After more than three decades of United States administration under the United Nations Trust Territory of the Pacific Islands, the Republic of the Marshall Islands (the Marshall Islands) became a self-governing country with its own Constitution under a Compact of Free Association with the United States. The Compact came into force in 1986 and was renegotiated in 2003.
The Marshall Islands ship registry is the second largest ship registry in the world by deadweight tonnage, representing a significant number of the world's commercial shipping fleet. A growing number of business entities formed in the Marshall Islands are routinely used as corporate vehicles for shipping and non-shipping activities.
Owners, operators and lessors are choosing the Marshall Islands as the flag state for their vessels with increasing frequency. The Marshall Islands flag is widely accepted by financiers, which is crucial as the flag selected will determine the governing law of the mortgage over a vessel and financiers rarely (or never) refuse to finance on account of a counterparty's choice of Marshall Islands flag.
II LEGISLATIVE FRAMEWORK
Domestic and international law and regulation
Maritime, financial and legal centres worldwide have full access to the Marshall Islands registry through the international offices of International Registries, Inc.1 The Marshall Islands Business Corporations Act (BCA) is modelled on the corporate laws of the United States.
Ownership is critical to choice of flag. Under the Maritime Act (1990 as amended), entities incorporated under the Associations Law (including under the BCA and the Limited Liability Company Act) and any foreign maritime entity qualified under Division 13 of the BCA may register a vessel in the Marshall Islands.
Type of vessel
For the more common types of commercial ships such as bulkers, tankers and container ships, the Marshall Islands will accept registration subject to the usual due diligence. Generally, the Marshall Islands does not place restrictions on the types of vessels it will accept and also has a number of fishing vessels and yachts on its registry. The maximum age limit for a Marshall Islands-flagged vessel is 20 years, at which point a pre-registration survey or waiver is required.
In the Marshall Islands, provisional registration is not a prerequisite to permanent registration, when the owner can obtain a permanent navigation licence. Full registration is permitted until the vessel is deleted and dual or parallel registration (subject to the rules of the other flag) is permitted. Deletion from the Marshall Islands Registry requires the owner to submit a written request for a certificate of permission to transfer. Demise or bareboat charter registration in the Marshall Islands is limited to two years or until the date of termination of the bareboat charter, whichever occurs first, and may be renewed every two years until the expiration of the bareboat charter.
Vessel-financing charters can be recorded in the Marshall Islands. Upon recording, the finance charter should be treated similar to a preferred ship mortgage and the lessor (as ship owner) should be granted the status of a secured party. In other words, the lessor (ship owner) should have the benefit of being treated in much the same way as a mortgagee is treated in relation to a Marshall Islands preferred ship mortgage. It is, however, worth noting that such structures are relatively new and untested and may be subject to challenge and possible re-characterisation.
Under Marshall Islands law, interest, dividends, royalties, rents, payments (including payments to creditors), compensation or other distributions of income paid by a non-resident Marshall Islands entity to another non-resident entity or to individuals that are not citizens or residents of the Marshall Islands are statutorily exempt from any tax or withholding provisions under the laws of the Marshall Islands. Almost all Marshall Islands special purpose companies (SPCs) are non-resident and are therefore exempt, and there are no withholding taxes levied on the repayment of loans (principal or interest or both) to non-resident lenders in relation to such SPCs.
iii FINANCIAL REGULATION
i Regulatory capital and liquidity
A foreign lender does not need to qualify to do business in the Marshall Islands to extend credit to non-resident Marshall Islands companies (as borrowers) secured on vessels registered under the Maritime Act. However, if foreign lenders wish to agree loans to a Marshall Islands resident borrower, they must meet the requirements under the domestic law relating to banking and business operations.
There is no central bank or other regulatory approval required under Marshall Islands law for non-resident Marshall Islands companies to borrow from financial institutions outside the Marshall Islands. The Maritime Act allows for the parties themselves to decide the currency in which the vessel financing is to be denominated.
ii Supervisory regime
The Marshall Islands has no exchange control regulations.
iv SECURITY AND ENFORCEMENT
i Security documents
There is no prescribed form of preferred ship mortgage, save for certain terms that need to be included in the mortgage to be regarded as preferred. The preferred ship mortgage is maintained in the main office of the Marshall Islands Maritime Administrator in the United States. As a matter of practical and logistical efficiency, flexibility and convenience, the preferred ship mortgage may be recorded by the Commissioner of Maritime Affairs and any deputy commissioners at any of its offices worldwide. The preferred ship mortgage needs to be in English and will require notarisation or acknowledgement by a special agent for the Marshall Islands. The mortgagees do not have to be resident in the Marshall Islands to benefit from a mortgage.
As referenced in Section II.i, under Marshall Islands law, a 'financing charter' is defined as 'a contract in the form of a demise or bareboat charter, regardless of duration, between the documented owner and the finance charterer of the entire vessel, which contract is agreed by the parties to be or is determined in judicial or arbitral proceedings to create in favor of the documented owner a security interest in the vessel granted by the finance charterer'. For a financing charter to be recorded in the Marshall Islands, it must be dated, signed and acknowledged by the documented owner and the charterer, and must include the name and official number of the vessel, the names and addresses of the documented owner and the charterer, and the aggregate of the nominal amount of all charter hire payments and purchase option amounts payable (or which may become payable) under the charter, exclusive of any interest, indemnities, expenses or fees.
The pledge of shares (or membership interests) in Marshall Islands shipowners are normally established by the grant included in a pledge agreement and will be perfected by delivering the certificated shares (or interests) into the possession (or control) of the secured party, along with the undated and signed relevant ancillary instruments (e.g., director resignations and powers of attorney) or as otherwise required or desirable under the laws of the relevant jurisdiction.
A Marshall Islands corporation is permitted to guarantee the obligations of others, provided this furthers its corporate purpose, unless specifically limited by Section 16 of the Business Corporation Act or in its articles of incorporation. If that is not the case and to avoid any ambiguity, doubt or issue, it is highly recommended that the Marshall Islands company obtains shareholder consent to the directors' resolutions. Without shareholder consent, a shareholder could challenge a transaction at a later date on the basis that it was not in furtherance of the corporation's corporate purpose, and the transaction could potentially be set aside. To address this risk, shareholder resolutions should be required as standard.2
ii Enforcement, arrest and judicial sale
The Marshall Islands adopted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) in 2007. Domestic legislation, in the form of the Uniform Foreign Money-Judgments Recognition Act also applies, and, as its name suggests, addresses the enforcement of foreign judgments. The Enforcement of Judgments Act and the Marshall Islands Rules of Civil Procedure (RPC) address the matter of enforcement generally.
Foreign arbitral awards can be recognised in the Marshall Islands. Once recognised, they can be enforced locally and this can include the right to seek to have a receiver appointed to take over the assets of the Marshall Islands company. It should be stressed at the outset that proceedings in the Marshall Islands must be seen and pursued in the context of an overall recovery strategy as it is unlikely that major assets will be located within the jurisdiction of the Marshall Islands courts.
To have an award recognised in the Marshall Islands, a number of steps must be taken, beginning with the filing of a complaint in the Marshall Islands court, which can be done electronically.3 Following this, a summons will be issued, stating the name of the parties and of the court, directed to the defendant and stating the name and address of the plaintiff's attorney, the time within which the defendant must appear and defend, and notifying the defendant that a failure to appear and defend will result in default judgment against the defendant, signed by the clerk and bearing the court's seal. A summons must be issued for each defendant to be served. The serving of the summons will be within 120 days of the filing of the complaint and must be served with a copy of the complaint.4 At this point the defendant has the option to answer or oppose the complaint and is able to raise affirmative defences, such as those listed in the RPC under Rule 12(b), which must be done within 21 days of receiving the summons. It may be at this stage that the Marshall Islands company would state that it opposes domestication of the arbitral award. A plaintiff may then file motion for summary judgment if he or she can show that the defendant has raised no genuine issue as to any material facts, and that the plaintiff is therefore entitled to judgment as a matter of law (a summary judgment). Once the arbitral award has been domesticated, it will be a judgment of the Marshall Islands courts and once a judgment is obtained, a demand for payment can be made and a successful party is not obliged to take enforcement steps. A successful party can obtain a judgment and make demands, for example, every six months or so and still maintain the right to commence enforcement at a later date.
With the exception of vessels operating strictly domestically in the Marshall Islands, it is rare to arrest and foreclose a Marshall Islands-registered vessel or any foreign-flag-registered vessel under the jurisdiction of the Marshall Islands courts.
The Maritime Act provides that a preferred mortgage on a Marshall Islands-registered vessel may be enforced in rem in admiralty or in any foreign country in which the vessel is located and follows the laws and enforcement procedures of the country arresting the vessel.
iii Ranking of liens
Under the Maritime Act, a preferred mortgage should have priority over all claims save for the following:
- maritime tort liens for damage caused by the vessel;
- maritime liens for unpaid tonnage tax, fees, penalties and other charges arising under the Maritime Act or its implementing regulations;
- crew wages;
- general average;
- salvage (including contract salvage); and
- expenses and fees allowed and costs taxed by the court.
It should be noted that any maritime lien claim for necessaries such as repairs, supplies, towage and drydocking that arose prior to the preferred mortgage registration should have priority over such preferred mortgage.
v CURRENT DEVELOPMENTS
i Recent cases
Supreme Court and selected High Court and Traditional Rights Court decisions can be accessed via the Marshall Islands judiciary website.
ii Developments in policy and legislation
Recently, the Marshall Islands adopted amendments to its Associations Law in regard to companies incorporated in the Marshall Islands in order to phase out bearer shares. The reasoning for the relevant amendments by the Marshall Islands Corporate Registry is to bring the Marshall Islands in line with the implementation of certain transparency requirements of the Organization for Economic Cooperation and Development in relation to inter-jurisdictional exchange of ownership information for tax compliance purposes.
iii Trends and outlook for the future
The Marshall Islands, with its balanced rules and regulations, has grown increasingly popular among shipowners over the past decade. The Marshall Islands is a widely accepted flag by financiers, who will ordinarily readily accept a Marshall Islands mortgage as collateral for a loan. With the rapid rise of vessels flagged in Marshall Islands, new laws, regulations and case law can be expected.
1 International Registries, Inc provides administrative and technical support to the Marshall Islands Maritime and Corporate Registries.
2 See Section 16 of the BCA.
3 Pursuant to Rule 5(d)(3A).
4 The RPC has several requirements for service. The BCA, at Section 20–22, discusses service on Marshall Islands companies.