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12 October 2011
The decision as to which law should apply to the security documentation relating to a ship mortgage is never a straightforward choice. Although the law which governs a ship mortgage is determined by the flag of registry, a different law is often chosen to apply to the underlying security documentation. Norwegian and English law have both been popular choices even though the procedure for the enforcement of ship mortgages is very different in each of these jurisdictions.(1) The enforcement procedure under Norwegian law is largely regulated by statute.
The general rule under Norwegian law is that a mortgagee seeking to enforce a ship mortgage is not entitled to take over, sell or otherwise dispose of a mortgaged vessel without first commencing proceedings before a Norwegian court. There are two types of enforcement proceeding in Norway:
Individual enforcement proceedings are governed by the Enforcement Act 1992. In order to file a petition for enforcement in Norway, a mortgagee must establish the validity of the claim and the basis of enforcement. In addition, it must be shown that a claim is due and payable and can be enforced.
Thus, a mortgagee who wishes to enforce a registered ship mortgage in Norway will need to demonstrate:
Before any enforcement action is taken, the mortgagee must send a formal written notice to the mortgagor stating that enforcement proceedings will be initiated if the mortgagor fails to remedy the default. This notice can be sent on the due date for payment at the earliest . Thereafter, if the default continues, enforcement proceedings may be commenced 14 days after such a notice is given.
Enforcement proceedings are commenced through the issue of a petition. A mortgagee may choose between two forms of enforcement: claiming forced usage of the ship or seeking a compulsory sale of the vessel. Where a claim for forced usage is made, the mortgagee's petition must be filed with the relevant city court where the registered owner (or the relevant representative) of the vessel resides. For vessels, the maximum period of forced usage is two years unless the court grants an extension before the expiry of the usage period. If any part of the secured debt remains outstanding after the expiry of the usage period, the mortgagee can usually file a petition for the compulsory sale of the vessel.
For a compulsory sale the petition must be filed with the city court which is closest to the place where the vessel is situated or expected to arrive in near future. The court first decides whether the necessary conditions are fulfilled, and a compulsory sale can take place either through an assisted sale or a judicial sale or auction. Unless otherwise agreed, the vessel is sold with the benefit of a clean title. Although the mortgagee has a preferred right to the sale proceeds, the court decides on the distribution of the proceeds. The costs relating to the compulsory sale are covered first, and then the secured creditors are dealt with in order of priority.
The court can proceed with and complete a forced sale only when the vessel is within Norwegian waters. If the vessel is in international waters, the court may order the vessel to return to Norway, or the mortgagee may use the forced usage option to secure the return of the vessel to Norway.
Where the mortgagor is subject to formal bankruptcy proceedings, a mortgagee is not entitled to enforce through the individual procedure, but can participate only in joint proceedings led by the bankruptcy estate. As with individual proceedings, the general rule is that the mortgagee is given a preferred right to the sale proceeds and possesses no rights in the vessel itself.
When choosing the governing law for the underlying security documents for a ship mortgage, it is important to be aware of the procedures that will need to be followed in the event that enforcement is necessary. Under Norwegian law, the mortgagee's right is to the proceeds of sale which are realised through a judicial sale administered by the court. The advantage of the Norwegian system is that it is clear and straightforward, and the mortgagee's rights to the proceeds of sale are protected from the claims of other creditors. Further, because the sale takes place through a court-approved process, clean title to the vessel can be given and this can maximise the value achieved for the vessel on a sale.
For further information on this topic please contact Henrik Hagberg at Wikborg Rein's London office by telephone (+44 20 7367 0300), fax (+44 20 7367 0301) or email (firstname.lastname@example.org). Alternatively, please contact Anja Kallestad at Wikborg Rein's Bergen office by telephone (+47 55 21 52 00), fax (+47 55 21 52 01) or email (email@example.com).
(1) For an examination of the English law relating to the enforcement of ship mortgages, please see "Enforcing ship mortgages under English law".
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