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.