Ships are suitable assets to be a subject of security, due to their economic values. Ship hypothéque is preferred as a security to a required loan, especially in the financing of ship building and sale. In Turkish law, although the general provisions on pledges are regulated in Turkish Civil Law ("TCL"), the legislator further regulated ship hypothéque in the Turkish Commercial Code ("TCC"), considering the unique nature of ships. This article examines the provisions in the TCC regarding the ship hypothéque.
Ship Mortgage as a Pledge on Movable Without Transferring Possession
Pursuant to Article 936 of the TCC, all ships shall be deemed as movables, whether they are registered or not. Thus, regardless of their flag or registry, provisions for movable properties are applicable to all ships if there is no special provision set forth in the TCC.1
However, it is also regulated that certain provisions for immovable properties shall be applicable to ships under specific exceptions. It is stated in Article 937 of the TCC that the provisions with respect to immovable properties that are regulated in the Enforcement and Bankruptcy Law ("EBL") shall be applicable for ships in specific circumstances. The same provision also refers to the relevant provisions of the TCL.
Although the rule for pledges on movable assets is to transfer possession to the creditor, Article 940 of the TCL provides an exception to that rule. The Article states that for movables, which are subject to compulsory registry, a pledge without possession transfer is possible. In line with the said provision, Article 1014(1) of the TCC provides that the mortgage of a ship, or of a share of a ship could be established, and deed-based pledges of registered ships could only be established via ship mortgage. In this regard, the legislator allows for ship mortgages exclusively, as a pledge on a registered ship. Scholars agree that a mortgage of a registered ship is a pledge on a movable with the registry and without transfer of possession.2 A registered ship signifies a ship that is registered under National Ship Register, Turkish International Ship Register, or Register for Ships under Construction. It is possible under the TCC to establish a mortgage on a ship that is yet to be completed.
Under Article 1015 of the TCC, a mortgage on a ship is a right in rem, which is established on a registered ship or on a share of a ship, and allows the creditor to collect their receivable from the amount obtained after the sale through bidding, with a priority privilege among creditors. Thus the creditor may claim their receivable through liquidation of the property. Pursuant to Article 1014 of the TCC, a mortgage could be established on a receivable that is due or undue, or subject to a condition or document of title. Pursuant to Article 1014(3) of the TCC, a mortgage could be established on a share of a ship that is subject to joint ownership, aside from a mortgage on an entire ship.
Ship Mortgage Deed
Pursuant to Article 1015 of the TCC, in order to establish a ship mortgage, it is required that the ship owner and the creditor agree to establish a mortgage, and the mortgage is registered in the ship registry. For a deed to establish a mortgage, it shall be done in written form, the signatures of which shall be notarized. Alternatively, this deed could also be signed before the ship registry. If either of these procedures is not fulfilled, the deed shall be invalid. Nevertheless, to establish a mortgage, registration is mandatory. Thus, the registration pursuant to Article 1015 is of constituent nature.
For mortgages on ships that are acquired abroad, Article 1015 of the TCC contains a specific provision. Pursuant to Article 1015(5) of the TCC, for ships that are acquired abroad, and have yet to be registered before the Turkish Ship Register or Turkish International Ship Register, an annotation as to flag certificate is deemed as registration. Therefore, with an annotation regarding the mortgage on the flag certificate, the mortgage is established. When the ship is to be registered, this annotation shall be transferred to the registry, which would be self-explanatory.
The creditor of the ship mortgage is also the creditor in the principal relationship. On the other hand, the debtor on the mortgage deed is the ship owner who undertakes to establish a mortgage on the ship, to the benefit of the creditor. However, the debtor of the mortgage deed is not required to be the debtor in the principal relationship.
The Scope of the Mortgage
The TCC refers to the provisions of the TCL, regarding the scope of receivables under the mortgage. Pursuant to Article 1018 of the TCC, the ship is security for the receivables stated in Articles 875 and 876 of the TCL. The relevant provisions provide that the principal, execution costs and default interest, the capital interest and necessary costs, including the premiums, fall under the scope of the mortgage.
The ship mortgage includes the appurtenances and accessories, as well as the ship itself, pursuant to the referred to provisions of the TCL.
Regarding the degree of mortgage, provisions regarding mortgages on immovable properties in the TCL shall be applicable, pursuant to Article 1017 of the TCC. In this regard, a fixed degree system is also applicable for ship mortgages.
Pursuant to Article 1016(4) of the TCC, a ship mortgage based on a value in foreign currency may also be established. However, a ship mortgage having more than one currency on the same degree may not be established.
Liquidation of the Mortgage
In Turkish law, execution of movable and immovable properties and collection of receivables are regulated under the EBL. However, the unique nature of a ship requires specific regulation on the enforcement procedure. Therefore, the enforcement procedure of ships is regulated in the TCC, with certain references to the EBL. Article 1381 of the TCC explicitly provides that if the payment obligation in the principal relationship is not performed, the mortgage creditor may initiate the execution procedure, which involves foreclosure and seizure of the ship. Also, foreclosure, seizure, and the compulsory sale are regulated, in detail, between Articles 1382 and 1397.
As a security regarding a receivable, a mortgage on a ship, or a share of a ship, may be established. Although ships are classified as movable properties under the TCC, establishing a mortgage, which is a type of immovable pledge, is possible. In this regard, establishing a mortgage, registration, the scope of mortgage, receivables under the scope of security, and enforcement as a remedy for non-payment, are regulated, in detail, under the TCC.
1. Preamble of Article 936 of the TCC.
2. OGUZMAN, Kemal / SELICI, Özer / OKTAY-ÖZDEMIR, Saibe, Esya Hukuku, 19th Ed., Filiz Kitabevi, Istanbul, p. 1000.
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.