Because ships are movables of high economic value whose operation is costly, leaving the pledges to be created over them to the general provisions on the pledge of movables would have given rise to serious drawbacks. As a pledge over movables depends on delivery, handing the ship over to the creditor would prevent her from putting to sea and would bring about a severe economic loss in consequence. In order to avoid that result, the legislature chose to regulate the pledge of ships by special provisions and, in Art. 1014 et seq. of the Turkish Commercial Code No. 6102 (TTK), gave a place to the ship mortgage as a separate type of pledge. Those provisions refer to a large extent to the rules on the mortgage of immovables contained in the Turkish Civil Code No. 4721 (TMK).
A ship mortgage is a right in rem created over a ship entered in the register, or over a share in such a ship, which confers on the creditor the power to have the ship or the share sold and to be paid out of the sale proceeds in priority to others. The right comes into existence only upon the registration of the mortgage in the Turkish Ship Register.
For the mortgage to arise, the shipowner and the creditor must bring their intentions together in favour of the creation of the pledge, and that mortgage must be entered in the ship register. The agreements relating to its creation must be made in writing and the signatures beneath them must be certified by a notary. Once a valid agreement is in place, the request for registration may be put forward by the creditor in whose favour the mortgage is created as well as by the owner. Besides the principal, a ship mortgage also secures the costs of enforcement, accrued interest and necessary expenses. Its scope covers the ship or the ship share, the rent, the expropriation compensation, the compensation payable by reason of the loss of or damage to the ship, and the insurance indemnity. Where more than one mortgage exists over the same ship, the rank of the mortgages is determined according to the rules laid down for the mortgage of immovables in TMK Arts. 870-872. In this briefing note we address those headings in turn.
The Definition and Legal Nature of the Ship Mortgage
In order to secure a claim that has already fallen due or that may arise in the future, a mortgage — a limited right in rem, accessory in nature — may be created over property belonging to the debtor. On the strength of that right, the creditor has the possibility of obtaining his claim by having the pledged property sold. The ship mortgage governed by Art. 1014 et seq. of the TTK rests on the same logic: created over a ship or a share entered in the register, this right confers on the creditor the power to have the ship or the share realised and to be satisfied in priority out of the sale proceeds. Because a contractual pledge over ships entered in the register may be created only in the form of a ship mortgage, such ships cannot be made the subject of a pledge dependent on delivery. For details of the register entries, our note entitled "The Ship Register and Registration" may be consulted.
For ships not entered in the register, the provisions of the TMK on the pledge of movables come into play and the pledge can be created only by delivery. There is one exception to that rule: where a ship not entered in the register is operated by a shipping partnership, the pledge of the participation share belonging to each of the co-owning shipowners is subject to the provisions of the TMK on pledges over claims and other rights. In other words, in that case delivery of the ship is not required for the pledge to arise.
Over Which Ships May a Ship Mortgage Be Created?
The ship mortgage under Article 1014 et seq. of the TTK is, as a rule, available only in respect of ships entered in the Turkish Ship Register. The exception to that rule appears in Article 112 of the TTK: where a ship not entered in the register is operated by a shipping partnership, the pledge over the participation share of each of the co-owning shipowners is created in accordance with the provisions of the TMK on pledges over claims and other rights.
How Is a Ship Mortgage Created?
The creation of a ship mortgage depends on an agreement between the owner and the creditor as to the establishment of a mortgage over the ship and on the registration of that mortgage in the ship register. The agreement creating the mortgage must be drawn up in writing and the signatures must be certified by a notary; if the parties so wish, the agreement may also be made at the ship registry office. Unless one of those forms is observed, the mortgage agreement does not acquire validity. In addition, for the agreement to be valid it must state the ship over which the mortgage is to be created, the claim to be secured and the creditor in whose favour the mortgage is to be established.
Under TTK Art. 1015(6), a separate rule has been adopted for the securing of a claim embodied in a bearer bond. In that case it is not compulsory to conclude an agreement for the creation of the mortgage; a declaration by the owner to the ship registry office together with registration is sufficient for the ship mortgage to be created.
Once a valid agreement has been made, the request for registration may be put forward by the creditor in whose favour the mortgage is created or by the owner. As a rule, the consent of the shipowner is required for the mortgage to be entered in the register. Where, however, a valid agreement was made before registration, where the owner has notified the creditor under the Ship Register Regulation that he consents to the entry, or where an application for entry has been submitted to the registry office, the interested parties may not refuse registration. That is to say, where a valid mortgage agreement exists and the owner refuses to request registration or to give his consent, the mortgage is registered upon the creditor’s application.
A subsequent restriction of the shipowner’s capacity to dispose does not, as a rule, alter that result. Where the owner has notified the mortgagee through a notary that he consents to the registration, or has applied to the ship registry office for registration, a restriction of his capacity occurring after that moment does not render invalid the consent notified to the register or the request for entry.
In the case of ships purchased abroad and not yet entered in the Turkish Ship Register or in the Turkish International Ship Register, a mortgage may be annotated on the certificate of flag. When the ship is entered in one of those registers, that mortgage is transferred to the register of the registry’s own motion.
For detailed information on the types of mortgage, our note entitled "Types of Ship Mortgage" may be consulted.
Claims Secured by a Ship Mortgage
Where the ship is sold by forced execution on the strength of the ship mortgage, not only the principal but also certain ancillary claims are met out of the proceeds of the sale. These consist of the following items:
- Contractual interest: interest running at the rate agreed by the parties for the secured claim, provided that that rate has been entered in the register.
- Necessary expenses: without any need for registration, the outlays made by the mortgagee in order to preserve the ship.
- Costs of enforcement: costs such as fees, service and publication expenses and attorney’s fees borne for the purpose of collecting the secured claim.
- Insurance costs: payments made by the creditor in order to meet the insurance premiums or the other sums payable to the insurer under the insurance contract, together with the interest on them.
- Default interest: default interest running by reason of the failure to pay the secured claim on its due date. Where the debtor and the shipowner are different persons and it has been agreed that the debt is to fall due upon notice from the creditor, the notice must be addressed to the owner as well as to the debtor for the mortgage to cover interest.
The Scope of the Ship Mortgage
Article 1020 of the TTK provides that what falls within the scope of the mortgage is to be determined within the framework of TMK Arts. 862 and 863. Under those provisions, the ship or the ship share, the rent, the expropriation compensation, the compensation payable by reason of the loss of or damage to the ship and the insurance indemnity fall within the scope of the mortgage.
- The ship and the ship share: the mortgage covers the ship together with its integral parts and its appurtenances. Where the ship is seized for the purposes of sale, items which are neither integral parts nor appurtenances fall outside that scope. The date on which an appurtenance or an integral part became attached to the ship is immaterial; all appurtenances and integral parts existing at the moment of seizure are included in the scope of the mortgage.
- Rent: the rent accruing from the commencement of enforcement by way of realisation of the mortgage, or from the debtor’s bankruptcy, until the moment at which the pledge is realised falls within the scope of the mortgage.
- Expropriation compensation: where the ship is expropriated, the expropriation compensation takes the place of the mortgaged ship and is treated as falling within the scope.
- Compensation for loss and damage: compensation payable by third parties by reason of the loss of or damage to the ship likewise takes the place of the ship and is included in the scope of the mortgage.
- The insurance indemnity: where the owner’s interest in the matters falling within the scope of the mortgage has been insured by the owner, or by another person on the owner’s behalf, the mortgage also covers the insurance indemnity.
Where more than one ship or ship share is mortgaged for a single claim, each of them is liable for the whole of the debt. The creditor may apportion his claim among them in such a manner that each ship or share is held liable only for a specified part. The apportionment takes effect by a declaration made to the registry office and by registration on the strength of it. Where there are persons holding rights over the joint mortgage, their consent is required as well.
The Rank of the Mortgage and Changes of Rank
Where more than one mortgage is created over the same ship, their rank is determined according to the provisions laid down for the mortgage of immovables in TMK Arts. 870-872. The security afforded by the mortgage is limited to the rank of the pledge; a pledge of second and third rank may be created provided that the mortgages standing in the earlier ranks are indicated at the time of registration. Where there is more than one mortgage over a ship, the order among them is determined according to their rank.
A subsequent exchange of ranks is subject to certain conditions. It requires a written agreement, with signatures certified by a notary or by the registry office, between the creditor whose mortgage right is moved back and the holder of the mortgage whose rank is advanced. In addition, the consent of the shipowner and of any other mortgagees whose rights are restricted is essential.
Transfer of the Mortgage and Substitution of the Secured Claim
Upon the assignment of the secured claim, the ship mortgage also passes to the new creditor. The claim and the mortgage cannot be severed from one another; neither may be transferred independently of the other. The validity of the transfer depends on a written agreement between the former creditor and the new creditor and on the registration of the transaction in the ship register.
It is also possible to substitute another claim for the claim secured by the mortgage. Where the creditor of the new claim is the same person as the former creditor, the creditor and the owner must conclude a contract with signatures certified by a notary, or reach agreement at the ship registry office, and the position must be entered in the register. Where the holder of the new claim is a person other than the former mortgagee, that person must also be a party to the written agreement. Where there are third parties holding rights over the mortgage, their consent is likewise necessary.
The Rights of the Mortgagee
The holder of a ship mortgage is granted separate powers in respect of the period before and the period after the claim falls due.
Before the Claim Falls Due
Where the security afforded by the mortgage is imperilled as a result of the deterioration of the ship or of her equipment, the creditor allows the owner a reasonable period in which to avert the danger; if the danger is not removed within that period, the creditor acquires the right to realise the mortgage forthwith.
Where, by reason of the manner in which the owner operates the ship, there is cause to fear a deterioration of the ship or of her equipment such as to imperil the security, or a threat to the rights of the mortgagee in some other respect, or where the owner fails to take the necessary measures against interference and damage by third parties, the court, upon the creditor’s application, orders as follows:
- that the ship be subjected to preliminary attachment under TTK Art. 1353;
- that, where it is considered necessary, the ship be handed over to a judicial custodian other than the master;
- that the owner take the necessary measures within one month from the date on which the preliminary attachment is enforced.
Where, on the expiry of that period, it emerges that the measures have still not been taken or that those taken remain insufficient, the court allows the creditor a period of one month in which to commence enforcement proceedings on a judgment by way of realisation of the mortgage. The deterioration of an appurtenance falling within the scope of the mortgage, or its removal from the ship contrary to the requirements of ordinary operation, is likewise treated as a deterioration of the ship.
Where the fear of deterioration stems from the act of a third party and is of such a degree as to imperil the security, the creditor may bring an action against that person for the prevention of the act.
After the Claim Falls Due
A mortgagee whose claim has fallen due but has not been paid may have the ship sold by bringing enforcement proceedings by way of realisation of the mortgage. He thereby obtains the possibility of recovering, out of the proceeds of the sale, the claims falling within the scope of the mortgage.
For details of the forms and conditions in which the mortgage comes to an end, our note entitled "Extinction of a Ship Mortgage" may be consulted.
The Independent Legal Assessment
In ship finance transactions the mortgage is the lender’s strongest security; the preservation of that strength depends, however, largely on the care taken at the stage of creation and registration. A failure to observe the formal requirements of the agreement, an insufficiently precise statement in the register of the secured claim or of the interest rate, or a failure to provide for the relationships of rank in the contract may cause the creditor to lose, at the stage of forced sale, the priority he expected. In transactions carrying an international element, the flag and the register status of the ship also directly affect the structure of the security to be created.
When a ship mortgage is being structured, the following heads should be addressed as a matter of priority:
- Establishing at the outset the register status of the ship and, where a shipping partnership is involved, the pledge regime that will apply
- Determining the ship, the claim and the creditor in the mortgage agreement in terms that leave no room for doubt
- Having the interest rate entered in the register and securing the position of the ancillary claims within the scope of the security
- Planning the system of ranks and the vacant ranks with future financings in mind
- Linking the insurance interest to the mortgagee and monitoring the position of the indemnity within the scope of the mortgage
- Reflecting in the contract the measures that may be resorted to before the claim falls due against the possibility of the ship deteriorating
Independent Legal provides advisory services and conducts litigation in the fields of maritime trade and ship finance in connection with the creation of mortgages, registry procedures and the realisation of the pledge.