On 7 December 2022, the United Nations General Assembly adopted the UN Convention on the International Effects of Judicial Sales of Ships (Beijing Convention).
El Salvador, one of the twenty signatories as of 3 July 2024, ratified the convention on 23 May 2024. At least two more signatories are expected to accede to the Convention during 2024. The Convention will enter into force 180 days after the date of the deposit of the third instrument of accession. Current signatories include China, the EU, Singapore and Liberia but not the UK.
Drafted by UNCITRAL, the Convention “governs the international effects of a judicial sale of ships that confers clean title on the purchaser” (Article 1). It aims to standardise the way in which information is circulated before and after judicial sales and ensure that the legal effect of judicial sale in and as between the party states is to confer clean title on the purchaser (Article 6).
English law and the courts of common law jurisdictions have for many years recognised judicial sales of Admiralty courts overseas as having the effect of conferring clean title on the purchaser, free and clear of all claims, liens, mortgages and encumbrances.
In this article we comment on the Convention’s main provisions and make occasional references to the practice of Hong Kong, a common law jurisdiction in which the Convention will probably be applied in the event that China accedes to the Convention.
Judicial sale
The Convention defines judicial sale to mean any sale of a ship which is ordered, approved by a court or other public authority either by way of public auction or by private treaty carried out under the supervision of a court and for which the sale proceeds are made available to creditors (Article 2). In Hong Kong, judicial sale in Admiralty in rem actions falls within the definition, as does sale of a ship by the court office in execution of a judgment not ordered in Admiralty proceedings (although this type of sale may not confer clean title on the purchaser).
“Ship” is defined to mean a ship registered in a register open to public inspection that may be the subject of an arrest leading to a judicial sale under the law of the state of judicial sale.
The Convention only applies to a judicial sale in a party state in respect of a ship that is physically located within the state of judicial sale (Article 2). This would be the case in all Admiralty sales in Hong Kong.
Judicial sale should be conducted in accordance with the law of the state of judicial sale which should have a procedure for challenging the sale prior to competition (Article 4, paragraph 1). This requirement is satisfied in Hong Kong.
Notice
The Convention requires a notice of judicial sale to be given to the ship’s registry, the holders of mortgages, hypotheques and registered charges (provided the register is open to inspection and transcripts can be obtained), the owner, any bareboat charterer, the bareboat charter registry and any holders of maritime liens who have notified the court of their claims (Article 4, paragraph 3).
Annex 1 specifies the minimum information to be provided in the notice. The same information is also required by the form of invitation to tender used in Admiralty actions in rem in Hong Kong. Annex I also requires the name of the owner and his address of residence or principal place of business to be stated. As the ship must be registered in a registry open to public inspection, it will usually be possible to obtain and provide details of the owner’s name and address (Article 4, paragraph 7). The Convention does not state a minimum length of time that should be allowed between the date of notice of sale and the prospective date of sale. Parties receiving the notice may not, therefore, have sufficient time to react before the sale is completed.
Admiralty sales in Hong Kong are ordered in actions in rem (that is, against the res which is the ship or proceeds of sale held in court). In rem mortgage enforcement actions sometimes proceed in default of acknowledgment of service.
The Hong Kong form of invitation to tender is advertised in the local press and the international press – for example, in the South China Morning Post and Lloyds List. This is treated as effective notice to all interests. Copies of the published invitation to tender are required to be filed with the Court. The Court may grant leave for details of the ship to be circulated through other channels, such as shipbrokers. It is likely that the current practice of publishing invitations to tender will have to be retained as notice of judicial sale is evidently not intended to advertise ship sales generally in the open market. The two documents serve different purposes.
In addition to the requirement to circulate a notice of sale, the Convention requires the notice to be transmitted to the repository, who is defined in Article 11 as the Secretary-General of the IMO or an institution nominated by UNICITRAL. If the notice is not in the repository’s working language, a translation must also be provided. The repository will make the notice publicly available (Articles 4, paragraphs 5(b) and 6 and Article 11).
Certificate
The Convention provides in Article 5 for the issuance of a certificate of judicial sale following completion subject to the condition that a notice of judicial sale has been duly published in accordance with Article 4 (paragraph 2). Non-compliance with Article 4 paragraph 3 may have serious consequences. An unsuccessful applicant for a certificate of judicial sale may not learn that his application has failed until after the sale is completed, by which time it will be too late for him to retrieve the position by giving a fresh notice of judicial sale.
The certificate is to be substantially in the form of Annex II to the Convention. Some of the details required by the form do not normally appear in the notice of sale used in Hong Kong. The function of the Hong Kong notice of sale is to alert all interests that the vessel has been sold and the sale proceeds will remain in court for a period of 90 days (or longer if so ordered by the Court) after which the order of priority of claims against the proceeds will be determined. Claimants are urged to proceed and obtain judgment within this period.
As with the Convention’s notice of judicial sale, the certificate of judicial sale is required to be transmitted to the repository together with a translation if required.
The certificate may be made available in the form of an electronic record provided three conditions are met (Article 4, paragraph 6). The certificate of judicial sale will serve as sufficient evidence of the matters mentioned (Article 5, paragraph 5) and “shall have the effect in every other party state of conferring clean title to the ship on the purchaser” (Article 6).
No indication is given in the Convention as to the time within which a certificate of judicial sale should be issued following completion of the sale.
After the certificate is issued, the purchaser or subsequent purchaser can produce it to the registry of a party state and require the ship to be registered in their name (provided they meet that state’s registration requirements). The purchaser or subsequent purchaser can also require the deletion of any mortgage, hypotheque or charge registered against the ship, require the ship to be deleted from the register and a certificate of deletion to be issued for the purpose of a new registration and require the ship to be deleted from any bareboat register (Article 7, paragraphs 1 and 2). The purchaser can obtain a certified copy of the certificate of judicial sale or a certified translation of the certificate of judicial sale if it is not issued in the official language of the registry.
Public policy
Article 7, paragraphs 1 and 2 above will not apply if the Court in the party state of the registry determines under Article 10 that the effect of the judicial sale (meaning the legal effect it is intended to have of conferring clean title to the ship on the purchaser under Article 6) would be “manifestly contrary to the public policy of the state”. Article 10 repeats these words. The definition of public policy may not be the same across all member states. However, the use of the word “manifest” indicates that a high test is being set.
Jurisdiction
The Convention reserves exclusive jurisdiction to the member state where the judicial sale is conducted to hear any application to set aside the sale or to challenge the issuance of a certificate of judicial sale and requires other member states to decline jurisdiction for applications of this nature. The state of judicial sale is required to transmit to the repository for publication any court decision avoiding or suspending the effects of a judicial sale for which a certificate was granted (Article 9). No time limitation period for applications is specified.
Ship arrest
The Convention further provides in Article 8 that any application to arrest a ship in a member state in respect of a claim arising prior to the judicial sale should be dismissed; if a ship is arrested for a prior claim, it should be released upon production of the certificate of judicial sale. Certified translations will be required if the certificate is not in the working language of the Court. Again, Article 8 does not apply if the Court decides that dismissing an arrest application or ordering release would be manifestly contrary to the public policy of the state of that court.
Distribution of sale proceeds
Article 15 mentions matters not governed by the Convention. Notable amongst these is the procedure for or priority in the distribution of proceeds of a judicial sale. The Convention is not intended to displace the law of member states. Priorities and payment out will remain matters of the law of the party state in which the ship is sold.
Comment
After the Convention after comes into force, its utility outside the party states will depend on the treatment accorded to certificates of judicial sale in the courts and registries of jurisdictions of non-party states and the comity that exists between jurisdictions in the two different groups of states.
As between party states, the enhanced legal certainty of judicial sale is expected to attract higher prices for vessels that are sold and thereby benefit mortgagees, unsecured creditors and defaulting owners as well as help purchasers to obtain finance.
On the other hand, the number of ship mortgage enforcements involving judicial sale has steadily diminished over the past thirty years. No doubt this is due in part to the rise of ship leasing, although mortgages may be put on with secondary financing. Mortgagees, well aware that judicial sale in Admiralty proceedings confers clean title on purchasers, have tended to prefer alternative ways of tackling problem loans such as investigating the claims record of the mortgaged ship, taking a view of the risk of claims appearing after sale and aiming for a sale in the market with the co-operation of the defaulting owner. The mortgagee, having decided that the risk of claims is manageable, will furnish the purchaser with a guarantee in respect of any claims that may appear after completion. In this way, the mortgagee avoids the time and expense of judicial sale.
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