Shipping and directed sales: the end (almost)
In the current economic climate, many mortgagees have considered the possibility of court sales of mortgaged ships.
20 April 2014 - 18:21
These jurisdictions have long-established procedures for the judicial sale of ships and the courts in these jurisdictions deal with such matters frequently and, usually, quite quickly. In the period between arrest and sale, costs relating to such matters as crew wages, insurance, bunkers, and stores, will accrue. These costs will be minimised, if the sale procedure is accelerated. The usual method of court sale has a public element. The fact that the ship is to be the subject of a judicial sale is widely advertised and prospective buyers are invited to submit written tenders (e.g. in England and Singapore), or to attend an oral auction (e.g. in The Netherlands).
This procedure, at least in jurisdictions such as England and Singapore, also requires the ship to be valued by a broker acting on behalf of the Admiralty Marshal (or Sheriff). The valuation takes into account the contents of a detailed survey report carried out on the ship by a marine surveyor. These surveys and public notices take time. The courts in common-law jurisdictions have always had a discretion as to the mode of sale to be adopted. The classic method involves appraisement of the ship's value by the court; public advertisement; an opportunity for prospective buyers to inspect the ship themselves; and the submission of written tenders to the court by interested parties.
In recent years, a practice grew up in some common law jurisdictions which shortened the court sale procedure substantially. That practice may be termed "directed sale". After the ship has been arrested, the arresting party (invariably, the mortgagee of the ship), or a prospective buyer, simply asks the court to direct that the ship is to be sold to the (named) buyer, at a specified price. In practice, the mortgagee finds a buyer for the ship before the arrest takes place. As soon as the arrest is carried out, the mortgagee, or the buyer, applies for a "directed sale" order. The court will usually require to be satisfied on two main points. First, there must be no connection between the existing ship owner and the proposed buyer. Secondly, the proposed buyer must satisfy the court that the price to be paid is a proper one and would be unlikely to be bettered, if the ship were sold by public written tender.
The role of the mortgagee
During periods of recession in the shipping market, it is frequently the case that the amount of the mortgage debt outstanding exceeds the ship's market value. In such cases, a mortgagee is often able to procure a buyer who will pay a price which is fully up to market levels, or somewhat in excess thereof. Any apparent over-payment made by the buyer will be compensated for by the terms of the new financing offered to the buyer by the mortgagee. In this way, a ship finance institution is able to enforce its mortgage and procure that the ship is transferred out of the ownership of a defaulting borrower and into the ownership of a new owner, usually with the same finance institution continuing to finance the asset, albeit on different terms from those which applied previously. The justification for the directed sale procedure is that, provided the court ensures that the ship is not sold at an under-value, neither the defaulting ship owner, nor other claimants against the ship, are disadvantaged in any way. There was always a body of opinion, however, which considered that the directed sale procedure was inadvisable, or unacceptable, mainly because it lacked the element of publicity. The court in Hong Kong, for example, has never allowed a directed sale to take place.
The preferred method: judicial sale by public tender
In a recent English case, Union Gold  EWHC 1696 (Admiralty), a mortgagee bank applied for directed sale orders in respect of a fleet of four small cargo ships which were under arrest. The court refused three of the applications and granted the fourth. Three of the ships were relatively new and there were no special circumstances applicable to them. The court compared the two procedures (directed sale and public tender) and held that the latter was much to be preferred because, in effect, justice is seen to be done when a ship is appraised by the Admiralty Marshal and sold by public tender. It is important that English admiralty sales should continue to be recognised by other jurisdictions throughout the world and that goal would be assisted by a court sale procedure which is undoubtedly open and impartial. The fourth ship was about 30 years old and of very low value. A valuable charter could be preserved, if the ship were sold immediately. The court permitted a directed sale of that ship. The statements of judicial principle contained in the judgment are such that directed sales are now most unlikely to be ordered in England, except in very special circumstances. The fact that the cost of lay-up may be reduced as a result of a directed sale order being granted does not, of itself, amount to a special circumstance. Two months after the English judgment was handed down, the Singapore court, in Turtle Bay  SGHC 165, rejected two directed sale applications, essentially for the same reasons as those set out in the Union Gold judgment.
Directed sale applications will no longer be accepted by courts in England, or Singapore, except in very special circumstances. It is not enough for a mortgagee simply to show that the proposed sale price is equal to, or above, the market value of a ship. The overriding objective of a court ordering the judicial sale of a ship, is to ensure that the sale is conducted in an impartial and open manner, so that the interests of all parties are seen to have been protected. By applying these principles, the courts in England and Singapore will encourage other jurisdictions to continue to recognise the effect of judicial sales conducted by them. These considerations of judicial policy are deemed to outweigh, by far, the relatively minor saving in cost which may be achieved by the directed sale procedure.
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