Memorandum on Ship Mortgages under Cyprus Law, by Sofi Mylona, Senior Lawyer at Chrysses Demetriades & Co. LLC , and member of WISTA-Cyprus
One can briefly defined a mortgage as a charge on a property securing money or money’s worth. It is the creation of a charge or encumbrance in favour of the lender of money by the person wishing to borrow. Thus, a shipowner who wishes to obtain money, may do so by borrowing money on the security of his ship, giving the person who is prepared to lend him the money, an interest in the ship as security for the loan. The shipowner is known as the “mortgagor” and the person lending the money is known as the “mortgagee”. It is well to know at the outset that a mortgagee incurs no liabilities to third parties since the mortgagor remains to owner of the ship or the shares in it.
- The Register of Cyprus Ships
Registrations, discharges, transfers and transmissions of mortgages relating to a Cyprus registered ship, must be recorded in the Register of Cyprus Ships. The Register of Cyprus Ships is a public register and is situated at the port of Limassol, at the Department of Merchant Shipping of the Ministry of Communications and Works. The Director of this Department is ex officio the Registrar of Cyprus Ships.
The Registrar keeps a Register, for entering therein of Cyprus ships and of any transfer or transmission or mortgage of any such ship or any share or interest therein. The Register is kept in the form prescribed by law and entries in the Register are made in accordance with the provisions of the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law of 1963, as amended (the “Law”).
The Mortgage Register shows only brief details of the mortgage, such as the date and time of its creation and registration, the name and address of the mortgagee and the number of shares mortgaged. Also, the Mortgage Register is open to inspection by the public upon payment of a search fee and a certified copy of the mortgage documents may be given on application and on payment of a relevant fee.
- Creation and forms of ship mortgages
Under the Law, any registered ship or share therein may be the subject of a mortgage created in accordance with the Law, without any restriction as to the type of ship mortgaged. Also, the mortgage is upon the ship, her boats and appurtenances. The judicial interpretation of these words is that they cover all articles necessary to the navigation of the ship or to the prosecution of the adventure which was on hand at the date of the mortgage or, which, though not then on board, were subsequently brought on board in substitution for other such articles.
The mortgage must be in a form prescribed by the Law and must be accompanied by a deed of covenants agreed between the parties and dealing with any matter relating to the mortgage, including certain matters prescribed by the Law.
The Law provides two forms of mortgages, (i) mortgage to secure principal sum and interest and (ii) mortgage to secure an account current.
The principal sum and interest mortgage form, is used when a fixed sum of money is advanced to the mortgagor at an agreed interest and the mortgagee is solely seeking to secure such a sum with interest. Whereas the account current mortgage form secures further amounts, such as possible costs and expenses or other liabilities of the mortgagor. The account current mortgage form, has become very popular and is nowadays the form of mortgage that is most commonly used.
The deed of covenants which must accompany the mortgage, contains the contractual agreement between the shipowner and the mortgagee and deals with any matter relating to the mortgage. The Law further states that the matters to be agreed between the parties to the deed of covenants shall include: the mode of payment of interest and of repayment of principal; the insurance of the ship and the renewals and applications of the proceeds thereof; limitations on employment of the ship, if any; definition of events of default upon which statutory or other agreed powers of the mortgagee may be exercised; and powers exercisable by the mortgagee.
- Registration of Mortgages
There is no legal obligation to register a mortgage. However, to have proper legal effect, registration is necessary. Any mortgagee who does not register his mortgage enjoys none of the benefits available under the Law.
A mortgage may be registered against a Cyprus ship simultaneously with, or subsequently at any time during the validity of its registration (provisional or permanent). The registration of a mortgage is officially certified by the issue of a transcript of register of the ship (if the ship is permanently registered at the time of registration of the mortgage) or a certificate of encumbrances (if the ship is provisionally registered at the time of registration of the mortgage), evidencing, inter alia, the registration of the mortgage and the particulars thereof. Such documents (which are issued by the Registrar on payment of the relevant fee) or the Register itself constitute, by an express provision in the Law, admissible evidence.
Under Cyprus law, a registered mortgage constitutes a charge on the ship itself and follows the ship; the mortgagee is afforded rights in the ship itself and may enforce the mortgage by proceedings against the ship in an action in rem, or he may exercise his statutory or other contractual powers against the shipowner in an action in personam. Therefore, under Cyprus law a ship mortgage constitutes a security right in the ship itself, i.e. a “right in rem”. The shipowner’s legal title to the ship is encumbered by and is subject to the ship mortgage and the mortgagee’s rights thereunder.
- Reliance of third parties
Third parties can rely on the correctness of entries in the Register and can assume that the entity/person who is entered in the Register as ship owner is in fact the entity/person who holds legal title to the ship.
The Law affords protection to a mortgagee who follows the provisions of the Law and acts for value, in good faith and on reliance to the entries in the Register when obtaining a mortgage from the registered owner of the ship. A mortgagee acting in good faith and for value, can obtain a valid mortgage under the Law by following the provisions of the Law and having his mortgage registered at the Register, even in cases where the registered owner of the ship has no or defective legal title to that ship.
In addition to the above, the Registrar of Cyprus Ships exercises quite strict due diligence procedure.
- Rank / protection of mortgagee
One of the most important advantage of registration is the obtaining of priority. If there is more than one mortgage registered in respect of the same ship, the mortgages shall, notwithstanding any express, implied or constructive notice, be entitled in priority one over the other, according to the date at which each mortgage is recorded in the Register (and not according to the date of each of the mortgages itself).
If two or more mortgages are registered on the same date, then their order of priority is determined by their respective times of registration.
Additionally the Registrar of Cyprus Ships requests the written consent of all existing mortgagees to the registration of a subsequent mortgage. The mortgagees’ consent is also required if more than one mortgage are produced for registration simultaneously; in this case the various mortgagees must agree as to the order in which they will be placed on the Register.
The priority of a registered mortgage cannot deteriorate and it is not possible to subordinate the mortgages by application to the Registrar. However, the Mortgagees may agree by contract between them to a variation of the priorities laid down by law but this does not in any way affect their respective priorities according to the Register.
Registration of a mortgage, which may be described as “notice to all the world”, protect the mortgagee against all later secured creditors of the shipowner and against all non-registered mortgages. Although failure to register does not invalidate the mortgage, it gives precedence to later registered encumbrances.
However, it must be noted that maritime liens enjoy priority over mortgages. A mortgagee, as regards his claim against the subject ship, is postponed to all maritime liens from the moment of their attachment. The main categories of claims in respect of which Cypriot law recognises and upholds maritime lines, are as follows:
(a) collision damage to property and person (including loss of life);
(c) emoluments, that is, wages plus all fringe benefits such as pension contributions, etc.;
(d) reimbursement to the master of disbursements made by him out of his own pocket on behalf of the owners.
It is not possible to record on the Register any encumbrances on a ship itself other than a mortgage. Court orders or injunctions, which may be obtained in a proper case preventing dealings with a ship, are recorded on the Register but they are not charges on the ship itself and cannot have priority over a mortgage. They are merely interlocutory measures taken in an effort to secure a claim and it is the priority of the claim in respect of which they were obtained that is essential, as the court orders cannot stand by themselves or have any priority.
- Is the mortgagee protected?
The Registrar of Cyprus Ships will not agree to close a ship’s register unless and until all and any mortgages are discharged and deleted.
In case a ship is declared a total or constructive total loss in accordance with the relevant provisions of the Law, the register will close subject to any mortgages existing on the ship.
Also, the Registrar will agree to close a ship’s register without the mortgagees’ consent (a) if requested to do so by the Minister of Communications and Works pursuant to the powers vested in the latter under the Law, (b) if the ship is broken up, and (c) if there have been no news regarding the ship for a period of six months from the date of receipt of the last information, under such circumstances which make it highly probable that the ship has been lost or broken up or that it has been sold to non-qualified persons. In such cases, the ship is deleted from the Register without prejudice to the validity of the recording in the Register of any registered mortgages and no certificate of closed transcript is issued unless all financial obligations towards the Republic of Cyprus have been settled and the register of the ship will remain open as regards any registered unsatisfied mortgages.