As is the practice worldwide, charters of vessels in the PRC may either be under bareboat charter or a voyage/time charter. A bareboat charter is an arrangement for the charter of a ship where no crew or provisions are provided by the ship owner. Instead, the charterer is responsible for all such arrangements and will possess, use and operate the ship completely during the charter period. A voyage or time charter is an arrangement where the charterer charters the ship (or part of it in the case of a voyage charter) for a particular voyage or for a set period of time. In voyage or time charters, the charterer can direct the destination of the ship but the owner of the ship retains possession of the ship through the employment of the captain and crew.
In shipping finance transactions, financing banks normally wish to take security over the income generated from the operation of the ship in addition to a mortgage over the ship itself. An issue a financing bank might encounter is the verification of the information provided by the borrower about the charters relating to the ship. This article sets out the possible avenues for the registration of bareboat charters and voyage/time charters in the PRC, which may provide the financing bank with a way of verifying the authenticity of the charters reported for the ships concerned.
Registration of Bareboat Charters
Under PRC law, the entering into, transfer or termination of a bareboat charter in the PRC is subject to registration with the competent local Maritime Safety Administration (MSA) regardless of whether the bareboat charter is arranged under a finance lease or an operating lease. This is to protect against claims by bona fide third parties. Thus, information about this type of charter can be obtained through a search with the relevant MSA. Please note, however, that such information may only be provided to the parties to the charter or any third party authorised by the parties to the charter.
Registration of bareboat charters should be effected prior to the commencement of the charter and various application documents, including the signed bareboat charter, will be required. For bareboat charters from an offshore owner to an onshore charterer, the onshore charterer should also register the ship with provisional Chinese nationality and suspend its foreign primary registration. A provisional nationality certificate is normally valid for two years although this can be renewed if the charter period is for a longer term.
Other than the above, for cross-border charters, the onshore charterer should also obtain an operating permit for the leased ship from the Ministry of Transport and an import license from the Ministry of Commerce or the Import & Export Office of Mechanical and Electrical Products, depending on the types of the imported ship.
Registration of Voyage or Time Charters
No registration is required for a voyage or time charter, probably because the ship owner still maintains control over the ship and, unlike in a bareboat charter, there is thus no separation of title/ownership and possession. As a result, there is no mechanism for the registration of a voyage or time charter.
The introduction of the Finance Lease Registration System (the System) in July 2009 may provide a platform for the registration of voyage or time charters.
The System is an online registration mechanism provided by the Credit Reference Centre of the People's Bank of China (CRC). According to the registration rules issued by the CRC (CRC Rules), the System may be used to register (i) finance leases and (ii) operating leases with an agreed or actual lease period of one year or more.
The CRC Rules provide that the leased assets in relation to which a finance lease or operation lease may be registered will normally be machinery and equipment, excluding assets leased for individual or family consumption. Although it is not explicit in the CRC Rules, we understand there should be no particular obstacles to registering voyage or time charters on the System. This has also been confirmed by the CRC through our telephone consultation. However, the CRC mentioned that from a practical perspective, there are no existing registrations in respect of voyage or time charters on the System.
Who can access the System?
Only members (either permanent or normal members) of the System, may have access to the System. A permanent member must be an institution and can both search for registration information and effect registrations of leases. A normal member can be either an institution or an individual, but such normal member may only search for and not effect registrations.
How to become a normal member?
Registering as a normal member of the System is a straightforward online process which may be completed by either onshore or offshore entities or individuals.
How to become a permanent member?
To become a permanent member, an institutional applicant needs to submit certain corporate documents (e.g. business license, legal representative's identity certificate) to the local CRC after the preliminary online registration process is completed so that the CRC can verify the due incorporation and valid existence of the applicant. An offshore entity cannot be registered as a permanent member of the System.
How can a foreign institution register a lease with the System?
Either party to the lease contract can register the lease if agreed by the other party. Therefore, the foreign party may authorise the Chinese party to carry out the registration. Alternatively, both parties may authorise a third party (e.g. a local agent) to register the lease on their behalf.
What information should be registered on the System?
In relation to each of the owner and charterer, the following information is required to be registered on the System: (i) (in respect of companies) the legally registered name, legal address, name of the legal representative, number of the enterprise organisation code/financial institution code and AIC registration number; and (ii) (in respect of individuals) ID number and address shown on the identify certificate.
In relation to the leased assets, a general description of the leased assets is required to be registered which should normally contain the name, type, quality, quantity, price and location of the leased assets.
How long can the registration term be?
The registration term can be from 1 to 25 years, extendable upon application.
Who can search for registration information on the System?
Anyone who has been registered as a member (either a normal member or a permanent member) can search within the System.
How to conduct a search of the System?
Any search must be specific. A member may only search for registration information on the System by choosing any of the following categories and entering the relevant information: (i) the legal registration name of the charterer, (ii) in the case where the charterer is an individual, the ID number of the charterer; or (iii) if the leased assets (e.g. transportation vehicles) have specific commodity codes, details of such code.
Although the registration of voyage/time charters is not mandatory under PRC law, the financing bank may nevertheless require the borrower (normally the ship owner) to effect/procure registration of the relevant charters on the System in the absence of a better alternative. The financing bank should be able to have reasonable comfort in the information registered on the System (or at the very least more comfort than relying on borrower-provided information) as:
- the CRC verifies the legal status of all parties effecting registration;
- specific information in respect of the charterer and the leased assets has to be provided; and
- any party related to the charterparty or with an interest in the leased assets can search and challenge the entry as it is public, allowing for the logging of dissident / challenging entries on the System to put the bank on alert.
However, the System is still a relatively new one and therefore it remains to be seen how it will evolve and if it will be used as a platform for the registration of voyage/time charters more widely. We will be closely monitoring the situation as it progresses.
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.