UK: Bareboat Registration

Last Updated: 3 June 2009
Article by John Forrester and Mark Bamford

There are, as is well known, many factors that may influence a shipowner's choice of flag when registering a vessel in its ownership. On the one hand these include domestic ownership incentives and discounts, cabotage regimes and naval military protection (a concept that some began to view as an anachronism but that has recently become relevant once again) when registering with a "national" flag. On the other hand there are advantages of corporate secrecy, greater freedom as to crew nationality, attractive taxation regimes and political and operational freedom when choosing an offshore registry.

As a result of the relative advantages and disadvantages of each option, a shipowner might find itself being torn in two directions if forced to make a choice between using its own national register and registering its vessels offshore. These issues can be further complicated where a shipowner uses bank debt to finance its ownership of a vessel. Banks lending against the security of a ship (by way of a registered mortgage) will of course want to ensure that the mortgage provides good security in that there is an established legal system in the country where the vessel is registered and that the mortgage can be effectively enforced if the loan is accelerated. But they will also want to satisfy themselves that the flag state has a good reputation on ship safety, environmental issues and port state control and that it is attractive to charterers (as it is their hire payments that will service the loan).

Fortunately, there is often a solution to this problem in the form of "bareboat registration" (sometimes also called "dual" or "parallel" registration). This is a system which in many cases will allow a ship registered in one state (the state of primary registration or "flagging out" state) to be bareboat chartered to nationals of another state (the "flagging in" state) for a fixed period during which the bareboat charterer will operate the ship under the flag of the flagging in state. During the period of the bareboat charter the primary registration will be cancelled or suspended (though for certain purposes only) but will revive upon termination of the bareboat charter.

The advantage of the bareboat registration system is that during the period of bareboat registration the title to the vessel and the mortgage over the vessel will remain registered in the flagging out state whose laws will continue to apply in this regard (i.e. it will retain the private law functions of protecting a shipowner's registration of title, mortgagees' registration of security and ordering the priority of different securities and interests). On the other hand, during the period of the bareboat charter the ship will be subject to the rules of the flagging in state as to crewing, manning and safety. At the same time it will also enjoy the protection of the flagging in state and the benefit of any concessions available to vessels registered under that flag (in other words the public law functions of the flagging out state will be suspended and replaced by those of the flagging in state). Thus, a shipowner can satisfy its bankers by registering its vessels in an offshore jurisdiction acceptable to the banks. This will then give them the comfort they need that they are dealing with a jurisdiction with which they are familiar and whose mortgage laws are considered acceptable. The vessel can then be chartered back to the original shipowner who can continue to operate the ship as before under its own national flag thereby retaining the benefit of local concessions such as reduced port fees and cargo preferences and the protection of that state.

It should be noted that it is not possible to select any combination of two countries when setting up a bareboat registry structure. As yet, there are no international conventions or general principles of international law regulating the use of bareboat registration. The ability to flag in or flag out a vessel depends upon the laws of the relevant state and accordingly bareboat registry is only permissible where the respective laws of the flagging out state and the flagging in state are compatible and permit such arrangements. Moreover, such arrangements will almost invariably require the formal consent of any registered mortgagee (and indeed, as a matter of contract between the owner and the mortgagee, there will usually be a prohibition on the owner entering into bareboat charters at all without the mortgagee's consent).

One common feature of the bareboat registration system is - not surprisingly - that the vessel must be let on bareboat charter to the charterer. Because of the lack of international conventions in this area (at least any convention which is in force), it is necessary to look to the individual laws of each jurisdiction to define the meaning of bareboat charter for the purposes of its legislation. In the case of the United Kingdom, the Merchant Shipping Act 1995 uses the expression "bareboat charter terms" which it defines, in relation to a ship, as meaning "the hiring of the ship for a stipulated period on terms which give the charterer possession and control of the ship, including the right to appoint the master and crew". Other jurisdictions have similar definitions.

Bareboat registration is not without its problems, especially for mortgagee banks, and it is important to understand in every case the precise way in which the laws of the flagging in state and the flagging out state interact. As mentioned above, there is no treaty in force which recognises the distinction between the ship's registration and the state whose flag she is entitled to fly. The answer in any particular case therefore lies in an examination of the respective laws of the flagging in and flagging out state. Most flagging out states require as a precondition to permitting flagging out of ships some kind of evidence as to the compatibility of the laws of the flagging out state and flagging in state. Accordingly, assuming that this requirement is vigorously complied with, there should be no conflict and it should be clear from an examination of the two laws which law will cover which issue. However, not all jurisdictions treat this issue with the rigour it deserves and areas of uncertainty can arise.

The most crucial area of concern in relation to bareboat registration for both a shipowner and its financier is the treatment of their respective rights as owner and mortgagee of the ship. If the law of the flagging in state either does not insist upon or does not permit some form of notation of the ownership and mortgages which appear in the underlying register there is an obvious danger that third parties having dealings with the ship will not, by looking at the bareboat register, receive any notice of the ownership and mortgage arrangements affecting the ship. Indeed, in cases where the bareboat register treats the bareboat charterer as owner, any third party looking at such a register would be entitled to assume that the bareboat charterer was indeed the owner and further would have no knowledge of the real ownership nor existence of mortgages in favour of a financing institution.

In this situation, two issues will arise: first, whether any mortgages registered in the underlying register would be enforceable against such third parties (who have no actual or constructive notice of their existence) and, second, whether such third parties would be entitled to assume that the law of the flag being flown by the ship would be the law governing the establishments of their rights against the ship (whether they be contractual or liens). The practice in these areas varies from jurisdiction to jurisdiction and must be considered carefully in every case.

One area of particular concern to a mortgagee is the need to satisfy itself that if it wishes to obtain possession of the mortgaged ship following a default by the owner under the loan agreement it can terminate the bareboat charter, cancel the bareboat registration and revive the primary registration and hence the ship's entitlement to fly the flag of the flagging out state. This can be important because, upon the arrest of a ship, the laws of the jurisdiction in which the ship is arrested will look to the laws of the vessel's flag to determine certain issues such as ownership and the rights of mortgagees. It is therefore important that the flag state for this purpose is the state of the vessel's primary registration, not the bareboat registry state. Ideally, a bank should seek to ensure that it will be able to effect a cancellation of the bareboat registration itself, so far as this is legally possible, without reference to the shipowner or the bareboat charterer. A bank would normally look to achieve this by seeking a combination of any one or more of the following:

a. A tripartite agreement (entered into between the lender, the shipowner and the bareboat charterer) whereby the bareboat charterer's rights as bareboat charterer are subordinated in all respects to those of the lender under the mortgage. This document will normally contain language by which the owner and the bareboat charterer agree that the bareboat charter will be cancelled immediately upon the lender giving notice of the occurrence of a default under the loan agreement and additionally normally contains covenants on the part of both the owner and bareboat charterer to take all action necessary to effect deletion of the ship from bareboat registration and revive the primary registration. It will usually also empower the lender to take all necessary action to achieve this result.

b. An undated letter addressed by the bareboat charterer to the owner consenting unconditionally to cancellation of the bareboat charter and agreeing to deliver possession of the ship to the owner or mortgagee on demand (coupled with a separate authority entitling the letter to be dated following a default)1.

c. An undated letter addressed by the bareboat charterer to the registrar of the bareboat registry advising of the cancellation of the bareboat charter and requesting immediate cancellation of the bareboat registration (again, coupled with a separate authority to date the letter).

d. An undertaking from the registrar of the flagging in state to delete the vessel's bareboat registration upon request of the lender (though registries are usually unwilling to give this).

e. Power(s) of attorney from the owner and/or the bareboat charterer empowering the lender to cancel the bareboat registration and revive the primary registration.

A final point on bareboat registration is to ensure that upon cancellation of the bareboat charter nothing will hinder the immediate deletion of the ship from the bareboat registry. It is therefore important to be satisfied that such deletion is not subject to any governmental consents in the flagging in state or other bureaucratic restrictions.

Footnote

1. The extent of the documents available from a bareboat charterer may depend on whether it is an "arms length" charterer or if it is an associated company of the shipowner (in which case consideration may be given as to what other security the bareboat charterer can offer).

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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