A cross-border mortgage dispute over three chemical ships was recently concluded and executed in favor of the party represented by a Dacheng team comprising senior partners Tong Dengyong, Yuan Bin and associate Wen Li from the Ningbo office.

In Agricultural Bank of China (ABC)Leqing branch v. Wenzhou Oriental Shipyard，the bank sought to claim RMB300,000,000 from the ship maker. The ship maker had originally registered three ships under construction as mortgages at the Maritime Safety Administration of China. When the ships were completed, the foreign buyer refused to accept the ships and the ships were instead sold to a Hong Kong-based associate company of the defendant’s. These ships were also registered as mortgage by the ship maker at Credit Suisse (Hong Kong).

Dacheng attorneys requested seizure of the shipsin Ningbo and Zhangjiagang, which, after being sold to a Hong Kong-based company, were renamed and attached flags bearing signs of foreign ownership. While proceedings were going on at the Ningbo Maritime Court, Credit Suisse asked to take part in the proceedings as third party and requested its lien over the mortgages be recognized. It also filed a lawsuit against the Hong Kong-based associate company at the court claiming repayment of debt and the execution of lien as the first mortgagee, in spite of the alternative to bring a suit in a foreign jurisdiction.

Chinese lawdoes not provide for whether a registered mortgage right over ships under construction has force of recourse when the ships are exported after completion, nor is there any court precedent. If the ships are both built and operated in China, the registration and perfection of mortgage rights would put third party creditors on notice of the security interest. However, if the rights are registered in different countries or regions, conflicts may arise in terms of perfection of the rights and priority of creditors.

Attorneys from Dacheng, based on a comparison and contrast ofprecedents and provisions in relation to ship mortgage in countries suchas Hong Kong, the UK as well as international conventions, formulated forcible points of argument on behalf of their client. Their opinion was eventually adopted by Ningbo Maritime Court, who ruled pursuant to PRC Maritime Law that ABC Leqing branch, according to the first-in-time rule, should have priority status over Credit Suisse in the execution of mortgage rights. Credit Suisse did not appeal against the ruling of first instance.

Ningbo Maritime Court auctioned off the ships at a price of RMB170mln and ABC Leqing branch was compensated accordingly. The case was listed as one of the most important cases in 2013 by Ningbo Maritime Court.