Luxembourg's strong legal framework mitigates debt repayment risks
A ship mortgage is in principle governed by the law of the flag in which the vessel’s in rem rights are registered.
Security over a Luxembourg vessel is granted by way of a contractual mortgage. The effect of a Luxembourg maritime mortgage is contingent on the legality and validity of the underlying facility and the obligations it secures.
A maritime mortgage grants the mortgagee in rem rights over the vessel to secure the performance of debtor obligations. In addition to a preferential right to vessel sale proceeds, a maritime mortgage can also secure rights to private sale and arrest.
A Luxembourg maritime mortgage can be executed as a notarial deed or a private deed. A notarial deed if often preferred as it confers an enforcement title on the mortgagee, allowing the mortgagee to sell the vessel upon an event of default
While there is no standard form, a valid ship mortgage must be granted in writing over an identified vessel(s) to secure the repayment of a determined monetary debt and detail the following:
- Mortgagor and mortgagee’s election of domicile in Luxembourg
- Applicable interest rate
- Maturity date for repayment of the capital
- Interest payment dates
A Luxembourg maritime mortgage is valid for an initial term of up to ten (10) years.
It may be renewed prior to its expiry for a further ten (10) years. Subsequent renewals are also possible.
A mortgage can secure principal, interest, default interest, commission fees and any other amounts due. Unless otherwise specified in the mortgage deed, vessel collateral extends to all present and future engine machinery, boats, tackle, outfit, freight, rigging, gear, including equipment and appurtenances whether on board or ashore, as well as any additional equipment, improvements and replacements made in or to the vessel or any part of it or to its equipment and appurtenances.
Upon execution, a mortgage is valid and enforceable between the parties. It becomes enforceable against third parties upon registration in the Luxembourg Maritime Mortgage Register of the Administration de l’Enregistrement et des Domaines (AED), along with the relevant facility agreement.
A maritime mortgage can only be recorded on a vessel registered in the Luxembourg Maritime Register although in practice the recordation can be performed concurrently with the vessel registration.
Security enforcement in the event of default is a lender’s foremost concern. While loan agreement provisions can mitigate debt repayment risks, vessel repossession with a view to its eventual sale remains the primary remedy for a lender to recover outstanding sums due under a facility agreement. Luxembourg is widely recognized as a creditor-friendly jurisdiction for security enforcement.
The enforcement title granted by a notarial deed entitles the mortgagee to sell the mortgaged vessel upon an event of default.
Alternatively, the mortgagee can enforce the mortgage through a court payment order by way of an attachment over the vessel. Barring payment of the summons, the vessel can be seized and a writ of attachment registered with the Luxembourg Maritime Mortgage Registrar. The court will then be petitioned to assess the validity of the attachment and, if confirmed, appoint a notary public to conduct a public auction. Proceeds of the sale are paid in order of priority.
A parate execution clause in a first preferred mortgage can compel the holding of a public auction thirty days following the summons to pay, dispensing the need for a court order.
The bankruptcy of the mortgagor does not impair a mortgagee’s right to enforce its security on a vessel.
A vessel may be the object of a private sale by a mortgagee if provided for by the mortgage deed. Sale proceeds vest in the seller and the purchaser acquires title subject to any existing liens, encumbrances and claims against the vessel. While generally less expedient and more constraining, a judicial sale will generally grant the purchaser a clean title to the vessel free of liens and other encumbrances without any warranties by the mortgagee. A judicial sale may also generate a higher sale price and preclude claims contesting the reasonableness of the sale price.
Mortgagee in possession
A contractual provision may afford the mortgagee a right to take possession of a mortgaged vessel in the event of default. This may carry risks for the mortgagee as it will be responsible for vessel operating expenses and risk incurring liability for any losses resulting from imprudent vessel use and other liabilities.
Secured mortgage creditors are ranked according to the date of registration in the Luxembourg Maritime Mortgage Register. Where more than one mortgage has been recorded on the same date, ranking is determined by the registration number.
Luxembourg has ratified the dated 10 April 1926 (the 1926 Convention). The following maritime liens rank in priority over Luxembourg maritime mortgages:
- Law costs due to the State, and expenses incurred in the common interest of the creditors in order to preserve the vessel or to procure its sale and the distribution of the proceeds of sale; tonnage dues, light or harbour dues, and other public taxes and charges of the same character; pilotage dues; the cost of watching and preservation from the time of the entry of the vessel into the last port;
- Claims arising out of the contract of engagement of the master, crew, and other persons hired on board;
- Remuneration for assistance and salvage and the contribution of the vessel in general average;
- Indemnities for collision or other accident of navigation, as also for damage caused to works forming part of harbours, docks, and navigable ways; indemnities for personal injury to passengers or crew; indemnities for loss of or damage to cargo or baggage;
- Claims resulting from contracts entered into or acts done by the master, acting within the scope of his authority away from the vessel’s home port, where such contracts or acts are necessary for the preservation of the vessel or the continuation of its voyage, whether the master is or is not at the same time owner of the vessel, and whether the claim is his own or that of ship-handlers, repairers, lenders, or other contractual creditors.
Some jurisdictions consider liens to be a procedural matter and determine priorities according to the law of the forum rather than the law of the flag state. This is one of the many crucial factors which a mortgagee must bear in mind when considering the arrest of a vessel. For its part, Luxembourg has ratified the 1952 International Convention on the Arrest of Sea-going Ships.
The following fee structure applies for the registration of a Luxembourg maritime mortgage.
|Mortgage Deed Registration (AED)||EUR 12.00 + EUR 2.00/page supplement
(including the annexes to the mortgage deed)
|Loan Agreement Registration (AED)||EUR 12.00 + EUR 2.00 per page supplement).
Where the purpose of the facility agreement includes the financing or re-financing of a mortgaged vessel(s) the registration is exempt from any ad valorem duty. Otherwise, an ad volerem duty of 0.24% of the loan amount is levied.
|Maritime Mortgage Registrar Fee||EUR 12.50|
Mortgage registration with the Luxembourg Registrar of Mortgages creates a preferential in rem right over the vessel in favour of the mortgagee and provides notice of the right to third parties.
Mortgage deeds and facility agreements are accepted in English, French and German.
A notarized translation to English, French and German is required where the documents for registration are in another foreign language.
Yes. The original mortgage deed together with an original of the underlying facility agreement must be filed with the Registrar.
An original Power of Attorney, together with documents evidencing the chain of authority (Extract from commercial register, articles of association, board resolutions etc.), must also be submitted for registration of the mortgage deed.
Is the mortgagor’s consent required for the transfer of the mortgages interest to a new lender, agent or trustee?
No. An amendment to the mortgage is however required to transfer any interest to a new lender or agent.