HONG KONG SAR, CHINA Law and Practice Contributed by: Christopher Andrew Potts, Crump & Co
• events of default, such as non-payment, breach of covenant or insolvency, which allow the lender to accelerate the loan; and • mandatory prepayment events, including total loss of the vessel or certain changes in ownership, which oblige the borrower to repay the loan imme - diately, even without a breach. Equity Financing While less common for large-scale ship acquisition compared to bank loans due to demanding listing requirements and complex procedures, shipping companies may raise equity through joint ventures, private placements or specialised maritime invest - ment funds. In practice, equity is usually alongside bank debt rather than as a standalone funding source. Ship Mortgages The ship mortgage is the primary form of security for lenders. Mortgages over Hong Kong-registered ships are governed by the Merchant Shipping (Registration) Ordinance (Chapter 415) and must be executed in the prescribed statutory form (Form RS/M1). The form can be drafted to secure a wide range of complex finan - cial arrangements such as syndicated loans, multi- currency facilities and hedging obligations. The mortgage must be registered against the vessel at the Hong Kong Shipping Registry and, if the mortgag - or is a company, at the Companies Registry in Hong Kong within one month of creation. Upon default, the mortgagee can take possession of the ship, or sell it either through a private sale or judicial auction via the Admiralty Court to discharge the debt. These rem - edies are grounded in both the statutory mortgage framework and the contractual terms incorporated into the loan and security documents. Common Transactions and Other Security Packages (Ancillary Security) Common transactions include newbuilding and second-hand vessel financing through bilateral and syndicated bank loans. Ship leasing arrangements, particularly finance leases and sale and leaseback, are also prevalent, often used by banks as an alternative to a direct loan for tax or structural reasons.
Beyond the statutory ship mortgage, lenders typically require a comprehensive security package to mitigate risk. This typically includes: • assignment of vessel insurances and insurance proceeds, such as hull and machinery, P&I and war risks; • assignment of earnings, freights and charter hire; • assignment of rights under key contracts such as ship-building contracts, charterparties and man - agement agreements; • corporate or personal guarantees; • charges over bank accounts; • mortgages over shares in the ship-owning special purpose vehicle; and • floating charges or debentures over other assets of the borrower. 2.2 Ship Leasing Ship leasing in Hong Kong is increasing, driven by Hong Kong’s tax incentives. The global ship finance landscape has shifted away from traditional European bank lending towards leasing, with Chinese lessors becoming dominant players. This shifts focus from lender/borrower loans to lessor/lessee leases for capital efficiency and asset management, while sale leasebacks offer liquidity and legal frameworks handle defaults differently, favouring lease asset reposses - sion over traditional mortgage enforcement. There has been a significant shift away from tradi - tional banks towards Chinese leasing houses, Japa - nese leasing companies, private equity and alternative credit funds. Banks have reduced exposure, creat - ing funding gaps, while leasing offers better funding diversification. Lessor/Lessee Versus Lender/Borrower Regarding the lessor/lessee (lease), the lessor owns the asset (ship) and grants use to the lessee for a fee (hire). This is an asset-based financing structure, often with higher loan-to-asset ratios, mitigating obsoles - cence risk for the lessee (especially with operating leases). Regarding the lender/borrower (loan), the bor - rower owns the ship and grants a mortgage as secu - rity. The lender provides debt, secured by the vessel (mortgage), but does not own the asset.
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