Answer: We agree with respect to subsection a. to c. of paragraph 20 of the draft guidelines, but strongly disagree with respect to subsection d. It lacks practical and legal applicability for movable property (ships, air-planes, cranes, vehicles etc.). We propose that subsection d should be deleted.
With respect to movables assets/collateral it is neither relevant nor practi-cable for purposes of investigating and confirming the effectiveness and enforceability of the relevant collateral arrangement that the credi-tor/mortgagee obtains a legal opinion from the set of jurisdictions where the collateral could move during the lifetime of the loan according to the collateral arrangement agreement. Commercial movable property can trade worldwide and consequently travel from jurisdiction to jurisdiction in and out of different legal regimes, even daily (ships, airplanes).
For the sake of clarity, we do not argue against the principal eligibility re-quirements set out in Article 181(f) of the CRR but argue that the “legal certainty” criteria of that Article, and more specifically the criteria in Article 210 (1) (a) of the CRR, that “ ..the collateral arrangement under which the physical collateral is provided to an institution shall be legally effec-tive and enforceable in all relevant jurisdictions…..”. are effectively satis-fied through compliance with subsection a.-c. of paragraph 20 of the draft guidelines and consequently disregarding subsection d. of that par-agraph.
We can illustrate this with reference to the legal set up applied for ship fi-nance.
Most commercial ships trade worldwide and consequently travel from ju-risdiction to jurisdiction in and out of different legal regimes daily. Jurisdic-tions where the collateral can travel during the live time of the loan are therefore typically not predetermined as the follow business opportunities in order to be a profitable investment
With a view to tackling potential legal uncertainty and controlling the numerous national systems of registration and preventing autonomy and loss of transparency which emanate from the fact that ships move around, international law has intervened by a series of UN Conventions including the 1982 UN Convention on the Law of the Sea which states as per article 91 that: “Every state shall fix the conditions for the grant of na-tionality to ships, for the registration of ships in its territory, and for the right to fly its flag. Ships have the nationality of the State whose flag they are entitled to fly. There must exist a genuine link between the State and the ship”. Article 94 goes on to say that: “Every state shall effectively ex-ercise its jurisdiction and control in administrative, technical and social matters over ships flying its flag”. The Convention is signed by 182 coun-tries and ratified in 168 countries which may be taken as a token of uni-versal/global recognition and acceptance.
Additionally, of relevance in the context of ship mortgages are the 1926 and 1967 International Conventions for the Unification of Certain Rules relating to Maritime Liens and Mortgages and the 1993 International Con-vention on Maritime Liens and Mortgages. Such conventions apply in the international shipping community either by virtue of ratification (with re-spect to some), implementation in national legislation almost verbatim (with respect to other) or simply as a matter of usual practice whereby countries which have not signed such treaties and conventions still apply the premises of those conventions which demonstrates that the recogni-tion of foreign ship mortgages is internationally recognised even in the absence of an agreement or convention between the countries to the effect that it is not necessary to obtain a legal opinion from the lex rei si-tae (i.e. the law where the ship is located) at the time of enforcement which would in terms of ship financing be identical to the lex fori (i.e. the laws of the jurisdiction in which a legal action is brought) in order to es-tablish legal certainty as to whether the relevant collateral arrangement is indeed enforceable.
Maritime law is not the result of a top down legislative process imposed by legislating authorities that regulate a particular practice but created by seafarers and merchants bottom up from the famous lex mercatoria that has arisen in order to grant legal certainty to traders. Maritime law is inter-national by its very nature given that vessels by its intrinsic nature move around for which reason the relevant maritime conventions are an expres-sion of an international framework of common rules governing all things maritime and exterritorial recognition of ship mortgages is based on a cus-tom of maritime law (customary law) and its force and effectiveness is not limited to the signatories of the relevant conventions that encode those usages. Given that vessels transit through waters of several jurisdictions the absence of a single nationality of the vessel would cause a series of con-flicts of jurisdiction which would significantly harm international trade and the international relationship among the different countries involved such as (a) the country of the cargo owner, (b) the country of the shipowner, (c) the country where the ship is located at the time of enforcement, (d) the country of crew members, (e) the country of the flag state etc. for which reason the law of the relevant flag state of the ship and conse-quently the law of the mortgage enjoys great priority in any enforceability assessment.
This approach is supported by Article 14 cf. Article 2(9) of the recast Euro-pean Insolvency Regulation (Regulation (EU) No. 2015/848) which con-tains rules determining where assets are situated for the purposes of the recast EU Insolvency Regulation which states that: “The effects of insol-vency proceedings on the rights of a debtor in immoveable property, a ship or an aircraft subject to registration in a public register shall be de-termined by the law of the Member State under the authority of which the register is kept”.
On a separate note it follows from paragraph 17 of Section 3.3.1 (Eligibility requirements for funded credit protection (FCP)) of the Consultation Pa-per that the drafting parties of the EBA had considered “softer alterna-tives” to the disputed requirement of having to obtain legal opinions from all jurisdictions where the collateral could move during the lifetime of the relevant loan in the form of such jurisdictions where the collateral is usually located for the purpose of its use. In terms of ships, such jurisdictions could be narrowed to (A) the jurisdictions in which the vessels would be per-forming long term employment contracts (charterparties) in excess of e.g. 24 months and (B) possible foreign bareboat flag jurisdictions, cf. below. Such alternative jurisdictions would more appropriately satisfy the “legal certainty criteria” of Article 181(f) and, specifically, the “relevant jurisdic-tion criteria” of Article 210 (a) of the CRR.
Lastly, we note that the law (and jurisdiction) of the underlying secured obligations, i.e. the law of the relevant debt/loan agreement secured by the mortgage/collateral agreement is not included in the list of “relevant” jurisdictions in paragraph 20 of the draft Guidelines. Such jurisdictions are, however, of utmost relevance as a fundamental prerequisite for enforcing a relevant collateral arrangement as it ensures the underlying secured ob-ligations are legally (and contractually) valid and enforceable in ac-cordance with its terms under the governing law of the relevant loan agreement and not subject to e.g. limitation, passivity, counterclaim etc.
Re. How do you currently perform the assessment of legal effectiveness and enforceability for movable physical collateral?
Answer: International ship mortgagees obtain customized legal opinions from local counsels specialized in ship finance law in the following juris-dictions:
• Jurisdiction of the borrower,
• Jurisdiction of the shipowner/collateral provider (mortgagor),
• Jurisdiction of the flag state/the law of the ship mortgage,
• Jurisdiction of the underlying secured debt obligations (e.g. loan agreement)
• Jurisdiction of the bareboat (secondary) flag state, if any, which is a type of secondary flag registration which enables a ship to tem-porarily fly and operate under the supervision of the flag of a (dif-ferent) foreign jurisdiction while the ownership and mortgage con-tinues to be registered in the primary underlying flag state.
Such jurisdictions provide the necessary comfort on legal certainty of moveable physical collateral.