The ship mortgage, governed by Art. 1014 et seq. of the Turkish Commercial Code No. 6102 (TTK), is a right in rem created over a registered ship or ship share which entitles the creditor to have that asset sold and to be paid out of the sale proceeds in priority to others. Because the right is a right in rem and owes its existence to registration, the manner in which it comes to an end is likewise subject to rules of its own. The legislature has accordingly dealt with the extinction of the mortgage within a systematic scheme rather than through scattered provisions.
The grounds of extinction are collected in TTK Art. 1044 et seq. under three main headings: grounds which extinguish the mortgage together with the claim, grounds which extinguish the mortgage alone without affecting the claim, and a court order declaring the mortgage extinguished. That enumeration is not exhaustive; situations not expressly mentioned in the Code may produce the same result. Those most frequently encountered in practice are the sinking of the ship beyond salvage and the sale of the ship by forced execution.
There is one further point that deserves emphasis. The extinction of the mortgage as a matter of law does not have the effect of automatically deleting the entry in the ship register. For the entry to be removed, the interested parties must apply to the ship register for its deletion. Below, we examine the cases leading to the extinction of the mortgage by group.
Cases Where the Ship Mortgage Ends Together with the Claim
The provisions in Articles 1044 to 1048 of the TTK govern the grounds which extinguish, at one and the same time, both the secured claim and the mortgage over the ship.
Extinction of the Secured Claim
The ship mortgage is a security right accessory in nature; it owes its existence to the claim it secures. There can be no ship mortgage standing on its own, detached from a claim. As the natural consequence of that dependence, where the secured claim is extinguished by payment or on any other ground, the mortgage lapses as well. That consequence, attached to the case of payment, is laid down in TTK Art. 1044.
The position changes where the person making the payment is not the shipowner. TTK Art. 1038(6) provides that, in the case of a debtor who does not hold the status of shipowner but who, having paid the debt secured by the mortgage, has a right of recourse against the owner or the owner’s predecessors in title, the mortgage does not lapse but passes to him. In other words, a person who pays the debt without being the owner and who has a right of recourse becomes the new beneficiary of the mortgage. Where the payment covers only part of the claim, the portion remaining with the creditor ranks ahead of the portion passing to the debtor. A debtor who acquires the mortgage by his payment, or who for the same reason has an interest in the correction of the ship register, may require the creditor to hand over the documents needed for that correction.
Merger of the Capacities of Creditor and Debtor in the Same Person
TTK Art. 1044(2) treats the merger of these two capacities in a single person as equivalent to payment. Since the merger extinguishes the debt, the ship mortgage, which exists only as an incident of that debt, cannot survive either.
Merger of the Status of Creditor with Ownership of the Ship
TTK Art. 1045(1) accepts that the mortgage lapses where the mortgage right and ownership of the ship come together in the same hands. The rule is subject to two exceptions: where the debtor is a person other than the shipowner, and where the claim covered by the mortgage is itself subject to a pledge or a usufruct. In those situations the mortgage survives. Where the owner and the creditor are the same person, realisation of the mortgaged ship cannot be demanded; nor does the ship constitute security for interest claims accruing thereafter.
Limitation of the Right against the Shipowner
For as long as the mortgage remains registered in the ship register, the statute of limitations does not run in respect of the secured claim. TTK Art. 1048, by contrast, provides that where the mortgage has been deleted from the register — even if the deletion was unlawful — the limitation period for the claim continues to run. Expiry of that period has the effect of extinguishing both the mortgage and the right to demand a mortgage.
The same provision contains a parallel rule for the shipyard owner. Where a shipyard owner holding a mortgage right by operation of law under TTK Art. 1013 fails to exercise the right to demand registration of the mortgage in time, the limitation period begins to run in respect of the claim; on expiry of that period, the shipyard owner’s claim lapses.
Payment by One of the Owners under a Joint Ship Mortgage
Where the same claim is secured by more than one ship, TTK Art. 1046 provides that the shipowner who pays the creditor acquires the mortgage right over another mortgaged ship to the extent that he has a right of recourse against the owner of that ship or against that owner’s predecessors in title; the mortgage over his own ship, on the other hand, comes to an end.
TTK Art. 1047 governs the same question from the debtor’s point of view. Where, under a joint ship mortgage, the debtor has a right of recourse against the owner of only one of the mortgaged ships or against that owner’s predecessors in title, only the mortgage over that ship passes to him; the mortgages over the remaining ships lapse.
Cases Extinguishing the Ship Mortgage Alone
Articles 1049 to 1051 of the TTK govern the grounds which leave the secured claim untouched and extinguish only the mortgage over the ship. In these cases the claim survives; what disappears is the fact that the claim was secured on the ship.
Agreement between the Owner and the Mortgagee to Discharge the Mortgage
Where the shipowner and the mortgagee reach a common intention as to the discharge of the mortgage and the entry is deleted from the ship register, the mortgage comes to an end. The agreement must be drawn up in writing and the signatures must be certified by a notary; if the parties so wish, they may also conclude the agreement at the ship registry office. A discharge agreement concluded without observing that form is not valid.
Where other persons hold rights over the mortgage, their consent must also be obtained for the discharge. If, for example, a person holds a pledge over the claim, the mortgage cannot be discharged without that person’s consent.
Waiver by the Holder of the Mortgage
The creditor’s renunciation of the mortgage, and the deletion of the entry from the ship register on the strength of that declaration of waiver, likewise extinguishes the mortgage. For the declaration to be valid, it must be made by a deed bearing a notarised signature or directly at the registry office. Here too, where third parties hold rights over the mortgage, their consent is required for the waiver.
Expiry of the Agreed Term
Unless the parties agree otherwise, a ship mortgage is created without being subject to a term. Where, however, a specific term has been provided for when the mortgage is created, the mortgage comes to an end on the expiry of that term.
Extinction of the Ship Mortgage by Court Order
The Code allows the mortgage to be extinguished by judicial decision in two situations: the impossibility of identifying the creditor is governed by TTK Art. 1052, and the deposit of the claim by TTK Art. 1053.
Where the Identity of the Creditor Is Unknown
Where the identity of the creditor cannot be established, and ten years have passed since the last entry made in the ship register in connection with the mortgage without the creditor’s right having been acknowledged during that period by the owner in a manner interrupting the limitation period within the meaning of Article 154 of the Turkish Code of Obligations No. 6098, the creditor may be summoned by public notice and the extinction of the mortgage may be ordered. Where the claim is subject to a maturity date, the ten-year period does not begin to run before that date falls due. The mortgage ceases to exist upon the making of the order declaring it extinguished.
Deposit of the Debt Covered by the Mortgage
Where the shipowner has acquired the right to pay the creditor’s claim or to give notice of termination and has deposited the amount of the claim in the creditor’s name, waiving the right to recover it, the unidentified creditor is summoned by public notice and the extinction of the mortgage may be ordered. Interest is deposited only where its amount has been entered in the register; there is no obligation to deposit interest falling outside the three-year period preceding the making of the order of extinction.
Unless the creditor is deemed already to have received his entitlement under the provisions of the Turkish Code of Obligations No. 6098 on deposit, the debt is regarded as paid upon the making of the order of extinction. Where the creditor makes no application at all to the place of deposit, his right over the sum deposited comes to an end on the expiry of ten years from the order of extinction. In such a case the depositor may recover the sum paid in, even if he waived the right of recovery at the time of the deposit.
Sinking of the Ship or Damage Beyond Repair
Where a ship that has sunk beyond any possibility of salvage, or that has become incapable of repair, is deleted from the register, the mortgage also comes to an end, since the asset forming the subject matter of the mortgage has ceased to exist.
TTK Art. 1022 nonetheless accepts that the mortgage also extends to the insurance indemnity and to compensation payable by third parties. Accordingly, where the ship is lost, the mortgage right continues to exist over the insurance indemnity and over the compensation payable by third parties.
Sale of the Ship by Forced Execution
Where a ship is sold by forced execution, the proceeds obtained are distributed among the creditors according to rank. The mortgage comes to an end in that distribution even if the secured claim has not been satisfied in full; the creditor retains no security over the ship for the portion left unpaid.
The Independent Legal Assessment
In practice, the extinction of a ship mortgage most often rests not on a single ground but on a chain of successive steps. Payment of the claim, the drawing up of the declaration of waiver and the deletion of the register entry may occur at different moments; the date on which the right lapsed as a matter of law and the date on which the register was cleared must therefore be established separately. In ship finance transactions in particular, the failure to apply for deletion once the loan has been repaid creates obstructions in subsequent transfers and registrations.
Nor should it be overlooked that the party asserting that the right in rem has come to an end must establish it by documentary evidence. Failure to observe the formal requirements — notarial certification, a declaration drawn up before the registry office or a court judgment — renders the assertion of extinction open to challenge from the outset.
When a particular file is being assessed, the following heads should be addressed as a matter of priority:
- Establishing whether the ground of extinction also covers the claim, that is, whether the mortgage has lapsed together with the claim or on its own
- Checking whether the waiver or discharge agreement followed the notarial form or the form of a declaration before the registry office
- Investigating whether any third party holds a pledge or usufruct over the mortgage and whether their consent has been obtained
- Where the mortgage has been deleted from the register, calculating the date from which the claim has been exposed to the risk of limitation
- Where the ship has been lost, taking timely steps to protect the right over the insurance indemnity and over compensation payable by third parties
- Applying to the ship register for deletion without delay once extinction has occurred
Independent Legal provides advisory services and conducts litigation across the whole process, from the creation of the mortgage to its deletion from the register, in ship finance and maritime trade disputes.