The system of maritime mortgages

The maritime mortgage is an essential guarantee for the maritime business. It enables shipowners to obtain financing for the acquisition or construction of ships. Let's find out more about this special legal mechanism.

I. Presentation of the maritime mortgage

Definition and legal nature

A maritime mortgage is a security interest in a ship without dispossessing the owner. It gives the creditor the right to have the ship sold in the event of non-payment and to be paid in preference to the price.

Although a ship is a movable asset, the maritime mortgage borrows a number of characteristics from immovable mortgages. This is due to the high economic value of ships.

History

The modern origins of the maritime mortgage date back to the laws of 10 December 1874 and 10 July 1885. These laws created a legal instrument tailored to the needs of maritime trade.

Prior to this reform, maritime credit was mainly based on the "prêt à la grosse aventure", an old mechanism that was ill-suited to developments in maritime transport. The law of 1885 confirmed the maritime mortgage while abolishing the liens that provided security for loans granted before departure.

Specific features compared with land mortgages

Maritime mortgages have a number of distinctive features:

• It relates to movable property and not immovable property
• It extends to the ship's accessories
• Registration is limited to 10 years
• It coexists with a system of maritime privileges that are superior to it
• It is subject to a specific advertising regime

II. The legal framework

National sources

The maritime mortgage regime is currently codified in the Transport Code and the Customs Code. The main provisions are set out in articles L. 5114-3 et seq. of the Transport Code.

The Customs Code supplements these provisions with rules relating to the registration and publication of mortgages (articles 241 to 252).

International sources

International law plays an important role. The Brussels Convention of 10 April 1926 for the unification of certain rules relating to maritime liens and mortgages defines a harmonised framework.

This convention guarantees the international recognition of mortgages by the signatory states. It thus ensures that mortgages taken out on a ship in a contracting State will be respected in the other Member States.

Brussels Convention of 1926

The Convention establishes a hierarchy between maritime liens and mortgages. It gives priority to certain maritime liens (legal costs, assistance claims, etc.) over mortgages.

This international text enables mortgagees to benefit from uniform protection, regardless of the port in which the ship is located, provided that this port is situated in a State party to the Convention.

III. Constitution of the mortgage

Vessels liable to mortgage

Only registered ships can be mortgaged in France. This rule therefore excludes light craft and ships flying foreign flags, unless there are international provisions to the contrary.

A ship under construction can also be mortgaged. In this case, the mortgage must be preceded by a declaration made to the maritime mortgage registrar, stating the characteristics of the future vessel.

Basis of mortgage

The mortgage covers the body of the ship and all its accessories: machinery, gear, fittings and other equipment necessary for its operation.

Freight is not included in the basis of the mortgage, unlike maritime liens, whose basis includes seaworthiness.

On the other hand, the mortgage extends to compensation due to the owner in the event of loss or damage to the vessel. These indemnities include insurance on the ship's hull, which constitutes an important guarantee for the creditor.

Form and content of the deed

The mortgage must be in writing, otherwise it will be null and void. The deed may be either private or notarial. If it is a private document, it must be drawn up in several originals, as one copy must be deposited with the customs office.

The deed of incorporation must state :

• The identity of the parties
• The guaranteed amount
• The precise designation of the vessel
• Terms and conditions of reimbursement
• Agreements relating to interest

Another interesting aspect is that the mortgage deed may contain the words "to order", enabling it to be negotiated simply by endorsement.

Capacity and power

The mortgage may be constituted by the shipowner or his agent with a special written power of attorney.

For jointly-owned vessels, the manager may mortgage with the consent of a majority of interests representing three-quarters of the value of the vessel. Each co-owner may also mortgage his share.

IV. Publicity and enforceability

Registration of maritime mortgages

The mortgage must be entered in a special register kept by the maritime mortgage registrar of the place where the ship is registered.

To request this registration, the creditor must present the original title deed (or a copy if it is authentic), together with three signed slips indicating the essential details of the mortgage.

These registration formalities, which used to be managed by the customs administration, will from 1 January 2022 be the responsibility of the commercial court registrars responsible for keeping the register of movable securities.

Period of validity

A maritime mortgage expires ten years from the date of registration. This period differs from that for real estate mortgages, which may take longer to register.

The purpose of this limited period is to ensure a certain fluidity in shipping credit while protecting the creditor's interests for a reasonable period.

Renewal

The registration is renewed every ten years, as long as the mortgage has not produced its legal effect (repayment, transfer of ownership, auction on seizure).

This renewal must follow the same formalities as the original registration. Failure to renew results in the mortgage losing its rank and disappearing from the eyes of third parties.

Information for third parties

Third parties can find out whether a ship has been mortgaged by requesting a statement of registrations from the maritime mortgage registrar.

This advertising system allows potential buyers to find out about the charges on the vessel before making a commitment.

V. Effects of the mortgage

Preferential right

The maritime mortgage gives the creditor a preferential right over the sale price of the ship. This right is exercised after the maritime liens set out in article L. 5114-8 of the French Transport Code, but before the liens under ordinary law.

In the event of competition between several mortgagees, priority is determined by the date of registration. Mortgages registered on the same day rank equally.

Resale rights

The mortgagee has a right of resale enabling him to exercise his rights over the vessel, even if it has changed ownership. This right is exercised by means of seizure and execution.

The resale right is exercised subject to any purging formalities that may be carried out by the purchaser of the vessel.

Ranking among creditors

The hierarchy of creditors is as follows:

1. International maritime liens (in the order of article L. 5114-8 of the French Transport Code)
2. Maritime mortgages (in the order of registration)
3. Common law liens
4. Unsecured creditors

This hierarchy shows that mortgages, although important, remain subordinate to maritime liens, which can weaken their value as security.

Conflict with other security interests

Conflicts may arise between the maritime mortgage and other guarantees. For example, a pledge on the ship's tools and equipment may compete with the mortgage.

Case law has ruled in favour of the maritime mortgage in this case (Cass. com., 1 June 1970).

VI. Implementation and extinction

Default by the debtor

In the event of non-payment, the creditor may enforce the mortgage. There are several situations in which this may occur:

• Non-payment of instalments
• Forfeiture of term due to reduction in guarantees
• Voluntary sale of the vessel

The creditor has preventive remedies at his disposal, such as the possibility of demanding an additional guarantee if the vessel deteriorates or is exposed to perilous navigation not initially foreseen.

Execution procedure

The mortgage is enforced by means of an attachment procedure governed by articles L. 5114-23 to L. 5114-29 of the French Transport Code.

The procedure begins with a summons to pay served on the shipowner. If payment is not made within 24 hours, a seizure report is drawn up by a bailiff.

This is followed by legal proceedings before the enforcement judge, who organises the auction of the vessel.

Causes of extinction

The maritime mortgage is extinguished by :

• Full payment of the debt
• Expiry of registration (10 years without renewal)
• Waiver by the creditor
• Legal sale of the vessel
• The purge following a voluntary sale
• Total loss of the vessel

In the event of a voluntary sale, the mortgage lapses two months after publication of the transfer deed, unless the creditor objects.

Write-off

Cancellation of the registration may result from a voluntary act by the creditor or a court decision.

For voluntary deregistration, the creditor or his assignee who can prove his rights may file a notarial or private deed recording the discharge.

Judicial cancellation is carried out following a ruling by the court in the place of registration. The judge may order the total or partial cancellation of the registration.

The maritime mortgage offers creditors a solid guarantee, albeit subject to certain privileges. It is an essential tool in maritime financing, contributing to the development of transport by sea and shipbuilding.

Sources

Code des transports, articles L. 5114-3 et suivants Code des douanes, articles 241 à 252 Convention de Bruxelles du 10 avril 1926 Jurisprudence: Cass. com. 1 juin 1970 Fascicule 1095 du JurisClasseur Transport Document " Fasc. 30 : NAVIRE. - Maritime liens and mortgages. Seizure of the vessel. - Maritime credit".