PRESENTATION TO THE DUBLIN SHIP FINANCE AND INVESTMENT FORUM

11 NOVEMBER 2008

PERFECTING AND ENFORCING YOUR SECURITY

We have heard today about shipping as an investment and the returns that can be achieved by
investing in shipping. A constant theme, not unsurprisingly, is the current global financial crisis. I do
not wish to add to the ‘doom and gloom’. However given the current climate I am sure all will agree
‘Perfecting and Enforcing your Security’ is a suitable and apt topic. I am not being negative but
pragmatic about the impact the current climate has and will continue to have on ship lending and on
transactions already concluded.

For new deals the level of security required by lenders will be greater and the perfection of such
security will need to be far more stringent perhaps dare I suggest than it may have been at the height
of market.

I would like to outline to those present (and perhaps those less familiar with shipping investment), the
types of security that can be considered for a specific transaction and how such security can be
realised in the event of default. Obviously this aspect may have particular relevance to concluded
deals which are now of concern due to the economic downturn but I hope will also demonstrate to
anyone considering investment in shipping that deals can be secured in various ways and in the event
of a default there are positive steps that can be taken to protect investment.

A quick history lesson, in the 1950’s, the lending practice was for charter backed finance. Oil
companies and steel mills offered shipowners time charters as an incentive to order large vessels.
The owners used the time charter hire as cash flow collateral for loans to buy the ships. It seems this
charter backed finance originated in the 1920’s in Norway. It was this chartered backed finance that
gave rise to the legal structuring of the “single ship company” - self contained units secured by time
charters.

In the 1970’s and 1980’s, the banks changed their approach and lending policy and began to rely on
the first mortgage. As I have just eluded to, the common legal structuring for shipping is for one
shipping company to own each vessel and for each vessel to be financed independently and to assign
a first mortgage on that ship to the lender. The advantages to the lender are that the mortgaged ship is
immune from arrest for claims against other ships in the owner’s fleet. Therefore the earnings of the
ship are not effected. The disadvantage however from a lending point of view is that the borrower has
no assets other than the ships, the insurances and earnings. In those circumstances, the enforceability
of a mortgage is critical together with taking additional security.

For completeness I will just refresh on the different security that can be taken by a lender. The
standard security in ship finance transactions includes:

1. the first mortgage

2. assignment of all insurances

3. assignment of all earnings

4. parental or personal guarantees and indemnities

5. security over assets of guarantor

6. a charge or pledge over shares of borrower so that ultimately the chargee/pledgee can sell the
ship owning company and the vessel

7. security over cash deposits or bank account deposits – obviously cash is good security easily
realised and can be easily utilised to offset indebtedness

8. general debenture over the assets of borrower

9. assignment of borrower’s rights under shipbuilding contract for newbuilds

10. assignment of refund guarantee for newbuilds

Shipping is one of the few truly international industries. For ease of explanation of this statement I
thought the following case study appropriate.

A Typical Ship Transaction

UK Lender

Greek Parent

Panamanian Liberian Borrower

Flag registration

In this example our lender is a UK bank. The borrower is a Liberian company. The parent company is
a Greek company. The ship is registered in Panama. The international nature of this transaction, gives
rise to various risks that need to be addressed in various jurisdictions. The loan agreement in our
example is likely to be governed by English law as we have a UK lender. However the borrower’s
capacity to borrow, to enter into the loan agreement and make the various covenants will be governed
by Liberian law. Whether a first mortgage is properly registered will be governed by a Panamanian law
and whether the parent Greek company has the capacity to grant the parental guarantee will be
decided according to Greek law.

I realise what I have described justifies the existence of what some of you might perceive as a
necessary evil - the existence of shipping lawyers. This typical example however demonstrates that a
lender, when considering the taking more that one form of security, will invariably have to obtain
advice on the different forms of security in many different jurisdictions.

REGISTRATION MORTGAGE

Of the forms of security, the mortgage is probably the most important. The primary remedy afforded by
the mortgage is the ability of the lender to sell the ship in the event of default to recover sums due. A
key concern for the ship financier is that through a registered mortgage it can clear the debt in the
event of default by repossessing and selling the vessel. In many jurisdictions the mortgage gives the
lender rights to the vessel itself (often referred to in common law jurisdictions as in rem rights).
Given this essential function of the ship mortgage, it is important that the lender ensure that the
mortgage is properly registered at the ships register in the appropriate jurisdiction.

The form of the mortgage will be governed by the legal system of the place of registration. The actual
form varies greatly from jurisdiction to jurisdiction and the protection expressly afforded by the form of
mortgage will differ. It is standard practice for the lender and borrower to also enter into a deed of
covenant to encapsulate as wide a form of protection as possible. As I have already explained this
means it is essential to involve local lawyers in the relevant jurisdiction of ship registration to ensure
and obtain confirmation of appropriate registration.

In Ireland for example a vessel must be registered in accordance with the requirements of the
Mercantile Marine Act, 1955 (the “Act”). The mortgage must be in the form prescribed under the Act
and by the Revenue Commissioners who currently control the registry.

The procedure for registration also varies from jurisdiction to jurisdiction. The types of security that are
registerable may differ and also the procedures for priority will differ. A mortgage not registered will not
in itself invalidate the mortgage but registration is essential to ensure priority as a secured creditor in
the event of insolvency etc of the lender. In Ireland as in other jurisdictions the priority of mortgages is
not determined at the time of the mortgage but priority is afforded in accordance with the date and time
the mortgage is entered in the book of registry at the ship registry.

There may be a requirement, as in most common law jurisdictions for security to be registered on
other public or company registers. For example in Ireland there is a requirement to register under
Section 99 of the Companies Act 1963 all security interests relating to a vessel within 21 days of
creation in order for any such security to be valid and enforceable against any liquidator or creditor of
the company.

DEFAULT

It is important that the loan agreement contain a comprehensive list of events of default. An event of
default will usually entitle the lender to accelerate the loan, declare the outstanding balance and
accrued interest is immediately repayable. It will generally be the actual notice as opposed to the
event of default that accelerates the loan so that limitation periods prescribed by the relevant
governing law do not commence earlier than desirable from the lender’s perspective.

Examples of default include:

1. failure to repay loan and or interest

2. insolvency of borrower

3. breach of covenant

4. sale of the vessel without consent of lender

5. in the event that the vessel becomes a total loss

6. the borrower encumbers vessel further without agreement of lender

7. in the event of a material misrepresentation by the borrower

As already explained it is the ship mortgage (and any deed of covenant), that affords the lender two
very important rights in the event of default:

1. the right to take possession of the vessel, and hence on possession to take the earnings of the
vessel if these have not already been assigned to the lender

2. a right of sale

HOW IS THIS ACHIEVED IN PRACTICAL TERMS?

Enforcement/Arrest

A mortgagee will generally have the right to take actual or constructive possession of a vessel.
Constructive possession is achieved by notifying the owner that as lender it is assuming ownership of
the vessel. Actual possession would be achieved by the lender putting its own master and crew on the
vessel.

Obviously both of these steps require the cooperation of the owner and crew and unless they are
obliging, the lender will need to take positive steps to enforce its right of possession. In practice this is
achieved by obtaining from the courts of the jurisdiction where the vessel is located, an order for
seizure (arrest) of the vessel and/an order of a court giving possession to the lender. The lender will
then generally exercise its right to sell the ship or seek a court order for the appraisement and sale of
the vessel.

The procedures for arresting a vessel vary greatly from jurisdiction to jurisdiction as do the costs
involved and the documentary requirements and undertakings that may be required by the arresting
party. To effect an arrest, the assistance of local lawyers will be required in the jurisdiction of arrest.
Ideally the appointed lawyer will be a maritime lawyer with experience of ship arrest and a familiarity
with the court system and the officials in the judicial process.

Many jurisdictions are party to the International Convention on the Arrest of Sea Going Ships of 1952
(the “Arrest Convention”). Under Article 1 (q) of the Arrest Convention any claim in relation to a
mortgage on a vessel amounts to a maritime claim for which a vessel may be arrested to secure such
claim. Any ship flying the flag of a contracting state may be arrested in another contracting state to
secure that maritime claim.

Many parties to the Arrest Convention also maintain national laws in relation to ship arrest. For
example in Ireland a ship may be arrested under three different admiralty acts including an act in 1989
which incorporates the Arrest Convention into Irish law.

After a ship has been arrested, the mortgagee may exercise (and undoubtedly will want to exercise) its
right of sale. As already explained this right of sale may expressly be provided for under the relevant
local law as is the case in Ireland. Generally there will be procedures under the legal system of place
of arrest for the sale of the vessel either through a private sale or a judicial sale. The advantage of a
judicial sale from the buyer’s perspective is that it clears claims against the vessel. The buyer gets
clean title and the claims that existed pre sale against the vessel are transferred to a claim against the
sale proceeds.

Competing Claims

In an event of default it is quite likely that the lender is not the only creditor of the shipowner and a
critical issue for the lender will be in terms of the asset the priority of the various claims. In many
jurisdictions there will be claims that rank above that of the mortgagees, irrespective of registration of
the mortgage and hence its position as a secured creditor. Once again advice will need to be sought in
the jurisdiction of arrest or possession of the vessel as to whether there are competing claims that
apply to the asset and their priority.

The question of priority may be determined in certain jurisdictions by the law of the flag. In other
jurisdictions such as Ireland the determination of priorities is determined by judgement of the admiralty
judge after hearing argument from the competing claimants on priority. As a rule of thumb, wages of
seamen and admiralty marshals expenses will be afforded priority over a mortgagee.

I would like to finish my talk by telling you about a series of arrests I did in 2000 in relation to the
recovery from a disponent owner of a fleet of vessels on a long term lease. Despite service of notices
of default, notice constructive possession, my client was faced with stony silence. We accordingly, had
no option but to commence a series of arrests around the globe.

Arrests were undertaken in Australia, Canada, France, the U.S., Hong Kong and finally, Fiji. After a
degree of searching, I found a recommendation for a “good commercial lawyer” in Lautoka Fiji.
Now as a lawyer obviously one should not make assumptions but it was a degree of trepidation that I
called Mr X. I was not hopeful that an arrest was going to be easy. Fiji was not a party to the Arrest
Convention. No one I knew or spoke to had ever looked at arresting a ship in Fiji. No one in fact even
knew of a maritime lawyer in Fiji. However I rang up Mr. X who was originally from the UK and was
familiar with UK admiralty law. My research was quite correct. There had never been a ship arrest in
Lautoka before. There was no admiralty procedure as such in existence. However as to the ease of
proceedings my hasty judgment proved quite wrong. The judge swiftly ordered an arrest and
repatriation of the crew. The ship sailed from Lautoka in less than five days.

The moral, without in any way being flippant, ultimately is, yes ships are an asset, they are a risky
investment. The cyclical nature of the industry creates its own unique risks and requirements to
understand it, but a ship is a real asset. With appropriate lending and properly perfected security, it is
possible to enforce that security in the event of a default even perhaps in the most unlikely
jurisdictions.

In summary some of the risks and I am not talking in this case about returns on investment and the
inherent risks of the shipping industry that exist by virtue of the cyclical nature of the industry such as
vessel values etc but the risks of the shipowner defaulting (which of course may result from cycle
downturns) are addressed in the first instance by the security taken and in that regard lenders need to:

1. check security and check covenants are met

2. get the appropriate legal opinions for capacity and enforceability in event of default

3. check insurances are adequate i.e. conditions, insured values and named assureds cover the
lender

And in the event of default:

1. look at the options for enforcement

2. follow the correct procedures for acceleration and enforcement under the loan documentation

3. instruct and obtain the appropriate legal advice for enforcement

In terms of arresting vessels as a lender you need to be aware of:

1. the procedure involved

2. the cost of an arrest and how long it will take to arrest sell and realise the proceeds of sale

3. what if any competing claims will have priority and the impact that this has on the “pot”

Finally, I hope I have given you some insight into the exciting world of ‘perfecting and enforcing your
security’. Even in the current climate investing in international shipping can reap potentially very
interesting returns but more so than ever perfecting security is paramount in the event that enforcing it
is necessary.

The current climate does not spell the end for ship financing but for any deals going forward the level
of security that will be sought from borrowers, I anticipate, will be far greater and lenders will need to
take a very keen interest more so now than ever, that the security afforded is enforceable.

To reuse an anonymous quote that I feel is relevant in the current climate and indeed to this topic: “we
cannot direct the wind, but we can adjust the sails”.

_________________________________________________________________________________

For further information, please contact Helen Noble, partner in the Banking and Financial Services Department and head of the
firm’s Shipping Law Group at Matheson Ormsby Prentice. The group advises in all aspects of shipping including establishing
business/operations in Ireland, tonnage tax, other related taxation issues and maritime regulatory issues. Helen can be
contacted by email: helen.noble@mop.ie or telephone +353 1 232 2000 or log on at www.mop.ie.