South Africa has become a preferred destination for ship arrests and as a result there has been a surge in the judicial sale of ships. But the financier remains at a disadvantage due to the ranking of a mortgagee’s claim under applicable legislation.
The South African Admiralty Jurisdiction Regulation Act 1983 (the Act) provides that the admiralty court may make an order that any maritime property which has been arrested under the Act must be sold, and that the proceeds of the sale will be held as a fund in the name of the Registrar of the court.
The fund typically consists of cash lodged in an interest-bearing account with a commercial bank.
The typical order for the sale of the ship requires that, following the sale, a referee is appointed to receive claims and objections to those claims from any creditor of the ship or its owner. The referee is obliged to draw up a report on the claims and objections submitted and to set these out in their order of preference as dictated by the Act. This report must then be confirmed by the court and any creditor may at that stage make representations to the court with regard to any aspects of the report.
Once the court has confirmed the report, or any part of it, the fund is distributed as ordered by the court.
Under the Act, claims are paid out of a fund in the following order:
(1) costs and expenses incurred to preserve the ship and to procure its sale;
(2) salvage claims, wreck removal and general average claims;
(3) possessory liens;
(4) claims which arose within one year of the commencement of the proceedings (all ranking pari passu) for:
- master and crew wages;
- port and pilotage dues;
- loss of life or personal injury connected with the employment of the ship;
- loss of or damage to property arising in delict tort directly connected with the operation of the ship;
- repairs to a ship or necessaries supplied;
- marine insurance policy premiums;
- protection and Indemnity (P and I) Club calls.
(5) mortgages and rights of retention effected in accordance with the law of the flag of the ship;
(6) other maritime liens not falling under any of the above categories;
(7) any other claims.
Therefore a salvor, a necessaries claimant (for example unpaid bunker suppliers and ship repairers) and a P&I Club will have claims which rank higher than those of a mortgagee bank. Internationally, the norm is to give preference to a mortgagee's claim over a necessaries claim. The mortgagee's ranking in the Act is seen as a hindrance to attracting more ships onto the South African ship register.
However, recently there has been an attempt to improve a mortgagee bank’s ranking. There is proposed draft legislation (the Judicial Matters Draft Amendment Bill of 2010) which seeks to give preference to mortgagee claims over a necessaries claim in certain circumstances.
To date, this Bill has not been passed into law and it does not appear that this will be achieved in the near future. In the interim, a mortgagee’s claim continues to rank below a necessaries claim, in contrast to the approach taken by most jurisdictions.
Inside Africa would like to thank Abongile Swana, Candidate Attorney, for her contribution to this blog post.