BANQUE WORMS v. THE MAULE (OWNERS OF THE SHIP)

1994, A.J. No. 301

H E A D N O T E

Ship mortgage - mortgagee's power of sale - only exercisable when debt due or money owing unless specific provision is made in particular circumstances

1994, A.J. No. 301

IN THE SUPREME COURT OF HONG KONG

ADMIRALTY JURISDICTION

_______________

Admiralty action in rem against : the ship or vessel "MAULE" (Cyprus Flag)

_______________

J U D G M E N T

_______________

1. The writ in this action was issued and the warrant for the arrest of the vessel was obtained and executed on 24th August 1994, that is approximately one month ago. The Defendants now apply for the writ to be struck out or the action stayed because there is no course of action or because the action is frivolous, vexatious and the abuse of the process of this court.

As a consequence thereof, the warrant for the arrest of the vessel should be set aside.

2. The Defendants are one of a group of borrowers from the Plaintiff bank. On 20th January 1993, their borrowing arrangements were repackaged. The group of borrowers entered a loan agreement with the Plaintiff. Under the agreement, apart from a fixed schedule of repayments, the borrowers assumed a variety of obligations and gave certain undertakings.

3. One such undertaking contained in Clause 7.01(g) of the agreement was that : if one of the borrowers had not found employment for one of its vessels called "FD II" by 31st December 1993, that borrower was to sell that vessel within 60 days of notice being given by the Plaintiff. Clause 9 of the agreement provided for events of default and included default in performance of any of the provisions of the agreement. Clause 9.02 provided for the consequences of an event of default. Those consequences included provision for the Plaintiff to accelerate payment under the financial arrangements and to exercise any right conferred by the agreement or other security documents.

4. Among such security documents is a first priority Cyprus mortgage and deed of covenant dated 4th February 1993 between the Defendants and the Plaintiff. The mortgage recited that the whole document was being executed by the Defendants to secure all sums due to the Plaintiff and to secure performance of all obligations contained in the agreement or the deed of covenant. By Clause 2 of the deed of covenant, the Defendants covenanted to pay all sums owing to the Plaintiff under the agreement. By Clause 3, as the security for payment of outstanding indebtedness, the Defendants mortgaged and charged the vessel.

5. The vessel "FD II" to which I have already referred was not found employment. On 3rd March 1994, the Plaintiff gave the owner of that vessel, one of the other borrowers, 60 days notice to sell, the notice expiring on 3rd May. The borrowers challenged that notice in the High Court in London. On 26th May, Rix J. found against the borrowers, held there had been an event of default and that the Plaintiff was entitled to exercise its powers under Clause 9.02 of the agreement. The decision of that judge is now under appeal. The "FD H" was subsequently sold by the Plaintiff and the proceeds applied in reduction of amounts owing to the Plaintiff. Then, the writ in this action was issued.

6. The endorsement on the writ simply says that the Plaintiff's claim is under the Cyprus mortgage granted as security for the Defendants' obligations under the agreement. In his affidavit to lead the warrant for the arrest of vessel, Mr. Roberts, the Plaintiff's solicitor, in his crucial paragraph 4, equally simply recites that there had been default in complying with the Plaintiff's notice in relation to the "FD II" "thereby entitling the Plaintiff to enforce its rights under the mortgage".

7. On the following day 25th August, the Plaintiff gave notice under Clause 9.02 of the agreement for accelerated payment so that all amounts payable became immediately due and payable. The total amounted to some US$6.2 m. On the next day, the Plaintiff applied for sale pendente lite of the vessel in this action. In his affidavit in support, Mr. Roberts in paragraph 3 referred to the arrest at the instigation of the Plaintiff "who are owed US$6.2 m" under the agreement. He went on to refer to the event of default and the notice dated 25th August demanding repayment of all sums outstanding.

8. On 15th September, the Plaintiff issued a further writ in rem claiming US$6.2 m under the mortgage. On 7th September, the Plaintiff filed its statement of claim in this action. Paragraph 7 asserted its right to sell under the mortgage and also under section 35 of the Cypriot Merchant Shipping (Registration of Ships Sales and Mortgages) Law 1963. Finally, by summons dated 9th September, the Plaintiff seeks to amend the endorsement of claim on the writ in this action so that the claim is "to exercise a right of sale as a result of an event of default".

9. The deed is governed by the law of the Republic of Cyprus. Affidavits of Cypriot law were obtained on both sides. In the event, it is not in dispute that, for the issue with which I have to deal, Cypriot and English law are the same. The assistance of the experts therefore becomes redundant.

10. The issue which has crystallized between the parties is whether or not a debt or sum must be due and payable to a mortgagee before the mortgagee can exercise a general power of sale under the mortgage.

11. It is not in dispute that on 24th August, when the writ issued, no money was due and owing to the Plaintiff. The instalment due on 30th June had been paid, the next instalment was due on 31st December. Formal notice, as I have said, to accelerate payment had only been given the following day, 25th August. It is the Defendants' contention that a mortgagee can only exercise his rights under a mortgage when a debt is due or a sum is owing. Consequently on 24th August the Plaintiff in fact had no cause of action. Further, the endorsement on the writ itself discloses no cause of action.

12. In Downsview Nominees Limited and Another v. First City Corporation Limited and Another [1993] A.C. 295 Lord Templeman said at page 311, "A mortgage, whether legal or equitable, is security for repayment of a debt". Mr. Smith for the Defendants submitted that is consistent with paragraph 3 of the deed, that is to say, that the mortgage was for security of outstanding indebtedness.

13. In The Cathcart [1867] at L.R. 1 A&E 314, the mortgagee was condemned in damages for wrongful arrest of the vessel, there being in all the circumstances no money due to him. In Fletcher and Campbell v. City Marine Finance Limited [1968] 2 Lloyds Law Reports 520, Brandon J. (as he then was) held that the general law relating to mortgages applies to ships. He found that a mortgagor has a right to redeem at any time after payment has become due until foreclosure or sale has taken place. If the mortgagee refuses such redemption, he will be liable in damages for wrongful sale.

14. Fisher and Lightwood's Law of Mortgage 10th ed. at page 279 contains the statement in relation to the exercise of a mortgagee's remedies "the Admiralty Court would order the arrest of a mortgaged ship before the debt falls due if the mortgagor is using her for a purpose likely to injure the security". From that, said Mr. Smith, it is implicit that there can be no arrest before a debt is due unless there is likely to be impairment of the security. Absent either factor, he said the right to arrest does not arise. In the 4th edition of Halsbury's Laws, Vol. 43 paragraph 138 there is a statement to like effect. In Meeson on Ship and Aircraft Mortgages, at page 87, there is also a statement to like effect. At page 100, however, Meeson said :-

"Sale

The deed of covenants will invariably provide for the mortgagee to have a power of sale exercisable in certain circumstances. However, even in the absence of any express provision, section 35 of the 1894 Act provides that:

Every registered mortgagee shall have the power absolutely to dispose of the ship or share in respect of which he is registered, and to give effectual receipts for the purchase money; but where there are more persons than one registered as mortgagees of the same ship or share, a subsequent mortgagee shall not, except under the order of a court of competent jurisdiction, sell the ship or share, without the concurrence of every prior mortgagee.

And a similar power in respect of registered fishing vessels is granted by paragraph 5 of Schedule 3 to the 1988 Act which provides:

(1) Subject to sub-paragraph (2), every registered mortgagee shall have power, if the mortgage money or any part of it is due, to sell the vessel or share in respect of which he is registered, and to give effectual receipts for the purchase money. (my emphasis)

(2) Where two or more mortgagees are registered in respect of the same vessel or share, a subsequent mortgagee shall not, except under the order of a court of competent jurisdiction, sell the vessel or share, without the concurrence of every prior mortgagee.

Furthermore, a mortgagee of personal chattels when in possession has an implied power of sale where the mortgagor is in default of his obligation to repay the debt secured by the mortgage or where he has acted in such a way as to imperil the security.

Wilson v. Tooker (1714) 5 Bro.Parl.Cas. 193; Lockwood v. Ewer (1742) 2 Atk. 303; Kemp v. Westbrook (1749) 1 Ves.Sen. 278; France v. Clark (1883) 22 Ch.D. 830, (1884) 26 Ch.D: 257; Re Morritt, ex. p. Official Receiver (1886) 18 Q.B.D. 222, 223; McHugh v. Union Bank of Canada [1913] A.C. 299 and The "Odessa" [1916] A.C. 145, 159.

If the mortgage does not provide for a specific date for repayment of the debt, the power of sale will nevertheless be available upon the mortgagee having given reasonable notice to the mortgagor requiring repayment and intimating to him that in default of repayment the mortgagee will sell the property. Deverges v. Sandeman, Clarke & Co. [1902] 1 Ch. 579.

Normally, the entry into possession of the mortgagee will be a prelude to his exercise of the power of sale, although he may, alternatively, have the ship arrested in a mortgage action and have the ship sold by the court."

15. Section 35 of the English Merchant Shipping Act is identical to section 35 of the Cypriot Merchant Shipping Law to which I referred earlier. The emphasised words "if the mortgage money or any part of it is due" to be found in the 1988 Act do not, said Mr. Smith, change the existing law but only clarified. He said it would be absurd for the law to be different in relation to fishing vessels.

16. Encapsulated, I think, Mr. Smith's argument is this: the theme throughout the cases and other authorities is that unless a sum is due to a mortgagee, the mortgagor cannot make tender in order to redeem his vessel. That amounts to an unwarranted clog on the equity of redemption which is a fundamental requirement of a mortgage relationship.

17. For the Plaintiff, Mr. Allman-Brown submitted that that is not the law. He asserted that a power of sale can be exercised whether or not any sum is due. He sought to demonstrate that in two ways. First, he referred to the proceedings which took place in London earlier this year. Following those proceedings the "FD II" was sold when no sum was due and owing. It was inconceivable, he said, that that would have been done with the apparent approval of the court in contravention of the law.

18. I have to reject that argument. I agree with Mr. Smith that what was there taking place was the enforcement of a specific obligation under the agreement. Clause 7.01(g) of the agreement entitled the Plaintiff to require the sale of the "FD II" which was subject to a mortgage in terms similar to that of the Defendants' own vessel. The Plaintiff exercised it power to sell "FD II" arising out of a specific obligation albeit that that power was contained in Clause 9.02 of the agreement.

19. Second, Mr. Allman-Brown said that both experts on Cyprus law accepted what the Defendants' expert described as the classic definition of a mortgage. That appears in Santley v. Wilde [1899] 2 Ch. 474 where the Lindley M.R. said:

"The principle is this, a mortgage is a conveyance of land or an assignment of chattels as security for the payment of a debt or the discharge of some other obligation for which it is given".

20. Therefore, said Mr. Allman-Brown, a mortgage can be for an obligation other than payment of money. He said that is precisely what the Defendants' mortgage contemplates, security for both payment and other obligations. He suggested that if Lord Templeman was present in court today he would agree that his concise definition of a mortgage in Downsview was wrong.

21. For the purpose of these proceedings it is accepted that, because the borrowers did not sell the "FD II" as required by the Plaintiff, there was an event of default. Certainly Rix J. so held in his extensive written judgment. Clause 7 of the deed of covenant provides for the Plaintiff to exercise its powers upon occurrence of any event of default not just non- payment. Therefore, said Mr. Allman-Brown, the Plaintiff can and does rely on-its power of sale alone in this action. He argued that the cases relied on by Mr. Smith, to which I have referred, relate to situations where there was default in payment. There has been no case, he said, in which a point analogous to that in issue here has been resolved in favour of the Defendants. He also contended that there is no extinction of the right to redeem. He said the Defendants can either pay what is due or reach agreement with the Plaintiff for release of the vessel.

22. Again, I am unable to accept the Plaintiff's argument. On the authorities, a power of sale can only be exercised when a sum is due. That must be distinguished from an enforcement of obligation as occurred in relation to the "FD II". It is clear to me that an event of default other than non-payment does not itself give rise to a right to sell unless specifically provided for. To trigger that right there must be a demand designed to accelerate payment so that the mortgagor knows what he must do to exercise his equity of redemption.

23. Clause 7 of the deed of covenant does not confer any peculiar powers on the Plaintiff. It simply asserts that the Plaintiff is entitled to exercise a mortgagee's powers and, to avoid doubt, spells out certain of those powers including the power of sale. But implicit, I am satisfied, is that such powers must be exercised in accordance with general law and that law requires that a debt is first due before a power of sale can be exercised. The vessel remains, as was intended, security for the performance of other obligations. Quite simply an additional step is required between an event of default other than for non-payment and sale of the vessel.

24. I am in no doubt that, on 24th August, the Plaintiff had no cause of action. Equally I am satisfied that the endorsement on the writ does not disclose a cause of the action and that it is not in the circumstances which I have recited capable of cure by amendment.

25. It is therefore not necessary for me to deal with the Defendants'c alternative ground which was based upon a failure to comply with the procedural requirements of Order 75 rule 5 paragraph 8.

26. Accordingly, the writ must be struck out and the warrant for arrest of the vessel set aside.