Part 1 of this article last week explained the importance of giving full effect to the rights of purchasers of vessels sold free and unencumbered at the request of the old creditors in judicial sales.
Our Merchant Shipping Act clearly provides that where a ship has been sold in a judicial sale, the interest of the mortgagees as well as of any other creditor in the ship pass on to the proceeds of the sale of the ship.
However notwithstanding this and that for decades the position in Malta has been that when a vessel is sold in a judicial sale, it is sold free and unencumbered so that a purchaser purchases the vessel without any of the vessel’s previous debts.
In June 2018, the vessel Bright Star was arrested in Malta for an old debt, six months after having been sold free and unencumbered in Jamaica, following the arrest of the ship in Jamaica by the same old creditor.
In May 2021, the court in Malta decided in favour of the new owners underlining the fact that once a vessel is sold in a judicial sale free and unencumbered, any previous creditor must make a claim against the proceeds of the sale declaring the subsequent arrest to be illegal. The case is now before the Court of Appeal.
This case clearly shows that even in jurisdictions like Malta where the law is crystal clear, unscrupulous mala fede claimants will try to put illegitimate pressure on buona fede purchasers who purchase vessels in judicial sales.
The convention on the international effects of judicial sales of ships seeks to resolve this. It has 23 Articles with its entire raison d’être contained in Article 6 which states: “A judicial sale for which a certificate of judicial sale referred to in Article 5 has been issued shall have the effect in every other State Party of conferring clean title to the ship on the purchaser.”
It is expected that the convention will be adopted by the General Assembly of UN in September- Ann Fenech
There are a number of criteria which need to be satisfied for the convention to apply, and important among which are the notification criteria contained in Article 4 and the issuance of a certificate of judicial sale by the court where the judicial sale takes place provided for in Article 5.
Article 4 provides that while the judicial sale needs to take place in accordance with the law of the state of judicial sale, a notice of judicial sale must be given to the owners or bareboat charterers of the ship, the registry or bareboat charter registry of the vessel, to the mortgagees, holders of registered hypotecs or other registered charges and to holders of maritime liens which would have presented a claim before the same court.
Article 5 provides that upon completion of a judicial sale which confers clean title to the ship, which was conducted in accordance with the law of state of judicial sale and in accordance with the convention, the court or other public authority conducting the sale will then issue a certificate of judicial sale to the purchaser. This certificate will state that the vessel was sold free and unencumbered in accordance with the law of the state of judicial sale and the criteria provided in the convention.
The convention also provides that both the notice of judicial sale and the certificate of judicial sale are to be transmitted to the repository mentioned in Article 10. The repository is the IMO which will provide a module in its already existing GISIS platform to host the repository.
This enables any person to access the digital IMO GISIS platform to see whether any vessel is about to be sold in a judicial sale and/or whether such a ship has in fact been sold and a certificate issued. This is of great benefit to creditors of ships who have an interest in pursuing the proceeds of a sale and who may wish to partake in any ranking of creditors procedures which may take place following the sale of such ships.
Article 7 provides that at the request of a purchaser who produces a certificate of judicial sale, a registrar of ships is obliged to delete the vessel, or affect a transfer of ownership, and is obliged to delete any pre-existing mortgages, hypothecs or registered charges.
Article 8 provides that an application for an arrest of a ship for a claim pre-existing the sale free and unencumbered shall be refused on the production of the certificate of judicial sale by the new owner of the vessel, and that if the vessel is arrested in ex parte proceedings, that vessel is to be immediately released on the production of a certificate of judicial sale.
In order to have further certainty, the convention provides in Article 9 that it is the court of the state of judicial sale which has exclusive jurisdiction to hear a claim or application to avoid the judicial sale and no other court of any other state. The only exceptions to these are two.
The court of the state of registration may decide that giving effect to the convention is against its public policy, and similarly, the court of the state where the vessel is subsequently arrested may also decide that not arresting such a vessel or releasing from arrest such a vessel would be in breach of its public policy.
It is expected that the convention will be adopted by the General Assembly of the United Nations at its 77th Session in September. It will be a significant step forward in achieving certainty in international maritime trade particularly in today’s challenging economic climate.
Ann Fenech is a partner at Fenech & Fenech Advocates and vice president of CMI and CMI coordinator for the project at UNCITRAL.