Collaterals
http://www.greeklawdigest.gr/topics/shipping/item/322-shipping-finance
As mentioned already, the main collateral of a bank or financial institution for security of the loan agreement is the ship mortgage, which is a tangible security provided by the borrower to the lender, registered in the ship registry of the ship and ensuring payment of the loan. The mortgage has priority of ranking for the satisfaction of the loan, with the exception of the maritime liens. Although the mortgage is the main collateral of the bank lender, additional collaterals may secure a shipping loan facility, such as a deed of assignment of the earnings, a deed of assignment of insurances (including loss payable clause), a pledge of the shares of the borrowing company or companies to the lender with or without voting powers, in some extreme cases also the pledge of the shares (stock certificates) of other shipowning companies of the group, such as in a cross collateralized loan, either in way of guarantors or in way of primary obligors in the cases of syndicated loans. Another additional collateral may be, depending on the commitment letter and the loan agreement, the requirement of the bank of a corporate guarantee by the mother company of the borrower or of the beneficial owner of the various layers of the ownership structure of the borrower. In all cases the corporate guarantor is acting as a primary obligor.
Regime applicable to a Greek ship mortgage
Greek legislation provides for two types of ship mortgage: the simple mortgages (articles 195-204 Code of Private Maritime Law) and the preferred mortgages (Legislative Decree No.3899/1958). Apart from the manner in which they are constituted (a simple mortgage is established through a unilateral declaration by the owner before the notary public followed by registration, while a preferred mortgage is a contract subject to registration), their main difference lies on the way that creditors can pursue satisfaction of their claims.
a. How can a lender pursue satisfaction of its claims in each case?
In the case of simple mortgages, the payment of the claim is secured by the judicial sale of the vessel and by priority ranking conferred upon the mortgagee. However, in the case of preferred ship mortgages, the protection accorded to the creditor is far more extensive and effective. In addition to the abovementioned right of judicial sale, the creditor is by statute entitled to manage and operate the vessel (arts. 9-14 of the L.D. 3899/1958), with a view to satisfying its claim through earnings from such operation. The creditor may also choose to sell the vessel in private sale (art. 5 of the L.D. 3899/1958). It is at its absolute discretion to choose the way considered more appropriate to secure payment of the claim.
b. Are there any weaknesses of the ship mortgages?
Despite their central role in securing the repayment of loans, the weaknesses of ship mortgages should not be underestimated. The first arises from their accessory nature and the fact that they are linked economically to the value of the ship, with the effect that any fluctuations in her value proportionally affect the efficiency of the collateral. Their accessory nature entails also that if the ship is lost, the creditor remains unsecured. The second weakness, which is of a legal nature, stems from the fact that, depending on the applicable law, all or certain classes of maritime liens have priority over the claims of the mortgagee to the sale proceeds. This is the case also in Greece according to articles 1012 par. 3 of Code of Civil Procedure and 205 par. 2 of Code of Private Maritime Law. Regarding the Greek flag ships registered in the Greek registry as foreign capitals (in accordance with the article 13 of the Legislative Decree No.2687/53), the ranking is different to a certain degree: preferred mortgages (Legislative Decree No.3899/1958) have priority over the maritime liens, with the exception of the maritime liens which are provided both by article 205 para 2 of the Code of Private Maritime Law and art. 2 of the International Convention of Brussels of 1926, now art. 4 of Conventions 1967 and 1993 (see clause 19 of the Approval Acts issued upon registration).
c. Alternatives to the ship mortgage
Alternative collaterals in lieu of the preferred mortgage are the ownership based collaterals in favour of the bank / lender. There are two types: first, the transfer of ownership by the borrowing ship-owning company to the bank / lender as security for the loan as per the provisions of articles 190-194 of the Code of Private Maritime Law (law 3816/58) and second, a (capital) lease finance combined with a bareboat charter.
In the first case of the ownership transfer, the borrower – ship-owner transfers the title of the ship to the lender for securing the payment of the loan but retains the power to manage and operate her and the lender’s right of ownership is subject to rebuttal irrespective of how the loan relationship develops. If the claim has been satisfied and a declaration to that effect is registered in the ship’s registry the ownership of the vessel reverse ipso jure to the ship-owner / borrower. If the loan however becomes due and payable for whatever event of default in the loan agreement, the lender is entitled to seek satisfaction of the claim from the sale proceeds of the vessel in public auction.
In case the agreement takes the form of a capital lease finance with bareboat charter, the creditor – lessor conveys to the lessee, in return for rental payments, the use of the asset for exclusively professional purposes for a specified period of time, following which the lessee has the right to either buy the asset back or hold it on lease for a further period specified in the contract. In this case, the title is transferred directly from a third party (the seller) to the creditor, which provides the funds for the purchase of the asset. When this mode of financing is chosen, the asset is operated in accordance with the contractual models prescribed by maritime law to maximize the economic potential of the asset. Accordingly the leasing agreement is made through a bareboat charter (such as Barecon, the standard form of BIMCO, a new form of which published recently - Barecon 2017). The lease of Greek-flagged vessels is for the moment prohibited by law, with the exception of pleasure of yachts (L. 1665/86, art. 1 para 3).