FISHING INDUSTRY NEWS ARTICLE – AUGUST 2014
BEWARE OF HIDDEN CLAIMS WHEN PURCHASING A VESSEL
It is a generally accepted principle of our law that in respect of moveable property such as a vessel, once the purchase price has been paid in full then on delivery of the vessel to the buyer ownership and risk passes to the buyer.
In order to protect the buyer against any encumbrances or charges against the vessel, it is usual to incorporate a warranty by the seller in the sale agreement. For instance the Norwegian sale form 2012 provides the following warranty:
“The sellers warrant that the vessel, at the time of delivery, is free from all charges, encumbrances, mortgages and maritime liens or any other debts whatsoever, and is not subject to port state or other administrative detentions. The sellers hereby undertake to indemnify the buyers against all consequences or claims made against the vessel which have been incurred prior to the time of delivery.”
As with any warranty it is only as strong as the financial strength of the seller unless (in the unlikely event) the buyer is able to obtain personal sureties from the directors or shareholders of the seller or some other financially strong parties. In addition, there may also be situations where the seller is not prepared to give such a warranty, for instance if the sale is in terms of business rescue or insolvency proceedings. Taking delivery and with it ownership of the vessel does not mean the buyer is home free.
As with the buying of a business or shares in a company, a proper due diligence needs to be undertaken. We discuss some of the dangers lurking under the surface which buyers should be aware of. The possible encumbrances vary in nature and “visibility”.
The first check a buyer should undertake is whether or not Section 34(1) of the Insolvency Act applies to the sale. This section provides for the publishing of a notice in the government gazette, and two issues of an Afrikaans and two issues of an English newspaper within the area, giving notice of the intended sale not less than 30 days and not more than 60 days before the date of such transfer. In the event that such notice is not published then the transfer of the vessel would be void as against creditors for a period of 6 months after such transfer, and in addition shall be void against the trustee of the seller’s estate, if his estate is sequestrated at any time within the said period.
The Insolvency Act further defines a trader as:
“any person that who carries on any trade, business, industry or undertaking in which property is sold, bought, exchanged or manufactured for purposes of sale or exchange…”
A fairly recent Supreme Court of appeal decision [McCarthy vs Gore 2007 (6) SA 366 (SCA)] has held that a transport company that sold 28 of its trucks without a Section 34 notice did not fall within the definition of a trader because it could not be said that its “core business” was that of selling property. Thus section 34 could not be applied by the liquidator of the transport company.
Whether or not a fishing company selling one of its vessel’s would fall within the definition of a trader is a delicate question. In some instances owners of fishing vessels do not have their own fishing rights and merely act as a catching vessel for other rights holders. Accordingly their core business is not that of selling or manufacturing property but rather hiring out their catching services. However, what if the seller was a vessel owner with its own fishing rights or had contracted the fishing rights of others so that after the fish was caught on its vessel such fish was processed (manufactured) and sold. It could be argued that the core business of the fishing company was that of selling property and accordingly it could be seen to be a “trader” in terms of the Insolvency Act. Hence the sale of its vessel could be seen as a sale to which Section 34 applies with the protections set out therein being available to creditors / trustees.
In respect of vessels there are generally two types of mortgage bonds to look out for. Firstly, marine bonds registered in terms of the Ship Registration Act with the Registrar of Ships, and secondly special notarial bonds which are registered by a conveyancer in the Deeds Office. Marine bonds can only be registered over vessels which are registered on the ship registry whereas special notarial bonds are registered in the Deeds Office over vessels which are not registered on the South African ship registry.
Either way the prospective buyer can with relative ease establish whether there are such bonds registered by doing a search either at the Registrar of Ships or at the Deeds Office. If the vessel is delivered to the buyer with such charges still in place, then the bond holders will have recourse against the purchaser on the basis of the bonds over the vessel and in particular such bonds would empower the bond holder to take possession of the vessel and ultimately sell it in order to recover any outstanding debt which the bond was securing.
PARTIALLY VISIBLE ENCUMBRANCES
A pledge is effectively a contractual security where a debtor pledges an asset to a creditor as security for a debt / obligation. The pledge requires an agreement between the debtor and the creditor and most importantly requires the creditor to take possession of the asset in order for the creditor to have a real right of pledge over the vessel. As such, in a sale situation the buyer would generally be able to identify that a third party other than the seller is in possession of the vessel and this would obviously raise a red flag for the purchaser prior to the paying of the purchase price in terms of the sale agreement.
Where a repairer has carried out work on a vessel and has not been paid, such repairer would be entitled to exercise a repairer’s lien over the vessel until it was paid. The exercise of such lien requires the repairer to retain possession of the vessel. As such a buyer again should be able to identify that the vessel is in the possession of a third party other than the seller and that the seller would not be in a position to hand over delivery to the buyer.
These are claims or rights of third parties which are more difficult to identify as there is no public record of such charges / rights and there is no visible evidence for the buyer to pick up on. Having a look at the recent financial statements or management accounts of the vessel owning company may give an indication to a buyer that there are such claims, but this is not a fool proof due diligence enquiry.
Gear / equipment not owned by the seller
On board the vessel there could be equipment which is either subject to an instalment sale agreement or is in fact rented by the seller. Such equipment cannot form part of the sale as the seller (not being the owner thereof) would not be able to transfer ownership in these assets to the buyer. After the delivery of the vessel to the buyer, the third party owner of such equipment would have a right to vindicate the property on board the vessel.
The maritime lien is a concept which is now well known by admiralty lawyers around the world with its origins officially having arisen in England in the mid nineteenth century. In essence a maritime lien is a claim which follows the vessel irrespective of ownership / possession of the vessel. This allows the creditor with amaritime lien recourse against the ship herself notwithstanding any change of ownership of the vessel. The danger for a prospective buyer of course, is that they are not aware of any such maritime liens when they pay the purchase price and take delivery of the vessel. Thereafter the vessel can be arrested by the maritime lien holder in respect of a debt due by the previous owner or perhaps an owner prior to that. The principle liens recognised under South African and English law are as follows:
- The Damage Lien – this is a lien in respect of damage done by a ship which covers damage done to external property and injury to persons external to the vessel;
- The Wages Lien – this is a lien in respect of seaman’s wages and also covers the master’s wages;
- The Master’s Disbursement Lien – this is in respect of payments made by the Master on behalf of or on an account of the ship;
- The Salvage Lien – this is in respect of any salvage claim arising from the salvage of the vessel;
- The Bottomry and Respondentia Lien – Bottomty and Respondentia historically is an arrangement by the Master of the ship who borrows money upon the security of the vessel where for example the ship needs urgent repairs during the course of a voyage and the Master is unable to contact the owner for funds. Where the ship.These forms of raising finance are no longer resorted to and as such these liens are irrelevant for the purposes of this advice.
As stated previously, these liens travel (like barnacles attached to the hull) with the vessel regardless of change of ownership. They can be extinguished inter alia by the discharge of the underlying indebtedness, the destruction of the ship, the underlying claim prescribing and/or by judicial sale.
What is important to note is that a judicial sale of a vessel in South Africa would be in terms of the Admiralty Jurisdiction Regulation Act and in terms of such sale all charges or debts against the vessel including liens are extinguished and the vessel is sold free of encumbrance to the purchaser. However, should the vessel be sold under insolvency or business rescue proceedings, this is not the case and such liens would continue to cling to the vessel even after such sale.
In rem maritime claims
Other than maritime liens, there are of course other claims which relate to the operation of vessels and which fall under the definition or maritime claims. In respect of such claims a maritime creditor can issue an in rem summons and arrest papers against the vessel itself. Based on the English case of the “Monica S” there is a strong view amongst South African admiralty lawyers that once proceedings in rem are commenced by merely the issue (and not service) of the in rem writ of summons, the claim then attaches to the vessel and action can proceed against the vessel by means of its arrest even after the subsequent delivery to a bona fide purchaser. A prudent buyer would carry out a writ search at the local Court adjacent to the port where the vessel operates from in order to see if any in rem papers have been issued. It is important to note that in rem papers once issued lapse after 12 months (unless extended by court order).
Regarding the above hidden claims, where one is purchasing a vessel in a foreign jurisdiction and delivery of such vessel is taking place in such jurisdiction, it is important to note that the laws relating to maritime liens, claims and potential charges against the vessel may and often do differ from the South African and English law position. Hence a local lawyer may need to be engaged in order to advise and / or carry out a due diligence.
Along with the inspection of the vessel to see that she is in a seaworthy condition, it is also advisable to carry out a due diligence to establish whether there are any visible or invisible charges which may prejudice the purchaser after payment of the purchase price and delivery of the vessel.