Enforcement of mortgage security over Cayman Islands flagged vessels - Maritime and Transport Law Committee, July 2020

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Matthew Stocker
Conyers, George Town
Matthew.stocker@conyers.com

Barnabas Finnigan
Conyers, George Town
Barnabas.finnigan@conyers.com

Introduction

The Cayman Islands Ship Registry (CISR), which has been registering vessels since 1903, is part of a longstanding tradition of seafaring in the Cayman Islands that is reflected in the territory’s motto, ‘He hath founded it upon the seas’. Although the CISR is best known as a superyacht registry, it holds Category 1 British Registry status, meaning the CISR is able to offer registration services in respect of all types of vessels,^[1] many of which are subject to financing arrangements. Cayman Islands flagged vessels are entitled to fly the Red Ensign and, as British ships, will fall under the world-wide protection of the Royal Navy and British consular services. This, together with the high and internationally recognised standards of the CISR, borne out by its Paris and Tokyo MOU white list status and its Qualship 21 certification, and the customer service focused approach of CISR’s staff, makes CISR an attractive proposition for ship-owners looking for a high quality flag state for their vessel.

With its stable political climate, robust yet flexible corporate regime, adherence to the highest international compliance and regulatory standards and a legal system based on English common law, the Cayman Islands have also long been seen as an attractive jurisdiction for financiers who are looking for certainty and stability. Financiers can draw further comfort from creditor-friendly and commercially-focused legislation, which helps to ensure that their position will be protected in the event of a default, which is particularly important in times of economic uncertainty.

Typical security arrangements in connection with Cayman Islands flagged vessels

Where a Cayman Islands flagged vessel is subject to financing arrangements, the financier will require certain security to be put in place over the vessel and its related earnings and insurances, and may also seek certain additional assurances or security from the owner. In addition to a ship mortgage (which is discussed in more detail below), a standard security package might include a deed of covenants (setting out how the owner is to deal with the vessel), together with assignments of insurance, earnings and requisition compensation and a charge over the vessel’s earnings account. Where the shares in the vessel are held in a corporate structure (for instance by a Cayman Islands or BVI SPV) the financier may also seek security over the shares in the owning SPV. In addition, depending on the relationship between the ship-owner and the financier, the financier may seek further assurances or security from the owner or its parent such as a guarantee.

With the exception of the ship mortgage, there is no strict requirement from a Cayman Islands law perspective for the security documents to be governed by the laws of the Cayman Islands, and commonly they would follow the governing law of the loan and other transaction documents. A Cayman Islands court would recognise and enforce non-Cayman Islands law-governed contractual and security arrangements, provided these are validly created under the applicable governing law. Additionally, the courts of the Cayman Islands will generally recognise and enforce any monetary judgement (and in certain circumstances a judgement for non-monetary relief) obtained in a foreign court arising under those foreign law governed security documents in respect of a Cayman Islands owner or Cayman Islands flagged vessel.

A financier will not be deemed to be resident, domiciled or carrying on business in the Cayman Islands solely as a result of the entry into/performance and/or enforcement of any transaction or security documents in relation to a Cayman Islands flagged vessel, nor will they need to be licenced, qualified or otherwise entitled to carry on business in the Cayman Islands in order to enforce their rights under those documents.

Registration of a Cayman Islands ship mortgage

In order to be filed with CISR and recorded by the registrar of shipping (the Registrar), any mortgages over a Cayman Islands flagged vessel will need to be governed by Cayman Islands law and must be in the prescribed form of statutory mortgage that is provided for under the Merchant Shipping Law (2016 Revision) of the Cayman Islands (the Merchant Shipping Law).

There are two types of ship mortgage available in the Cayman Islands:

• an ‘account current’ mortgage, which secures all amounts payable to the mortgagee by the mortgagor under the loan and any other associated security documents, together with enforcement costs of the mortgage itself; and

• a ‘principal sum and interest’ mortgage, which simply covers the principal sum secured under the mortgage plus any interest as agreed between the parties.

It is also worth noting that it is possible to register a mortgage over any vessel under construction registered with the CISR in addition to fully completed vessels.^[2]

Registration effect of a Cayman Islands ship mortgage

In accordance with the Merchant Shipping Law, a mortgage over a Cayman Islands flagged vessel will be registered in the order presented to the Registrar.^[3] It is, however, possible for a prospective mortgagee to obtain a 30-day priority period by filing a priority notice with the Registrar stating their intention to register a mortgage over the vessel. The effect of this is that the interest notified to the Registrar in the priority notice will take precedence over any subsequent mortgage or priority notice filed by any other party during the 30 day priority period, provided that the final mortgage is registered before the end of the priority period.

Once their interest in the vessel has been registered, a mortgagee will have priority over the other unsecured creditors and/or bankruptcy trustees in the event of a bankruptcy or liquidation of the mortgagor, and the vessel will therefore sit outside the pool of assets available to the unsecured creditors in any such proceedings.^[4]

The Merchant Shipping Law also includes further protections for financiers. For example:

• where the mortgage includes a negative pledge against the creation of further mortgages over the vessel without the mortgagee’s prior written consent, the Registrar cannot validly register any further mortgages over the vessel until the written consent of the existing mortgagee has been provided, and any mortgage registered in violation of this provision will be void;^[5]

• where the mortgage instrument prohibits the transfer of ownership in, or termination of the registration of, the vessel without the prior written consent of the mortgagee, the Registrar may not validly transfer ownership or terminate registration of the vessel until the mortgagee has provided their written consent, and any transfer of ownership or termination of registration in violation of this provision will be void;^[6] and

• in the event that two or more mortgages are registered over the vessel a subsequent mortgagee may not exercise the power of sale without the consent of any prior mortgagee or unless the sale has been ordered by court order.^[7]

Once registered, the mortgage over the vessel will remain valid for the duration of the mortgage, without the need for the mortgagee to take any action to renew the mortgage registration

Enforcement of a Cayman Islands ship mortgage

The options available to the mortgagee in relation to the enforcement of the mortgage security will depend largely upon the location of the vessel at the time of enforcement. 

As a matter of Cayman Islands law, where all or any part of the sum secured under the mortgage becomes due, the mortgagee will be entitled to exercise the statutory power of sale arising under the Merchant Shipping Law.^[8] The mortgagee will also have a right of sale in respect of the vessel arising at common law. Although the statutory right of sale may be exercised without recourse to the courts, as a practical matter the mortgagee may need to take possession of the vessel in order to affect the sale. Unless the mortgagee has the cooperation of the owner and/or the crew of the vessel this may therefore require a court order to enable the mortgagee to arrest and take possession of the vessel.

When exercising the power of sale, the mortgagee has a duty to take reasonable care to obtain the best price reasonably obtainable at the time, it is required to act fairly towards the mortgagor and is not entitled to act in a way which may unfairly prejudice the mortgagor.^[9] The mortgagee will not generally be entitled to sell the vessel directly to themselves, and any sale to a connected person will be subject to additional scrutiny.^[10] From a practical perspective, any purchaser of the vessel will also need to be within the categories of person permitted to be the registered owner of a Cayman Islands vessel under the Merchant Shipping Law.

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