SHIP AUCTIONS – WHAT YOU NEED TO KNOW

Sunday, September 18, 2016
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In March this year, Bowmans Durban hosted the auctions of two sister vessels, the MV “SADAN K” and the MV “ZEYNEP K.” The sale of these two bulk carriers was ordered by the Durban High Court. The vessels sold at the auction for USD10,000,000 each; accordingly the total sale price achieved at the auction was 20 million United States dollars for both vessels.

Generally in South Africa, if a creditor arrests a vessel, and the owner of the ship is not in a position to secure or make payment of the creditor’s claim, the creditor may apply to court for the sale of the vessel. (This is also the case for other types of “maritime property” such as ships bunkers, containers and sometimes cargo, but in this article we will just focus on the sale of ships.) There are a number of other factors which may influence whether a sale order is granted, such as the cost of maintaining the arrest, whether the vessel has been arrested by other parties for other unpaid debts and the potential prejudice to the vessel owner, to name a few. Our courts are entitled to order that a vessel be sold publicly - i.e. by judicial auction, or alternatively privately i.e. by private tender or treaty. It is usual for vessels to be sold by public auction unless a private (acceptable) offer has been made for the vessel.

Once an order for the sale is obtained, brokers make arrangements for advertising the sale to as wide a target market as possible. Potential purchasers may also make arrangements to physically inspect the ship. At the auction, the vessel will be sold to the highest bidder who makes a bid for the vessel. That bidder is then obliged to pay for fuel remaining on board the vessel at the time of the auction “on top” of what is paid for the ship.

In a judicial sale, once payment is made, the proceeds of the sale will form a Fund (or Funds where fuel is sold separately to the vessel) which will be held by the Registrar of the High Court against which all creditors may bring their maritime claims. A Referee (usually a local advocate) is then appointed to consider and rank for payment all claims submitted by creditors to the Fund(s).

Once all the claims have been submitted, the Referee will circulate a schedule setting out details of all the claims received and the ranking sought so that should any creditor, or an interested party, wish to object to any claim they may obtain the relevant documents. The Referee will then consider all the claims, objections and any replies and will thereafter prepare a report to the High Court setting out his recommendations for the distribution of the monies held in each Fund.

The ranking of claims against a Fund is determined by the provisions of Section 11 of our Admiralty Act which, in summary, ranks claims in the following order:

  1. Those claims pertaining to the preservation of the vessel following arrest (including the sheriff’s costs of preservation and maintenance) and the sale costs (including any commission).
  2. Claims for salvage, wreck removal and general average.
  3. Wages and other sums due to the master and crew of a ship in connection with their employment.
  4. he remaining creditors, provided their claims arose not earlier than one year before either commencing proceedings (i.e. issue summons or submit the claim to the Referee), rank in accordance with the list set out in Section 11 (4) (c) of the Act which is briefly described as follows:
    • 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;
    • P & I Club calls.
  1. The claim in respect of the mortgage.
  2. Lien claims not already ranking above.
  3. All other claims (including claims older than 1 year) which lie directly against the vessel.
  4. Associated ship claims.

Claims against a vessel sale fund may only be paid out of the fund in accordance with their ranking awarded, so claims which rank more highly will be paid out before claims which rank lower down on the list. Clearly this is not an issue when the sale fund is sufficiently large to meet all claims against a fund; usually, however, this is not the case. Generally the mortgagee bank, whose claim ranks above all claims against the fund, which arose more than one year before the commencement of proceedings to enforce the claim/s, will have a claim which is sufficiently large to wipe out the fund before these lower ranking creditors are paid out of the fund. Note that any creditor with a maritime claim may claim from the sale fund in South Africa. Accordingly, foreign fuel or ship store suppliers and so on may also lodge their claims against a vessel sale fund.  In terms of South African Admiralty Law, a judicial sale of property is done free of all liens and encumbrances and following the sale any mortgage over the vessel will be deregistered.

* This article first appeared in the Sunday Tribune