The future of maritime trade in Africa is looking bright considering the ongoing deployment of the African Continental Free Trade Area (AfCFTA). By eliminating import duties and reducing non-tariff barriers, AfCFTA is projected to considerably increase trade among African countries, boosting, hereby, the demand for intra-African maritime transport. As a result, the United Nations Conference on Trade and Development (UNCTAD) projects that, by 2030, Africa’s maritime fleet could increase by around 200%.
However, UNCTAD also warns that without substantial investments in the African maritime sector, AfCFTA shall not reach its full potential. One way to facilitate these investments, it is argued, is to guarantee that maritime law adequately protects creditors that are crucial for maritime trade. It has become usual for maritime laws of all major coastal states around the world, including most African coastal states, to protect creditors do so by attaching a maritime lien to claims that are crucial for maritime trade. It is therefore crucial that the treatment of maritime liens under the laws of African States is properly understood. This blog provides insights into maritime liens in Africa and provides insights into the effects on insolvency on these liens. In particular, it highlights the negative effects of the UNCITRAL Model Law on Cross-Border Insolvency on the protections offered by maritime liens in Africa and suggests a resolution. The video presentation at the end unpacks the issues discussed in greater detail.
Overview of Maritime Liens
Maritime liens arise by operation of law. As such, a maritime lien arises simultaneously with the claim which the lien secures, without any registration or other formalities required. From this moment, the maritime lienholder can directly enforce its claim on the ship in whose operation the protected claim arose. The wide range of protection mechanisms granted to maritime liens illustrates the weight given to the crucial maritime claims underlying maritime liens. For instance, the existence of the maritime lien does not depend on whether the shipowner was in fact operating the ship when the underlying claim arose. In other words, the maritime lien attaches to the ship even where the initial debtor of the underlying claim is not the shipowner, and is, perhaps, the charterer or another operator of the ship. Besides, the transfer of property of the ship after a maritime lien has arisen does not affect the maritime lien on the ship. Additionally, maritime liens also have the highest priority ranking in relation to other claims on the ship, ranking even above ship mortgages. Without this priority, lienholders would face the risk that no proceeds would remain after the ship mortgagee enforces its claim, as ship mortgages generally secure the largest portion of debt on the ship.
Maritime Liens as a Reflection of National Socio-economic Priorities
The protection mechanisms introduced above apply generally to all maritime liens regardless of the applicable domestic law from which the lien originates. Strikingly, however, the types of claims that are accorded maritime lien status often depend on the applicable domestic law, leading to considerable differences. The Côte d’Ivoire Maritime Code, for instance, grants maritime lien status to certain claims that are not protected as such in the relevant Nigerian and Kenyan legislation. Such claims would include, for instance, shipbuilding and ship repairing claims.
Moreover, even in countries that recognise similar maritime liens, the priority ranking amongst these liens might differ. For instance, under Nigerian and Kenyan maritime law, a similar list of maritime liens is recognised, but, most notably, the claim for port fees ranks second under Kenyan law, while ranking fifth and last under Nigerian law, ranking just above ship mortgages. These differences in recognition and priority ranking of maritime liens reflect the socio-economic priorities on maritime trade which a country wishes to advance. To protect these national socio-economic priorities and considering the direct enforcement of a maritime lien on the ship, maritime liens are generally enforced on a territorial basis: under the regime of the country in which the ship is located at the moment of enforcement.
Maritime Liens in Cross-Border Insolvency
The proof of the pudding is in the eating. Maritime liens are only effective when they can withstand the situation in which the proceeds of the sale of the ship are insufficient to satisfy all competing claims encumbering her. In other words, the litmus test for the security provided by maritime lien occurs when the shipowner faces insolvency. Remarkably, however, maritime lien security is jeopardised in countries that have enacted the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI), which include certain important African coastal states, such as South Africa and Kenya.
The MLCBI provides that, in principle, the entire insolvency of a debtor is administered in the jurisdiction in which the centre of main interests of the debtor is located. This universalist approach clashes with the territorial enforcement of maritime liens on the basis of the location of the ship. More specifically, under the MLCBI, maritime lienholders are obliged to turn to the country in which insolvency proceedings have been opened, potentially missing out on the maritime lien security which they expect in the country where the ship is located.
As such, the MLCBI can also obstruct the advancement of the inherently national socio-economic priorities underlying maritime lien security. Hence, countries enacting the MLCBI should be aware of this possibly obstructive effect of the MLCBI. Applied to the current African context, countries enacting the MLCBI should be aware that the MLCBI can hinder the effectiveness of maritime liens, thereby potentially impeding the much-needed investments in the African maritime sector.
Concluding Thoughts: Reconciling Maritime Liens and Cross-Border Insolvency
Overall, the MLCBI is a well-perceived instrument to effectively administer cross-border insolvency. Preferably, therefore, an alternative should be sought in which the MLCBI and adequate maritime lien security can coexist. Inspiration for such an alternative can be found in the Singaporean enactment of the MLCBI.
The Singaporean enactment of the MLCBI ring-fences maritime liens from the consequences of foreign insolvency proceedings. Therefore, maritime lienholders are still able to enforce their lien on a ship located in Singapore notwithstanding any conflicting insolvency proceedings of the shipowner opened abroad. By seeking inspiration from this Singaporean solution, African countries could kill two birds with one stone: guaranteeing an effective cross-border insolvency regime, as well as effective maritime lien security. Ultimately then, both these outcomes can help facilitate the increase of intra-African trade in the wake of AfCFTA.
More on this topic can be found in the video presentation at the CLRNN Spotlight on Corporate Governance and Insolvency Law seminar on 26 November 2021: