[vc_row type=”vc_default” full_width=”stretch_row_content_no_spaces” css=”.vc_custom_1500547593342{padding-right: 100px !important;}” el_class=”noPaddinRow”][vc_column width=”1/6″ el_class=”noPaddingLeft”][vc_raw_html]JTNDZGl2JTIwY2xhc3MlM0QlMjJtYWluLXN0cmlwJTIyJTNFJTBBJTNDZGl2JTIwY2xhc3MlM0QlMjJibHVlLXN0cmlwMCUyMiUzRSUzQyUyRmRpdiUzRSUwQSUzQ2RpdiUyMGNsYXNzJTNEJTIyYmx1ZS1zdHJpcDElMjIlM0UlM0MlMkZkaXYlM0UlMEElM0NkaXYlMjBjbGFzcyUzRCUyMmJsdWUtc3RyaXAyJTIyJTNFJTNDJTJGZGl2JTNFJTBBJTNDJTJGZGl2JTNF[/vc_raw_html][/vc_column][vc_column width=”5/6″ el_class=”justifyText” css=”.vc_custom_1513159206845{padding-right: 310px !important;}”][vc_empty_space height=”50px”][vc_row_inner el_id=”newsletters”][vc_column_inner width=”1/6″][/vc_column_inner][vc_column_inner width=”2/3″][vc_custom_heading text=”Ship Purchases: Buying a Vessel or Battle?” font_container=”tag:h1|font_size:22|text_align:justify|color:%236699cc|line_height:1.8″ use_theme_fonts=”yes”][/vc_column_inner][vc_column_inner width=”1/6″][/vc_column_inner][/vc_row_inner][vc_empty_space height=”25px”][vc_column_text]Ship purchasers and their lenders are sure of one thing – they intend to purchase a ship with given specifications. Knowledge is however scarce in “navigating” the likely risks that attend a ship purchase and attendant complications of “blind” transaction. This article seeks to highlight some practical red flags in ship purchase due diligence from purchaser/lender perspectives. There are three basic ports of call for purpose of this discussion: (1) The Ship (2) Registration and Incidentals (3) The Seller and Buyer.


Where is it located?

The current location of this mobile asset is a key question in commencing negotiations. The ship for sale may be thousands of nautical miles away from the domicile of the purchaser or the place of delivery. This raises several issues: How will the ship be inspected? Will the Purchaser take delivery at the current location or at another Port? It follows that unless otherwise stated if delivery is taken at the current location journey risks shift to purchaser. It is not unusual that a purchaser or lender pay for a ship located abroad without prior inspection and await its delivery in Nigeria. A grave “cost saving” mistake! Others “visit” the ship at its place of berth. Good but not good enough! It is strongly advised that every Purchaser/Lender procures an Independent Ship Inspector recognized by a classification society to inspect the vessel prior to firm commitment on the price. Why? Two basic issues come into play:

A/  What is the value of the ship?

It is very important for a Purchaser/Lender to have an independent assessment on the value of the ship intended for purchase. Clearly any vessel that is bought at an over priced purchase may prove a difficult sell even at the same price. Unless off course it is bought by another blind purchaser! This fundamental error makes the possibility of lender’s enforcement by sale (should the need arise) rather bleak. The picture looks even bleaker when we consider that a ship is a depreciating asset and would have lost value down the road at the time enforcement becomes necessary – unless major overhaul was carried out. The best practice for a lender is to get an independent ship valuation placing a current value on the vessel at the time of purchase after which the lender should assume a forced sale value (current value minus depreciation minus forced sale discount plus interest charges) at the time the lender may be likely to enforce which is usually when the term loan expires. The amount of the approved loan should therefore be arrived at from a matrix of the forced sale value; the interest payments; and the expected time of repayment.

B/  Is the vessel fit for purpose?

Many ships have been ordered for a particular purpose or in fulfilment of an contract by a client (usually an oil company) only to be rejected on arrival in Nigeria because it did not meet the specifications or fitness for purpose. Only a qualified and accredited ship inspector can match written specifications with a physical inspection of a vessel. Questions like whether the ship would navigate inland waters freely or its hold will carry the amount of cargo prescribed better dealt within an inspection report by such an accredited ship inspector. The interesting thing is that such inspectors are not awfully expensive and can be recommended by the classification societies with whom they are registered all over the world. Their rates are reasonably standardized and regulated by the classification societies. How many lenders and purchasers have lost money by purchasing a vessel without a thorough professional inspection? You tell me!


A/  Registry

Ships are usually registered at a National Ship Registry of choice by the owner – intended seller. It is said to be flying a flag of the country where it is registered. For example a Nigerian flag. A comprehensive search at such a Registry is compulsory before a purchase is closed. I was once involved in a transaction where a bank financed a purchase and sought to emplace a mortgage after disbursement only for us to discover that the seller was not known to the Ship Registry and the original owner was still the registered owner. The first sale had to be registered at great costs before the borrower was registered as owner, then a mortgage could be emplaced.

One enquiry to be made at the registry is the procedure for registering a mortgage at that registry or deletion and transfer to another registry. This will help the Lender plan options for registration of its security, timelines and expenses. It is also important to note any outstanding inspections or unpaid fees detailed at the Ship Registry as they should be dealt with by the Seller prior to purchase. Please note that many liens may not be registered at the registry and these should be covered by Indemnities in the Contract for Sale. One of such is a maritime lien that flows with the ship irrespective of a change in ownership. Typical maritime liens are wages owed to ship crew which become the responsibility of a new owner because they flow with the ship. Lastly, do not omit to request from the owner any proof of maintenance history and latest inspection certifications.

B/ Ownership structure

It should be noted that ownership structure of a ship is by default 64 shares. Please do not ask me why. Therefore any search at the Registry should report if the 64 shares are owned by one person or there are other shareholders. Note that all shareholders should consent to the sale. If the ship or shares thereof are owned by a company then a further search at the Corporate Affairs Commission is necessary to confirm the true owners of the companies. It should be noted that a ship mortgage may not be registered at the Registry but one may discover a charge registered at the Companies registry by way of a Debenture on the fixed and floating (not related to the fact that a ship is floating) assets of the company which may indirectly or specifically include the ship or its expected earnings.

C/ Classification

Apart from being registered at the ship registry commercial vessels usually belong to a classification society – or in industry parlance they are “classed”. Classification societies are independently recognized bodies that impose standards for safety and inspection on its members and they have come to be recognized as benchmarks for the likely condition of a ship. The paradigm is a ship is thought to be in better condition if it is classed with a more acceptable classification society. It follows that some classification societies may be rejected by a prospective client – say an Oil producing company who has requested the purchaser to procure a vessel. A Lender or Purchaser should therefore not only see that the ship is classed but that it is with a reputable (or acceptable) classification society. It should be noted that one may request a change of classification society as a condition precedent to final payment.

D/ Mortgages

The registry search should also look out for any registered mortgages. It should be noted that where there is more than one mortgagee, a subsequent mortgagee shall not (except by order of court) sell the ship or a share without the concurrence of every prior mortgagee – S 326 (2) Merchant Shipping Act. It is also worthy of note that a registered Mortgage protects the ship from any bankruptcy proceedings of the borrower – S325 Merchant Shipping Act.


It should be noted that the Register of Ships is prima facie but not conclusive proof of the ownership of a vessel. – Baumwoll Manf Von Carl Scheibler v Furness – 1893 AC 8 H.L.

With the above in mind one should go beyond the Register to investigate a Sellers antecedent – weighing the probability of the seller truly being a ship owner and establishing a clear nexus between the ship, the register and the seller. Additionally the Lender should seek to know whether the customer to be financed has any shipping knowledge or access to shipping knowledge. It follows that the less your customer knows, the more help you will need from advisors at each point.

It may be advisable for Lenders in certain situations (where they are unsure of the customer) to isolate their risks by setting up a new company solely to own the ship. This ship holding company would not do any trade or other business and its original documents would be deposited with the Lender who has taken charge on the shares of the company. This excludes possibility of the ship being targeted by other creditors with whom the company may have traded. It also makes it easier to enforce as the sale of the ship is achieved by simply selling the shares in the company to the prospective buyer.


Ship purchase transactions are as unpredictable as the seas – varying in complexity. The key is to a smooth sail is understanding the underlying principles and being adaptable to the needs the parties in each deal.

Ayuli Jemide is a Partner with DETAIL.[/vc_column_text][/vc_column][/vc_row]