This article penned by Dr Ann Fenech, was published in the Times of Malta on 25 June 2019

In February 2018 the Malta Maritime Law Association, in conjunction with the Comité Maritime International (CMI) and the Ministry for Transport, organised an international Colloquium on the CMI draft convention on the international recognition of judicial sale of ships. It was attended by 180 delegates from over 52 countries made up of flag administrations, maritime judges, ship repairers, bunker suppliers, providers of supplies, international banks, organisations such as the ITF and BIMCO.

The reason behind this substantial international attendance is the importance of the subject to the smooth operation of international trade. It is crucial that when a vessel is sold in a judicial sale by a competent legal authority in a legitimate manner, the buyer purchases such a vessel completely free and unencumbered and that the sale is recognised internationally.

It is this certainty which encourages a third party buyer to pay the market price for such a vessel, which means that the more money fetched by the vessel in the judicial sale, the bigger the chance for the vessel’s creditors to get paid and in some cases with money left over for the defaulting owner. This also means that the buyer will find financiers who will support his purchase in the knowledge that all previous debts including mortgages are deleted and thus the new financier will be able to register his interest as a mortgagee on the vessel.

World trade is heavily dependent on international shipping. According to the statistics published by the International Maritime Organisation, 90 per cent of the world’s trade is carried by ships. Thus the smooth operation of international shipping is a sine qua non.

When legitimately held judicial sales of ships which are sold free and unencumbered by the competent judicial authorities are not recognised, this leads to uncertainty and complete and utter chaos in the chain of international trade with considerably serious repercussions. There have been cases where purchasers paid top dollar for a ship in a judicial sale and the new owners find it impossible to deregister it from its old register and delete the old mortgages; this leads to a vessel with two owners and a new mortgagee unable to register his mortgage; there have been cases where new purchasers have to endure their new vessel being rearrested by the old creditors of the vessel so they who have nothing to do with the old debt are held to ransom by the old creditors; there have been cases, where a vessel is rearrested by the old owners on totally fictitious grounds of alleged wrongdoing.

When there is a failure of recognition by other states leading to such vessels being rearrested or stalled or stopped in the course of their voyages frequently under charter to third parties loaded with cargo destined to consignees, the uncertainty is unacceptable to the proper and orderly function of international trade and it is precisely what the smooth operation of international trade needs to avoid.

The persons who would have arrested the vessel in the first place prior to her judicial sale would typically be the financiers, banks, the crew, the providers of provisions, repairers, tug operators, harbour authorities etc. who would be moved to the arrest because the owner would reach the point where he is unable to pay his debts. The number one priority of these creditors is that the vessel fetches, as stated, the maximum price in a judicial sale so that they stand the best chance of getting paid. Of course, no buyer in his right senses is going to pay the best price for a ship riddled with debt unless they are assured that the title they are given in the ship would be free and unencumbered. If they cannot get that assurance then either there will be no buyer or the buyer will pay way below the market price with the very real chance of the creditors remaining unpaid.

Thus the international recognition of judicial sale of ships is in the real interest of all parties, the new purchasers, the creditors and the defaulting owner. It was the United Nations Commission for International Trade Law (UNCITRAL) in July of last year, which analysed the results of the Malta Colloquium through a proposal presented by Switzerland at the 51st General Assembly. UNCITRAL had to choose three new projects among the eight presented at that General Assembly. Following detailed presentations by Switzerland and the CMI, this project was chosen by UNCITRAL as a project to be added to its work schedule.

In December of last year the work was assigned to Working Group 6 at UNCITRAL which held its first meeting in New York between May 13 and 17 this year. It was attended by member states of UNCITRAL and the entire scope was a preliminary discussion on the draft presented by CMI through Switzerland. The entire week was taken up with explanations given by CMI of each and every article and answering the questions raised by all the delegations present.

A number of very important delegations such as Switzerland, China, Hong Kong, the US, Spain, Japan and Singapore had maritime law experts as part of their delegations so they could contribute in a significant manner to the debate.  The draft convention proposed by CMI is a relatively short instrument which includes the criteria that need to be satisfied in order for a judgment to be internationally recognised; it sets out notification periods prior to the judicial sale to safeguard the interests of various parties and provides for the provision of a certificate of judicial sale to be obtained by the purchaser to enable him to delete the vessel and any existing incumbrances.

The UNCITRAL Secretariat will shortly be finalising its report on the meeting. It will also in the next few months prepare a further draft for the next round of discussions which will take place at the United Nations in Vienna in November.

Needless to say, Malta has a very real interest in such an international instrument. The Malta Flag is the largest flag in Europe with over 90 million tonnes registered under it, therefore the authorities have an interest in ensuring that there is international unification in matters regarding the transfer of ownership and deletion of vessels and of mortgages following judicial sales which must take place in the smoothest possible manner.

Our courts are also very frequently requested to order judicial sales by auction or to approve private sales of ships where title to the buyers of such vessels is passed free and unencumbered. The international recognition of such judicial sales therefore is of paramount importance.

Therefore an international convention on the international recognition of judicial sales is a very good thing for international trade and for Malta.

Ann Fenech is the vice president of the CMI, managing partner of Fenech & Fenech Advocates and committee member of the Malta Maritime Forum.

Author: MMF