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The current difficulties in the shipping markets have
re-focussed attention on mortgage enforcement. In this article
Bill Amos, partner at Ince and Co Hong Kong,
outlines the court sale process in Hong Kong, in particular the
viability of court sales by private treaty.
When is a court sale needed?
For a bank facing a default situation, a court sale of the ship
is an option of last resort.
If the ship is not encumbered with trade debt (and if the
borrower is co-operative), then the bank will be able to use its
power of private sale under the mortgage. A private sale by the
bank is a fast and low-cost option.
However, if the ship is heavily encumbered with trade debt and
other claims, then a court sale increases in attraction. The unique
feature of a court sale is its ability to wash the vessel free of
claims, thereby transferring a clean title to the purchaser and
enhancing the sale price in the process.
It is also the case that an arrest of the ship by a third party
can force the bank's hand.
If, therefore, a court sale is required, it is necessary to
consider the method of sale. There are essentially three methods of
court sale: auction, public invitation to tender, and private
treaty. As regards the last of these methods, although referred to
as "private treaty", it is nevertheless a sale
by the court.
Court sale: public tender or private treaty?
A bank that has already extensively marketed the vessel through
brokers etc. will have identified the potential buyer and
established the market price. In such circumstances, a court sale
by private treaty to the purchaser is preferable to the slower
public sale process.
However, it cannot be assumed that the court will necessarily
agree to this approach. The previous Admiralty judge in Hong Kong
delivered a judgment in a case called The Margo L (1997)
in which he highlighted two essential steps/objectives:
the ship must be sold at the best possible price (so that the
proceeds can satisfy as many claims as possible);
the public sale of the ship must be made known to the maritime
world (so that potential claimants can come forward).
The conclusion reached by the judge was that a sale by way of
public tender (i.e. sealed bids) would, in the normal course,
realise the best possible price. This was because the competitive
nature of a tender process would result in bidders submitting the
best price they could afford. The judge however acknowledged that a
private treaty sale could be considered where there were
"powerful special features".
In order to seek a private treaty sale it would be usual to
obtain three independent valuations, with the purchaser agreeing to
pay the highest. The factors in favour of a private treaty sale may
include the following:
" experience shows that the court's public tender,
being viewed as a distress sale, may attract only bargain hunters.
The highest (or only) bid is generally that of the bank's
nominee;
" the court bailiff's own appraisement is unlikely to
exceed the independent valuations obtained, given that the
court's valuation would be made after an actual inspection of
the vessel (and would therefore take into account any
defects);
" the cost of maintaining the vessel under arrest during
the public sale process will diminish the sale proceeds available
to the bank, other creditors and, ultimately, the Owners;
" a lower sale price would be likely to be achieved on a
"forced sale" basis;
" the absence of claims ranking in priority to the
bank;
" the bank's mortgage debt exceeding the proceeds of
sale; and
" the low value of the vessel, or other special
characteristics.
The viability of a private treaty sale by the court will thus
depend in large part on the individual circumstances and
characteristics of the ship to be sold, as well as the independent
valuations obtained.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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