Apr 26, 2016

How to Mortgage a Ship by Osinuga Damilola

Ship mortgage is a form of security wherein the ship-owner (“Mortgagor”) gives a lender (“Mortgagee”) an interest in a ship as security for a loan via a Deed and same is discharged upon repayment of the loan. Mortgages may either be equitable or statutory. The essential feature of a mortgage is that it is only a security transaction, where the property is redeemable by the mortgagor upon satisfaction of the debt.  By Section 326(1) of the Merchant Shipping Act 2007 (“MSA”), the mortgagee shall not by reason of the mortgage be deemed the owner of the vessel or share of it nor shall the mortgagor be deemed to have ceased from being the owner thereof.

Statutory Mortgage
Pursuant to Section 54(1) of the MSA, a ship registered in Nigeria, or a share in the ship may be made a security for a loan or other valuable consideration, and there shall be a proper written instrument creating the security. The document used for creating this security is a Deed of Mortgage. It is best that such mortgage be registered with the Corporate Affairs Commission (CAC) and Nigerian Maritime Administration and Safety Agency (NIMASA).

 Mortgage of ship creates the status of propriety claim pursuant to the Admiralty Jurisdiction Act 1991 which is usually superior to general maritime claim. This entitles the Mortgagee to institute an action in rem against the ship to realise its security. An action in rem is an action, which is brought directly against a property.

 Usually, statutory mortgage creates a superior security and ranks in priority over all unregistered mortgages or subsequently registered mortgages. Section 57(1) of the MSA states that a registered ship shall be entitled in priority over the other, based on the date on which each mortgage is recorded in the register and not according to the date of each mortgage itself.

 In principle, the property is realizable by the mortgagee if it is not redeemed by the stipulated date.  The law as regards the realization of mortgage on a ship is that if the mortgagor defaults or does anything that tends to jeopardize the security, the mortgagee of a controlling number of shares may take possession of the ship.  This was the position of the court in NATIONAL BANK OF NIGERIA LTD. V. OKAFOR LINES LTD. (No. 3) 1967 1 NSC 110. 

Upon taking possession, the mortgagee may use the ship within limits or sell her.  The mortgagee may use the ship for the purpose of earning freight.  The mortgagee is however not at liberty to do whatever he likes with the ship.  He must consider the interest of the mortgagor and succeeding mortgagees and the law requires him to use the ship only as a prudent man will use her.  He will be liable to the mortgagor for any loss sustained through the imprudent use of the ship. See ADALMA TANKER v. MERCANTILE BANK & ORS.  (1986) FHCLR 414.

Equitable Mortgage
Equitable mortgage is a mortgage in which the lender is secured by taking possession of all the original title documents of the property that serves as security for the mortgage. Sometimes it could be created by words. The most important element in this type of mortgage is that there is intent by parties to create mortgage. It is safe to state that this type of mortgage is only used where legal formalities are not complied with. Equitable mortgage is not a reliable and dependable security interest.

In practical terms, the lender who has an equitable mortgage acquires some preferential or recognizable interest in the vessel concerned, subject always to the over-riding interest of existing legal mortgages and maritime lien holders. Where there is a breach of the mortgage deed by the Mortgagor or a default in payment, the Mortgagor can take a number of actions as listed below:
·         Action in personam against the ship-owner;
·         Entitled to arrest the ship by an action in rem at the Federal High Court pursuant to Section 251 of the Constitution of Federal Republic of Nigeria and Section 5(2) of Admiralty Jurisdiction Act;
·         Right to repayment;
·         Right to take possession for the sale of a ship; and
·         Take benefit of insurance (if applicable).

This Article was produced by ‘Damilola Osinuga. LL.B, LL.M, ACIArb. A Legal Practitioner and expert in the areas of Maritime, Insurance, International Trade and Ship Brokerage.

Ed's Note: This article and photo were published by the author on 26th April, 2016 via https://www.linkedin.com/pulse/ship-mortgage-osinuga-damilola-b-l-aciarb-uk-?trk=hp-feed-article-title-publish