Mortgaging a ship is a form of security wherein a ship owner (“Mortgagor”) gives to the lender (“Mortgagor”) an interest in a ship as a security for loan either by way of creating a statutory mortgage or a equity mortgage. The mortgage is consequently discharged upon payment of the principal sum and usually the interest.

Section 54 of the Nigerian Merchant Shipping Act 2007 (“MSA”) allows a vessel or a share in a vessel to be made a security for a loan or other valuable consideration. Upon entering a mortgage agreement, the mortgage may be registered at the Nigerian Ship Registry. One of the benefits of registering the instrument creating the mortgage at the ship registry is that, it takes priority over unregistered mortgage deeds. Where the Mortgagor is a corporate body, a charge may be registered at the Corporate Affairs Commission.

Section 57 of the MSA stipulates that if there are more mortgages than one registered in respect of a ship or share, the mortgages shall, notwithstanding any express, implied or constructive notice, be entitled in priority one over the other, according to the date on which each mortgage is recorded in the register and not according to the date of each mortgage itself. It is therefore important that mortgage agreement be registered as soon as executed by parties.

Under the Nigerian law, the procedure for enforcement of a ship mortgage is subject to a contractual right. Accordingly, the rights of a mortgagee are derived from specific terms agreed with the mortgagor. Usually, the loan documentation, which the mortgage is premised upon, will identify those events by the mortgagor, which give rise to the right on the part of the mortgagee to take enforcement action.

Identifying an event of default is not always straightforward because, in practice, certain defaults are difficult to prove, such as those relating to a breach of a material adverse change clause that has been drafted in deliberately wide terms.

Notwithstanding the above, where the mortgagor believes that an event of default has occurred, it will have been necessary to serve either a Notice of Default or Notice of Acceleration stating that the entire outstanding indebtedness is due and repayable. It is expedient that any procedural requirements like notice by emails or other means must be strictly complied with.

Mortgagee’s rights are thoroughly protected by Admiralty law in the Nigeria. A mortgagee can elect to use any of the following modes to enforce its rights on the mortgaged property.

 Arrest of the vessel and sale through the Courts.

A mortgagee may initiate action for enforcement of a mortgage at the Federal High Court in Nigeria or effect its vested right of vessel’s disposal or its share which is subject to the mortgage. A combined reading of Section 2 (2a) and Section 5(2) of the Admiralty Jurisdiction Act Cap A5, Laws of the Federation of Nigeria (“LFN”) 2004 (“AJA”) states that an action may be brought in rem in respect of claims relating to a mortgage of a vessel.

Under Nigerian law, a registered mortgagee enjoys priority after only the cost of enforcement, crew wages, salvage and damage claims.

One of the benefit of this mode of enforcement is that, after the vessel is sold, such vessel is free and clear of encumbrance whether registered or not. Accordingly, such vessel is protected in the hands of new owners from any claims against the old owners, even if those claims have the status in any jurisdiction of a maritime lien.

Taking possession of the Vessel.

Most Mortgages or Deeds of Covenants have a clause giving the mortgagee a right to take possession in the event of default. However, one of the challenges of this mode of enforcement is that, by taking possession, the mortgagee becomes liable to perform the existing contracts of the ship-owner and the vessel.

Another difficulty in this area is that the master may refuse to receive instructions from the mortgagee to sail the vessel out of jurisdiction.  However, it is frequently the case that the Master and crew are owed substantial arrears of wages by the time the mortgagee comes to enforce his mortgage, and a promise of prompt payment of those arrears of wages can often secure co-operation from the Master and crew.

Foreclosure and sale of the vessel

Usually, an instrument creating the mortgage may provide for the mortgagee’s power of sale. The mortgagee, upon an event of default, may exercise such powers. Where the instrument stipulates conditions for the exercise of that power, except the mortgagee complies strictly, the sale may be ineffectual.

One of the challenges with this mode of enforcement is that such sale will be subject to other encumbrances against the title, and the mortgagee will have to warrant that there are no other outstanding claims, which might be enforced against the vessel.

Conclusion

The above is not an exhaustive analysis of the enforcement procedure that may be enjoyed by a mortgagee.  The mortgagee may have other powers, such as the right to appoint a receiver. It may also have other security, such as an account charge, corporate guarantees and collateral security assets.

Before taking a decision on the mode of enforcement, it is important that a careful review of the powers of the mortgagee and the limitation be carried out. Such review should be carried out whilst ensuring that the interest of the lender is placed at the forefront so as to mitigate any loss which it may suffer.