign currency? 4 Can one determine whether an obligor registered in your There is no central bank or currency exchange controls per se in jurisdiction is duly organised and in good standing from a search Panama and the US dollar is legal tender. Most international com- of a public registry? mercial transactions are made in US dollars. The Panama Public Registry Office (PPR) is the public office where corporate entities must be recorded to acquire their legal status with 9 Do usury laws limit the interest payable to a lender in respect of a regard to third parties and where searches can be made for such vessel financing? purposes. Law 5 of 1933 (Law 5) and Law 4 of 1935 (Law 4) set out certain limits on the maximum level of interest chargeable. However, pursu- 5 Can the shareholders or other equity interest holders, directors ant to article 223 A of the Code of Commerce of Panama, interest and officers or other authorised signatories of an obligor on transactions perfected, consummated or with effects outside of organised in your jurisdiction be determined from a search Panama are expressly excluded from the application of such limits. of a public registry? If not, how are these parties customarily Further, Law 4 has been also been abrogated in relation to onshore identified? transactions and the same may be argued with respect to Law 5. Generally speaking, the identity and powers that may be granted In any case, however, a maximum of 2 per cent per month to the directors and officers, under the articles of incorporation or exists pursuant to a decree of the National Banking Commission amendments thereto could be ascertained by searching the PPR. and interest above that could be deemed usury as a matter of public General powers of attorney that are recordable could also evidence policy. Therefore, it is arguable that a local court enforcing a foreign the authorised signatories. The shareholders or similar interest hold- judgment obtained against a Panamanian corporation may limit ers and other authorised but not recorded authorisations would the scope of the judgment if it involves interest payable at a higher have to be verified by inspecting the share register or minutes books, monthly rate than 2 per cent. respectively, which are private in nature and would require a judicial order to be disclosed.

www.gettingthedealthrough.com 83 PANAMA Arias, Fabrega & Fabrega

10 Are withholding taxes payable on principal or interest payments to relating to the legality and proper operation of the vessel and any non-resident lenders? special remedies availing to the mortgagee under Panamanian law. Generally not, but it is also a matter of determining whether the proceeds have been used to generate taxable income in Panama. 15 Give details of any required form for ship mortgages in your jurisdiction. Registration of vessels The law provides for the following essential requirements: (article 260 of Law 55 of 2008), which include: 11 What vessels are eligible for registration under the flag of your • the names and domiciles of the mortgagor and mortgagee; country? Are offshore drilling rigs or mobile offshore drilling units • the fixed or maximum amount of the principal or of the obliga- considered vessels under the laws of your jurisdiction? What is tion secured; the effect of registration? • the dates of payment of principal or of compliance of the obliga- The definition of vessel is broad and offshore drilling rigs, mobile tions secured, and of interest, or the method to determine such offshore drilling units and other offshore structures such as floating dates, except when the obligation secured is payable on demand production, storage and offloading units and mobile offshore drill- or it is a conditional or a future obligation; ing units may be registered. Law 57 of 2008 provides the following • if subject to interest, the agreed rate or the method for comput- definition of a vessel: ing the same must be stated. The rate may be stated with reference to a specific market, costs of funding, fluctuating elements Any vessel engaged in the transportation of cargo or persons; pon- or floating formulas; and toons, dredgers, floating docks, oil drilling platforms or any other • a description of the mortgaged vessel, in the terms of its registry hulls engaged in or which may engage in maritime trade, as well as certificate or licence number, radio call signs if assigned and reg- any other structure recognized as a vessel by the Panama Maritime ister tonnages (gross and net) and measurements (length, width Authority. and depth).

The effect of the registration is to allow the vessel to fly the 16 Who maintains the register of mortgages? What information does Panamanian flag and to grant it the protection of rights under the it contain and where are such filings to be made? What is the laws of Panama, as provided in Law 57 of 2008. effect of registration? The Public Registry of Titles and Encumbrances of Vessels of the 12 Who may register a vessel in your jurisdiction? Panama Maritime Authority is the organisation where ownership Pursuant to article 3 of Law 57 of 2008, regardless of nationality documents, and naval mortgages, as well as their cancellation, and provided the prescribed formalities and requirements are com- amendments or assignments, and other recordable encumbrances, plied with, any individual, corporate entity or a combination of can be registered these may register a vessel. The registration has the effect of making the document effective as to third parties (ie, erga ommes). 13 Is there an alternate registry for international shipping operations? 17 Must the total amount of the mortgage be stated therein? Must No. The PMA’s Directorate General of Merchant Marine (Digemar) the mortgage contain a maturity date? Must the underlying debt maintains a single register regardless of the place of operation or instrument be filed with or attached to the recorded mortgage? nationality of the owners of a vessel. Vessels are classified as engaged As mentioned above, the law requires that the mortgage states the in either coastal and internal service; or international service, which fixed or maximum amount of the principal or of the obligation includes vessels that do not operate in Panamanian ports or territo- secured. rial waters. It is not necessary to attach the debt instrument, but the mort- There are also special categories within the register such as gage must provide for the terms required under article 260 of Law temporary registration, dual registration for vessels under bareboat 55 (see question 15). charter and pleasure boats. 18 Can a mortgage be registered in the name of an agent or trustee Ship mortgages and other liens over vessels for the benefit of multiple lenders?

14 What types of ship mortgages exist and what obligations may a The party named as mortgagee in the mortgage would be deemed to ship mortgage secure? Can contingent obligations, including swap have the rights to enforce the mortgage in respect of the obligations obligations, be secured? Are there standardised forms? secured. The concept of obligations in favour of a group in solidum Under Panamanian law the naval mortgage may secure any type secured by a naval mortgage could also be deemed subject to the of obligations, be they existing, simple, conditional, contingent, or agreement or legal relationship between the creditors or lenders even future obligations. For example, unadvanced tranches, rotat- under such obligation. Therefore, when an agent, security agent or ing credit facilities, obligations subject to alternative currency or security trustee is so appointed and then enters the mortgage agree- multi-currency clauses and other types of complex financing, may ment, the underlying relationship, even if subject to foreign law, generally be secured without the need to execute or register supple- should be accepted in respect of the actions that would be carried mentary deeds when the conditions occur or the future obligation out by the mortgagee, but maintaining the rights of the mortgagee is perfected. as exclusive in respect to other creditors or lenders who are not. In addition, from a Panamanian law perspective the naval mort- While the rights of the mortgagee would be deemed in rem against gage can secure obligations of third parties (ie, other than those of the vessel, those of the other creditors or lenders would be deemed in the owner). personam against the mortgagee. In other words, while the rights of The law contemplates mortgage agreements; this implies the the mortgagee would be in accordance with Panamanian law with execution of an agreement by both parties. regard to the mortgage, the relationship of agency or security trust, When drafting a mortgage agreement, lawyers will incorporate between the mortgagee and the other creditors or lenders would be provisions relating to the operation of the vessel as regards the intent deemed as ruled under the laws that are chosen to govern such rela- contained in the financing documentation, as well as other matters tionship among them and to determine the rights and obligations

84 Getting the Deal Through – Ship Finance 2014 Arias, Fabrega & Fabrega PANAMA that arise between them in respect to, for instance, the proceeds from • expenses, indemnities and wages for aid and salvage due from the enforcement of the mortgage. the last voyage; and • wages, compensations and indemnities of the master and crew 19 If the mortgagee is an agent or trustee for a lending syndicate, members due for the last voyage. must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender? 23 May non-mortgage liens be recorded over a vessel? Generally, and depending on the drafting of the mortgage as to such Under certain circumstances a promise of sale can be recorded as a changes, a change in lender who is not the mortgagee could be made limitation to the right to sell. without further filings, so long as the obligation secured subsists not- There are no other express recordable liens (per se) in the law. withstanding the change. 24 Will mortgages on ‘foreign’ flag vessels be recognised in your 20 If the mortgagee transfers its interest to a new lender, agent or jurisdiction? If so, do they share the same priority as those on trustee, what filings are required? Is the mortgagor’s consent vessels registered under the laws of your jurisdiction? required? Generally speaking, a foreign mortgage would be registered against An assignment of mortgage would be required in writing and, to be a vessel of foreign registry. The Code of Maritime Procedure (Law 8 effective against third parties, would also need to be registered. of 1982) provides for special proceedings for enforcement of mort- The consent of the mortgagor would be required if the mortgage gages, and the procedure is the similar for vessels of Panamanian agreement so provides. and foreign registry.

21 What other maritime liens over vessels are recognised in 25 What is the procedure for enforcing a mortgage in your jurisdiction your jurisdiction? Do these claims give rise to a right to arrest by way of foreclosure? Are interlocutory sales permitted? How a vessel? In what circumstances may associated ships be long does a judicial sale take? What are the associated court arrested? costs and how are they calculated? Under Panamanian law the vessel would be subject to arrest as an The procedure includes arrest of the vessel, filing a complaint asset of the owner, for its debts, or for enforcement of maritime liens. together with the petition for arrest and evidence regarding the reg- Under article 244 of Law 55, the following are listed as maritime istration of the mortgage and amount overdue for the purposes of liens against the vessel: enforcement. An interlocutory sale would be available if the complaint is not The following maritime credits shall enjoy a lien against the vessel timely answered (ie, within 30 days from the arrest, which would and shall concur in respect to its price in the order of preference have the effect of notification of the complaint) and where the vessel expressed in this article, to wit: is deemed abandoned or that it may be lost if not promptly sold. 1 Judicial costs incurred in the common interest of maritime On average, the process of judicial sale takes between three and six creditors. months. 2 Expenses, indemnities and wages for aid and salvage due from Costs for the arrest are calculated depending on the area in the last voyage. which the vessel is kept while being arrested. The plaintiff would 3 Wages, compensations and indemnities of the master and crew bear such costs of maintenance, which would be requested from members due for the last voyage. time to time by the court marshall. Upon requesting the arrest, a 4 The naval mortgage. liability bond of US$1,000 and initial marshall’s costs would have 5 Amounts due the Panamanian government for the annual tax to be posted with the court. and rates of the vessel. 6 Wages and stipends due to stevedores and other wharfers 26 May a vessel be sold privately by a mortgagee? Will the sale engaged directly by the owner, operator or master of the vessel discharge liens over the vessel? for the loading and unloading of the vessel at its last arrival. It is possible to agree in a naval mortgage that the mortgagee may 7 Compensation for damages caused by fault or negligence. sale the vessel out of court, in case of default. Such sale would only 8 Contributions to general average. extinguish the mortgage lien under which it was made. 9 Amounts due on obligations incurred for the necessaries and supplies of the vessel. 27 What are the limitations on rights of self-help by a mortgagee? 10 Amounts taken in bottomry over the hull of the vessel and its apparel for supplies, equipment and tackle if the contract were Panamanian law provide for ample powers which could be granted entered into and executed prior to departure of the vessel from in the mortgage. Limitations would be mostly for liability caused by the port where such obligations were contracted; and the insur- wilful misconduct or reckless disregard, which would not be deemed ance premiums for the last six months. waived by contract. 11 Wages of pilots and watchmen and expenses of conservation and custody of the vessel, its apparel and supplies after the last 28 What duties does a mortgagee owe to an owner or third-party voyage and entry into port. creditors? 12 Indemnities due to shippers and passengers for failure to deliver If the mortgagee would take possession of the vessel or exercise the cargo or effects loaded or for damage thereto, attributable rights to sell the vessel out of court proceedings the mortgagee to the master or crew in the last voyage. would be deemed liable to the owner to the extent the same has 13 The price of the last acquisition of the vessel and interest due not been excluded in the mortgage (save for wilful misconduct or for the last two years. reckless disregard) and under general rules of liability for damages caused to third parties, including creditors, if the vessel is deemed 22 What maritime liens rank higher than a mortgage lien? affected in its value in relation to such creditors and in detriment of Law 55 (see question 21) provides that the following liens rank their potential claims. higher than a mortgage lien: In case of a non-judicial sale if such powers are allowed in the • judicial costs incurred in the common interest of maritime mortgage, the law provides that the mortgagee would have to notify creditors; www.gettingthedealthrough.com 85 PANAMA Arias, Fabrega & Fabrega

35 How are share pledges for vessel financings established? Are Update and trends share pledges or share charges common in your jurisdiction? This would have to be created through a pledge agreement and, in In the near future there may be some further regulation or principle, a depository which could be the pledgee, appointed to amendments to the laws in order to improve the efficiency and keep control the pledged shares. quality of the registration system. These might include the use of electronic signatures and methods of validation of electronic This kind of security is commonly seen in financings and how documentation for commercial transactions that could include ship the pledgor may exercise certain rights over the shares may be regu- finance and naval mortgages. lated in the pledge agreement. To that end, it is recommended practice that the officers and directors of the corresponding corporation keep a copy of the pledge agreement and make relevant notations in the share register of the corporation as appropriate. the owner and any other registered mortgagees of its intention to so sell the vessel. 36 Is there a risk that a pledgee, before or after exercise of the share pledge, may be exposed to debts or other liabilities of the pledged Collateral company? 29 May finance leases or other charters be recorded over vessels In principle, no such risk would exist other than if the pledged shares flagged under the laws of your jurisdiction? have been issued partially unpaid (when possible) or have been sub- Financial leases may be recorded and there is a special law for this ject to another type of security affecting the shares. Generally, a type of contract. pledge asset would be excluded from a concursus in favour of the pledgee. 30 May finance leases be re-characterised by a court as a financing contract? If so, is there any procedure for protecting the lessor’s Tax considerations for vessel owners interest against third-party creditors? 37 Is the income earned by the owners of vessels registered in your As a general comment, commercial law principles provide that in jurisdiction subject to domestic taxation? At what rate? determining the nature of a commercial contract the intent of the The Panamanian tax system is territorial. Accordingly, the income parties shall prevail. from owners of vessels engaged in international trade is not sub- It is therefore advisable to draft relevant contracts on a case- ject to income tax. Likewise, for income derived from coastal trade, by-case basis with proper assurances or prevent possible challenges, income tax shall apply. The flat rate (subject to alternative calcula- depending on the type of operation of the vessel in question. tion depending on the income) would be 25 per cent.

31 How is a security interest created over earnings of a vessel, 38 Is there an optional tonnage tax exempting vessel owners from charter contracts, insurances, etc? How are these security tax on income? interests perfected? In case of vessels registered as being engaged in international trade, Such security interests would be created and perfected pursuant to the registration charge and annual tax and other similar rates, are an assignment agreement. Panamanian law requires further that the calculated on the bases of the gross and net tonnages and the type debtor be notified. of vessel.

32 Must security interests against non-vessel collateral be registered 39 What special tax incentives are available to shipowners to be enforceable? If so, where are such filings made? registering vessels in your jurisdiction? The enforcement of security interests arising against a vessel under There are no tax incentives per se. The income tax applicable the law or contract, other than arising from per se security instru- depends on the place of operation. There are special reductions in ments and which are not eligible for registration would have to be the registration charge and annual tonnage tax and rates for vessels claimed before a court of law in connection with a debt of the owner that are: new builds; less than five years old; registered as part of a or otherwise arising from applicable laws. group or an already registered group; and that have no record of port state control detentions. 33 How is a security interest over a deposit account established? How is a security interest perfected? 40 Are there any other noteworthy tax provisions specifically This would have to be effected through a pledge agreement and, in applicable to shipping, shipping income or ship finance? principle, a depository – which could be the pledgee – appointed to Panama has special petroleum free trade zones created by law, which keep control of the pledged account. will apply to vessels engaged in such operations. General rules for pledges are contained in the Code of Commerce and the Civil Code. Insolvency and restructuring On the other hand, pursuant to Law 129 of 2013 the requirements for mortgages over moveable or chattel property, including 41 Is there a general scheme of reorganisation or insolvency cash, are more flexible, which would, in principle, allow the mort- administration in your jurisdiction? gagor the use of the asset subject to the mortgage. Thus, it may also No. be a matter of practicality to ensure an efficient security instrument in relation to cash deposits. 42 Will the courts of your jurisdiction respect the rulings of a foreign court presiding over reorganisation or liquidation proceedings? 34 How are security interests in non-vessel collateral enforced? Generally speaking, local proceedings on bankruptcy and credits By suing the owner or grantor and attaching assets of its property. would have preference over foreign claims and credits, including those recognised by a foreign court.

86 Getting the Deal Through – Ship Finance 2014 Arias, Fabrega & Fabrega PANAMA

44 May a vessel owner provide security on behalf of other related 47 Has your jurisdiction adopted the Model Netting Act of the or unrelated companies? What are the requirements for it to be International Swaps and Derivatives Association (ISDA)? If not, enforceable? may a swap provider exercise its close-out netting rights under an Panamanian law provides that a mortgage may be granted to secure ISDA master agreement despite an obligor’s insolvency? obligations of third parties. The Model Netting Act has not been adopted. Any claims for unse- As part of the enforceability of the mortgage the mortgagee cured claimants for debtors in solvency would have to be determined would have to provide evidence of the secured obligation being before a Court trying the bankruptcy. defaulted. Otherwise, claims under an ISDA master agreement could be included in a naval mortgage and be claimed against the vessel. 45 Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant of the mortgage? The law provides certain circumstances in which a mortgage may be granted to cover existing debts, so as to give the secured credit preference over other existing or subsequent obligations.

Jorge Loaiza III [email protected]

Plaza 2000, 16th Floor, 50th Street Tel: +507 205 7000 PO Box 0816-01098 Fax: +507 205 7001 / 02 Panama City [email protected] Panama www.arifa.com

www.gettingthedealthrough.com 87 RUSSIA Jurinflot International Law Office Russia

Alexander Mednikov Jurinflot International Law Office

Due diligence registration of the company, as well as information on commencement and completion of liquidation procedures. At present, a new 1 How does one demonstrate title to or legal ownership of a vessel online version of access to USRLE database is being tested, which registered under the laws of your jurisdiction? provides the possibility to obtain full extracts from the registry Upon registration of the vessel in one of the Russian ship registries online for free. However, bankruptcy proceedings may not be timely (the State Registry of Ships or the Russian International Registry of reflected in the USRLE, so it is advisable for an interested party Ships (RIRS)), the registering authority issues a certificate of registra- also to conduct a separate check through an electronic database of tion, which can be produced to any interested parties. Ship registries proceedings in commercial courts (www.arbitr.ru), which shows all are also open for the public to seek information on registered ships, matters to which a particular entity is or has been a party. including the name of the owner, which can be obtained from the registering authorities (port administrations or river basin inspector- 5 Can the shareholders or other equity interest holders, directors ates) upon request in the form of extracts from the registries. and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search 2 How can one determine whether there are any liens recorded over of a public registry? If not, how are these parties customarily a vessel? identified? Encumbrances on vessels, in order to be valid and enforceable, must In accordance with the Russian law, authority to act on behalf of be entered in the same registry in which the vessel itself is registered; the company without a power of attorney (POA) is vested in a CEO the registry shall contain the details of the mortgagor, the mortgagee, of the company or a party taking its place (individual or corporate the amount of secured obligation and the date of termination of the administrator, receiver, etc). Information on such party (the CEO or mortgage. Any registered encumbrances will also be shown on the the party taking his or her place) must be entered in the USRLE and extracts issued in respect of the vessel. is provided to interested parties in an extract from the registry, which may be obtained upon request (see question 3). This may be done 3 How does one determine whether there are any security in respect of a company of any type. For any other signatories, their agreements, liens, charges or other encumbrances granted authority to sign will be based on a POA and must be confirmed by by a vessel owner or affiliated party who might be a borrower, producing an original or a certified copy of such a document. It must guarantor or other credit party in connection with a vessel finance be noted that in accordance with Russian law, any POA is revocable, transaction? with the exception of a POA certified by a notary public in the text The possibility of determining whether any security agreements or of which it is explicitly stated that it is irrevocable. encumbrances in respect of the ship or affiliated entity exist depends The possibility of determining equity interest holders (share- mostly on the type of such security arrangements. In particular, ship holders or participants), on the other hand, depends on the type of mortgages must be registered in order to be valid and the existence company in question. For limited liability companies, all actual par- of such mortgages may be discovered from sources that are open to ticipants and any changes in participants must be recorded in the the public. The pledge of participatory interests in commercial com- USRLE and information on actual participants shall be contained panies that exist in the form of a limited liability company must also in an extract in respect of the company in question. For joint-stock be recorded in a registry open to the public (Unified State Registry of companies, information on actual shareholdings is not reflected Legal Entities – USRLE) and may also be discovered by independent in the USRLE – only in the company’s own shareholders’ regis- research. In contrast, the pledge of shares in open or closed joint- try, or, if the shareholder in question decided to keep its shares at stock companies is recorded only in the shareholders’ registry of the depositary, then at the depositary, none of which are open for such company, which is not open for public inspection and may be public inspection. Therefore, whether or not a particular party is a obtained only from the interested party upon request. Similarly, any shareholder of the company in question may not be determined by security arrangements that are not connected with encumbrances obtaining the extract from the USRLE in respect of the company over property subject to registration (guarantees, suretyships, assign- in question – only by obtaining an extract from the shareholders’ ments, etc) do not require any official registration and may be dis- registry, which shall be obtained from the registry by the relevant covered only by way of disclosure of information by a related party, counterparty itself. for example, in the course of a due diligence procedure. 6 What corporate or other entity action is necessary for an obligor 4 Can one determine whether an obligor registered in your to enter into or guarantee a debt obligation? When is action by jurisdiction is duly organised and in good standing from a search the board of directors or other governing body required? Must of a public registry? shareholders approve a guarantee? Yes, this information may be obtained from the USRLE upon In most cases, to enter into most types of transactions or contracts, it request. An extract from this registry will contain information on is sufficient for the Russian company to have the relevant document

88 Getting the Deal Through – Ship Finance 2014 Jurinflot International Law Office RUSSIA executed by their CEOs. In accordance with the current Russian vessels under the technical supervision of the Russian classification legislation, by default, only major transactions (those with a value societies, Russian Maritime Register of Shipping or Russian River greater than 25 per cent of the company’s assets as per the latest Register may be registered under the Russian flag (with the excep- balance sheet) or transactions with an interest (those with a party tion of the RIRS, in which vessels classified by Bureau Veritas may affiliated to the company’s shareholder or member of management) also be entered). require approval or the company’s board of directors or general Russian law defines a vessel as ‘a self-propelled or non- meeting. However, companies may also provide in their constitut- self-propelled floating structure, used for the purposes of merchant ing document (charter) that other transactions – by value or by type shipping’ (paragraph 1 of article 7 of the Merchant Shipping Code of transaction – require such approval. In particular, many compa- of Russia (MSC)). Article 2 of the MSC includes ‘exploration and nies choose to limit the authority of their executive bodies to enter development of the mineral and other non-living resources of the into any financial or security arrangements (credit, loan agreements, seabed and its subsoil’ as one of the purposes of merchant ship- guarantees, mortgages, etc) notwithstanding the value of the respec- ping. Paragraph 6 of article 7 of the MSC further defines a ‘floating tive arrangement. Therefore, it is always advisable to review the marine platform’ as ‘a vessel intended for exploration and develop- counterpart’s charter for any such limitations. ment of the mineral and other non-living resources of the seabed and its subsoil’. Therefore, offshore drilling rigs and offshore drilling 7 Must foreign lenders qualify to do business in your jurisdiction units, as long as they meet the test set in paragraph 1 of article 7 to extend credit to a borrower organised in your jurisdiction? of the MSC, will be considered to be vessels and may be registered Will foreign creditors be deemed resident as a consequence of under the Russian flag. making a loan or other extension of credit to an obligor within your Title to vessels, all other property rights and their encumbrances jurisdiction? are subject to registration and are not valid without such registra- No, Russian borrowers may borrow abroad and in foreign curren- tion. Registration is considered to be the sole confirmation of title or cies directly. Foreign lenders will not considered to be resident sim- other rights and may be contested only in court. The vessel obtains ply by extending a cross-border loan or a credit to a Russian entity. the right to sail under the Russian flag from the moment of its registration. Repayment 12 Who may register a vessel in your jurisdiction? 8 Is central bank or other regulatory approval required for repayment Only Russian nationals, companies (including those with foreign of a loan in foreign currency? capital) and other legal entities registered in Russia, Russian munici- No such approvals are required. However, it should be noted that in palities or the state (regions and the federation) may own vessels accordance with the Russian currency control legislation, all trans- sailing under the Russian flag . The sole exception to this is vessels in actions in foreign currency must (with few exceptions) be effected foreign ownership that have been bareboat-chartered by the above- through accounts opened by the Russian parties of such transactions mentioned Russian parties, which may be temporarily registered in banking organisations licensed by the Central Bank of Russia and under the Russian flag in the bareboat charter registry or the RIRS. are also subject to specific control from the side of such Russian banks (exercised through filing to the banks of ‘passports of transac- 13 Is there an alternate registry for international shipping tion’ and reporting remittances under respective transactions). operations? The RIRS has been in existence since 2006. It does not permit the 9 Do usury laws limit the interest payable to a lender in respect of a registration of ships in foreign ownership, but provides substantial vessel financing? other incentives to shipowners, including: customs and tax benefits; As far as relations between commercial borrowers and lenders the possibility of entering into fixed-term employment agreements are concerned, determining the rate of interest is considered to with crews; the possibility of registering vessels under supervision of be a contractual term to be agreed by the parties at their discre- foreign classification societies (currently this is only open to vessels tion. However, interest that may be charged as a sanction for non- registered with Bureau Veritas); and the possibility of insuring vessels fulfilment of other obligations (penalty) may be reduced by the and liabilities with foreign insurers. There are, however, certain limi- courts if the rate or amount of such penalty is evidently dispropor- tations by sphere of operations for vessels registered in the RIRS – tionate to the breach. unless such ships have been built by Russian shipbuilders after 1 January 2010, they may only be used for international or cabotage 10 Are withholding taxes payable on principal or interest payments to carriage of goods or passengers, towage, exploration and develop- non-resident lenders? ment of the mineral and other non-living resources of the seabed and Yes, by default, interest payable to non-resident lenders is subject its subsoil, hydrotechnical works. to withholding tax and the basic rate is 20 per cent. However, double taxation agreements allow a substantial reduction of the rate Ship mortgages and other liens over vessels down to 10 per cent (Norway and Japan) or even to zero (France, 14 What types of ship mortgages exist and what obligations may a Germany, the UK and the US) for lenders who are residents of the ship mortgage secure? Can contingent obligations, including swap respective states. obligations, be secured? Are there standardised forms?

Registration of vessels In accordance with the Russian law, a mortgagee, which is a creditor under a secured obligation, may obtain satisfaction of its monetary 11 What vessels are eligible for registration under the flag of your claims against the debtor from the value of mortgaged property. country? Are offshore drilling rigs or mobile offshore drilling units Therefore, various types of obligations, including contingent obliga- considered vessels under the laws of your jurisdiction? What is tions, may be secured by mortgage, the principal requirement that the effect of registration? such an obligation must give rise to a claim which may be evaluated Generally, there are no limitations by vessel type for registration in money. of ships under the Russian flag. There are, however, certain restric- There are no standardised forms of mortgage agreements and tions by age (some types of vessels may not be registered in the RIRS provided that the agreement meets the basic requirements to the if their age exceeds 15 years) and by classification society – only mortgage agreements and to contracts generally as stated in the law www.gettingthedealthrough.com 89 RUSSIA Jurinflot International Law Office

(those with respect to defining the parties, the secured obligation, the assigned unless the respective mortgage agreement provides other- object of mortgage, its evaluation, etc), the parties are free in drafting wise; mortgagor’s consent is not required, unless the contract pro- the agreement. Generally, in more complex transactions with higher vides otherwise. In order for the transfer to be valid, the registering value objects, the mortgage agreements tend to be more elaborate. authority must register the assignment. For this, a respective application, together with the contract of assignment and supporting docu- 15 Give details of any required form for ship mortgages in your ments must be submitted. jurisdiction. Under Russian law, ship mortgage agreements must be executed in 21 What other maritime liens over vessels are recognised in the form of a single document, signed by duly authorised representa- your jurisdiction? Do these claims give rise to a right to arrest tives of both parties. Notarial certification is not necessary, unless the a vessel? In what circumstances may associated ships be contract provides for the possibility to enforce the mortgage with- arrested? out applying to the court (however, such enforcement at present is General provisions of Russian law provide that performance of obli- not allowed for vessels). As mentioned above, ship mortgages must gations may be secured both by such security measures as are specifi- be registered; to accomplish this, the signed mortgage agreement, cally provided for in the law and by security measures that are not together with the respective application and other supporting docu- provided for in the law (for example, those devised by the parties ments must be submitted to the registering authority (port adminis- to a contract). Therefore, there is no set list of encumbrances that tration or river basin inspectorate). can exist in respect of the vessel. However, in practice, in addition to ship mortgages, the most widespread encumbrances in respect 16 Who maintains the register of mortgages? What information does of vessels are maritime liens (as provided in the 1993 International it contain and where are such filings to be made? What is the Convention on Maritime Liens and Mortgages) and the right to effect of registration? withhold the ship in connection with a claim related to ship con- There is no separate register of mortgages – information on all struction or ship repairs. encumbrances in respect of a vessel must be recorded in Section III Claims based on the ship mortgage, maritime liens and the right of the respective ship registry (State Registry of Ships, RIRS, etc), of the shipbuilder or ship repairer to withhold the vessel are all which is kept by port administrations and river basin inspectorates. treated as maritime claims and give the respective creditor the right Regarding ship mortgages, records in Section III contain the date of to apply for arrest of a ship. Associated ships can also be arrested if making of a record, the names of the mortgagor and the mortgagee, the party responsible under the respective claim is either a registered the maximum amount of a secured obligation and the date of termi- owner of an associated ship at the time of commencement of arrest nation of the mortgage. Registration of the mortgage is obligatory procedures and was a registered owner, a bareboat, time or voyage and a mortgage will not be valid without such registration. charterer of the vessel in connection with which the claim in question arose; or a bareboat charterer of an associated ship at the time 17 Must the total amount of the mortgage be stated therein? Must of commencement of arrest procedures and was a registered owner, the mortgage contain a maturity date? Must the underlying debt a bareboat, time or voyage charterer of the vessel in connection with instrument be filed with or attached to the recorded mortgage? which the respective claim arose. However, it is not possible to arrest The law itself does not require the total or maximum amount of the associated vessels where the claim is related to the right to withhold secured obligation to be stated in the mortgage agreement, but for a ship (or in other cases when a claim is with respect of title or own- the purposes of registration of ship mortgage, this information (as ership of the vessel). well as the date of termination of the mortgage) is normally required to be clearly stated in the application for registration by the register- 22 What maritime liens rank higher than a mortgage lien? ing authorities, so the parties to the mortgage agreement should bear Claims ranking higher than those secured by mortgage of the vessel this in mind in the course of drafting of an agreement. are (in order of increasing priority: claims arising from ship repair The underlying debt instrument may sometimes be required by and ship construction contracts (if the respective creditor can exer- the registering authority, as the respective regulations are not clear cise withholding), claims secured by maritime liens generally and on this issue and it remains at the authorities’ discretion. claims of authorities for wreck removal costs when such removal was effected for the purposes of safety of navigation or protection 18 Can a mortgage be registered in the name of an agent or trustee of the environment. for the benefit of multiple lenders? No, registration of a mortgage in the name of an agent is problem- 23 May non-mortgage liens be recorded over a vessel? atic (or rather, enforcement of such a mortgage in favour of other The general provision of the law is that all encumbrances in respect lenders will be a problem), since the principal requirement of a mort- of a ship must be registered, but notwithstanding this provision, gagee under the Russian law is that it must be a creditor under the maritime liens and rights of withholding of a ship need not be reg- secured obligation. Therefore, each mortgagee creditor must be registered in order to be valid and enforceable. However, should the istered as a creditor in respect of a part of the obligation or as a joint creditors or other parties wish to register such encumbrances, they creditor in respect of the full obligation. should be able to do so.

19 If the mortgagee is an agent or trustee for a lending syndicate, 24 Will mortgages on ‘foreign’ flag vessels be recognised in your must any filings be made upon transfer of a portion of the jurisdiction? If so, do they share the same priority as those on underlying debt among existing lenders or to a new lender? vessels registered under the laws of your jurisdiction? A mortgage may not be registered in the name of an agent or trustee Mortgages on foreign-flagged vessels are recognised and may be (see question 18), but any transfer of mortgage is valid only in case enforced in Russia, provided that: of transfer of the respective secured obligation or part thereof. • a mortgage was duly registered in accordance with the laws of the respective state; 20 If the mortgagee transfers its interest to a new lender, agent or • a respective ship registry is open for inspection; and trustee, what filings are required? Is the mortgagor’s consent • the information recorded in the registry includes at least the required? name of the mortgagee (or a statement that a mortgage is made Interest in a mortgage may be transferred (assigned) only with ‘to bearer’), amount of secured obligation and other information transfer of an interest in a secured obligation. A mortgage may be required in accordance with the applicable law.

90 Getting the Deal Through – Ship Finance 2014 Jurinflot International Law Office RUSSIA

Mortgages registered in other countries that are party to the 1993 insurance must be stated in the insurance contract or advised of by Convention are recognised and may be enforced; mortgages regis- the insured to the insurer in writing. tered in countries that are not parties to the Convention may be recognised and enforced if the vessel in question is within the juris- 32 Must security interests against non-vessel collateral be registered diction of Russian courts. to be enforceable? If so, where are such filings made? No, security interests in respect of such collateral as the earnings or 25 What is the procedure for enforcing a mortgage in your jurisdiction rights of beneficiary under insurance contracts need not (and may by way of foreclosure? Are interlocutory sales permitted? How not) be registered. long does a judicial sale take? What are the associated court costs and how are they calculated? 33 How is a security interest over a deposit account established? The general rule is that enforcement is effected on the basis of a How is a security interest perfected? relevant court judgment. Upon obtaining such a judgment and a To establish a security interest over a deposit account, the parties respective execution order, the mortgagee applies to the bailiffs, who either need to open a joint account with a specific regime regulated commence enforcement proceedings by arresting the vessel and pre- by a tripartite agreement with a bank or to grant to a creditor the paring the auction at which the vessel is to be sold. Upon sale of right of ordering remittances from the debtor’s account with the the vessel, the bailiff distributes the proceeds between the interests bank. It is advisable to have such arrangement regulated by a tripar- concerned. Interlocutory sales are not possible. tite addendum to the contract between the debtor and the bank. It should also be noted that legislation on pledges is currently under 26 May a vessel be sold privately by a mortgagee? Will the sale going notable amendments and new security instruments in respect discharge liens over the vessel? of accounts may soon be available to the parties. Although recent changes in the laws regulating mortgage have significantly extended the possibilities to enforce a mortgage without 34 How are security interests in non-vessel collateral enforced? recourse to the courts, the private sale of mortgaged vessels by a Such interests are enforced as any other contract, namely, if volun- mortgagee is still not allowed. tary performance is not provided (the assignment is not honoured by the third-party debtor or is not valid, payment of insurance com- 27 What are the limitations on rights of self-help by a mortgagee? pensation is refused, remittance of amounts from account on order Essentially, in respect of mortgaged vessels, mortgagees have no such of the creditor is refused, etc), the creditor must apply to the court. rights. 35 How are share pledges for vessel financings established? Are 28 What duties does a mortgagee owe to an owner or third-party share pledges or share charges common in your jurisdiction? creditors? The pledge of shares or participatory interests is quite a widespread As it is generally not possible for the mortgagee to take over the security measure in Russia (although not specifically in the shipping vessel (at least prior to the sale) or sell it privately, the direct duties sector). Where the parties to a financing arrangement agree that as of the mortgagee to third parties are fairly few. If the vessel in ques- an additional security measure they will impose the pledge of shares tion is encumbered by more than one mortgage, the mortgagee that in an owning or another associated company, they need to enter into becomes entitled and intends to enforce his rights must first notify a separate contract in respect of the pledge of shares. The procedure the other mortgagees of this in writing. for establishing a pledge depends on the type of company where shares are pledged, as set out below. Collateral Limited liability companies 29 May finance leases or other charters be recorded over vessels Certificates are not issued and bearer certificates or interests are not flagged under the laws of your jurisdiction? allowed. The pledge of shares (participatory interests) is effected by Yes, it is technically possible to record various charters over a vessel a contract, which is certified by a notary public. Simultaneously to registered in Russia, but in most cases this is not done. However, signing the contract, the pledgee also signs the corresponding appli- as far as the finance leases are concerned, they are required to be cation. This application is than sent by the notary to the registering registered. authority, which records the pledge of participatory interests in the USRLE. 30 May finance leases be re-characterised by a court as a financing contract? If so, is there any procedure for protecting the lessor’s Joint venture companies interest against third-party creditors? The pledge of shares is effected by a contract in a simple written form. However, in order for the pledge to become valid, it must be No, normally the courts would not re-characterise the finance lease registered in the registry of shares of the respective company or, as a financing contract. if the pledgee keeps its shares registered with a depositary, rather than directly with the registry of shareholders – with the depositary. 31 How is a security interest created over earnings of a vessel, Registration is effected by way of filing an application with the reg- charter contracts, insurances, etc? How are these security istry or depositary (both of which are specialist licensed organisa- interests perfected? tions), co-signed by both the pledgee and the pledger. Bearer shares The right to receive earnings, such as charter hire, may be assigned to or certificates are not allowed. Certificates in respect of registered another party, including the mortgagee. Assignment must be effected shares (if issued and not kept with the depositary), in case of pledge in writing; no consent of the payee is required, unless the terms of can be left with the pledger or passed to the pledgee. the original contract or the law so require. However, it is necessary to notify the payee in writing of the assignment and the assignee 36 Is there a risk that a pledgee, before or after exercise of the share bears the risks of failure to effect such notification. pledge, may be exposed to debts or other liabilities of the pledged As far as insurances are concerned, property may be insured company? in favour of the party that has a lawful interest in such property The pledgee may be exposed to the liabilities of the pledge com- (including the mortgagee or financial lessor). A beneficiary of such pany only in case if it becomes the owner of shares or participatory www.gettingthedealthrough.com 91 RUSSIA Jurinflot International Law Office interests and only to the extent of the value of such shares or inter- affairs. During some of these procedures, particularly ‘financial ests (unless the pledgee as the new shareholder or participant gives rehabilitation’ and ‘external management’, it is possible for the orders to the company that lead directly to the exposure, in which debtor to seek means of resolving its difficulties through obtaining case the pledgee may bear subsidiary liability). financing, sale of business or sale of assets. Upon commencement of bankruptcy procedures, claims of creditors can only be made within Tax considerations for vessel owners the order provided by law (in the course of the bankruptcy matter). Mortgagees are in a rather advantageous position compared with 37 Is the income earned by the owners of vessels registered in your other commercial creditors: during the ‘financial rehabilitation’ and jurisdiction subject to domestic taxation? At what rate? ‘external management’ stages they may even enforce the mortgage, Yes, income earned by owners of vessels registered in Russia (with unless the debtor succeeds in proving that sale of pledged or mort- some exceptions for profits from the operation of vessels registered gaged property will have a negative impact on the restoration of its in the RIRS) is subject to profits tax at 20 per cent. solvency. As regards the sale of mortgaged property, mortgagees of all kinds can obtain satisfaction of their claims from the proceeds of 38 Is there an optional tonnage tax exempting vessel owners from the sale: in the case of sale by the two above-mentioned procedures tax on income? – in full (to the extent of proceeds); in the case of sale during the Registration of ships in the RIRS is subject to payment of a state liquidation stage – up to 70 per cent (if the mortgage secures repay- duty on registration and, thereafter, annually for extension of reg- ment of credit – up to 80 per cent) of the proceeds. istration, based on the vessel’s tonnage. Import and internal purchase of ships intended for registration in the RIRS is exempt from 42 Will the courts of your jurisdiction respect the rulings of a foreign import VAT and customs duty. Income from operating any vessels court presiding over reorganisation or liquidation proceedings? registered in the RIRS in international carriage or chartering them In the absence of an international treaty to this effect, this will be out for such purpose, as well as income from any merchant trading unlikely. activities conducted using RIRS-registered ships built in Russia after 1 January 2010 is exempt from the profits tax. Salaries and other 43 What is the order of priority among creditors? In what payments to crew members of such ships will be exempt from social circumstances will creditors be required to disgorge payments tax until 2027. from an insolvent company? See also question 13. There are three orders of creditors whose claims arose prior to opening of bankruptcy procedures: persons to whom the debtor owes 39 What special tax incentives are available to shipowners compensation for damage to their life or health (which may be par- registering vessels in your jurisdiction? ticularly important for shipping industry); salaries and related pay- Other than exemptions for vessels registered in the RIRS and their ments; and other creditors. The Federal Law on Insolvency provides owners, there are currently few similar tax incentives for shipping mechanisms for invalidation of various types of transactions that industry. The only notable example is the possibility to use higher result in unfair treatment of creditors and in case of invalidation of depreciation coefficients for vessels subject to finance lease. such transactions, respective creditors will be required to restore the unjustly obtained property. 40 Are there any other noteworthy tax provisions specifically applicable to shipping, shipping income or ship finance? 44 May a vessel owner provide security on behalf of other related The shipping industry is subject to general taxation regulations with or unrelated companies? What are the requirements for it to be the exception of the RIRS exemptions mentioned in question 38 and enforceable? depreciation coefficients mentioned in question 39. Yes, it is possible and there are no specific requirements for that (such as the mortgagee being interested in the transaction between Insolvency and restructuring the creditor and the debtor, etc). However, general requirements, for 41 Is there a general scheme of reorganisation or insolvency example in respect of necessary approvals being obtained, will apply. administration in your jurisdiction? Russian bankruptcy legislation provides for a number of procedures that may apply, depending on the state of the insolvent debtor’s

Jurinflot International Law Office

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92 Getting the Deal Through – Ship Finance 2014 Jurinflot International Law Office RUSSIA

45 Is there a law of fraudulent transfer that permits a third-party consider the insolvent debtor bankrupt may be filed if the total creditor to challenge, for example, the grant of a mortgage amount of claims (to a legal entity) is in excess of 100,000 roubles because of insolvency of the mortgagor or insufficient and if such claims remain unpaid for three months from the date consideration received by the mortgagor in exchange for the grant when they have been due. of the mortgage? Yes, mortgages may be challenged on grounds such as lack of capac- 47 Has your jurisdiction adopted the Model Netting Act of the ity, lack of approval to enter into a mortgage transaction or the International Swaps and Derivatives Association (ISDA)? If not, insolvency of the mortgagor. (However, it is irrelevant whether any may a swap provider exercise its close-out netting rights under an consideration for the mortgagee was available.) ISDA master agreement despite an obligor’s insolvency? Russia has not officially adopted the Model Netting Act. Close-out 46 How may a creditor petition the courts of your jurisdiction to netting rights exercised after debtor’s insolvency are unlikely to be declare a debtor bankrupt or compel liquidation of an insolvent recognised by a Russian court. obligor? A creditor will need to apply to a commercial court of the region in which the debtor has its principal domicile. An application to

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V Hariharan Haridass Ho & Partners

Where the vessel owner or affiliated party is a company and where Repayment the charges created by such documents are registerable under section 131 of the Companies Act, then any liens and encumbrances can 8 Is central bank or other regulatory approval required for repayment be discovered through a search of the Accounting and Corporate of a loan in foreign currency? Regulatory Authority (ACRA) business profile printout on the com- No, central bank or other regulatory approval is not required. pany or the affiliated party. 9 Do usury laws limit the interest payable to a lender in respect of a 4 Can one determine whether an obligor registered in your vessel financing? jurisdiction is duly organised and in good standing from a search No, there is no limit but the courts will strike down interest rates of a public registry? that they consider unconscionable given the circumstances of the This information can be determined from a business profile search case. Practically, there is a general acceptance that any interest rate of the ACRA’s records and by obtaining a certificate of good stand- in excess of 24 per cent a year is unconscionable. ing regarding the obligor from the ACRA. 10 Are withholding taxes payable on principal or interest payments to 5 Can the shareholders or other equity interest holders, directors non-resident lenders? and officers or other authorised signatories of an obligor Owners of vessels registered with the MPA under the Block Transfer organised in your jurisdiction be determined from a search Scheme and owners who are registered as approved international of a public registry? If not, how are these parties customarily shipping enterprises with the MPA are exempt from having to pay identified? withholding tax on interest to non-resident lenders. In all other Where the company is a private limited company, the names of the cases, withholding tax is payable on interest to non-resident lenders. shareholders, directors and company secretary can be determined The tax rate will depend on the terms of any double taxation treaties from the ACRA business profile search of the company. Where the that Singapore may have with the country where such non-resident company is a public company, only the names of the directors and lender is tax resident. However, it may be possible to obtain a waiver company secretary can be determined by such a search. of the withholding tax from the MPA upon application through the prescribed form. Factors that the MPA will consider will include the quantum of the loan, the number of vessels that the owner is con- templating registering with the MPA in the near future and whether

94 Getting the Deal Through – Ship Finance 2014 Haridass Ho & Partners SINGAPORE the interest rate offered by the non-resident lender is lower than that registered to secure a debt due from a third party to the mortgagee, offered by financial institutions in Singapore. a certified true copy of the deed of covenant must be registered with the MPA. Registration of vessels 18 Can a mortgage be registered in the name of an agent or trustee 11 What vessels are eligible for registration under the flag of your for the benefit of multiple lenders? country? Are offshore drilling rigs or mobile offshore drilling units considered vessels under the laws of your jurisdiction? What is Yes, a mortgage can be registered in the name of an agent or trustee the effect of registration? for the benefit of multiple lenders. Save for fishing vessels, hydrofoils and wooden vessels, all types of 19 If the mortgagee is an agent or trustee for a lending syndicate, vessel are eligible for registration with the MPA. Offshore drilling must any filings be made upon transfer of a portion of the rigs or mobile offshore drilling units are considered vessels under underlying debt among existing lenders or to a new lender? Singapore law. Registration provides a ship with Singaporean nationality when it goes on overseas voyages, protects a ship’s name for as No, there is no filing to be done if the agent or trustee transfers a long as it is registered, provides proof of ownership and makes it portion of the underlying debt among existing lenders or to a new possible to register mortgages on the ships. Further, as a consequence lender. of such registration, the owner of the vessel becomes subject to the terms of Singapore legislation giving various international maritime 20 If the mortgagee transfers its interest to a new lender, agent or conventions the force of law in Singapore in respect of the vessel. trustee, what filings are required? Is the mortgagor’s consent required? 12 Who may register a vessel in your jurisdiction? The prospective new mortgagee must file the transmission of mort- Singapore citizens or Singapore-incorporated companies may regis- gage executed by the previous mortgagee in its favour, which appears ter vessels with the MPA. Where the tonnage of the vessel to be regis- on the reverse side of the mortgage instrument, with the MPA. The tered is in excess of 1,600 GT and if the vessel is self-propelled, then mortgagor’s consent is not required, unless the loan and security all of the shareholders in such companies may be non-Singaporean. documents expressly require such consent to be given.

13 Is there an alternate registry for international shipping 21 What other maritime liens over vessels are recognised in operations? your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be No, there is no such alternate registry in Singapore. arrested?

Ship mortgages and other liens over vessels Singapore recognises crew claims, collision claims and salvage claims as maritime liens. These claims do give rise to a right to 14 What types of ship mortgages exist and what obligations may a arrest the vessel. Associated ships may be arrested if the claim falls ship mortgage secure? Can contingent obligations, including swap under section 4(4) of the High Court (Admiralty Jurisdiction) Act of obligations, be secured? Are there standardised forms? Singapore (HCAJA). Mortgage instruments take a prescribed form and are short mortgage forms similar to the English model accompanied by a deed 22 What maritime liens rank higher than a mortgage lien? of covenants. The mortgages can secure principal, interest, default Maritime liens for crew wages, collision claims and salvage claims interest, commission fees and any other amounts due. Contingent rank higher than a mortgage lien. obligations, including swap obligations, may be secured. 23 May non-mortgage liens be recorded over a vessel? 15 Give details of any required form for ship mortgages in your No, non-mortgage liens cannot be recorded over a vessel at the MPA. jurisdiction.

Ship mortgages follow a standard form as set out in the Merchant 24 Will mortgages on ‘foreign’ flag vessels be recognised in your Shipping Act and the regulations passed thereunder. There are two jurisdiction? If so, do they share the same priority as those on types of forms – one to secure the principal sum and interest and one vessels registered under the laws of your jurisdiction? to secure accounts current, etc. If more details need to be incorpo- Yes, mortgages on foreign flag vessels will be recognised in rated, these may be included in the deed of covenant. Singapore and they share the same priority as vessels registered under Singaporean law. 16 Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the 25 What is the procedure for enforcing a mortgage in your jurisdiction effect of registration? by way of foreclosure? Are interlocutory sales permitted? How The register of mortgages is maintained by the MPA. The register long does a judicial sale take? What are the associated court contains the name and address of the mortgagor, the name and costs and how are they calculated? address of the mortgagee, the date of the mortgage, date of registra- To start with, the claim of the arresting party must fall within the tion of the mortgage and the ranking of the mortgage. Filings are permitted claims listed in the HCAJA. If it does, then the procedure made with the MPA. Such registration creates a legal mortgage of for enforcing any mortgage in Singapore is by way of ship arrest, the vessel in favour of the mortgagee and is accorded the ranking as pursuant to a warrant of arrest issued by the Singapore High Court appears in the register. to be obtained by the arresting party upon application to the Court. Interlocutory sales are permitted. Judicial sales can be effected as 17 Must the total amount of the mortgage be stated therein? Must quickly as three months from the date of arrest, provided there are the mortgage contain a maturity date? Must the underlying debt bids during the first tender exercise that meet or exceed the reserve instrument be filed with or attached to the recorded mortgage? price set by the Singapore High Court. Associated costs will include No, the total amount of the mortgage need not be stated. The mort- sheriff’s guard charges and port charges (which are both based on gage does not need to contain a maturity date, nor does the under- a scale) and the sheriff’s expenses for appraisement and sale of the lying debt instrument need to be filed, save where the mortgage is vessel, which will be the aggregate of 5 per cent of the first S$1,000 www.gettingthedealthrough.com 95 SINGAPORE Haridass Ho & Partners of the sale price of the vessel and 2.5 per cent of the balance sale order. As for other security interests, enforcement is by way of writ price of the vessel. action.

26 May a vessel be sold privately by a mortgagee? Will the sale 35 How are share pledges for vessel financings established? Are discharge liens over the vessel? share pledges or share charges common in your jurisdiction? A vessel may be sold privately by the mortgagee. However, such sale By way of a share pledge or share charge agreement. However, share does not discharge liens over the vessel. pledges or share charges in connection with vessel financing are not common in Singapore. 27 What are the limitations on rights of self-help by a mortgagee? The mortgagee may not sell the vessel to itself or its nominees (eg, 36 Is there a risk that a pledgee, before or after exercise of the share solicitors acting for the mortgagee in the sale). However, the mort- pledge, may be exposed to debts or other liabilities of the pledged gagee may sell the vessel to a company that the mortgagee directly company? or indirectly controls provided that the mortgagee has acted in good No, there is no risk of the pledgee, before or after exercise of the faith. share pledge, being exposed to debts or other liabilities of the pledged company. 28 What duties does a mortgagee owe to an owner or third-party creditors? Tax considerations for vessel owners

The mortgagee’s duties require a reasonable balancing of the inter- 37 Is the income earned by the owners of vessels registered in your ests of the owner, the mortgagee and other third-party creditors. The jurisdiction subject to domestic taxation? At what rate? mortgagee must take efforts to obtain a fair price for the vessel and Pursuant to section 13(A) of the Income Tax Act, income earned by may not act in an arbitrary manner. Further, where the security of the a Singapore-registered vessel from operating outside Singapore port mortgagee is not impaired, the mortgagee has the liability to com- limits is exempt from tax. Any other shipping income will become plete the existing charter or voyage that the vessel had undertaken. part of the general income of the company and if the company makes a profit, such profit will be taxed at the prevailing corpo- Collateral rate tax rate, applicable in Singapore, which at present is 17 per 29 May finance leases or other charters be recorded over vessels cent, subject to relevant tax exemptions given by the Inland Revenue flagged under the laws of your jurisdiction? Authority of Singapore. No, finance leases or other charters may not be recorded over Singapore-flagged vessels at the MPA. 38 Is there an optional tonnage tax exempting vessel owners from tax on income? 30 May finance leases be re-characterised by a court as a financing All Singapore-registered vessels have to pay tonnage tax annually at contract? If so, is there any procedure for protecting the lessor’s the rate of S$0.20 per net tonne. The fact that tonnage tax is payable interest against third-party creditors? has no correlation to the owner’s liability for income tax. To date, the Singapore courts have not re-characterised a finance lease as a financing contract. 39 What special tax incentives are available to shipowners registering vessels in your jurisdiction? 31 How is a security interest created over earnings of a vessel, Special tax incentive schemes in Singapore include the Block charter contracts, insurances, etc? How are these security Transfer Scheme and the Maritime Sector Incentive Scheme (the interests perfected? MSI Scheme). The MSI Scheme itself is divided into three sections, Security interests are created by way of an assignment. Where the namely: assignor is a company, a security interest may be perfected by filing • international shipping operations (including the approved inter- notification of the charge created by the assignment with the ACRA, national shipping enterprise scheme and the maritime finance within the period prescribed by the Companies Act; namely, within incentive scheme); 30 days of the date of the creation of the charge. • maritime leasing arrangements; and • shipping support services. 32 Must security interests against non-vessel collateral be registered to be enforceable? If so, where are such filings made? Under the approved international shipping enterprise scheme, there is a 100 per cent tax exemption on qualifying income derived from A security interest on land or real property may be recorded at the operating foreign-flagged ships. Under the maritime finance incen- Singapore Land Authority. Where any type of security interest is cre- tive, a tax exemption or concessionary tax rate (5 or 10 per cent ated by a company, the notification of the charge arising from such depending on the type of activities carried out) can be obtained on security interest can be filed at the ACRA, within the period pre- qualifying income derived from leasing ships or containers and man- scribed by the Companies Act (see question 31). aging an approved shipping or container investment enterprise.

33 How is a security interest over a deposit account established? 40 Are there any other noteworthy tax provisions specifically How is a security interest perfected? applicable to shipping, shipping income or ship finance? The security interest is created by a memorandum of charge. Where No, there are no other noteworthy tax provisions other than those the charge is a company, the security interest is perfected by filing stated above in questions 37 and 39. a notification of the charge created by the memorandum of charge with ACRA within the period prescribed by the Companies Act (see Insolvency and restructuring question 31). 41 Is there a general scheme of reorganisation or insolvency 34 How are security interests in non-vessel collateral enforced? administration in your jurisdiction? Mortgages on land may be enforced by possession and sale. Charges Yes, it is known as judicial management. Once a company is placed on equipment may be foreclosed, pursuant to the court foreclosure on judicial management (which will be for a specific period of time,

96 Getting the Deal Through – Ship Finance 2014 Haridass Ho & Partners SINGAPORE

44 May a vessel owner provide security on behalf of other related Update and trends or unrelated companies? What are the requirements for it to be enforceable? With the introductions of tax incentives pursuant to the MSI Yes, a vessel owner may provide security on behalf of other related or Scheme in 2007 (see question 39), and with the expected unrelated companies. There is no difference in enforcement require- improvement in the global shipping market and increase in charter and freight rates, one of the aspects of ship finance in Singapore ments than if the vessel owner had granted the security directly. that we expect to see a rise in would be the establishment of more shipping business trusts. 45 Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient for example, one year) the creditors cannot enforce the debt obliga- consideration received by the mortgagor in exchange for the grant tion of the company. In such a situation, a ship mortgage created by of the mortgage? the company cannot be enforced. Yes, a third party creditor may challenge such a transaction. The law prohibiting undue preferences and undervalue transactions appears 42 Will the courts of your jurisdiction respect the rulings of a foreign at section 329 of the Companies Act read with sections 98 and 99 of court presiding over reorganisation or liquidation proceedings? the Bankruptcy Act of Singapore. The general practice of the Singapore courts is that they respect the rulings of a foreign court presiding over reorganisation or liquida- 46 How may a creditor petition the courts of your jurisdiction to tion proceedings, save where it is against public policy in Singapore declare a debtor bankrupt or compel liquidation of an insolvent or save where the foreign court proceedings were in violation of the obligor? principles of natural justice. The creditor must first issue a statutory notice to the debtor to pay the monies due within a prescribed period of time. If the debtor fails 43 What is the order of priority among creditors? In what to pay, than the creditor may petition the Singapore court to declare circumstances will creditors be required to disgorge payments the debtor bankrupt, or to compel liquidation of an insolvent obli- from an insolvent company? gor. To file a petition to declare a person bankrupt or to wind-up a The order of priorities is contained in section 328 of the Companies company, the debt itself must exceed S$10,000. Act. Preferred creditors include the petitioner who petitioned for the winding-up in respect of its costs and expenses for the winding-up, 47 Has your jurisdiction adopted the Model Netting Act of the employees and secured creditors. Creditors will be required to dis- International Swaps and Derivatives Association (ISDA)? If not, gorge payments from an insolvent company where the payment is may a swap provider exercise its close-out netting rights under an deemed a fraudulent preference under section 329 of the Companies ISDA master agreement despite an obligor’s insolvency? Act. Yes, Singapore has adopted the ISDA Model Netting Act by way of the Payment and Settlement Systems (Finality and Netting) Act 2002.

V Hariharan [email protected]

24, Raffles Place Tel: +65 6533 2323 No. 18-00, Clifford Centre Fax: +65 6533 7029 Singapore 048621 [email protected] www.hhp.com.sg

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Due diligence 5 Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor 1 How does one demonstrate title to or legal ownership of a vessel organised in your jurisdiction be determined from a search registered under the laws of your jurisdiction? of a public registry? If not, how are these parties customarily For a fee of £21 a transcript of registry is available from the Registry identified? of Shipping and Seamen. This transcript will show details of the ship, Details of a company’s directors, officers, secretary and shareholders the name and address of the current ownership and shareholding in will be listed on the company’s annual return which can be requested the ship and details of any mortgages over the ship. from Companies House. Companies House also maintains an acces- sible register of company secretaries and directors, and companies 2 How can one determine whether there are any liens recorded over are required to make filings upon a change of any director or secre- a vessel? tary for the purposes of this register. However, as mentioned above, The transcript of registry only shows any mortgages registered over the accuracy of Companies House data is reliant on companies mak- a ship. Liens do not need to be registered under English law. ing the required filings in a timely manner. Companies are also required to keep a register of directors list- 3 How does one determine whether there are any security ing each director’s name, service address, country in which he or she agreements, liens, charges or other encumbrances granted is usually resident, nationality, business occupation and date of birth. by a vessel owner or affiliated party who might be a borrower, The register must be kept at the company’s registered office or at a guarantor or other credit party in connection with a vessel finance single alternative inspection location. Any person is entitled, on pay- transaction? ment of a prescribed fee, to inspect a company’s register of directors. See questions 1 and 2. A transcript of registry will demonstrate In addition, companies must keep a separate register of directors’ whether a mortgage has been granted over the ship and registered. residential addresses. This is not available for public inspection. However, unregistered mortgages are possible Companies are also required to keep a register of members list- If the shipowner is a company registered in the United Kingdom ing members’ names and addresses, date registered and the number a search of the Companies House register for the relevant part of of shares held. Again, the register must be kept at the company’s the UK will reveal any fixed or floating charges granted by the ship- registered office or at a single alternative inspection location and owner and registered. any person is entitled, on payment of a prescribed fee, to inspect a A writ search can be carried out at the Admiralty and company’s register of members. Commercial Court for a fee of £10 to determine whether any claims The register of shareholders maintained by the company and have been commenced against the ship. This may demonstrate any the annual return will identify only the registered shareholders. They encumbrances over the ship. will not identify whether the registered shareholder is holding them as a nominee for another, nor describe any equitable interests which 4 Can one determine whether an obligor registered in your exist. Bearer warrants (ie, bearer shares) are possible, though not jurisdiction is duly organised and in good standing from a search common, and it may not be possible to identify the current holder of of a public registry? these from the public record. A search on the Companies House website will show key informa- 6 What corporate or other entity action is necessary for an obligor tion such as the registered office, date of incorporation, insolvency to enter into or guarantee a debt obligation? When is action by actions registered against the company and key future filing dates. the board of directors or other governing body required? Must Company accounts and annual returns can also be accessed for a £1 shareholders approve a guarantee? fee. However, the accuracy of Companies House data is reliant on companies making filings. Entry into a debt obligation or guarantee must be duly authorised Good-standing certificates can be ordered from Companies by the appropriate corporate action. Typically this will be by means House. A good-standing certificate will state that a company has of a resolution of the board of directors, although the board may been in continuous, unbroken existence since its incorporation and delegate powers to individual directors or others to enter into such that no action is currently being taken to strike the company off obligations on behalf of the company. A shareholders’ resolution the register. A good-standing certificate may also, if requested, show is not usually required either for guarantees or loans unless the names of directors, the secretary and shareholders, issued capital loan is made to a director or the guarantee is given on his behalf. and company objects. Shareholder approval may also be appropriate if the directors have A search at the Bankruptcy and Companies Court will deter- doubts as to whether a transaction is of benefit to the company mine whether any proceedings have been lodged against a company. and therefore if the transaction would be a proper exercise of their This can be done using the search computers at the Bankruptcy and powers. Companies Court (a £10 fee is payable) or by telephone. The company’s articles of association or other constitutional documents may place restrictions on the giving of guarantees or

98 Getting the Deal Through – Ship Finance 2014 Holman Fenwick Willan LLP UNITED KINGDOM impose procedures which must be followed in order to authorise the taxtreaties/in-force/index.htm. In ship finance transactions, lenders entry into a debt or guarantee obligation, but (subject to exceptions will typically require that a tax gross-up clause be included in the relating to transactions involving directors) in favour of a person loan documentation. dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be Registration of vessels free of any limitation under the company’s constitution (section 40, 11 What vessels are eligible for registration under the flag of your Companies Act 2006). country? Are offshore drilling rigs or mobile offshore drilling units considered vessels under the laws of your jurisdiction? What is 7 Must foreign lenders qualify to do business in your jurisdiction the effect of registration? to extend credit to a borrower organised in your jurisdiction? The UK Ship Register (the Register), which is maintained by the Will foreign creditors be deemed resident as a consequence of Maritime and Coastguard Agency (MCA), is split into four parts making a loan or other extension of credit to an obligor within your depending on the type of ship: jurisdiction? • Part I – merchant vessels and pleasure vessels or large yachts Foreign banks or other lenders do not need to seek UK regulatory over 24 metres; approval to extend credit to an English company, and there are no • Part II – fishing vessels; exchange controls in place that would restrict payments from an • Part III – Small Ships Register for ships under 24 metres; and English company to such foreign lenders. Corporate lenders will not • Part IV – bareboat charters of foreign-flagged vessels that are be deemed UK-tax resident unless they are incorporated in the UK chartered on bareboat charter party terms by a charterer. or are centrally managed and controlled here. A non-resident company that trades through a UK permanent establishment is liable to A ship may not be registered in more than one part of the Register pay UK corporation tax on the profits arising from that permanent and the MCA does not permit the registration of ships under establishment. However, please also note question 10 in relation to construction. withholding tax on interest payments. The Merchant Shipping Act 1995 provides that ‘ship’ includes every description of ship used in navigation (section 313). It is Repayment unclear under English law whether offshore drilling rigs or mobile offshore drilling units would be classified as ships. It is important 8 Is central bank or other regulatory approval required for repayment whether such structures are classified as ships or not because the of a loan in foreign currency? regulatory regimes that apply to ships are different from those that Regulatory approval is generally not required for repayments of a apply to non-ship structures. loan in foreign currencies, subject, however, to any international There are no age restrictions on ships registered with the sanctions that may be applicable to the currency in question. Anti- Register. However, ships over 15 years old must be approved by the money laundering and anti-terrorism regulations will also need to MCA’s technical experts before they can be registered. be complied with. The MCA has the power to refuse to register a ship, even if it is eligible for registration, on the grounds that the ship does not com- 9 Do usury laws limit the interest payable to a lender in respect of a ply with environmental or safety requirements. vessel financing? There is no legal requirement to register a ship under the UK Lenders granting loan facilities governed by English law need to flag. However, an owner will usually register a ship so that juris- exercise caution when setting the rate of interest payable if the bor- diction can be established over the ship. International law provides rower is in default of its obligations. General English law contrac- that all ships using the high seas must possess a national character. tual provisions will apply including common law rules on clauses Registration will also provide evidence of the ship’s nationality, it deemed to be a penalty and therefore unenforceable. Whether a will confer the right to fly the national flag and will provide the right clause setting out the default rate of interest would be deemed to to naval protection, diplomatic protection and consular assistance. be a penalty would be decided by the courts on a case-by-case basis; It will also provide prima facie evidence of the title of the registered however, there are established case law principles to follow, namely: owner and of registered mortgages. From a lender’s perspective, reg- (i) that default interest can only be charged while the default is con- istration is required in order to ensure that a mortgage can be regis- tinuing unremedied; and (ii) that the rate should be reasonable in tered against the ship on the Register, thereby enabling mortgagees terms of the current market (see Lordsvale Finance plc v Bank of to protect their interest. Zambia [1996]). Default rates of between 1 and 2 per cent above 12 Who may register a vessel in your jurisdiction? the contractual rate of interest applicable to the loan facility in question are common market practice in English law ship finance loan The ownership of a UK ship is divided into 64 shares. The Merchant agreements. Shipping Act 1995 provides that, in order to be registered as a UK ship under Part I of the Register, at least 33 of the shares (the major- 10 Are withholding taxes payable on principal or interest payments to ity interest) in the ship must be owned by persons or a company non-resident lenders? qualified to own UK ships (a qualifying owner). To be a qualifying owner the persons or company must fit into one of the following Payments of principal are not subject to UK withholding tax. categories: However, payments of interest by a UK-based borrower to a foreign • British citizens; lender are subject to a 20 per cent withholding tax at source. This rate • British Dependent Territories citizens; may be eliminated or reduced under the terms of a double taxation • British citizens living overseas; treaty, or under the EU Interest and Royalties Directive in the case • citizens of an EU member state exercising their rights under arti- of EC lenders. The lender must make a formal application to the UK cle 48 or 52 of the EU Treaty in the United Kingdom; tax authority (HMRC) for approval to receive interest gross or at a • companies incorporated in one of the European Economic Area reduced rate of withholding tax, and until the borrower has been countries; notified by HMRC that a reduced rate of withholding tax applies, the • companies incorporated in a British overseas possession having borrower must deduct a 20 per cent withholding tax before payment their principal place of business in the United Kingdom or in to the lender. A list of all the countries with which the UK has entered that overseas possession; and into double taxation treaties can be found at www.hmrc.gov.uk/ • European economic interest groupings. www.gettingthedealthrough.com 99 UNITED KINGDOM Holman Fenwick Willan LLP

Where more than one qualifying owner of the ship is resident in 16 Who maintains the register of mortgages? What information does the UK, one of the qualifying owners will be appointed the manag- it contain and where are such filings to be made? What is the ing owner of the ship and will receive all correspondence from the effect of registration? MCA. The register of mortgages over UK ships is the responsibility of the If none of the qualified owners are resident in the UK, a repre- centralised Registry of Shipping and Seamen (the Registry). Filings sentative person must be appointed who may be either an individual are made to the Registry. resident in the UK or a company incorporated in one of the EEA A mortgage creates a fixed security over the ship, which attaches countries with a place of business in the UK. to the ship in rem. The mortgage will survive a change of owner- There are additional requirements for registration of fishing ves- ship. It entitles the lender to sell the ship and use the sale proceeds sels and small ships. to pay off the amount owing to it if the owner is in default. Under All applications for registration shall be made to the Registrar at the Merchant Shipping Act every registered mortgagee shall have the Registry of Shipping and Seamen. Registrations can be made in power, if the mortgage money or any part of it is due, to sell the ship person or by post and must be supported by a declaration of eligibil- or share in respect of which he is registered, and to give effectual ity in the approved form, which shall include a declaration of British receipts for the purchase money. connection, a declaration of ownership by every owner setting out Mortgages are registered in the order in which they are pro- his qualification to own a British ship and a statement of the number duced to the registrar for the purposes of registration. Registration of shares in the ship, the legal title of which is vested in each owner. gives the mortgagee higher priority over unregistered mortgagees. This is so irrespective of whether the unregistered mortgage was cre- 13 Is there an alternate registry for international shipping ated first and is irrespective of knowledge. Where more than one operations? mortgage is registered against the same ship or share, the priority of There is no alternative registry for international shipping operations the mortgages between themselves shall be determined by the order or time in which the mortgages were registered, the earliest regis- that allows for foreign ownership of ships registered in the UK. tered mortgage having priority. However, if an overseas company opens an establishment in the Failure to register a mortgage does not render the mortgage UK or has some degree of physical presence in the UK, for example, void. However, an unregistered mortgage will be an equitable mort- a place of business or a branch through which it carries on business, gage and an unregistered mortgagee will not have priority over a the overseas company must register with Companies House. See subsequent registered mortgagee. Part 34 of the Companies Act 2006 and the Overseas Companies Under English law, any person who is an intending mortgagee Regulations 2009/1801 for further information. under a proposed mortgage may notify the registrar of the intended interest, and the registrar shall record that interest. This is known as Ship mortgages and other liens over vessels a ‘priority notice’. A priority notice has effect for a period of 30 days. 14 What types of ship mortgages exist and what obligations may a If the mortgage is executed and registered within 30 days and during ship mortgage secure? Can contingent obligations, including swap that time another mortgage has been registered, the mortgagee with obligations, be secured? Are there standardised forms? the priority notice will take priority over the other mortgage even The UK statutory forms of mortgage generally fall into two cat- though it has been registered first. egories, those securing ‘principal sum and interest’ only, and those 17 Must the total amount of the mortgage be stated therein? Must securing an ‘account current or other obligation’. Ship mortgages the mortgage contain a maturity date? Must the underlying debt can be granted by an owner to secure their own obligations whether instrument be filed with or attached to the recorded mortgage? as principal debtor or as guarantor of another party’s obligations, although where a third party granting a ship mortgage is a UK com- Neither the total amount of the mortgage nor the maturity date need pany lenders should ensure that the English law corporate benefit to be stated. tests are met. Because principal sum and interest mortgages will not It is only the original mortgage instrument that must be pre- secure contingent or other liabilities beyond principal and interest sented when registering the mortgage with the Registry – neither the payable under the loan, it is ‘account current or other obligation’ underlying debt instrument nor the deed of covenants need to be mortgages that are usually used in ship finance transactions. The filed or attached to it. The Registry will endorse the mortgage with the date and time of its registration and then it will be returned to current pro forma UK statutory mortgages are issued by the MCA. the mortgagee. These contain limited information, and although English statute and Where the owner is a UK company, the mortgage and deed of common law provides mortgagees with a number of general rights covenants should also be registered with Companies House within if the owner defaults (such as the right to take possession of the 21 days of creation of the charge. ship, the right of sale, the right to appoint a receiver, the right to foreclose and the right to arrest the ship), it is usual that a lender will 18 Can a mortgage be registered in the name of an agent or trustee also require that a deed of covenants ‘collateral’ to the ship mort- for the benefit of multiple lenders? gage be executed. This will set out the lender’s rights and powers in Yes, the Registry will accept for registration of a mortgage in favour more detail. The deed of covenants is not registrable with the MCA. of an agent or trustee (or, under English law, more commonly known However, if the owner is a UK company, the deed of covenant, as a security trustee) for the benefit of multiple lenders. together with the ship mortgage, must be registered at Companies House to ensure the lender’s priority (see question 17). 19 If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the 15 Give details of any required form for ship mortgages in your underlying debt among existing lenders or to a new lender? jurisdiction. English law has well-established principles of trust and agency. If a The Merchant Shipping Act states that a registered ship mortgage syndicate of banks have put a trust structure in place whereby one of must be in one of the forms prescribed pursuant to that Act and those lenders acts in a separate capacity as security trustee for itself published on the MCA website, www.dft.gov.uk/mca/. and the other syndicate members, then for so long as the security trustee remains appointed in this capacity, security will not need to be amended if any of the syndicate banks (including the security trustee in its separate capacity as lender) sells or otherwise transfers its loan commitment to another lender.

100 Getting the Deal Through – Ship Finance 2014 Holman Fenwick Willan LLP UNITED KINGDOM

20 If the mortgagee transfers its interest to a new lender, agent or 25 What is the procedure for enforcing a mortgage in your jurisdiction trustee, what filings are required? Is the mortgagor’s consent by way of foreclosure? Are interlocutory sales permitted? How required? long does a judicial sale take? What are the associated court The UK statutory form of mortgage can be transferred to a new costs and how are they calculated? mortgagee if the outgoing mortgagee completes and signs the form If the owner is in default under the mortgage documents, the mort- of transfer contained in the statutory mortgage and lodges this with gagee has the right to apply to the court for the arrest and sale of the Registry. The Registry would not require evidence that the mort- the ship if it is located within UK territorial waters. The Admiralty gagor has consented to this transfer. However, the loan documen- Court in England and Wales has jurisdiction over all ships in UK tation may have been negotiated in such a way that the lender or territorial waters irrespective of their flag. lenders may have to seek the borrower’s consent to any transfer of To arrest the ship, the mortgagee must issue its claim in the commitment or of the underlying security. If the lenders in question Admiralty and Commercial Court Registry. The claim form must also benefit from a deed of covenants this will need to be transferred then be served by fixing it on the ship. Usually the mortgagee will to the new security trustee (and details of the amendment filed with apply for the issue of a warrant of arrest at the same time as issu- Companies House for UK borrowers). ing its claim. For the court to issue a warrant of arrest the mortgagee must file an affidavit setting out, among other things, the 21 What other maritime liens over vessels are recognised in details of the mortgage and the default in payment by the owner. your jurisdiction? Do these claims give rise to a right to arrest The mortgagee must also provide an undertaking to meet the costs a vessel? In what circumstances may associated ships be of the Admiralty Marshal. Upon receipt of the application and the arrested? payment of the fees, the warrant of arrest will be issued and the Under English law, there are five categories of maritime lien: Admiralty Marshal will serve the warrant of arrest. After the arrest, • salvage remuneration; the ship remains in the custody of the Admiralty Marshal until it is • damage done by a ship; released or sold by the court. • master and crew wages; The mortgagee may make an application to the court for an • master’s disbursements; and order for sale. Once the order has been made, the ship will be valued • bottomry. and ship brokers will be instructed to advertise the sale in the trade press. Potential buyers will usually inspect the ship and make sealed These claims give rise to an action in rem against a ship and a right bids. The ship will then be sold for the highest bid (if the mortgagee to arrest a ship. finds a buyer privately, the court may, in exceptional circumstances, Maritime liens operate as a charge on the ship that will follow allow for the ship to be sold to that buyer, though recent case law the ship notwithstanding a change of ownership. This is so even has further limited the scope of such ‘private’ sales). Once the ship is where a purchaser is a bona fide purchaser for value without notice sold, the proceeds of sale are paid into court. The Admiralty Marshal of the claim. As maritime liens survive the sale of a ship, this may will submit his expenses and apply for leave to pay these expenses operate to allow the arrest of a ship even if it has changed ownership. from the fund in court. The mortgagee will then apply for judgment This is because the lien attaches to the ship at the time the cause of for an order for the payment out of the proceeds of the court. action arises and will remain attached until satisfied or time-barred. It is also possible to arrest a sister ship of a ship that is subject 26 May a vessel be sold privately by a mortgagee? Will the sale to a maritime lien if the owner of the sister ship was the owner or discharge liens over the vessel? demise charterer or bareboat charterer, or in possession or control of Yes, under English law a ship may be sold through the court or pri- that ship, when the cause of action arose in relation to the defendant vately by the mortgagee pursuant to the powers given to it under ship; and that person or entity is also the beneficial owner of all the the mortgage documents. The private sale by the mortgagee will not shares in the sister ship when the claim is commenced. discharge liens over the ship unless they are discharged from the The Senior Courts Act 1981 sets out a list of maritime claims proceeds of sale. which give rise to a statutory right of action in rem against a ship. These are commonly referred to as statutory liens and these also give 27 What are the limitations on rights of self-help by a mortgagee? rise to a right to arrest a ship. See question 14 regarding the lender’s powers set out in the deed of covenants collateral to the mortgage. 22 What maritime liens rank higher than a mortgage lien? Claims for all of the liens set out in question 21 will rank higher than 28 What duties does a mortgagee owe to an owner or third-party a registered mortgage, even if they arise after the mortgage has been creditors? created or registered. A possessory lien will also rank higher than a With regard to a private sale of a ship by the mortgagee, it must take mortgage lien. all reasonable steps to obtain the best price reasonably obtainable Typically, a mortgage will have priority over statutory liens for the ship (Tse Kung Lam v Wong Chit Sen [1983]) and account unless a claim has been made and a writ in rem has been issued to the owner for any balance remaining once the amounts due have against the ship prior to the date of the mortgage. been discharged.

23 May non-mortgage liens be recorded over a vessel? Collateral Non-mortgage liens may not be recorded or registered over a ship 29 May finance leases or other charters be recorded over vessels under English law. flagged under the laws of your jurisdiction?

24 Will mortgages on ‘foreign’ flag vessels be recognised in your The only interests that can be registered against a UK-flagged ship jurisdiction? If so, do they share the same priority as those on are mortgages (see question 14). Therefore, there is no way to record vessels registered under the laws of your jurisdiction? a finance lease or charter against a ship on the Register unless obligations under those documents were secured by a mortgage against the Yes, in the United Kingdom mortgages on ‘foreign’ flag ships are ship, which generally is unlikely. recognised. The priority of the foreign mortgage will be the same as if it had been a similar mortgage over a UK-flagged ship.

www.gettingthedealthrough.com 101 UNITED KINGDOM Holman Fenwick Willan LLP

30 May finance leases be re-characterised by a court as a financing the intention of the parties. In order for a fixed charge to be taken contract? If so, is there any procedure for protecting the lessor’s over a bank account, the account holder must not be able to deal interest against third-party creditors? with the money in the charged account without written permission Where the party that has sold the asset and leased it back has a right from the security taker. If the account is being used frequently in against, or an obligation to, the buyer or lessor to retake title to the the course of the account holder’s business this restriction may be asset at the end of the lease, for example by paying an option price, impracticable. it is possible that a court may re-characterise the lease as a secured A floating charge over an account provides the security taker financing contract or loan. However, English courts are unlikely to with less security than a fixed charge because a floating charge-holder do this unless there is evidence that the sale and finance lease docu- is only paid out of asset realisations after fixed charge-holders, the ments do not record the true commercial motivations of the parties. expenses of the insolvent estate, and any preferential creditors have The lessor may seek indemnities from the lessee to guard against all been paid in full and a percentage of the remaining assets has such a risk. been ring-fenced for payment to unsecured creditors (see question 43). However, a floating charge is often preferred because it allows 31 How is a security interest created over earnings of a vessel, the account holder more control over the money in the account. The charter contracts, insurances, etc? How are these security account holder is free to withdraw funds from the charged account interests perfected? without the security taker’s consent. Security interests over earnings of a ship, charter contracts and A fixed or floating charge over a deposit account can be per- insurances can be created by means of an assignment. In order to fected by registering the particulars of the charge at Companies be effective as a legal assignment under section 136 of the Law of House. Property Act 1925, the assignment must be in writing, signed by the assignor and it must be absolute, and not purporting to be by way 34 How are security interests in non-vessel collateral enforced? of charge only. In addition, written notice of the assignment must Ship finance loan agreements will set out the circumstances, usu- be given to the debtor (eg, the charterer in an assignment of earn- ally named collectively as ‘events of default’, upon the occurrence ings and the insurer in an assignment of insurances). If the assign- of which the lender can accelerate the loan and enforce its security. ment satisfies these requirements, the legal right to the debt, all legal Depending on how the documents are drafted or negotiated, the and other remedies for the recovery of that debt and the power to borrower may have a number of days’ grace to remedy the default give good discharge without involving the assignor, transfers to the before enforcement action may be taken by the lender. assignee. If the assignment does not fulfil all of these requirements, it The lender’s security documents will often contain detailed does not necessarily fail. It is likely to operate as an equitable assign- enforcement provisions setting out the steps the lender is entitled ment. The disadvantages of this are that the lender cannot give a to take following an event of default, for example dating the signed good discharge for the debt without the agreement of the borrower stock transfer form provided collateral to a share charge to trans- and the lender cannot sue the debtor without joining the borrower fer ownership of the shares in the borrower away from its parent, into the action. or (though infrequent in shipping transactions) by appointing a Alternatively, these security interests can be created by means of receiver in respect of the charged assets. If the borrower or other a fixed or floating charge. Any charges over UK-flagged ships must obligor disputes the lender’s enforcement action (eg, a guarantor be registered with Companies House in order to ensure they take refuses to pay overdue amounts that the borrower has failed to pay), priority. Fixed and floating charges are discussed in more detail in the lender will need to enforce its rights either through the English question 33. courts, or if the borrower or other obligor is insolvent and unable to pay, as a secured creditor in the relevant insolvency regime to which 32 Must security interests against non-vessel collateral be registered the borrower or other obligor is subject (see question 41). to be enforceable? If so, where are such filings made? The two most common types of security interest against non-ship- 35 How are share pledges for vessel financings established? Are related collateral are security over the borrower’s shares, and secu- share pledges or share charges common in your jurisdiction? rity over a bank account. Security interests over bank accounts are Security over shares is common in ship finance transactions as the discussed in question 33. borrower will often be a limited liability company or special purpose Ship finance lenders will often take a charge or pledge over the vehicle with no assets other than the ship itself. Under a share pledge shares in the borrower company. A share pledge is the appropriate or charge, all of the shares in the borrower are charged or pledged form of security where shares are in bearer form. A share charge is to the lender, who, following a default by the borrower under the used where shares are registered. The main advantage of a share loan, will be able to step in and take ownership of the borrowing charge or pledge is that following an event of default (see question company or, alternatively, sell the shares to a third party. This gives 34), the lender will be able to sell the shipowning company as well the lender the ability to sell the shipowning company, as well as the as the ship itself. ship itself. In order to secure priority a share charge or pledge should be The share security will either be in the form of a ‘share pledge’ or registered at Companies House. Although some security created a ‘share charge’. The form will be dependent on whether the shares over shares may be subject to the Financial Collateral Arrangements are bearer shares or registered shares. (See question 32.) Regulations 2003, which provides that the security does not need A share pledge depends upon physical possession of the share to be registered, most practitioners still take a cautious view and certificates. In order to perfect its security, the lender will want pos- register the security at Companies House. session of all of the share certificates of the issued shares of the borrowing company. 33 How is a security interest over a deposit account established? A share charge does not legally depend on the bank having How is a security interest perfected? physical possession of the share certificates. However, in the event A security interest over a deposit account is usually taken by way of that the borrower defaults and the lender wishes to sell the shares, a fixed or floating charge. the lender will need the share certificates and executed stock transfer A fixed charge gives the security taker control over the charged forms in order to perfect its security. Therefore, as an ancillary to asset. If the security taker does not have sufficient control over the the share charge, the lender will require the borrower to execute asset, the charge will be floating and not fixed, even if this was not undated stock transfer forms which, following an event of default

102 Getting the Deal Through – Ship Finance 2014 Holman Fenwick Willan LLP UNITED KINGDOM by the borrower, the lender will then complete in favour of itself or, • the ships must be ‘qualifying ships’. This means they must be more likely, a new arm’s-length shareholder. 100 GT or more, be seagoing and be used for a ‘core qualifying For both a share pledge and a share charge, the lender will also activity’. These activities are: carriage of passengers or cargo by require undated letters of resignation from each of the directors of sea; towage, salvage or other marine assistance carried out at the borrowing company to enable the lender to replace the directors sea; and transport by sea in connection with other services nec- and officers of the company with its own team in the event of default essarily provided at sea; by the borrower. Irrevocable proxies and directors’ undertakings • qualifying ships must be strategically and commercially man- may also be obtained. aged in the UK. Strategic and commercial management will be In the UK, the share pledge or charge should be registered at assessed by reference to certain specific criteria; and Companies House against the shareholding company. • the company must not time charter on average more than 75 per cent of its net tonnage. 36 Is there a risk that a pledgee, before or after exercise of the share pledge, may be exposed to debts or other liabilities of the pledged Companies electing to enter and remain within the tonnage tax company? regime must commit to providing officer-training places in pro- It is an established principle of English corporate law that a share- portion to the number of officers employed by the company on its holder of an English company is only liable for the company’s debts qualifying ships. up to the value of its shareholding. English courts strictly adhere to Tonnage tax-related losses cannot be used to reduce other prof- the corporate veil principle (whereby a company is recognised as a its liable to corporation tax. Tonnage tax companies are also not legal person separate from its shareholders), and will only pierce the permitted to deduct loan financing interest from other taxable prof- veil and look to the members in exceptional circumstances where a its or to claim capital allowances (tax depreciation) in respect of number of conditions are met and there is proven impropriety. vessels within the tonnage tax regime. Before and after the exercise of share security granted in its favour, a lender will, however, need to be aware of the English 39 What special tax incentives are available to shipowners statutory concept of ‘shadow director’ set out in section 251 of registering vessels in your jurisdiction? the Companies Act 2006, whereby persons (excluding professional There are no special tax incentives for shipowners registering vessels advisors) in accordance with whose directions or instructions the in the UK. The tonnage tax regime (see question 38) does not require directors of the company are accustomed, will be treated as directors that the vessels be registered in the UK. and therefore be subject to the same legal duties, and be liable in the same way if illegality is proven, such as fraud or misconduct in the 40 Are there any other noteworthy tax provisions specifically winding-up of the company in contravention of the Insolvency Act applicable to shipping, shipping income or ship finance? 1986. The Insolvency Act also treats shadow directors as ‘connected’ Taxable profits generated by shipping activities outside of the ton- to the company and provides liquidators or administrators with sig- nage tax regime (see question 38) are subject to UK corporation tax nificant power to challenge transactions involving shadow directors in the usual way. prior to the onset of insolvency as a preference or at an under value. The rate of capital allowances (tax depreciations) on ships has It should, however, be noted that, to date, a lender has not been now reduced to 8 per cent. This is partly responsible for a reduction proven in the English courts to be acting as a shadow director. in previously popular tax leasing products provided by ship financiers, where the financier would lease the ship to the customer and use Tax considerations for vessel owners accelerated tax depreciation to reduce the financing costs. 37 Is the income earned by the owners of vessels registered in your jurisdiction subject to domestic taxation? At what rate? Insolvency and restructuring

The mere registration of a vessel in the UK will not cause the income 41 Is there a general scheme of reorganisation or insolvency from operation of the vessel to become subject to UK tax. As indi- administration in your jurisdiction? cated in question 7, a company is subject to UK corporation tax if it is a UK tax resident or if it is non-resident but carries on a trade There is a general scheme of restructuring and insolvency admin- through a UK permanent establishment. A ship is not treated as a istration in the UK. It is the process of administration governed permanent establishment for this purpose. by Schedule B1 to the Insolvency Act 1986. Under these rules the The current rate of UK corporation tax payable on taxable administration of a company must achieve one of the following profits is 21 per cent. This will reduce to 20 per cent in 2015. objectives (in order of priority): • the rescue of the company (the primary objective); 38 Is there an optional tonnage tax exempting vessel owners from • the achievement of a better result for the company’s creditors tax on income? as a whole than would be likely if the company were wound up (without first being in administration) (the second objective); or In addition to the standard corporation tax rules in the UK, there • the realisation of some or all of the company’s property to make is a separate tonnage tax regime into which companies operating a distribution to one or more secured or preferential creditors qualifying ships that are strategically and commercially managed in (the third objective). the UK can elect. Those who elect into the regime pay tax based on the net tonnage of the ships operated rather than by reference to the If a ship mortgagor is subject to insolvency proceedings, all legal profits earned from such operations. The result is a very low effective proceedings against the mortgagor will be stayed by virtue of an rate of tax. An election into the tonnage tax regime has a minimum automatic moratorium. However, the mortgagee is still free to duration of 10 years. enforce its security and retain the proceeds of enforcement in pri- In order to qualify for tonnage tax the following criteria must ority to unsecured creditors, provided that the mortgagee does not be satisfied: require the assistance of the courts for such enforcement. • the company must be tax resident in the UK (see question 7); On the other hand, if the ship mortgagor is in the process of • the company must ‘operate ships’. This means it must own or administration, a moratorium is created (paragraphs 42 and 43, charter the ship. It is the operator of a ship that is eligible for Schedule B1, Insolvency Act 1986) during which no legal proceed- tonnage tax, so the owner of a ship will generally not be eligible if it charters the ship on bareboat terms; ings, or enforcement of security can take place without the consent www.gettingthedealthrough.com 103 UNITED KINGDOM Holman Fenwick Willan LLP of the administrator or the court. This moratorium does not alter the • proceeds of floating charge assets (less preferential debts and the substantive rights of any party against a company in administration, prescribed part) paid to floating charge-holders; but simply suspends the exercise of those rights during the adminis- • unsecured creditors (including the tax authorities) – rank equally tration. This does not prevent creditors from terminating contracts between themselves unless they are subject to a binding subordi- or from exercising rights of set-off. nation agreement; • interest incurred on all unsecured debts post-liquidation; 42 Will the courts of your jurisdiction respect the rulings of a foreign • any surplus paid to shareholders in accordance with the com- court presiding over reorganisation or liquidation proceedings? pany’s articles of association. The general English common law principle is that a foreign judgment will be enforceable in England and Wales if the defendant was A creditor may be required to disgorge payments from an insolvent • present in the foreign country; company where: • submitted to the jurisdiction of that court by voluntarily appear- • the insolvent company is found to have granted a preference, ing in proceedings; or which occurs where: • (before the commencement of the proceedings) the defendant • within six months (or two years if the person being pre- had agreed, in respect of the subject matter of the proceedings, ferred is connected with the company) before the company to submit to the jurisdiction of that country. went into liquidation, the insolvent company took an action which has placed a creditor in a better position than he Therefore, at common law, if a defendant was not present in the would have been in; jurisdiction of the foreign court and did not submit to that jurisdic- • the company was influenced by the desire to prefer that tion, he can generally expect that judgment will not be enforceable creditor; and against him in England and Wales. • at the time of the action, the company was unable to pay its However, the English common law position has been modified debts; or by various statutes, case law and EU regulation. • the insolvent company is found to have made a transaction at The EC Brussels I Regulation states that it is not a defence to an undervalue. This is where within two years before the admin- recognition of a judgment that the defendant did not submit to the istration or liquidation, a transaction was made with a person jurisdiction. However, this regulation expressly does not apply to connected to the company, at below the market value, and at the bankruptcy or insolvency proceedings so will not be considered here. time of the transaction the company was unable to pay its debts The EC Regulation on Insolvency Proceedings allocates jurisdic- as they fell due. tion to the courts of the country in which the insolvent company has its centre of main interests (usually its head office or the place In either case, an administrator or liquidator may apply to the court where the majority of its business was conducted). It then provides for an order avoiding any such action or transaction at undervalue for automatic recognition of the effects of that insolvency in all and the creditor may be forced to give back any profit he has made member states. as a result. The UNCITRAL Model Law on Cross-Border Insolvency, which has been implemented in English law by the Cross-Border 44 May a vessel owner provide security on behalf of other related Insolvency Regulations 2006, similarly provides for recognition by or unrelated companies? What are the requirements for it to be the English courts of foreign insolvency proceedings brought in the enforceable? courts of the debtor’s centre of main interests. To date, only some 20 Generally, under English law, a shipowner may provide security on countries have adopted the Model Law. behalf of other related or unrelated companies. In relation to public The Foreign Judgments (Reciprocal Enforcement) Act 1933 pro- companies (and private companies with a public parent company), vides for the recognition of judgments from specified jurisdictions, there may be issues regarding the giving of financial assistance that provided those judgments are registered. is prohibited under the Companies Act 2006. In the recent Supreme Court joined appeals of Rubin v In order for the security to be enforceable, the security must be Eurofinance SA and New Cap Reinsurance Corporation v AE duly executed and the party taking the security should be advised to Grant, the issue facing the court was whether the jurisdiction of the conduct due diligence as to the relevant corporate authorities of the English court to assist a foreign insolvency proceedings extended to shipowner providing the security. recognition of foreign judgments that would not otherwise be entitled to recognition due to the lack of submission to the jurisdiction 45 Is there a law of fraudulent transfer that permits a third-party by the defendant. creditor to challenge, for example, the grant of a mortgage The Supreme Court held that it would not recognise the judg- because of insolvency of the mortgagor or insufficient ment of a foreign court unless the defendant was present in or had consideration received by the mortgagor in exchange for the grant submitted to its jurisdiction. It made it clear that judgments of courts of the mortgage? in foreign insolvency proceedings are not to be accorded special status. Under English law, when a company has entered into insolvency proceedings, certain transactions that were entered into by the company 43 What is the order of priority among creditors? In what before the insolvency began may be challenged by an administrator circumstances will creditors be required to disgorge payments or liquidator under the Insolvency Act 1986. These transactions are from an insolvent company? known as ‘reviewable transactions’. The types of reviewable transaction or grounds on which a The order of priority among creditors in the UK is as follows: transaction may be challenged under the Insolvency Act 1986 are as • proceeds of fixed-charged assets (less direct realisation costs) to follows (in the case of (i) and (ii), see question 43). fixed charge-holders; (i) If the insolvent company has granted a preference (section 239). • fees and expenses of the liquidator or administrator; (ii) If the insolvent company is found to have made a transaction at • preferential debts paid to preferred creditors – usually limited to an undervalue (section 238). employee wages; (iii) If the insolvent company benefits a creditor by granting a float- • the ‘prescribed part’ set aside from realisations from floating charge assets for unsecured creditors (up to a maximum of ing charge for existing debt for no new consideration (section £600,000); 245). A floating charge may be avoided where:

104 Getting the Deal Through – Ship Finance 2014 Holman Fenwick Willan LLP UNITED KINGDOM

A creditor wishing to wind up a company should first: conduct Update and trends a search to ensure that no winding-up petition is already pending; search the register at Companies House to check whether the com- Clearly the withdrawal from ship finance markets by many well- pany is already in some insolvency procedure; and check with the established shipping banks is a trend that will significantly affect Companies Court to check whether there are any other winding-up the availability and cost of capital. Shipping is a capital-intensive petitions. industry and most owners will usually require access to some source of finance. US private equity funds have clearly viewed Winding-up petitions are usually made in the High Court (in this as an opportunity and are investing in both shipping debt and the Companies Court in London or a district registry if outside equity, whether bank loan portfolios in distress or strategic joint London). In order to compel liquidation, the creditor (who will be ventures and alliances with owners and operators. It is unclear the ‘petitioner’) must be able to prove to a court that the company is whether the investments of private equity funds in shipping, unable to pay its debts as they fall due. Methods include: combined with finance raised by the banks in the capital markets, will be sufficient to plug the gap left by the banks. • if a creditor (by assignment or otherwise) to whom the company owes a sum of £750 or more has served a statutory demand that has not been paid within three weeks; • if a judgment, decree or order of any court in favour of a creditor • it has been created in the 12 months (or in two years if in of the company is returned unsatisfied in whole or in part; favour of a person connected with the company) before a • if it is proved to the satisfaction of the court that the company is company’s insolvency to secure past indebtedness (eg, if a unable to pay its debts as they fall due; or floating charge is granted by the company to secure a loan • if it is proved to the satisfaction of the court that the value of the to the company that was previously unsecured); company’s assets is less than the amount of its liabilities, taking • it was given as a preference to a creditor; or into account its contingent and prospective liabilities. • it was given in exchange for prior consideration; and • at the time the floating charge was created, the company was The petitioner, once able to prove the company is insolvent, must unable to pay its debts or became unable to pay its debts as then prepare, file at court and serve on the company the petition for a consequence of the charge. winding-up. If the above criteria are satisfied, the floating charge will auto- At the hearing of the winding-up petition, the judge may: dis- matically be invalid and no application needs to be made by the miss the application; adjourn the hearing; make a winding-up order; office holder. make an interim order; or make any other order as it thinks fit. (iv) If the company entered into a transaction defrauding creditors When exercising his discretion, the judge will have regard to the (section 423). A transaction may be set aside where: wishes of the creditors. • the transaction was entered into at an undervalue; and Once a winding-up order is made, the official receiver becomes • the purpose was to put assets beyond the reach of a creditor the liquidator and upon the making of a winding-up order the liqui- or a person who is making a claim or make a claim against dator takes control of the company’s assets. the company. 47 Has your jurisdiction adopted the Model Netting Act of the There is no requirement for the company to be insolvent, in liquida- International Swaps and Derivatives Association (ISDA)? If not, tion or in administration in order to make a challenge under section may a swap provider exercise its close-out netting rights under an 245. ISDA master agreement despite an obligor’s insolvency? The Model Netting Act has not been adopted into English law. 46 How may a creditor petition the courts of your jurisdiction to However, English law has a statutory regime set out in Part VII of the declare a debtor bankrupt or compel liquidation of an insolvent Companies Act 1989 whereby the operation of certain (otherwise obligor? conflicting) provisions of the Insolvency Act 1986 are amended in Compulsory liquidation is a court-based procedure whereby assets order to protect the financial markets from the insolvency of market of a company are realised and distributed to the company’s credi- participants. The regime is complex, however, the general effect for tors and shareholders before the company is dissolved. The circum- institutions acting as swap providers is that if an institution closes stances in which a company may be wound up are set out in section out the contracts of a defaulting party, the gains and losses on those 122(1) of the Insolvency Act 1986. contracts are netted out and thereby either reduced to a net gain payable to the defaulter or a net loss provable in their insolvency.

Tony Rice [email protected] Ian Hughes [email protected]

Friary Court Tel: +44 20 7264 8000 65 Crutched Friars Fax: +44 20 7264 8888 London EC3N 2AE www.hfw.com United Kingdom

www.gettingthedealthrough.com 105 UNITED STATES Seward & Kissel LLP United States

Lawrence Rutkowski Seward & Kissel LLP

Due diligence liens, perfection of these liens is often accomplished by the filing of a Uniform Commercial Code financing statement (Form UCC-1) 1 How does one demonstrate title to or legal ownership of a vessel in the jurisdiction wherein the grantor of such liens resides (in the registered under the laws of your jurisdiction? case of an individual; where it has its principal place of business (in Vessels, at least most commercial vessels and in some instances pleas- the case of certain entities); or in the jurisdiction wherein the gran- ure craft, are registered under the laws of the United States with the tor was formed (in the case of a corporation or similar entity). The United States Coast Guard. The title to some pleasure craft is regis- actual rules can be rather complex in certain circumstances but are tered with the various states, but virtually all commercial watercraft, comparatively simple in the instance most likely applicable in the especially those trading internationally, are documented under fed- case of the financing of a US-registered commercial vessel. In these eral law. The Coast Guard office responsible for the registration of instances, the relevant party is likely to be a corporation formed title and the recording of liens is the National Vessel Documentation under the laws of one of the 50 states of the United States. If that is Center (NVDC) located in Falling Water, West Virginia. The NVDC indeed the case a creditor would perfect its security interest granted maintains all records regarding title to US-flagged vessels. The under a security agreement by a filing of a UCC-1 in the state of NVDC will issue a certificate of ownership (Form CG-1330), which incorporation of the debtor. Hence, in order to determine whether will indicate the identity of the registered owner of a vessel and will any such security interests exist against a party, one can perform a list any liens, predominantly mortgages, that have been recorded UCC search (typically using one of the many services that perform against the vessel (much like a transcript of registry available under this function for a nominal fee) in the relevant state or states. the laws of those jurisdictions whose merchant marine laws are based on those of England). The NVDC will also issue abstracts of 4 Can one determine whether an obligor registered in your title (Form CG 1332), which will detail the history of all transfers jurisdiction is duly organised and in good standing from a search and liens that have been recorded against the relevant vessel and any of a public registry? discharges of those liens from the date of initial issuance of a certificate of documentation for the vessel under the US flag. All transfers Yes. If the obligor is a corporation, limited liability company or of title are evidenced by bills of sale. like entity, a request to the secretary of state’s office in the relevant jurisdiction (again, typically performed through a third-party service provider) will result in confirmation that the obligor is in good 2 How can one determine whether there are any liens recorded over standing, that is, it continues to exist as a legal entity and is current a vessel? in its filing fees, or that it no longer is in good standing in which case A request to the NVDC for a certificate of ownership will produce further due diligence will be required to determine the exact status a document that will list any liens that have been recorded against of such entity. a vessel. Generally, the only liens recorded are preferred mortgage liens though, unlike many other registries, US law permits the filing 5 Can the shareholders or other equity interest holders, directors of a notice of claim of lien by anyone asserting a lien against a docu- and officers or other authorised signatories of an obligor mented vessel. Most maritime liens arise by operation of law and organised in your jurisdiction be determined from a search there is no requirement that they be recorded with the NVDC, the of a public registry? If not, how are these parties customarily exception being mortgages. All vessel mortgages must be recorded identified? with the NVDC in order to be valid ‘preferred mortgages’ that can be enforced by a foreclosure proceeding in the US federal courts. Generally, no. Except in certain limited circumstances, there is no requirement that a list of offices or directors or shareholders be made publicly available. This is not true, of course, in the case of a 3 How does one determine whether there are any security publicly traded company, which must file an annual report identify- agreements, liens, charges or other encumbrances granted ing its principal executive officers. Additionally, holders of 5 per cent by a vessel owner or affiliated party who might be a borrower, or more of a publicly traded US company must file a Form 13D guarantor or other credit party in connection with a vessel finance with the US Securities and Exchange Commission. However, none transaction? of this information is customary in the case of a private company, In order for a vessel to be registered under the US flag, such ves- in which instance the information must be obtained through due sel (among other things) must be owned by an individual, part- diligence or by way of a certificate of someone within the subject nership, trust, association, corporation or other entity that meets entity’s business (ordinarily the company secretary) who will certify certain requirements of US citizenship, the exact requirements to this information. depending, for example in the case of a corporation or like entity, on the nature of the registry endorsement sought. While maritime liens (other than mortgages) are by their nature inchoate, ‘secret’ lines not normally recorded anywhere, in the case of non-maritime

106 Getting the Deal Through – Ship Finance 2014 Seward & Kissel LLP UNITED STATES

6 What corporate or other entity action is necessary for an obligor Registration of vessels to enter into or guarantee a debt obligation? When is action by 11 What vessels are eligible for registration under the flag of your the board of directors or other governing body required? Must country? Are offshore drilling rigs or mobile offshore drilling units shareholders approve a guarantee? considered vessels under the laws of your jurisdiction? What is Historically, guarantees of third-party obligations were considered the effect of registration? ultra vires or beyond the scope of a company’s business and therefore beyond its corporate power. While that concept is no longer As defined in section 3 of Title 1 of the US Code the word ‘vessel’ includes ‘every description of watercraft or other artificial contriv- rigidly embedded in the corporate laws of many states, the laws of ance used, or capable of being used, as a means of transportation on some do explicitly provide that any guarantee, whether it is clearly water’. Recent interpretations of that expression by the US Supreme within the intended scope of such corporation’s business or not, will Court have injected an element of uncertainty into what legal prac- be enforceable if the shareholders of such corporation approve the titioners once thought was a well-settled area of law, but the prevail- issuance of the guarantee. ing view is that for these purposes the definition includes offshore With respect to debt obligations that clearly fall within a corpo- drilling rigs and mobile offshore drilling units. ration’s business scope, no shareholder approval is usually required Any ‘vessel’ of at least 5 NT not documented under the laws of a but a determination needs to be made as to whether or not the foreign country is eligible for registration with the NVDC provided incurrence of the debt obligation is within the ordinary course of it is owned by a citizen of the US (see question 12). A federal registra- the company’s business and whether it can be stated that it is part of tion of a vessel allows the vessel to fly the US flag and makes it eli- the day-to-day business of the company. Matters that are not ordi- gible to become subject to a ‘preferred mortgage’, which is generally nary, day-to-day matters should be approved by a company’s board considered to entitle the mortgagee to superior treatment compared of directors or, if the corporation has delegated such power to an with state-titled vessels. executive committee, the executive committee. The laws of each US state are different and while many mat- 12 Who may register a vessel in your jurisdiction? ters governing corporate law are consistent from state to state, not A US-flagged vessel must be owned by a US citizen to be docu- all such matters are and the laws of each relevant state should be mented with the NVDC. However, there are different levels of a reviewed by a qualified practitioner within such state. Moreover, citizenship with respect to certain entities and for certain trades. By each corporation is will have its own unique certificate or articles of way of example, a corporation seeking to register a vessel must be incorporation and by-laws and these need to be reviewed to make formed under the laws of the US or a state thereof, its chief executive any authoritative determination regarding the foregoing. officer must be a US citizen, no more of its directors may be non- citizens than a minority of the number need to constitute a quorum 7 Must foreign lenders qualify to do business in your jurisdiction of the board but the shareholders need not be US citizens. However, to extend credit to a borrower organised in your jurisdiction? if the vessel is intended to be used in the US coastwise trade (or the Will foreign creditors be deemed resident as a consequence of American fisheries trade) the corporation must be at least 75 per making a loan or other extension of credit to an obligor within your cent owned by US citizens. The complete rules and procedures for jurisdiction? determining when an entity (as opposed to an individual) is a US As a general rule, no. Simply making loans is not considered to be citizen are voluminous and the foregoing is a mere example. A full ‘banking’, which is a complex, regulated enterprise. But the laws analysis is beyond the scope of this summary and each case must be of each relevant state should be examined. Similarly, a lender will looked at thoroughly and independently. not ordinarily be deemed resident within the US solely by virtue of making a loan to a US-based entity or individual but this is an area 13 Is there an alternate registry for international shipping that defies generalisation and broad, sweeping conclusions of this operations? sort are of limited value. Each case should be looked at individually. No, there is no ‘alternate’ registry. Many US owners, both public and private, register commercial vessels with ‘open’ international Repayment registries such as the Marshall Islands, Liberia and Panama if there 8 Is central bank or other regulatory approval required for repayment is no compelling commercial need to register those vessels under the of a loan in foreign currency? US flag. No. However, as the legal currency of the US is the dollar, the courts Ship mortgages and other liens over vessels of most states will only award judgments in dollars. 14 What types of ship mortgages exist and what obligations may a 9 Do usury laws limit the interest payable to a lender in respect of a ship mortgage secure? Can contingent obligations, including swap vessel financing? obligations, be secured? Are there standardised forms? Each state has its own usury laws but many do not apply them for There is no prescribed form of mortgage in the US. Unlike the commercial transactions that meet certain size thresholds. The law English model, there is no statutory short form accompanied by a with respect to ship mortgages has no independent usury limitations. deed of covenants. Rather, a preferred mortgage typically includes the limited information required by law and NVDC procedures 10 Are withholding taxes payable on principal or interest payments to and whatever covenants the parties choose in include that are not included elsewhere in the relevant debt documentation. The ship non-resident lenders? mortgage, therefore, is by practice and custom a more comprehen- Loans by foreign lenders to US-resident parties may be subject to sive document than a statutory form mortgage. withholding taxes. As a consequence of certain bilateral treaties and reciprocal exemptions in the respective domestic laws, many trans- 15 Give details of any required form for ship mortgages in your actions are not subject to withholding taxes but each transaction jurisdiction. must be examined under federal law and the laws of the relevant While no form is required (see question 14), a mortgage must: state. • identify the vessel; • state the name and address of each party to the instrument; • state the amount of the direct or contingent obligations (in one or more units of account as agreed to by the parties) that www.gettingthedealthrough.com 107 UNITED STATES Seward & Kissel LLP

is or may become secured by the mortgage, excluding interest, has been the subject of extensive litigation in the courts. Obvious expenses, and fees; necessaries are fuel oil and repairs but particular contexts give rise • state the interest of the grantor, mortgagor, or assignor in the to more esoteric issues. Litigation has taken place in the courts over vessel; whether a fishfinder on a fishing vessel is a necessary, whether a • state the interest mortgaged; and piano is a necessary on a cruise vessel and whether seismic equip- • be signed and acknowledged. ment on an oil exploration vessel are necessaries. As in the case of other areas of the law, each asserted claim must be independently 16 Who maintains the register of mortgages? What information does examined in the context in which it arises but one can state as a gen- it contain and where are such filings to be made? What is the eral rule that the supplier of goods and services to a vessel essential effect of registration? for the operation and navigation of that vessel is likely to have a lien The NVDC maintains the register (see questions 1 and 2). The effect for the supply of necessaries. It is important to note that in many of a proper recording of a mortgage is that it becomes a ‘preferred circumstances the US courts will look to the law of the jurisdiction in mortgage’ entitled to the priority set out in the applicable statute which the claim arose to determine the existence of the lien. Hence, (formerly the Ship Mortgage Act and now codified in Title 46 of the notwithstanding the foregoing, if the jurisdiction where fuel oil was US Code section 31322 et seq). supplied to a vessel does not grant the supplier a lien under local law, the federal courts might not recognise it. 17 Must the total amount of the mortgage be stated therein? Must Other liens recognised under US law include: the mortgage contain a maturity date? Must the underlying debt (i) those for the wages of the master and the crew of a vessel and for instrument be filed with or attached to the recorded mortgage? any stevedore employed directly by a vessel; (ii) liens for damages arising out of maritime tort; The total amount of the mortgage must be stated therein (see ques- (iii) liens for general average; and tion 15). The underlying debt instrument does not need to be filed (iv) liens for salvage, including contract salvage. with or attached to the recorded mortgage, but if the debt instrument is not attached, the mortgage instrument itself should set forth 22 What maritime liens rank higher than a mortgage lien? sufficient information to be able to allow a court being asked to enforce the mortgage (or a third party inspecting the documents on Each of the liens listed in (i) to (iv) in question 21, together with any file with the NVDC) to determine what debts are in fact secured by liens that arose before the recording of the relevant mortgage will the mortgage and in what instances can the mortgage be enforced. have priority over the mortgage, as will expenses for the vessel in Hence, the practice has developed that the principal debt instru- custodia legis, that is, while in the possession of the court during a ments are filed as annexes to the mortgage document itself. foreclosure proceeding. Additionally, a lien for necessaries supplied in the US has priority over the lien of a preferred mortgage on a 18 Can a mortgage be registered in the name of an agent or trustee foreign-flagged vessel. for the benefit of multiple lenders? 23 May non-mortgage liens be recorded over a vessel? Yes. Because of the historical antecedents of ship mortgage law, a mortgage is generally viewed at law as being a contingent grant of As noted above, a party asserting a maritime lien claim against a US title to the vessel and not a mere grant of a security interest. Since a flag vessel may file a notice of claim of lien with the NVDC. The -fil trustee can hold property for one or more beneficiaries but an agent ing of such a notice does not alter or change the priority of the claim cannot hold title for its principal, the mortgage is usually granted or, by itself, create a lien. However, creditors sometimes file these in favour of the collateral agent for a syndicate of banks acting in notices to create procedural hurdles for future sales of the relevant capacity as trustee. vessel or to put mortgagees and other third parties on notice of the claim. 19 If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the 24 Will mortgages on ‘foreign’ flag vessels be recognised in your underlying debt among existing lenders or to a new lender? jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction? If a member of the syndicate is transferring is interest in the underlying debt to another party, no filing need be made with the NVDC Yes. With the exception noted in question 22, the priorities are the unless the mortgagee itself is changing. If the latter is the case (which same. is typical in a bilateral loan transaction or if the agent or trustee was the principal lender and is exiting the transaction), an assignment of 25 What is the procedure for enforcing a mortgage in your jurisdiction mortgage should be recorded with the NVDC. by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court 20 If the mortgagee transfers its interest to a new lender, agent or costs and how are they calculated? trustee, what filings are required? Is the mortgagor’s consent A mortgage foreclosure proceeding is started by the mortgagee fil- required? ing an ex parte motion for the arrest of the subject vessel with the See question 19 regarding mortgage assignments. The mortgage federal district court of the jurisdiction wherein the vessel is found assignment should contain the same formalities as those referenced at the time the arrest is sought. If such motion is granted (upon the above for a mortgage (but for the requirement of reference to a total successful demonstration of a prima facie case), the vessel will be amount). arrested. If the owner is unable to post a bond or other security for the mortgage claim, the vessel will remain in the custody of the court 21 What other maritime liens over vessels are recognised in pending an interlocutory sale thereof. Once such sale occurs at a your jurisdiction? Do these claims give rise to a right to arrest public auction any lien claims asserted against the vessel (including a vessel? In what circumstances may associated ships be the mortgage lien) shall attach to the proceeds of the sale and the arrested? parties will either settle or litigate their competing claims before the court. With certain very limited exceptions, any person providing ‘neces- The length of the process is variable and will depend on the saries’ to a vessel is entitled to a maritime lien claim enforceable by a circumstances at hand including whether the owner contests the civil action in rem in the federal courts. What comprises a necessary arrest as unlawful, the court’s docket and any claims brought by

108 Getting the Deal Through – Ship Finance 2014 Seward & Kissel LLP UNITED STATES creditors with respect to the setting of a minimum sales price at auc- a grant of security interest pursuant to a security agreement and the tion. Nonetheless, while the eventual litigation over the priority of filing of a UCC-1 (see question 31). lien claims make take upwards of a year, the process from arrest to interlocutory sale is measured in months. 33 How is a security interest over a deposit account established? How is a security interest perfected? 26 May a vessel be sold privately by a mortgagee? Will the sale Security interests in deposit accounts are governed by article 9 of discharge liens over the vessel? the Uniform Commercial Code. The security interest is granted by While a vessel may be sold by a mortgagee at a private sale if the an assignment or pledge. Perfection is achieved by the secured party mortgage instrument provides for such a right, such private sale will obtaining control over the account usually by way of a ‘control not be deemed to discharge liens against the vessel. Such discharge agreement’ whereby the depositary holding the account agrees to can only occur through a judicial process. act pursuant to the instructions of the secured party.

27 What are the limitations on rights of self-help by a mortgagee? 34 How are security interests in non-vessel collateral enforced? Self-help remedies cannot be exercised if the exercise thereof would This will depend on the nature of the collateral, particularly whether cause a breach of the peace. the collateral is in the possession of the secured party, the possession of a third party or a claim. Collateral such as shares that have been 28 What duties does a mortgagee owe to an owner or third-party certificated are usually held by the pledgee (see question 35) and can creditors? be sold by public auction or private sale without judicial interven- Generally, beyond the duty to act in good faith, a mortgagee owes no tion. In the case of an account pledge (see question 33), notice is duties to an owner in default or to a third-party creditor. However, usually sent to the depositary with instructions to remit funds in there have been cases brought in the US courts by third-party credi- the account to the secured party. Similarly, in the case of claims for tors that have alleged that due to its continued support of an other- payment, notice can be sent to the account debtor with instructions wise insolvent debtor, a mortgagee was essentially a co-venturer with to remit proceeds of the claim to the secured party. The debtor may the vessel owner and should have its claim equitably subordinated seek court action to prevent any action by a secured party it sees as to that of the third-party creditor. Historically, these claims have unlawful but, subject to a Chapter 11 bankruptcy filing, the secured met with little success but the risk thereof should not be completely party should prevail if it has been granted a security interest and it discounted. has been properly perfected.

Collateral 35 How are share pledges for vessel financings established? Are share pledges or share charges common in your jurisdiction? 29 May finance leases or other charters be recorded over vessels Share pledges are established by the execution of a share pledge flagged under the laws of your jurisdiction? agreement. In order for the share pledge thereunder to be perfected, No. the shares being pledged must be delivered to the pledgee if in certificated form or made the subject of a control agreement (analogous 30 May finance leases be re-characterised by a court as a financing to that discussed with respect to deposit accounts in question 33) contract? If so, is there any procedure for protecting the lessor’s with a securities intermediary (such as clearing house or broker) if interest against third-party creditors? in uncertificated form. There is always a risk in a bankruptcy proceeding that a debtor, It is custom and practice in vessel financings in the US that share bankruptcy trustee or third-party creditor will raise the argument pledges also require delivery of an irrevocable proxy giving the that a lease – depending on its characteristics – is a financing con- pledgee the right to vote the shares upon default, an undated instru- tract, not a true lease and that the asset at issue is an asset within the ment of transfer empowering the pledgee to transfer the shares upon estate of the bankruptcy debtor. The consequences of such a claim, default and sometimes undated letters of resignation and authority should it prevail, are serious. First, the lessor or creditor cannot seek from the directors and/or officers. All of this is subject to certain to terminate the lease and repossess the asset. Second, the lessor may limitations in those instances where vesting control in a non-US be deemed an unsecured creditor of the debtor since it will not have pledgee could violate law limiting transfer of control of US flag ves- a recorded security interest anywhere. While parties to equipment sels or give rise to tax concerns such as causing a deemed dividend leases involving equipment subject to the Uniform Commercial of otherwise tax deferred income (earnings of a controlled foreign Code often file precautionary UCC-1s precisely for this reason, there corporation engaged in international shipping). is no comparable mechanism under the US Ship Mortgage Act pursuant to which a lessor may file a claim of security interest. 36 Is there a risk that a pledgee, before or after exercise of the share pledge, may be exposed to debts or other liabilities of the pledged 31 How is a security interest created over earnings of a vessel, company? charter contracts, insurances, etc? How are these security The exercise of a pledge does not cause the pledgee of shares to be interests perfected? liable for the debts of the pledged company any more than the share- These interests are created by assignments, assignments of charters, holders who pledged the shares would be in the first instance. This assignments of insurances or other security agreement. The security concern is most often raised in the oil pollution context but unless interest granted thereunder will be perfected by the filing of UCC-1s the pledgee is exercising operational control of the relevant vessel under the Uniform Commercial Code to the extent the collateral or there is little risk of liability. the debtor are located in the US. Tax considerations for vessel owners 32 Must security interests against non-vessel collateral be registered 37 Is the income earned by the owners of vessels registered in your to be enforceable? If so, where are such filings made? jurisdiction subject to domestic taxation? At what rate? Security interests in non-vessel collateral (subject to certain excep- Other than with respect to a limited class of owners of US-flagged tions such as pledges of stock, pledges of deposit accounts and cer- vessels participating in the tonnage tax regime (see question 38), tain mobile equipment subject to certificates of title) are created by income tax is based solely on income earned by the owners sourced www.gettingthedealthrough.com 109 UNITED STATES Seward & Kissel LLP

similar activities in their jurisdiction, whether by reciprocal exemp- Update and trends tion or by tax treaty. Additionally, US taxpayers owning foreign- flagged vessels through ‘controlled foreign corporations’ may in There have been few, if any, significant developments in the laws appropriate circumstances defer taxation on the income earned by affecting ship finance over the past several years. What has such corporations until it is distributed or deemed distributed back happened is that market-driven developments have highlighted to the US shareholders. issues under certain laws, for example, the prospect that a lease may be re-characterised as a financing in a bankruptcy. In addition, the Chapter 11 process (see question 41) has been Insolvency and restructuring used more frequently by shipping companies both domestic and foreign. Broad interpretations by bankruptcy court judges 41 Is there a general scheme of reorganisation or insolvency of the jurisdictional grant of the Bankruptcy Code has resulted administration in your jurisdiction? in increased recourse to its protection by shipowners whose operations are predominantly conducted abroad. Commensurately, Yes, in the US this would be Chapter 11 of the US Bankruptcy Code. the use of Chapter 15 has grown. While the issues presented by Chapter 11, as it is widely known, is a complex scheme adminis- those cases that have been brought are not new, the issues have tered by separate bankruptcy courts in the US that has at its core been brought into starker relief within the shipping industry. the intent to provide a debtor with ‘breathing space’ to reorganise its business in a manner that is fair and reasonable to all stakeholders in the company subject to reorganisation. Once an entity files a petition for reorganisation under Chapter 11, there is an automatic within the US or on the income of the taxpayer if it is a US resident. stay that prohibits creditors subject to the bankruptcy court’s juris- The flag of the vessel is essentially irrelevant. diction from taking any action to enforce a claim anywhere and that would include a foreign enforcement of a ship mortgage. Moreover, 38 Is there an optional tonnage tax exempting vessel owners from a bankruptcy may give rise to claims of lease re-characterisation or tax on income? preference of fraudulent conveyances, none of which are likely to be Subchapter R to the US Internal Revenue Code allows both US and raised outside that context (see question 43). non-US corporations to elect to be taxed in certain circumstances on the basis of the tonnage of their US-flagged fleet used in ‘United 42 Will the courts of your jurisdiction respect the rulings of a foreign States foreign trade’, rather than on their income from such activities court presiding over reorganisation or liquidation proceedings? provided the corporation is the ‘operator’ of one or more partially or This will depend on the facts and circumstances of each case but fully self-propelled US-flagged vessels of at least 10,000 dwt, which Chapter 15 of the US Bankruptcy Code represents the domestic are used exclusively in US foreign trade. adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade 39 What special tax incentives are available to shipowners Law in 1997. Generally, a Chapter 15 case is ancillary to a primary registering vessels in your jurisdiction? proceeding brought in another country, typically the debtor’s home To the extent that the owners have taxable income in the US, country. As an alternative, the debtor or a creditor may commence a US-flagged vessels are subject to the accelerated cost-recovery system full Chapter 7 or Chapter 11 case in the US if the assets in the US are rules allowing owners to depreciate the vessels faster than ordinary sufficiently complex to merit a full-blown domestic bankruptcy case. straight-line depreciation for tax purposes. In addition, under Chapter 15 a US court may authorise a trustee or The Capital Construction Fund rules also allow owners of other entity (including an examiner) to act in a foreign country on US-flagged vessels to shelter some income from taxation if the behalf of a US bankruptcy estate. income otherwise subject to tax is set aside to build future vessels in the US. There are currently no available investment tax credits 43 What is the order of priority among creditors? In what for shipping. circumstances will creditors be required to disgorge payments from an insolvent company? 40 Are there any other noteworthy tax provisions specifically These questions cannot be answered summarily. Secured creditors applicable to shipping, shipping income or ship finance? are clearly treated in a superior manner to unsecured creditors who Section 883 of the Internal Revenue Code exempts foreign corpora- are in turn treated in a manner superior to equity holders, but under tions with US-sourced income from shipping or the leasing or hiring- Chapter 11 the determination of who is a secured creditor and who out of a vessel from US income tax if the jurisdiction wherein the is not requires a complicated analysis that is very much dependent ultimate owners are based exempts US shipowners from taxation for

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110 Getting the Deal Through – Ship Finance 2014 Seward & Kissel LLP UNITED STATES on the facts of the case. Such analysis is, however, often the most grant of security if the grantor was insolvent at the time of the grant contentious part of a bankruptcy proceeding. and did not receive a fair consideration (reasonably equivalent Disgorgement of payments from an insolvent company in the value). The tests for both insolvency and fair consideration can be US is the subject of the ‘preference’ rules in a Chapter 11 proceeding. complex. To the extent this subject can be broadly articulated, it can be stated that a payment made outside the ordinary course of business within 46 How may a creditor petition the courts of your jurisdiction to the 90 days preceding a Chapter 11 filing may be set aside as a pref- declare a debtor bankrupt or compel liquidation of an insolvent erence and that the party receiving such a payment may be ordered obligor? to disgorge it. An example of such a preference might be the early Any two or more creditors may petition to commence an involun- payment of a debt to one creditor that has the effect of granting that tary bankruptcy petition against a debtor. creditor preferential treatment with respect to others. 47 Has your jurisdiction adopted the Model Netting Act of the 44 May a vessel owner provide security on behalf of other related International Swaps and Derivatives Association (ISDA)? If not, or unrelated companies? What are the requirements for it to be may a swap provider exercise its close-out netting rights under an enforceable? ISDA master agreement despite an obligor’s insolvency? Yes, subject to such provision of security not being ultra vires, a The US Bankruptcy Code has provisions that specifically allow for preference or a fraudulent conveyance. netting of obligations under ISDA swap and derivatives transactions.

45 Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant of the mortgage? Yes. As a general rule, both in bankruptcy and under state law a third-party creditor may challenge a transaction providing for the

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SHIP FINANCE 2014 ISSN 2056-4015