Insights

Act No. I of 2025 (the “Act”) introduces the finance charter instrument as a legal mechanism to secure lessors’ rights in ship financing. This article analyses the newly available security instruments, particularly the financial charter instrument.

What is a finance charter?

A finance charter is an arrangement where a ship is leased to a party under specific terms that facilitate financing for the vessel’s acquisition, operation and/or management. Typically structured as a bareboat or demise charter, the finance charterer assumes responsibility for the ship’s operation while the ownership title remains with the lessor. This allows financiers to secure their investment in the vessel without being directly involved in its operation.

Proposed enactment of Article 49b

The introduction of Article 49B in the Merchant Shipping Act outlines the legal framework for the registration of finance charter instruments, including several important provisions:

1. Registration of Finance Charter Instruments

The finance charter instrument follows the same procedures as a mortgage and is executed by the finance charterer in favour of the lessor being the shipowner and must be attested by a witness. The registration of the instrument in the ship’s register serves as formal notice of the lessor’s rights over the vessel, ensuring legal recognition and protection of the financing arrangement.

2. Scope of Obligations Covered

The proposed security is designed to secure various financial and other obligations arising from the finance charter agreement. These include the payment of hire for the secured vessel, payment of principal sums and interest, as well as performance of any other obligations encompassing multiple operational obligations typically imposed on a lessee or charterer. Through the registration of a finance charter instrument, a lessor can secure these obligations effectively.

3. Prior Consent of Mortgagees

Before a finance charter instrument can be registered, the written consent of any registered mortgagee must be obtained. This ensures that the lessor’s rights are not in conflict with the interests of existing creditors, notably senior lenders which have in turn secured their interests with a mortgage over the ship.

4. The Priority of Claims

The finance charter instrument is granted privileged status unlike other maritime claimants of the financed ship including non-maritime claimants of the finance charterer. This is a consequence of the nature of the finance charter instrument as a charge  over the vessel, enforceable against all third parties. A finance charter instrument “attaches” to a vessel in the same manner as listed under Article 50 of the Merchant Shipping Act.

Although, this charge is superior to unsecured claims, it is not superior to existing mortgages or certain privileged claims like crew wages, port dues, salvage claims and claims for damages due to loss of life or personal injury. These claims are considered more critical and have higher priority.

The privileged status of a finance charter instrument is also catered for, should the financed ship be sold pursuant to an order or with the approval of the competent court. As a secured maritime claimant, the claims of a lessor with a registered finance charter instrument will be passed on to the proceeds of the sale of the ship.

5. Preservation of Mortgage Rights

Despite the registration of the finance charter instrument, the rights of existing mortgage holders remain unaffected. Whether a mortgage is registered prior to, or after the finance charter instrument, the mortgagee’s rights are preserved and shall rank higher than the financial charter instrument. Additionally, the registration of a finance charter instrument over a ship shall not prohibit the registration of any new mortgage or the amendment or discharge of existing mortgages.

This concept grants the required flexibility to those finance lessors who seek to obtain their own financing from other lenders, while benefitting from the comfort of holding a mortgage in their favour in addition to any subordination agreement awarding preference to their claims and entered into with the finance lessor concerned.

6. Enforcement of Repossession Rights

Art. 49B allows for a statutory right of repossession by the lessor should the finance charterer default on the finance charter agreement. This right is enforceable once the lessor provides written notice to the finance charter.

The power to retake possession granted to a lessor resembles that available to the mortgagee under the existing provisions of the Merchant Shipping Act, and that of a lessor in the amended provisions in the Civil Code dealing with the letting of ships and aircraft. The statutory power of repossession reinforces a lessor’s contractual rights to do so generally referred to in finance charter agreements.

Conclusion

The introduction of the finance charter instrument strengthens ship financing security, providing lessors with clear legal protection. The registration process, along with provisions ensuring the priority of claims and the enforcement of repossession rights, add flexibility to the financing process while safeguarding investments.

This article is the second in a series of articles that will be published by Ganado Advocates in the coming weeks.