Short & Sweet: Ship Sale and Purchase #6 – Encumbrances, and liens

| Insight

In this 6th piece in our Sale & Purchase series, we focus on the warranties and indemnities in delivering a Vessel free of encumbrances and maritime liens.

Under Clause 9 of Saleform 2012, the Sellers warrant that the Vessel, at the time of delivery, is free from all charters, encumbrances, mortgages and maritime liens or any other debts whatsoever, and is not subject to Port State or other administrative detentions. The Sellers also undertakein the clause to indemnify the Buyers against all consequences of claims made against the Vessel which have been incurred prior to the time of delivery.

While Clause 9 provides an extensive warranty and indemnity, the major underlying issue is that a Seller in shipping is often a single purpose vehicle with no other assets than the Vessel, the operation of which is often sub-contracted to an operator. When the Vessel is sold, there is nothing left in the Sellers but the purchase price, and often the owners of the Sellers will quickly distribute the sale proceeds and liquidate the Seller company.

While registered encumbrances and mortgages can with some certainty be checked against the transcript of the relevant ship registry obtained on closing, there could be maritime liens and other claims against the Vessel which may only surface at a later stage by way of threats for (or actual) arrest of the Vessel, and thereby disturbing the Buyers’ use and operation of the Vessel, possibly forcing the Buyers to settle claims against the Vessel, even if such claims were created while in Sellers’s possession and control and were pursued against the Vessel after transfer of title to Buyers. In guarding against such risks, some Buyers try to run searches in the courts of the handover port (or her recent main port calls) to identify any pending claims from creditors of the Sellers or their managers.

However, the extent of such checks are of course limited both geographically and chronologically. Likewise, it would be difficult to obtain full and transparent visibility of the Sellers’ (and their managers’) creditors, or to obtain statements from all such creditors that any such claims are settled. If such claims qualify as maritime liens, they can be enforced against the Vessel (in rem) notwithstanding transfer of ownership to the Buyers. What is more, maritime liens rank in higher priority than registered mortgages created by the Buyers in favour of their financiers. Which of such claims may qualify for maritime liens will vary from jurisdiction to jurisdiction around the world, depending on the local legislation and the adoption of relevant international conventions on maritime liens (see our previous article touching upon these issues, with a Norwegian jurisdiction angle). With most Vessels trading world-wide, the risk can be equally varying.

The risk the Clause 9 indemnities lacking substance can be mitigated by a guarantee and indemnity from a company within the Sellers’ group with the requisite financial strength, such as the parent company. The Buyers may then have a claim against such guarantor for the indemnity under Clause 9 of the MoA provided the guarantee extends to all claims under the MoA and for a sufficient period of time. In situations where there is an SPV Seller and there are grounds to suspect unsettled creditor claims, we would recommend to obtain such guarantee and indemnity.

In cases of distressed sales, the likelihood of third party claims is substantially higher and there is an increased need to secure the Buyers’ rights in the indemnities of Clause 9. Often, in such cases, it is agreed that settlement of part of the purchase price is deferred, and is rather placed in escrow for a period of some (6 – 12) months after closing, regulated by a tailored escrow agreement whereunder the Buyers can withdraw funds to cover claims raised against the Vessel within the scope of the indemnities of Clause 9. After the expiry of the agreed period, the remaining funds will be released to the Sellers. Depending on the jurisdiction, we have also sometimes obtained guarantees or similar from the bankruptcy administrator (or equivalent) giving a priority right for claims under Clause 9 in the Sellers’ bankruptcy estate.

Lastly, a separate practical note on Clause 9: if the Vessel is subject to a charter and such charter is transferred to the Buyers (by novation) as part of the transaction, the Sellers should carve-out the warranty in respect of the Vessel being delivered «free from all charters».