The maritime world fascinates, with its ships criss-crossing the oceans for trade or leisure. But behind the image of adventure, a ship represents above all a considerable investment and a major economic asset. Like any valuable asset, it can be used as collateral to obtain financing. For creditors - banks, shipyards, investors - it is essential to secure their loans or receivables. Maritime law has developed specific tools for this purpose, among which the maritime mortgage occupies a central place.
Much more than just a piece of movable property, a ship is an instrument of credit. Shipowners, whether they operate a single yacht or a fleet of cargo ships, need financing to build, acquire, maintain and operate their vessels. A maritime mortgage is precisely the kind of security that allows the ship itself to be used as collateral for a debt, without dispossessing its owner. How does this security work? Who can set it up? What rights does it confer on the creditor? This article sheds light on the workings of maritime mortgages under French law.
What is a marine mortgage?
A maritime mortgage is a security interest, meaning that it relates directly to an asset - the ship - to guarantee payment of a debt. It is said to be conventional, because it necessarily arises from an agreement of wills, from a contract between the shipowner and his creditor.. Unlike certain immovable mortgages, it cannot result from a court decision. This feature simplifies the system.
Its history in French law is relatively recent. For a long time, the very idea of mortgaging movable property such as a ship was rejected.. It was not until the law of 10 December 1874 that this security was officially created, responding to the growing financing needs of the maritime sector and bringing France into line with other maritime nations.. Perfected by subsequent texts, in particular the major overhaul of maritime law in 1967Today, maritime mortgages are governed mainly by Act no. 67-5 of 3 January 1967 and its implementing decree of 27 October 1967.The relevant provisions are gradually being incorporated into the Transport Code.
Which ships can be mortgaged? The law covers "ships and other seagoing vessels".. This includes commercial, fishing and pleasure vessels, as well as equipment such as barges, dredgers, floating cranes and even oil exploration and production platforms.. The essential condition is that the vessel is registered under the French flag and holds a certificate of registration, or that it is in the process of being registered.. The size or tonnage of the vessel is no longer important today.This is in contrast to the situation under the previous legislation. A small pleasure boat can therefore be mortgaged in the same way as a supertanker.
It is also possible to mortgage a ship under construction. In fact, it is a very common practice, enabling the shipyard or buyer to secure the necessary financing during the construction phase, even before the vessel is completed and fully operational. The mortgage may relate to the entire vessel or only to an undivided share of it, if the vessel is owned by several co-owners..
Given the international nature of maritime transport, the question of the applicable law frequently arises. The general principle is that the law of the ship's flag is competent to govern the constitution, validity and effects of the mortgage.. International conventions, such as the Brussels Convention of 1926 (still in force in France) or the Geneva Convention of 1993 (not yet widely ratified but influential), recognise the validity of mortgages constituted in accordance with the law of the State of registration, provided that they are correctly recorded in a public register.. French law thus accepts the validity in France of mortgages created abroad on foreign ships, or even on French ships..
How do you set up a maritime mortgage?
Setting up a maritime mortgage is subject to precise rules, both in terms of form and content.
Basic conditions
Who can grant a mortgage? Logically, only the shipowner can do so. The latter must have the legal capacity to dispose of the property, i.e. to sell it.. In the case of a company, the act must fall within its corporate purpose. Interestingly, case law has been able to validate a mortgage granted by a company considered to be fictitious, considering that the nullity of the company does not automatically entail the nullity of the security granted before the declaration of fictitious status, except in the case of fraud.. This shows the strength of the mortgage as a right attached to the vessel itself..
The owner may act through an agent, but the agent must hold a mandate. special expressly authorising him to mortgage the vessel. A general management mandate is not enough. Even the director of an owner company must, in principle, justify such a specific power for the mortgage to be enforceable against the company.. The master of the ship, although having extensive powers for the purposes of the expedition, may only mortgage the ship if he has an express mandate from the shipowner, except in exceptional circumstances and if it is impossible to communicate.
When the ship is owned jointly by several people (the so-called "quirats" system or traditional joint ownership), the shipowner-manager may only mortgage the entire ship with the agreement of a majority representing at least three-quarters of the value of the ship.. On the other hand, each co-owner may mortgage his own undivided share without the agreement of the others.although the value and liquidity of such a share are more uncertain.
For a ship under construction, the mortgage is granted by the owner of the ship during construction: the shipowner if the construction is carried out on an "economy" basis, or the shipyard if it is carried out on a "fixed price" basis.. A specific declaration must be made to the authorities (currently the customs department or the one-stop port office, depending on the case) to allow provisional freehold registration and the registration of the mortgage..
Form and publication requirements
A maritime mortgage is a solemn deed: it must be evidenced in writing, otherwise it will be null and void.. This document may be a notarial deed or a simple private document.. At least two originals must be produced, as one of them must be submitted for registration.. The deed may contain an "order to pay" clause, allowing the mortgage to be transferred simply by endorsing the deed, but this practice is rare..
Simply signing the deed is not enough. For the mortgage to be effective against third parties (other creditors, potential buyers of the vessel, etc.), it must be published.. Without publicity, it is only valid between the creditor and the debtor. Publicity is essential and ensures transparency.
The registration is made in a special register. Historically kept by the registrars of maritime mortgages within the Customs administration.Since 1 January 2022, this register (which forms part of the single register of movable securities) has been kept by the registrars of the commercial courts.. The registration is made at the registry in whose jurisdiction the ship is under construction or registered.. The mortgage is also mentioned on the ship's "registration card", an administrative document that records the ship's identity and legal status..
To obtain registration, the creditor must present to the registry the original (or a copy if it is a notarised deed) of the title constituting the mortgage, accompanied by documents known as "bordereaux".. These forms contain the essential information: identity of the creditor and debtor, date and nature of the instrument, amount of the secured debt, precise designation of the vessel, and the creditor's address for service.. Some of these details are essential for informing third parties.
There is also a form of "flying" publicity: a summary statement of mortgage registrations must be included in the ship's papers and updated on each departure.. This allows people who come into contact with the ship during its voyage (suppliers in a foreign port, for example) to be informed of its mortgage situation.
The registration preserves the creditor's right for ten years. To maintain the guarantee beyond this period, the registration must be renewed before the expiry of this period, otherwise it lapses..
What are the effects of a maritime mortgage?
A validly constituted and published mortgage confers on the creditor important rights designed to protect his claim in the event of the debtor's default.
The mortgage base
What exactly does the mortgage cover? The ship itself, i.e. its hull, its machinery, but also all the accessories that are essential for its navigation or operation, such as the gear (masts, sails, ropes, etc.) and equipment (anchors, chains, deck equipment, etc.).. Unless otherwise agreed, the mortgage automatically extends to all items that are added to or replace existing parts after the security is created, such as a new engine..
A delicate point concerns equipment purchased on credit and incorporated into the vessel, for which the seller has taken out a specific guarantee such as a pledge of equipment. Case law has ruled in favour of the mortgagee, holding that a pledge over equipment intended to be incorporated into a seagoing vessel cannot be set up against the holder of the maritime mortgage.. This solution protects the mortgagee but can complicate the financing of additional equipment for the shipowner. On the other hand, if a supplier has sold equipment (such as an engine) with a retention-of-title clause, this clause takes precedence over the mortgage: as the asset has never become the property of the shipowner, it cannot be included in the scope of the guarantee..
The mortgage does not extend to the freight (the price of transport) earned by the ship.. This is a significant difference from certain maritime privileges.
French law, on the other hand, applies the mechanism of real subrogation. If the vessel is lost or damaged, the mortgagee's rights are transferred to certain indemnities that replace the value of the property in the debtor's assets. This mainly concerns hull insurance indemnities (insurance covering damage to the vessel itself).. Insurers are often informed of the existence of mortgages and may even undertake to pay the creditor directly, although the law specifies that payments made in good faith by the insurer to the shipowner are dischargeable.. Subrogation also applies to compensation owed by a third party responsible for damage to the ship, to general average contributions received by the shipowner, or to certain salvage or assistance payments..
The mortgagee's prerogatives
The creditor whose mortgage is registered has three essential prerogatives:
- Protection measures The creditor may act to preserve the value of his pledge. He can use the action paulienne if the debtor fraudulently attempts to have the vessel escape his prosecution, even if the debtor is not insolvent. He can also oppose material acts (deliberate damage) or legal acts (excessively dangerous navigation not foreseen) that would significantly reduce the value of the vessel or seriously compromise its situation. The law specifically prohibits any transaction aimed at causing the ship to lose its registered status (e.g. a bogus sale to a foreigner) without the agreement of the mortgagees, on pain of nullity of the deed and criminal penalties (breach of trust) if fraudulent intent is proven. This does not prevent a real sale abroad if the rights of the creditors are safeguarded (repayment or agreement to transfer the mortgage).
- A preferential right This is the heart of the guarantee. In the event of non-payment of the debt, the mortgagee has the right to have the vessel seized and sold at judicial auction. From the price obtained at the sale, he will be paid before the other creditors, known as unsecured creditors, and before creditors benefiting from "second rank" privileges. His rank in relation to other mortgagees is determined by the date on which his mortgage is registered: the first registered is the first to be paid ("prior tempore, potior jure"). Mortgages registered on the same day compete with each other. Note, however, that certain maritime liens known as "first ranking" liens (legal costs, crew salaries, salvage, etc.) take precedence over others. always a mortgage, even if it was registered before the lien arose. For a detailed analysis of these priority guarantees and their hierarchy, please see our article dedicated to maritime privileges.
- A right of resale The mortgage "follows" the ship, even if it changes ownership. If the shipowner sells the mortgaged vessel without repaying the secured debt, the creditor can always seize the vessel from the new buyer to have it sold and be paid from the price. This is a very powerful prerogative. To protect purchasers acting in good faith, the law provides for a procedure known as "purging". The buyer can notify registered creditors of his purchase and offer to pay mortgage debts up to the purchase price. The creditors then have the choice of accepting the offer (which releases the vessel from the mortgage) or refusing and asking for the vessel to be auctioned off at a higher price (one-tenth higher bid). The right of resale also lapses if the ship is sold by court order, which has the effect of "purging" all previous securities. However, a judicial sale abroad does not automatically have this effect in France.
How does a maritime mortgage expire?
Like any security, a maritime mortgage is not permanent. It disappears mainly with the extinction of the debt it secures: if the loan is repaid, the mortgage no longer has any reason to exist..
It may also be extinguished by the creditor's express waiver, by completion of the purging procedure by a purchaser, or by prescription (although prescription of the action for payment of the principal debt is the most common case).. The forced sale of the vessel also puts an end to the mortgage.. Finally, in a very specific case, the final "capture" of the vessel (capture in wartime, for example) extinguishes the mortgage.but not confiscated by the courts.
Once the mortgage has been extinguished for one of these reasons, it must be deleted from the register of movable securities.. This write-off may be voluntary, if the creditor agrees (by deed or private document), or judicial, if the creditor wrongfully refuses the write-off even though the debt has been extinguished.. Cancellation is carried out by the registrar and officially releases the vessel from the charge represented by the mortgage..
Setting up or managing a maritime mortgage raises a number of specific technical issues. To secure your financing or assert your rights as a creditor, our firm can provide you with advice and assistance. tailored advice. Contact us for an analysis of your situation.
Sources
- Law no. 67-5 of 3 January 1967 on the status of ships and other sea-going vessels (articles 43 et seq.).
- Decree no. 67-967 of 27 October 1967.
- Transport Code (articles R. 5114-14-8 et seq.).
- Civil Code (general principles of mortgages).
- Brussels Convention of 10 April 1926 for the unification of certain rules relating to maritime liens and mortgages.
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