Overview

A registry such as the Cayman Islands, that makes no concessions on quality standards but provides a fiscally attractive climate for business operations, is well suited to ship financing.  The absence of any form of direct tax simplifies financial transactions.  Most major banks have offices in the Cayman Islands, which may assist a commercial arrangement.  Alternatively, demise charter registration enables the mortgage to be secured in another jurisdiction that is subject to laws of the lender's preference, or where preferential lending incentives are available.  Equally, from an operational standpoint, proprietary interests may be secured by registration in the Cayman Islands and the vessel demise charter registered onto another flag so as to benefit from a favourable treaty when trading with or within a particular coastal state.  This can help cash flow and thus enhance the mortgagor’s ability to meet repayments.

One area in which the registry concentrated quite hard during Peter Gibbs’ tenure as its first director was the provision of mortgagee security to help protect the financier (typically a bank) without burdening the ship owner.  For example, it has provided by statute that the mortgagee can opt to prevent a transfer of ownership, transfer of flag or the creation of further mortgages without the prior written consent of the mortgagee.  This is not something normally secured by statute in common law countries.

It introduced a provision to record “priority notices”.   This device enables the mortgagee to establish and maintain priority as of the date of execution of the mortgage and to release funds even though the mortgage is registered at a later date.  In short, it prevents a subsequent mortgagee from gaining priority by registering his interest first [known colloquially as a “hot shoes” provision].

It introduced provisions to record a mortgage on a ship under construction, at interim registration and when provisionally registered through a British Consular Office.

Finally, there was even provision introduced to cover the event of a drug bust and the ship being impounded.  The second amendment to the Merchant Shipping Law provides that, in the event of a ship being seized, the mortgagee’s interest shall remain registered except where it is proved that the mortgagee was privy to the possibility of the ship being used for criminal purposes.

There are no exchange controls in the Cayman Islands; neither are the Cayman Islands part of the Sterling Area on which the UK government could impose exchange controls in the event of some financial emergency.  The Sterling Area covers British territories closer to the UK such as Gibraltar, the Isle of Man and the Channel Islands.  In the Cayman Islands, assets and financial instruments of any kind may be freely transferred anywhere in the world. 

Exempted companies formed in the Cayman Islands may obtain a Certificate of Exemption guaranteeing that the company will be exempted from tax for a period of 20 years, and this may be renewed.  Hence, mortgagees can have a document effectively guaranteeing that there will be no withholding tax on any mortgage or mortgage interest payments for the term of that mortgage.

Very little shipping is financed through equity.  Some financing is done through bond issues but most is done through banks, either directly or more rarely through leasing arrangements.  The lender initially relies on a secure mortgage, law he understands, surveys upon which he can rely, and, of course, the reputation of the borrower.  During the life of the mortgage he is concerned with capital adequacy borne in the collateral value of the vessel.  If the rate of depreciation exceeds the rate of loan repayment, then the mortgagee becomes increasingly exposed, especially in the event of a forced sale. 

A well-maintained ship will command the best possible resale value.  A registry that ensures the proper maintenance of hull, equipment and manning standards is therefore important in preserving the lender's collateral.  It is also important to the insurer, since this in turn reduces accident probability.  Hence, the Cayman Islands, as a well regulated open registry, working alongside mainland institutions, has an important role to play in the operation of ships by responsible ship owners worldwide.

For more information, see the section, Marine Registration - Mortgages, or Contact Us.