Ship Finance in Indonesia: Ship Mortgages and Other Liens Over Vessels

SSEK Legal Consultants founding partner Dyah Soewito, senior foreign legal advisor Michael D. Twomey and Stephen Igor Warokka, an associate at the firm, have contributed the Indonesia chapter of the new Getting the Deal Through global guide to Ship Finance. SSEK has one of the leading shipping practices in Indonesia. SSEK advises multinational and joint venture shipping and offshore drilling companies on all aspects of their operations in Indonesia, including advising on the establishment of joint venture companies, the opening of representative offices and the acquisition and sale of vessels. SSEK is ranked as a tier-one shipping firm by The Legal 500 and is highly recommended for its shipping practice by Asialaw.

The following is an excerpt from the Indonesia chapter of the Getting the Deal Through global guide to Ship Finance written by SSEK Legal Consultants.

What other maritime liens over vessels are recognized in Indonesia? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?

No maritime liens over vessels are recognized in Indonesia other than ves­sel mortgages. The right to arrest a vessel is provided under Indonesian law. In short, a harbor master can arrest vessels based on a court order issued in a criminal or civil case.

Under the Indonesian Shipping Law, when the arrest of a vessel is related to a civil law claim, the claim to the court is called a 'maritime claim'. The conditions that may give rise to a maritime claim are described in the Indonesian Shipping Law. Briefly stated, these claims relate to, among others, losses or damages resulting from the opera­tion of a vessel and costs incurred in respect of a vessel, including charter hire, towage costs, salvage costs, port costs, etc.

What maritime liens rank higher than a mortgage lien?

While not liens, payment of certain shipping-related receivables under the Indonesian Shipping Law, including payment of salaries to captains and crew members of a vessel, salvage costs and payment of port fees, have priority over a vessel mortgage. In addition, claims for unpaid taxes and customs have priority over a mortgage lien.

May non-mortgage liens be recorded over a vessel?

The prevailing shipping regulations provide that other rights in rem may be registered with the relevant Directorate General of Sea Transportation (DGST) office. However, we are not aware of any registration of a non-mortgage lien and doubt that the DGST or a DGST official at an Indonesian port would register such a lien.

Will mortgages on 'foreign' flag vessels be recognized in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?

Foreign-flagged vessels cannot be registered in Indonesia and, therefore, mortgages cannot be registered on foreign-flagged vessels.

What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?

While a mortgagee has the right to sell the vessel privately, in practice, the mortgagor has to consent to a private sale at the time of the sale. In other words, consent to a private sale in the mortgage itself will not be sufficient. As a result, enforcement of a mortgage in Indonesia is done through the Indonesian courts.

To do so, the mortgagee will file a motion to foreclose and, upon receipt of a court order, a public auction will be conducted by the State Auction Office under the supervision of an Indonesian district court. The timing of judicial sales varies. In practice, if the foreclosure action is contested and the mortgagor appeals adverse decisions all the way to the Supreme Court, it could take three to five years, or longer, to obtain a final court decision.

Once a final court decision is issued, the sale by the State Auction Office usually takes one to three months, or longer, depending on whether the mortgagor continues to try to thwart or hinder the foreclosure or sale process. The court's and auction office's costs in relation to the fore­closure vary on a case-by-case basis. Interlocutory sales are not permitted.

May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?

Yes, a vessel may be sold privately by a mortgagee pursuant to a power of attorney to sell the vessel granted by the mortgagor, provided the mort√Ç­gagor does not object to the private sale process. In practice, courts have determined that consent by a mortgagor for the sale of a vessel must be contemporaneous with the foreclosure of a mortgage. However, the sale will not discharge liens over the vessel, unless the underlying loan has been terminated and the mortgage has been revoked.

What are the limitations on rights of self-help by a mortgagee?

A sale by a mortgagee will not discharge liens over the vessel, unless the underlying loan has been terminated and the mortgage has been revoked.

What duties does a mortgagee owe to an owner or third-party creditors?

By law, there are none except for the duty to return the proceeds of any foreclosure sale in excess of the amount of the secured obligation to the borrower.

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