Security interests in river vessels: liens and mortgages

Acquiring, maintaining or operating an inland waterway vessel often represents a substantial investment. To finance these operations, recourse to credit is frequent. Conversely, many professionals (suppliers, repairers, crews, port authorities, etc.) may hold debts relating to the operation of the boat. How can lenders guarantee repayment? How can other creditors be sure they will be paid, especially if the boat owner runs into financial difficulties? This is where security interests come into play, legal mechanisms that use the boat itself to guarantee one or more debts.

Under French river law, there are two main categories of security interest that can be attached to a registered boat: liens and river mortgages. Liens are guarantees granted by law to certain claims deemed particularly worthy of protection. They often have priority but are generally hidden and temporary. A river mortgage, on the other hand, is a guarantee created by a contract between the owner of the boat and its creditor; it must be published to be fully effective and offers more lasting security. Understanding the operation, scope and, above all, classification of these different types of security is essential for creditors and owners alike. It is just as essential to master all the rules governing inland waterway transport; these securities are an essential component of financial stability and the transferability of boats. The ownership of a river boat is therefore subject to specific rules governing its financing and protection, in particular those relating to its identification, registration and tonnage. Understanding the priorities between liens and river mortgages can determine the financial viability of a boating project. It is therefore crucial for all boat owners to be well informed about their rights and obligations to avoid future disputes.

Liens: priority but often hidden legal guarantees

The law recognises that certain debts relating to the boat or its navigation deserve greater protection. It grants them a lien, i.e. a right to preferential payment from the sale price of the boat, ahead of other creditors. There are two types of lien applicable to boats: those specifically created by river law and those derived from the general law of the Civil Code.

Specific river privileges

The Transport Code, in harmony with Protocol No. 1 of the Geneva Convention of 1965, lists several claims benefiting from a river lien. It is interesting to note that these liens can arise even if the vessel is operated by a third party (a charterer, for example) and not by its owner. The property then guarantees the debt of another, unless the owner has been wrongfully dispossessed and the creditor was acting in bad faith.

What are these preferential claims? Article L. 4122-16 of the Transport Code lists them:

1. The legal costs incurred to achieve the forced sale of the boat and the distribution of the price (including the costs of custody during the seizure). These costs are even paid before all other creditors, including preferential creditors.
2. Claims arising from the employment contracts of the captain and crew members (for salaries, the lien is limited to six months). This priority is explained by the fact that these payments are for maintenance purposes.
3. Remuneration due for assistance or salvage of the vessel, as well as the vessel's contributions to general average (extraordinary expenses voluntarily incurred for the common salvation of the vessel and its cargo). These claims have benefited everyone by preserving the property.
4. Compensation due for damage caused by the boat in a collision or other shipping accident. Please note: this privilege only covers damage caused to other boats, port or river installations, people or property. not on board of the vessel responsible. Passengers or owners of goods carried on board therefore do not benefit from this specific privilege for their own damage.
5. Lastly, any navigation-related taxes (such as VNF tolls), port dues and pilotage fees.

The lien covers not only the principal claim, but also the interest and costs incurred by the creditor in obtaining a writ of execution (a judgement of conviction, for example).

Civil Code liens applicable to boats

In addition to these specifically river-related liens, article L. 4122-12 of the French Transport Code specifies that boats may also be encumbered by the general liens that the Civil Code recognises on movable property (articles 2331 and 2332). The most common of these are :

• The lien of the seller of the unpaid boat (lien of the seller of furniture).
• The "conservator's" privilege: the person who has incurred costs to conserve the item.

It is this last privilege in particular that can raise practical questions. What is meant by "conservation costs"? Case law hesitates between a strict approach (costs essential to avoid the imminent material loss of the boat) and a more economic approach (costs necessary to maintain the boat in a condition to fulfil its function). For example, the Court of Cassation has sometimes refused to consider as conservation costs the installation of equipment that simply improves operation or profitability. However, it has accepted the privilege when the installation of equipment (radio, etc.) had become compulsory in order to obtain a sailing licence, because without it, the boat would have been unfit for its purpose (Com. 31 Jan. 1962, Bull. civ. III, no. 66; Com. 9 Oct. 1984, no. 83-15.370). The dividing line sometimes remains blurred.

The basis and characteristics of liens

What do these privileges relate to? Obviously the boat itself. However, according to article L. 4122-13 of the French Transport Code, they also extend to all objects which, without being an integral part of the boat, are permanently attached to it for its operation (equipment, fittings, etc.). However, if these items do not belong to the owner of the boat (for example, equipment leased or sold with a retention of title clause), they are not covered by the lien. In addition, the legal status of inland waterway vessels can also influence the configuration of liens, as it determines the extent to which national or local regulations intervene in the recognition of owners' rights. It is therefore essential to understand this status in order to fully appreciate the legal implications, particularly in terms of protecting the assets attached to the boat. Indeed, misinterpretation of the legal status could lead to complex disputes over ownership and priority rights.

Liens also benefit from "real subrogation" on certain indemnities replacing the boat: indemnities due for its loss or for unrepaired material damage (including those resulting from assistance, salvage or general average). Please note, however, that this subrogation does not apply to not on the compensation paid by the boat's insurer in the event of a claim. This compensation is reserved in priority for mortgagees.

A major advantage of privileges is the resale right They follow the boat wherever it goes (article L. 4122-18 of the French Transport Code). Even if the boat is sold, the preferential creditor can have it seized from the new buyer to obtain payment.

However, this right of resale is offset by a major disadvantage: the river privileges are occult. They arise and are exercised without any publicity formalities. A buyer, even in good faith, may therefore discover after the purchase the existence of a previous lien of which he was unaware.

To limit this legal uncertainty, the law provides for a very short lifespan for these privileges. They fade away:

• Or with the debt they guarantee.
• Or, and this is the most important rule, on expiry of a very short period after the debt has arisen: one year for liens relating to salaries, assistance/rescue and legal costs of the sale ; six months only for others (damages, taxes). After this period, the lien disappears, even if the claim still exists.
• Lastly, the voluntary sale of the boat (if the creditor does not object quickly) or its forced sale in court also extinguishes the liens.

The river mortgage: the conventional guarantee par excellence

Long sought by the shipping industry to facilitate access to credit, the river mortgage was introduced into French law by a law of 1917, inspired by the maritime mortgage. Now governed by articles L. 4122-1 et seq. of the French Transport Code, it is a much more traditional and secure form of security than liens.

How do you set up a mortgage on a boat?

Unlike liens that arise automatically by operation of law, river mortgages are exclusively conventional. It is the result of a contract between the owner of the boat (the debtor or a third party who pledges his property as security for the debt of another) and the creditor. There is no legal or judicial mortgage in river matters.

Which boats can be mortgaged? Only registered boats or under construction (after a specific declaration to the registration office). An unregistered boat cannot be mortgaged.

The mortgage contract is solemn It must be established by writesThis can be a notarial deed or a private deed. This deed can be drawn up "to order", which allows the mortgage to be transferred at the same time as the debt by simple endorsement, facilitating the circulation of credit.

The vital importance of advertising

This is the fundamental difference with hidden liens. In order for a mortgage to be effective against third parties (other creditors, subsequent purchasers, etc.), it must be published. This publicity is done through a registration at the clerk's office of the commercial court in the place where the boat is registered, in the same register as that used for advertising sales.

The registration is made on presentation of two slips detailing the secured debt, the parties, the boat and the mortgage deed. It is the date of this registration that determines the rank of the mortgage in relation to any other mortgages on the same boat ("first registered, first served"). If several mortgages are registered on the same day, they compete with each other. The registration guarantees the capital of the claim, as well as three years' interest in addition to the current year's interest. It is valid for ten years and can be renewed before it expires to retain its rank.

Thanks to this publicity, any interested party (potential buyer, other creditor, etc.) can find out the precise mortgage status of the boat by requesting a statement of registrations from the registry. An extract of these registrations (or a negative certificate) must also be on board.

Registration can be struck off (and the mortgage disappears) either by agreement of the parties or by virtue of a judgment that has become final.

What the mortgage guarantees and its effects

The basis of the mortgage is similar to that of liens: it relates to the boat and its permanently attached accessories, except those that do not belong to the owner.

The effects of the mortgage for the creditor are classic:

• A preferential right The mortgagee will be paid out of the boat's sale price before unsecured creditors and, subject to certain reservations, before holders of liens under the Civil Code. Its ranking in relation to river liens and other mortgages depends on the classification rules (see below).
• A resale right The creditor can seize the boat even if it has been sold to a third party after the mortgage has been registered. Unlike the right to follow liens, the right to follow a mortgage does not create insecurity, because the mortgage was public and the buyer could (and should) find out about it.

To protect themselves against this resale right, the purchaser of a mortgaged boat can use the purge (articles R. 4122-7 et seq. of the French Transport Code). It consists of notifying the registered creditors of its offer to immediately pay the mortgage debts up to the amount of the purchase price. If a creditor is not satisfied, he or she may request that the boat be auctioned, by bidding first for a price 10% higher than the buyer's offer. In the event of an auction, the buyer must be aware that the creditors have the possibility of using the enforcement of seizure to assert their rights. This situation can lead to complications and delays in transferring ownership of the boat. It is therefore advisable to anticipate these steps and seek to negotiate with creditors before proceeding with the purge.

Finally, there is one notable advantage of mortgages over liens: in the event of loss or serious damage to the vessel, the mortgagee's right is transferred by real subrogation on the insurance indemnity paid by the insurer. Preferential creditors do not have this advantage.

Who gets paid first? Classification of securities

When a boat is sold (voluntarily or in court) and several creditors (preferential, mortgage, unsecured) come forward to be paid from the price, a strict order of payment must be respected. This is often where the real stakes are for the creditors.

The general hierarchy is as follows:

1. The legal fees incurred for the forced sale and the distribution of the price.
2. The river privileges (in the order set out in article L. 4122-16: crew wages, assistance/rescue, damages, taxes, etc.). Claims ranking pari passu are allocated on a pro rata basis, except in the case of salvage claims, where the most recent claims take precedence over the oldest.
3. L'river mortgage (the ranking between several mortgages depends on the date of registration).
4. The liens under the Civil Code (curator, salesperson, etc.).
5. The unsecured creditors (those who have no security).

However, there are important exceptions to this general rule:

• River privileges for damage caused by the boat only takes precedence over the mortgage if the damage is previous registration of the mortgage.
• The liens under the Civil Code can pass before a mortgage if the claim has arisen before the registration of the mortgage AND if the preferred creditor was in possession of the boat or had it seized before the registration.
• A particularly unfavourable point for mortgage creditors: case law considers that the general movable lien of the Treasury takes precedence over river mortgages, as there is no law to the contrary (contrary to what exists for ships and aircraft) (Com. 3 Feb. 1998, no. 95-18.690). The tax authorities can therefore take precedence over the mortgage lender.

Navigating the world of river security requires a certain amount of expertise to fully understand the rights and risks of each party. Whether you are a creditor looking for the best way to secure what you owe, an owner wishing to use your boat as collateral for financing, or a buyer looking to purchase a property free of unexpected charges, our firm can advise you on the best strategy and the precautions to take. Contact us to discuss your situation and find out more about our comprehensive range of legal services in commercial law.

Sources

• Transport Code (articles L. 4122-1 to L. 4122-21, R. 4122-1 et seq.)
• Civil Code (articles 2331, 2332)
• Geneva Convention of 25 January 1965, Protocol No. 1 concerning Rights in rem in Inland Navigation Vessels
• Case law cited (Com. 31 Jan. 1962; Com. 9 Oct. 1984; Com. 3 Feb. 1998, no. 95-18.690)