By Hege Størdal Nilsen
Advokatfirmaet Simonsen Vogt Wiig
Tel: +47 555 68 200
Ship arrest in Norway
How to manage and limit the effects of an insolvent owner and the opening of insolvency proceedings
Under Norwegian law, arresting a ship to enforce payment of claims is rather easy and may be done at a relatively limited cost. However, it is important to be aware of and manage the limitations of the legal effects of an arrest, e.g. in terms of the achieved security and in the event of opening of insolvency proceedings.
The relevant legislation, governing the rules on arrest of a ship, is found in the Norwegian Maritime Act and the Norwegian Dispute Act.
Arrest of a ship is conditional upon the creditor having a “maritime claim”, as set out in article 92 of the Norwegian Maritime Act. The debtor of the maritime claim must be the owner of the ship, as actions against vessels “in rem” is not recognized under Norwegian law.
Further, the creditor must prove on a balance of probability that he has sufficient reason to arrest the ship. This is set out in the Norwegian Dispute Act section 33-2 (1):
“Arrest of assets is permissible if the debtor’s conduct gives grounds to fear that enforcement of the claim would otherwise be evaded or considerably impeded or would have to take place outside the realm.”
Case law has shown that this requirement in respect of arrest of ships is not practiced very strictly. If the claimant is able to prove that the creditor has failed to settle the claim after a number of reminders, these reminders will usually pass the test.
Exempted from this requirement, are due claims that are secured by a mortgage or a lien on the vessel. Creditors holding such security may arrest the vessel without showing cause.
Arrest does not entitle the claimant to require settlement by forced execution – An important exception
Arrest of a ship does not entitle the claimant of the arrest to require settlement of the claim by forced execution, and consequently, an arrest will not give the creditor an automatic right to initiate judicial forced sale proceedings of the ship.
This is because arrest, according to Norwegian law, provides a security right not a right of enforcement, and further, that the creditor usually does not have a coercive basis for his claim. As a clear main rule, a right of enforcement requires the creditor to obtain a coercive basis, normally a judgment after a lawsuit, in respect of the claim.
However, there is an important exception set out in the Dispute Act section 33-7 (3):
“If necessary to prevent considerable loss in value, the court can, at the request of the claimant of the arrest, decide by interlocutory order that the claimant of the arrest shall be entitled to request forced execution.”
This exception may e.g. be available if the owner is not able take care of the vessel.
The arrest as a first step to protect a claim in insolvency proceedings
Another important issue to note is that the arrest as such only entails that the debtor loses the right to dispose of the arrested ship to the disadvantage of the claimant. This effect includes that the arrest shall have protection against the defendant’s subsequent own legal transactions, including subsequent mortgages on the ship granted by the owner.
The arrest as such does not protect the debtor’s claim against subsequent execution liens achieved by other creditors or the effect of opening of bankruptcy proceedings.
However, the arrest of a ship may be an important first step to protect a claim in the event of opening of insolvency proceedings.
The priority ranking of originally unsecured claims in Norway, as the main rule, depends on whether and when an execution lien was obtained and registered in the ship register. A prior arrest, however, may give the claimant an advantage.
When the claimant has obtained a final judgement confirming his claim, and thereafter register the claim as an execution lien against the vessel, the claimant holds priority already from the time of the arrest. An executed lien will give the claimant security and protection against the owner’s unsecured creditors and a subsequent opening of bankruptcy proceedings.
However, in the event that the shipowner is taken under bankruptcy proceedings, the execution lien could be set aside under the Norwegian Creditors Security Act. According to section 5-8 in the Security Act, executed liens, established later than three months prior to the filing of the bankruptcy petition, shall not be accepted as a security giving priority to the claim.
It is important to note that the three-month-period is counted from the time of registry of the executed lien. Consequently, the reservation of priority from the time of the arrest will not give protection against a recovery claim from the estate. The bankruptcy entails a seizure of all the assets of the shipowner. This means that if the shipowner has been taken under bankruptcy proceedings before the ship is arrested, the unsecured creditors will not be able to arrest the ship. An arrest might not even be necessary in this case, as the bankruptcy in itself entails that the shipowner loses the right to dispose of his assets, including the ship.
There is an important exception from this; if the creditor’s claim is secured by a maritime lien, the creditor is still able to arrest the ship. In such cases, arrest of the ship might also be necessary to avoid time bar of the maritime lien. According to the Maritime Act section 55, a maritime lien is time barred 1 year after the claim has been established. This means that in the event of the shipowner’s insolvency, the arrest claimant might risk being in the same position as an unsecured creditor if he uses too much time before he protects his claim. Therefore, time is of the essence, not only in respect of claiming arrest, but also in establishing an executed lien in the vessel.