Shipyard bankruptcy – the position of suppliers and the fate of their seller's chattel mortgage

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Subcontractors are often taken by surprise when faced with an estate of a bankrupt yard challenging their security over goods delivered to the yards. What is the position of suppliers seller's chattel mortgage?

Needless to say, a shipyard bankruptcy affects many of its stakeholders, including the suppliers and subcontractors. Many vendors and suppliers seek to secure payment for their deliverables to the shipyard through seller’s chattel mortgage (No.: «salgspant«, being a non-possessory security interest pursuant to Sections 3-14 to 3-22 of the Norwegian Liens Act of 1980). Unfortunately, such subcontractors are often taken by surprise when faced with an estate of a bankrupt yard challenging their security over goods delivered to the yards.

As a starting point, the formal requirements of a seller’s chattel mortgage are uncomplicated and easy to satisfy and ensure perfection of the security. The Norwegian Mortgage Act merely requires that the chattel mortgage is agreed in writing before the relevant goods are delivered. In practice, it is sufficient that the relevant issued order confirmation or invoice includes a reference stating that the goods delivered are subject to chattel mortgage. Although the formal requirements from the outset are straightforward and clear, the chattel mortgage may often have limited value when it comes to bankruptcy proceedings or towards other mortgage holders seizing the debtor’s assets in pursuing to secure their repayment.

Section 3-15 of the Norwegian Mortgage Act imposes extensive restrictions on the various items that can be subject to chattel mortgage. According to those provisions, a chattel mortgage cannot be agreed in respect of goods/deliverables which «the buyer has the right to sell onwards before the purchase price is paid». The construction of those provisions  could be interpreted to imply that the buyer’s right to sell the item onwards before the payment obligation is met without an express right to that effect. However, the true content of this provision is more restricted than the wording may seem to indicate. Case law and legal theory have established that it is decisive whether the item is «intended» as such for resale (not if it could simply be resold). This follows, among others, from the Supreme Court’s decision Rt 1992 s 438, and preparatory work behind the said provision.

The crucial factor in terms of rendering the sellers chattel mortgage invalid, may therefore be if the sales items are intended for resale, either directly or after being integrated as components into a sales item to be sold on to third parties. Goods (e.g. equipment) delivered to a shipyard will often be deliveries for integration into the yard’s production whether dealing with ships under construction or maintenance/rectification works. Sales’ collateral on such items will not be upheld as valid when in conflict with the rights of bankruptcy estate or another mortgage holder with a collateral in inventories or operating accessories.

Consumables, tools etc. that are not intended to be integrated into the ship or otherwise intended for resale may however be better positioned. Chattel mortgage agreed between the yard and a prospective subcontractor in relation to these types of goods are likely to steer clear of the restrictions contemplated herein. It is also noteworthy to mention that a chattel mortgage over a sales item that cannot be individualized from other items, typically when delivering consumables included in a larger inventory and mixed with other goods, will be deemed invalid, and will join all the other assets of the bankruptcy estate or consumed by collateral in inventories or operating assets.

Measures are however available and can be taken by vendors and suppliers who seek to safeguard their chattel mortgages agreed in respect of goods delivered to their customers. Simonsen Vogt Wiig Law firm is often engaged as bankruptcy estate trustees as well as legal counsels for suppliers/vendors in the industry – and thus possess a valued competence on this issue which is frequently sought for by players seeking to optimize their position.