Erik Muthow and Prabhat Misra give a broad overview of how the
vessel mortgage process, and relevant laws, work in the UAE and
highlight areas where lenders and ship owners should be mindful of
when electing to finance a UAE flagged vessel.
In brief:
- A mortgage is arguably the most effective form of security over vessels.
- The UAE Maritime Code and the UAE courts recognise the importance of ship mortgages as a form of security, however, maritime laws and practices in the UAE differ from those of longer established jurisdictions around the world.
- In the UAE security documentation needs to be as watertight as possible and registration procedures need to be adhered to in order to avoid problems.
- It is important that all parties involved are award of their rights and obligations when it comes to mortgage registration and enforcement.
The recent global downturn remains an illustration of how volatile the shipping industry can be, with the effects of falling freight markets still felt across the industry. The downturn also serves to refocus the minds of the shipping sector on the need for adequate financing, and ensuring that proper and effective security is taken over underlying assets. It is a primary concern for lenders that the most valuable asset (usually the vessel being financed) is protected and that the security is as water-tight as possible.
In recent months, Hadef & Partners has seen an increase in
foreign lenders financing and re-financing vessels which are owned
by companies based in the UAE or where a UAE vessel ownership,
operation or chartering interest is involved. The UAE has a long
and proud maritime tradition, however, comparatively speaking, it
remains a relatively young admiralty jurisdiction with continuously
evolving maritime practices. As a result, some laws and established
legal principles or practices differ from those of other maritime
jurisdictions.
Mortgages: laws, practices and principles in the UAE
Article 18 of the Maritime Code established the UAE ship register.
Under the Maritime Code, any vessel exceeding ten tonnes which
intends to fly the UAE flag, must be registered in the UAE. The UAE
vessel register is currently maintained by the Marine Affairs
Department of the National Transport Authority (NTA) who maintain a
"national" or "closed" register.
The register requires the vessel owning entity to be either a UAE national(s) or a UAE corporate entity, with the majority of shares being held by UAE nationals. Unlike some other jurisdictions, such as Panama for example, the UAE does not currently allow foreign owners or companies to register their vessels on the UAE flag, although it is possible for foreign registered vessels to obtain UAE navigation licenses in some instances. This limits the number of vessels which can be registered in the UAE.
In addition to this, information on the number of vessels registered, mortgages recorded and vessel ownership, is not freely available to third parties. Generally, the NTA needs to be satisfied that any third party request for information is legitimate and has been approved by the owner of the vessel prior to releasing any information. It is therefore important that proper consents are granted by the vessel's owner before a lender elects to carry out due diligence in respect of that vessel and its owner.
A number of steps need to be taken to record and perfect security created through a mortgage instrument on a UAE flagged vessel. It is important that the correct steps are taken before the registration of the mortgage to avoid any problems on the day of registration, especially if registration has to be completed by a pre-defined date. The main points to bear in mind are as follows:
- the mortgage must be effected through an "official instrument" otherwise it will be void. In practice, this means that the mortgage must be in Arabic and should be properly notarised. Although there is no statutory short form mortgage or prescribed form for drafting a mortgage, it should contain all the essential elements, as set out in the Maritime Code
- the loan amount set out in the mortgage should have a specific maturity date, the maximum mortgage amount should be fixed, interest, if any, should be stipulated, and the mortgage should cover a particular vessel or vessels. It is unlikely that the NTA will accept a mortgage instrument which does not meet these basic requirements
- a mortgage can only be granted by the owner of the vessel over any commercial debt, provided that it does not contravene UAE public policy, and the mortgagee is a UAE national(s) or a UAE company with majority UAE shareholders
- as the mortgage will be created over an asset registered in the UAE, the mortgage documentation must be drafted in Arabic. Although in practice dual English/Arabic mortgage documentation is accepted, it is important to bear in mind that the Arabic version will generally prevail if there is a dispute over language
- any substantive document which alters the scope and application of the original mortgage instrument must also be filed with the NTA
- the relevant fees should be paid. The process of notarisation with the Dubai court notary and mortgage registration with the NTA currently incurs a charge of approximately AED12,500 per vessel, however, fees are subject to change.
Other things to be aware of:
- the law in respect of provisional mortgages over a vessel which has not yet been registered is unclear, therefore, it is preferable to ensure that a mortgage is created over a vessel which is already registered with the NTA or that the vessel will be registered before the mortgage instrument is agreed, executed and registered
- the mortgage can be in any currency, provided that it is one of the main globally recognised currencies. Should proceedings be initiated in a UAE court, however, the amount will be converted into UAE Dirhams for the purposes of the court application
- it is debateable whether UAE law allows for interest in excess of 12% per annum, therefore the parties should ensure that the interest rate reflected in the mortgage is not seen as usury and that it is in line with UAE law and practice;
- it is debatable whether there are "hardening periods" in the UAE in respect of perfection of mortgage security
- the Maritime Code enables a lender to recover debts out of the insurance policy, provided the insurer has confirmed agreement in writing to this arrangement in the mortgage instrument.
When things go wrong: mortgage enforcement and
priority
In the UAE, the enforcement process is only possible through a
court and under UAE law there is no provision for "self-help
remedies" whereby lenders can take possession of, and sell the
vessel, in the event of default free from a court order. There is,
however, no express prohibition on self-help remedies as these are
contractual arrangements between the parties. Therefore, if all the
parties agree, self help remedies can be exercised, but it is
possible for a third party, the owner or the lender to approach the
court and challenge any such arrangement.
Pursuant to the Maritime Code, a ship mortgage is classified a
"maritime debt". The importance of this classification is
that, unlike normal attachment proceedings, which are primarily
governed by the general provisions of the UAE Civil Procedure Code,
the Maritime Code allows the beneficiary of a maritime debt to
arrest the vessel. Unlike most attachment applications, it is
usually not a requirement for the arresting party to first prove to
the UAE court that the underlying asset will be removed from the
UAE and/or the debtor is going to flee without meeting his
obligations. In order to obtain an arrest order, the claimant would
need to prove, at least prima facie, that the vessel is validly
mortgaged and that the owner is in default of his mortgage
obligations. If the judge who is hearing the arrest application is
convinced that the mortgage is validly recorded and that a genuine
prima facie claim exists, then the UAE court is likely to grant an
arrest order against the vessel. The arrest order will prevent the
vessel from leaving the UAE until the court proceedings are
finalised or the claim is dismissed.
Within eight days of obtaining an arrest order, the claimant is expected to submit a substantive claim so that the case can be assessed on its full merits. Depending on the geographical base of the debtor, whether there are any challenges from third parties to the main proceedings or against the vessel, whether an expert is appointed by the court, or one of the parties, and how prompt the parties are in submitting their written submissions, the process can take several months, even years to complete.
Once the matter has been heard by the court and a judgment has been passed, either party has the option of appeal to the UAE Appeal Court. Where appeal is not sought and the judgment of the first court is upheld and the debtor does not settle the outstanding amount in full by the agreed due date, the court will proceed with the judicial sale of the vessel through auction. This process can take another three to six months depending on whether there are any complications or challenges by third parties.
Priority and Ranking
Vessel mortgages generally rank below the debts referred to
below:
- judicial costs incurred by the court
- debts arising out of employment contracts of the crew and Master
- monies due for assistance and salvage and the share of the vessel in a general average
- compensation due for collisions and other navigational accidents, bodily injuries to crew and compensation for loss or damage to goods and possessions of crew
- debts arising out of contracts made by the Master of the vessel and operations carried out by him for the maintenance of the vessel or continuation of a voyage. This includes any debt due to the Master, lenders, suppliers, persons who have repaired the vessel, or other contractors.
Foreign mortgages and arrests in the UAE
The UAE courts will normally treat a foreign registered mortgage in
the same way as a UAE registered mortgage, insofar as both are
maritime debts under the Maritime Code. The same processes will
therefore apply in respect of foreign mortgage enforcement in the
UAE courts. The UAE courts will also generally uphold claims from
foreign lenders for debts secured over vessels which are registered
in another jurisdiction provided the UAE court is satisfied that
they have jurisdiction and that the mortgage is validly recorded in
the relevant foreign jurisdiction.
Conclusion
A mortgage is arguably the single most effective form of security
over vessels. The UAE courts recognise the importance of this form
of security, however, maritime laws and practices in the UAE do
differ from those in other, longer established, maritime
jurisdictions. It is therefore of particular importance that the
necessary procedural and legal steps are taken at the outset to
ensure that the mortgage is properly recorded and perfected and
that all stakeholders are fully aware of their legal rights and
obligations in respect of mortgage registration and enforcement in
the UAE.
If you are interested in the topic of managing security
effectively to ensure the availability and ultimately profitable
use of assets, you may be interested in reading "what is effective security?"
on the types of effective security in the UAE in addition to vessel
mortgages.
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.
