Self-help remedies under ship mortgages in Madeira

Wednesday 1 December 2021

Claudia Santos Cruz
Morais Leitão, Lisbon


Law No 56/2020, of 27 August 2020, approved the latest amendments to the Madeira International Ship Register (the 'MAR') introducing, inter alia, common law-style self-help remedies favourable to lenders. Prior to this new version of the MAR Regulation, the inclusion of out of court lender powers to take possession and sell the vessel in a ship mortgage agreement would be void and of no effect.

Mortgagees may now, in the event of default, take possession of the vessel, provided the vessel is not encumbered by a prior mortgage or, if it is, where the mortgagees of any prior mortgages give their written consent. The MAR is a white list international ship registry in the Madeira Free Trade Zone, which is separate from and independent of the Portuguese Conventional Ship Registry. The new law, which came into force in September 2020, introduced several changes that make this flag more attractive to lenders/mortgagees.

We highlight some of the main changes arising for the recent and ongoing reforms to Madeira's International Ship Register.

Arrest and self-help remedies

In most cases, vessels registered in the International Ship Registry in Madeira and flying the Portuguese flag do not operate in Portuguese waters, and it is therefore unlikely that an arrest will occur in Portugal, which is generally also not deemed a friendly jurisdiction for arrest by lenders.

The new wording of the MAR Regulation states that the parties may, in the mortgage agreement, grant the mortgagee the right to take possession of the ship in the event of the default of an underlying obligation. It further establishes that the right to take possession grants the mortgagee powers to seize, navigate and sell the ship under the terms foreseen in the mortgage, as if it were its owner.

These rights must be expressly granted in the mortgage, that is, the parties are required to contractually establish the terms under which the right to possession may be exercised. Note that a mortgagee may only exercise this right if there is no higher-ranking mortgagee, unless such mortgagees give their consent in writing.

In order to apply retrospectively, for example, in relation to the new powers granted to a mortgagee to take possession of the vessel in a default situation and sell it privately without recourse to the owner/borrower, most existing registered mortgages will need to undergo an amendment to incorporate these new powers (unless they are already contractually included, which will need to be reviewed on a case-by-case basis). New mortgages registered from 1 September 2020 must also expressly refer to these powers, and the terms and conditions in respect of which the mortgagee can resort to this mechanism. These self-help remedies are only made available to mortgagees of mortgages registered in MAR and not in the conventional Portuguese registry.

Foreign law mortgages

Although ship mortgage registration requirements and procedures are governed by Portuguese law, the MAR Regulation expressly provides that the parties may choose that the mortgage be subject to a foreign law. This is without prejudice to the international conventions to which Portugal is a party.

Should the parties choose to subject the mortgage to the laws of a country other than Portugal, the request for registration must include a translated copy of the applicable legislation signed by both parties, except when the registrar waives (in part or in whole) such a requirement, or determines that the translation be made by a specific translator.

Please note that although the legislation foresees the possibility of registering a mortgage governed by a foreign law, in practice, we are not entirely satisfied that this approach has been fully tested on the arrest of a vessel in a foreign jurisdiction. Our concern is that potential conflicts of law may arise in court on a vessel arrest, namely that usually international maritime principles provide that the law of the mortgage is the law of the flag, so that in cases of omissions, one can look to the law of the flag for guidance. It is not yet clear how foreign courts will, in practice, reconcile the distinction between a Portuguese flag and foreign law mortgage.

Final note

Vessels registered in Madeira may be owned and managed by foreign incorporated companies and have full access to European Union cabotage. For shipowners to register their vessels in the MAR, they merely need to appoint a local agent with powers to ensure their representation before the state and other authorities.

The MAR Regulation also allows the provisional registration of vessels and mortgages (and other similar encumbrances) over hulls/vessels under construction. From the lenders' perspective, this framework also foresees that the priority of such registrations is not affected by their conversion from provisional to permanent.

The new regulation includes several other novelties that may be useful to lenders, such as the provision of less burdensome registration procedures, and less stringent limitations on the language of the supporting documentation (documents in English, French or Spanish are generally accepted without being translated).

Over the years, there has been a continuing effort towards creating a more competitive international ship registry in Portugal. One of the key changes was the reorganisation of the priority of maritime claims, which ranks mortgages over the vessel as third, ranking behind judicial costs and expenses borne in the common interest of the creditors, and salvage and assistance salaries.