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12 February 2020
General characteristics of ship mortgages under Swiss law
No registration of mortgages on ships under construction (hull)
Registration of maximum mortgage/exchange rate risks
Possibility of private sale
Acknowledgement of foreign enforcements
In the 1990s, inland cruising was still a comparably small business on European inland waterways. Since then, the number of vessels active in European inland cruising has risen significantly and the European fleet is now the biggest worldwide, representing 41% of the global fleet and even surpassing the fleet on the River Nile.
Of the 359 vessels which were registered in 2018 (not including day-trip vessels), 153 were registered in Switzerland, making it one of the major hubs in European inland cruising. Financing institutions and other investors regularly secure their investments by means of Swiss ship mortgages. This article provides a short overview of the legal situation regarding ship mortgages under Swiss law and basic information for foreign investors and banks.
The overview refers to the practice of the Swiss Inland Ship Register. The legal situation regarding maritime ship mortgages, which have to be registered in the Swiss Maritime Ship Register, is largely the same, although some details may be slightly different.
A ship mortgage under Swiss law is a right in rem which secures a claim and gives the mortgagee the right to enforce the mortgage under certain conditions and receive payment from the proceeds of the vessel's sale prior to any other unsecured creditor (apart from prioritised claims). The ship mortgage extends not only to the vessel itself, but also to insurance benefits. Ship mortgages are registered in the ship register and attach to the vessel (ie, they will survive a transfer of title).
Ship mortgages secure the capital claim, three forfeited annual interest payments and certain enforcement expenses.
As a rule, the contractual claim itself will be secured (eg, the bank's claim arising from the ship finance agreement). Abstract promises of debt, as are customary in certain other jurisdictions, are not customary with Swiss ship mortgages and Swiss law is also unfamiliar with the concept of the (partial) declaration of submission to execution: if a debtor refuses to settle the secured claim, an enforcement of the mortgage and the claim, and not only of the ship mortgage, will be necessary.
Other than real estate mortgages, ship mortgages do not have to be created by a notarial public deed, but rather by a simple written agreement and the subsequent registration in the ship register.
Only vessels with a valid ship certificate can be registered in the Swiss Ship Register. The registration of mortgages on hulls or ships under construction is therefore not possible under Swiss law. However, if such a mortgage has been registered abroad and prior to registration in Switzerland, the mortgagee of such foreign mortgage will be sufficiently secured, as registration in Switzerland cannot take place without due deletion of the foreign mortgage.
If a mortgage is sought for a ship under construction, the hull will usually be registered in a foreign register which permits mortgages on hulls and the ship will be transferred to the Swiss register on completion.
The registration of a maximum mortgage is possible and customary under Swiss law. Since the amount of the mortgage must always be entered in Swiss francs, the registration of a sufficiently high maximum mortgage not only secures ancillary rights (interests), but also serves to take into account the risk of currency fluctuations.
The following claims take precedence over a mortgagee's secured claim in the event of a forced sale, even if not registered in the ship register:
Ship mortgages are generally enforced just like any other mortgage. This implies that a debt enforcement must be initiated and legal action may have to be initiated to obtain a court ruling on the existence and enforceability of the mortgage and the claim. Further, a one-month grace period must be respected and, most importantly, at least according to the current practice of the Swiss enforcement authorities, the ship must be brought to Switzerland for a public sale. The necessity to bring a ship to Switzerland is one of the reasons why it is advisable to provide for the possibility of a private auction in the financing documents.
The timeframe of a ship mortgage enforcement strongly depends on whether the debtor opposes. If the debtor does not oppose, an enforcement may take less than three months, but in a worst-case scenario, an enforcement could also take more than one year.
On sale of a vessel, all mortgages will be deleted.
If such a clause has been agreed on, the mortgagee can sell the pledge privately (ie, without the involvement of the debt collection office). As in public auctions, private sales will lead to the deletion of all registered mortgages. It is the standard approach in practice to include respective wording in the ship finance agreements. However, such clauses become invalid if bankruptcy (insolvency) is declared over the shipowner.
The legal situation with regard to foreign foreclosures is somewhat unclear. At present, the Swiss Inland Ship Register recognises foreign foreclosures carried out where a vessel berths. However, this practice is not based on a clear statutory rule, but rather on an analogous application of a Swiss Federal Supreme Court decision.
Even if the flag authority is not directly involved in the registration of mortgages, it must be kept in mind that the flag authority is in charge of assessing whether a newly registered vessel fulfils the flag requirements. The fact that this process may take some time could lead to a time gap between a registration application (and the possible deletion in a foreign register) and the confirmation of the actual registration. Adequate measures must be taken when organising the closing to consider this potential time gap.
For further information on this topic please contact Stephan Erbe at ThomannFischer by telephone (+41 61 226 24 24) or email (firstname.lastname@example.org). The ThomannFischer website can be accessed at www.thomannfischer.ch.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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