Thought leadership from our experts

International effect of Judicial Sale of Ships

Ships are responsible for as much as 90% of the carriage of world trade providing the main life line for global trade. This impressive statistic underlines the importance of international shipping to the lives of each and every one of us. We depend on ships to carry petroleum to run our industries, wheat, grains and livestock to feed our populations, containers stuffed with anything from clothing to pharmaceutical products to fill the shops in the high street and equipment for our hospitals, refrigerated containers carrying fresh produce varying from fruit and vegetables to fish and flowers. This very brief list is sufficient to emphasise the importance of ships to large industries as much as to the ordinary man in the street.

Ships and ship owners are however susceptible to economic forces which may effect the ability of ship owners to pay their creditors. Economic recessions and events like the global pandemic which we have just lived through, or very simply a business plan which has failed, can have catastrophic effects on the liquidity of a ship owner leading to his inability to pay his financiers, or his suppliers or his crew or any other creditor. It may not always be possible for such a ship owner to refinance his debt and when that is not possible, it very frequently leads to creditors moving in on the owner and his vessel, leading to the arrest of the vessel followed by the judicial sale of that vessel.

The most common form of judicial sale is the judicial sale by auction, held under the auspices of the courts of the country in which the vessel is arrested. In a number of jurisdictions there are also court approved private sales. These are sales which are also held under the authority and control of the court, however they do not involve an auction but involve the approval by the court of a sale to a private buyer for a stipulated price, which price, it would have to be proved is equal to or in excess of the market value of the vessel.

The fact remains however that we are here talking about the sale of a distressed vessel which is overloaded with debt. It therefore stands to reason that a prospective purchaser would only be interested in purchasing such a “distressed” vessel if he can purchase the vessel “free and unencumbered” and can purchase her with a clean slate. It is only on that basis that a prospective purchaser would be remotely interested in purchasing her, and it is only on that basis that a purchaser will be prepared to pay good money. Of course the bigger the price, the better the chance of the creditors getting paid and the bigger the chance of the owner actually having any money left over. When a purchaser buys a vessel in a judicial sale, the purchase price is paid into the court which would have ordered the sale and the creditors are then paid from the proceeds of the sale. If the price exceeds the debts, then any balance is paid to the owner. If the price is not sufficient to pay all the debts, very frequently there is a ranking of creditors procedure.

In addition to the above it is equally important to the purchaser that when he purchases the vessel free and unencumbered, he can get the vessel deleted from its previous flag and re registered in a new flag according to his requirements. Thus the recognition of the judicial sale by the existing registry and the new registry is fundamental.

The above, one would think, is pretty obvious. However there have been several instances over the years where purchasers of vessels in judicial sales have struggled to get their new title recognised by existing registries, have struggled with unscrupulous creditors re-arresting the vessels after they have been sold to the purchasers who would have purchased the vessels in good faith and would have paid top dollar for the purchase of vessels free and unencumbered. This leads to chaos and confusion and an interruption of international trade when the industry requires clarity and consistency. How can a purchaser expect to obtain financing from a bank to purchase a vessel in a judicial sale when after the financier has extended credit to purchase such a vessel free and unencumbered finds out that an old mortgagee or old creditor is still chasing the vessel when they should be getting paid out of the purchase price of the vessel? How can one expect a purchaser to pay top dollar if the vessel he is intending to purchase can still be arrested by old creditors? If a vessel does not fetch the best price, what chances do the creditors have of getting paid? What would happen to the crew of a ship who would have been paid out of the proceeds of the price of a judicial sale in the event that such a sale is not given its full effect further along the line? The answers to all of these questions point in one direction – uncertainty and chaos which is very bad news for the smooth operation of vessels responsible for carrying 90% of world trade.

It is in this context that the Comite Maritime International (“CMI”) came up with a Draft Convention on the International recognition of Judicial Sales known as the “Beijing” draft. Following a colloquium organised in Malta in February 2018 which was attended by a cross section of maritime interests ranging from builders to owners to financiers and service providers from over 58 countries, the United Nations Commission for International Trade law (UNCITRAL) at its fifty first session held in New York was persuaded to add this topic to its work programme. This task was allocated to Working Group V1 and the first meeting was held at the UN in New York in May 2019 which meeting led to a first revision which was in turn discussed and deliberated at the UN in Vienna in December 2019. Since then and notwithstanding the fact that we have had a Pandemic which has effectively removed physical meetings, deliberations have continued in earnest through virtually held meetings under the Chairmanship of Beata Czerwenka and very effectively co-ordinated by the UN Secretariat led by Jose Angelo Faria attended by state delegations and NGO delegations from all over the world. The result is that UNCITRAL has just published the 4th revision of the Beijing Draft for deliberation at the next meeting to be held at the UN in Vienna in October. Such progress has been registered that it is likely that a final draft be presented to the UN General Assembly in the near future.

The Draft Convention currently contains 21 articles. It applies to the judicial sale of a ship when the ship is physically within the territory of the state of judicial sale at the time of the sale and when under the law of that State, the judicial sale confers clean title to the ship on to the purchaser.

The Convention provides that notification of the sale must be provided to a number of persons including the owner, the bareboat charterer of the ship, the registry of the ship, the holder of a registered mortgage or hypothec and the holder of a maritime lien who would have registered his claim. It further provides for the setting up of a repository and currently discussions are underway with the IMO as approved in principle by the legal committee of the IMO at its 107th session for a possible additional module within the IMO’s Global Integrated Shipping Information System the GISIS platform. The Convention provides for all notifications to be sent to the repository which means that in practice any person interested in tracking a particular vessel would at the push of a button be able to find out if a particular vessel is going to be sold in a judicial sale.

A very important provision in the convention relates to the issuing of the Certificate of Judicial Sale. Following the sale, the Court of the State of Judicial Sale would then issue a Certificate of Judicial Sale attesting to the fact that the vessel was sold free and unencumbered and obliges the registrars of flag administrations from state parties to give effect to such certificates by deleting any mortgages, hypothecs or registered charges attached to such ships and by deleting the ship from such registries and issuing certificates of deregistration to enable new registrations.

In order to ensure order and certainty, the convention makes it clear that it is only the court of Judicial Sale which has exclusive jurisdiction to hear any claim or application to avoid a judicial sale. The Convention also makes it very clear that on the production of a certificate of judicial sale, a Court of a State Party is obliged to dismiss any applications for the arrest of a vessel for a claim against the vessel prior to its sale in a judicial sale, and must release a vessel arrested for a claim which predates a judicial sale on the production of a certificate of judicial sale.

The entire raison d’etre of the Convention is contained in article 6 which states:

“ A judicial sale for which a certificate of judicial sale referred to in article 5 has been issued shall have the effect in every other State Party of conferring clean title to the ship on the Purchaser.”

Much work has already gone into fine tuning this convention and that is to the credit of numerous state delegations and NGO’s who have participated wholeheartedly in the debate and thanks to the UN Secretariat for its ability to sift through all the various suggestions and to capture the ideas being deliberated. Hopefully we will have a Convention on the international effects of judicial sales in the not too distant future – something which is eagerly awaited by purchasers of vessels, creditors and financiers alike so as to further reinforce the certainty required in international trade.

*Head of the Marine Litigation Department Fenech & Fenech Advocates

Vice President CMI and Chief Co-Ordinator for CMI at UNCITRAL Working Group V1 on judicial sales.