Ships and aircraft require large investments and have financing structures to support their acquisition and operation. Ship financing originally developed from laws governing pledges on ships to secure funds. Over centuries, maritime jurisdictions established systems of registered ship mortgages to strengthen security for private investment. Nigeria's laws also provide for registered ship mortgages. Aircraft financing uses similar techniques as ship financing through mortgages, but financial leasing is more common for aircraft. The security structures for ship and aircraft loans can include mortgages, assignments of earnings, insurances, and operating sub-charters.

1. SHIP AND AIRCRAFT FINANCE
Ships and aircraft are both expensive chattels used for transportation. They both
wander the world, one on the waters, the other in the air. They therefore both are the
most experienced travelers of the world's legal systems. However, because of the
huge sums of money involved in their acquisition, investors and businessman alike
often shy away from venturing into any business that require their use.
The origins of the customary codes for ship finance according to the legend
Justinian and hence other academics could be traced to the traditional Sea Law of
the Island of Rhodes.
However, English Admiralty Law which has played a significant role in the
development of International Maritime Law, took its genesis from the laws of Oleron,
a small Island off the Mouth of Charente in the Bay of Biscay.
The laws of Oleron expressly acknowledged the possibility that a master of a vessel
could pledge his ship to a lender in return for an advance and no doubt this
customary transaction formed the origin of the now obsolete security transactions of
bottomry and respondentia whereby a master of a ship could, for the purpose solely
of obtaining supplies of repairs necessary to enable the vessel to return to its home
port, pledge the vessel by means of bottomry bond or pledge the cargo by means of
respondentia. The liens were of doubtful value because the lien holder lost the right
to be repaid if the ship or cargo was lost. In any event, modern communications and
developments have rendered these methods of raising money on the security of a
vessel obsolete since the funds for necessaries can now be supported by the credit
of the owner as opposed to the credit of the vessel.
It is worthy of note to point out here that it was many hundreds of years before
maritime jurisdiction developed a proper system of registered ship mortgages. British
and Continental European developments took place mainly in the nineteenth
century, but it was only in 1920 that the United States, finding itself after the First
World War with a fleet of ocean-going vessels with a value in excess of $3Billion,
decided to put its admiralty law on a proper footing so as to attract private
investment by strengthening ship mortgage security which under American State law
was practically worthless.
In Nigeria, the Merchant Shipping Act (MSA)CAP 224 LFN, 1990 made exhaustive
provisions for ship mortgages. Specifically, Section 323 MSA deals with the
procedure for ship mortgages.
It provides that, a ship registered in Nigeria or a share therein, may be made a
security for a loan or other valuable consideration.

2. However, before a mortgage created on a ship is valid, it must be registered at the
Ship's Port of Registry and the mortgage must have the consent of the minister.
See S.315 and 323 MSA.
Consequently, if the mortgage is discharged an entry will be duly made on the
register by the Registrar upon being satisfied that the mortgage has been
discharged. See also S.324 MSA.
Further, by section 325 MSA, if there are more mortgages than one registered in
respect of the same ship or share therein, the mortgages shall notwithstanding any
express, implied or constructive notice, be entitled in priority one over the other,
according to the date at which each mortgage is recorded in the register book and
not according to the date of each mortgage itself. Thus priority of series of
mortgages on the same ship of share therein is determined not by he date of
creation of the mortgage but by the date of registration of such mortgage in the
register book of mortgages.
Aircraft mortgages tread in the path of ship mortgages. The techniques of
financing aircraft and the documentation are similar in many respects to ship
mortgages as are private international law aspects.
However, while the one-ship company is common, the one-plane company is not.
Many airlines are owned by Governments. Further, aircraft are often financed not
on the security of mortgages but by financial leases.
Another difference flows from the importance of spare parts in aircraft
financing, especially engines. Airlines may substitute engines or take
engines on lease. These items of equipment can form a substantial proportion
of the cost of an aircraft and hence of the security, but many legal systems
are unsuccessful in bringing these separate prices within the scope of
effective charges.
Generally, the security structure for a shipping loan comprises of a number
of elements. It could take the form of a mortgage of the vessel or an
assignment of earnings such as hire from a charter-party, out of which the
loan is to be repaid. It could be an assignment of insurances on the vessel or
an assignment of compensation for any requisition for hire or for title.
Sometimes, in the case of a oneship company, a pledge on the share of the
company to give the lender the alternative of selling the company instead of
the vessel on a default. The lender may wish to do this to preserve a
beneficial charter which could be terminated by the charter if the ship were
sold.
As earlier indicated, loans may be secured on several ships owned by the same
company or more commonly, by several one ship companies. This is usually
referred to as fleet mortgages. Ship owners often arrange for ships in their
2

3. fleet to be owned by separate companies in order to isolate the financial risk
associated with each ship and to forestall the sister ship action whereby one ship
can be arrested for debts of another. In such a Case each ship owning company
will guarantee the loan to the borrowing company and secure the guarantee by a
mortgage on its ship.
Care should however be taken to ensure that the guarantees are not liable to be
avoided on the grounds that the guaranteeing companies received no corporate
benefit for their guarantees or that the guarantees are transactions at an undervalue
void able on insolvency.
Sometimes, ship financing may take the form of a financial lease of the ship. This
occur, when the lender makes a loan for a ship owning company specially formed
for the purpose. The owning company charters the ship under a demise charter to
the "real" owner. The demise charter is in substance a financial lease and the hire
is sufficient to repay the loan plus interest. The demise charterer may then charter
the vessel under an ordinary operating charter to a charterer. The demise charterer
assigns the benefit of the sub-charter and earnings from the ship to the owner by
way of security for the demise charterer's obligations under the demise charter.
The loan to the ship owner is secured by a mortgage on the vessel, an assignment
to the lender of the demise charter, plus insurances, requisition, compensation and
a further assignment of the operating sub-charter. Because the demise charter is the
source of debt service, its terms may approximate to a take - or - pay contract
under which the hire is payable in all eventualities and the demise charterer will, in
its acknowledgment to the lender of notice of the assignment agree with the lender
not to raise, as against the lender, set - offs and counter claims that could be raised
as against the owning company, e.g, for failure to comply with the charter party.
Finally, for aircraft, the security structures are similar to those of ships, except that,
as mentioned, insulation by one-ship companies is less commonly followed in the
airline industry. However, financial leasing is a preferred form of financing,
largely because of the wider availability of tax incentives. In addition, there may
be a mortgage of spare parts, such as engines which may be subject to the normal
rules applicable to non-possessory chattel mortgages.
SYLVA OGWEMOH, LL.M
MARINE PARTNERS
E-mail: ogwemoh@marinepartntersng.com