Bareboat chartering and Parallel Registration for Merchant Ships By Professor Alkis John Corres

Bareboat charter is a form of time charter. The main difference is that the bareboat charterer assumes both the commercial and the technical management of the vessel. This is a formal procedure mentioned in Article 12 of the United Nations Convention on Conditions for Registration of Ships.

The idea dates back to postwar Germany.. ..at a time when the country needed to start its reconstruction programmes: German ships were not available in sufficient numbers, All shipyards were bombed out, Money was desperately short, making time chartering impossible, Skilled officers and seamen were available in large numbers and in need of work.

Therefore, crew - less ships were needed cheaply Therefore, crew - less ships were needed cheaply. These ships had to come from other registries. Countries that have appreciated the flexibility and the benefits offered by parallel registration can allow ships from another flag (original flag B) to fly their own flag (new flag A) for a limited period on basis of a charter party. In order to do this parallel registry provisions must be inserted in their legislation which will allow for ships to move in and out. Parallel registries are separate and operate independently from the main registries. For this temporary transfer no ‘’deletion certificate’’ is issued as the vessel remains under the laws of its original flag (flag B) for matters relating to ownership and mortgages.

So, we have Bareboat-In and Bareboat-Out. Most registries have opted to offer both options to ship operators. However only 15% of all flags have introduced parallel registries. International law as we know imposes the obligation on ships to carry only one flag (at a time). The flag denotes the legal system of the state that the ship comes under. A ship bareboat chartered - out will temporarily (i.e. for the duration of the bareboat charter) leave its original registry and will join the parallel registry of the receiving flag writing also on the stern the name of one of this country’s ports. The receiving flag will furnish the vessel with a Certificate of Registry, while the original flag will confirm its agreement for the transfer in writing.

Sale & Leaseback Loan Sale Charter A Simple Sale and Leaseback Structure Diagram Bank Loan SPC (Owner) Sale Charter Charterer (Customer)

Bareboat chartering as described in the previous slides is nowadays also used extensively in ship finance. The two most common forms are: Hire purchase (Leasing) Sale and Lease Back In countries where ship leasing is allowed, leasing arrangements provide an alternative to traditional ship financing. Banks will generally consider it favourably given that the position of the ‘’lender’’ is stronger compared to loan financing. As banks are generally unwilling to become involved in ship management the most usual method used takes the form of a ‘’ Sale and Leaseback’’ where a shell company owned by the lender ( lessor) becomes the owner of the vessel and enters into a bareboat contract with the lessee who takes over both the commercial and the technical management. The lessor will typically have a first preferred mortgage on the ship. This triangular arrangement has considerable advantages, but also serious disadvantages, for the lessee which we shall briefly review.

Sale and Leaseback The main advantage of a Sale and Leaseback solution for the lessee is the ability to expand the fleet under his own control with the minimum of equity. The main disadvantage is a quite complicated, inflexible and inequitable leasing contract replete with covenants in favour of the lessor. S+LB is a back to back arrangement where the lease is paid over a number of years through charter hire involving three parties, the owner of the vessel, the bareboat charterer and the lessor. As in all leasing contracts one finds a ‘’ Hell and High Water’’ clause which nullifies the possibility of the borrower to pay only interest and remain within the spirit of the agreement, as the case is under a loan agreement. Installments therefore have to be paid in full and by the due time or else a charter termination event may be triggered.

Description of a deal involving a special purpose company owned by the lender and a bareboat charter for a new building.

In short, in order to have a bareboat transaction which makes use of parallel registration, one will need as a minimum: A bareboat charter party of definite duration including all the usual details and the names of the contracting parties. Parallel registration provisions in the original registry for bareboat-out. Parallel registration provisions in the receiving registry for bareboat-in and an agreement to receiving the vessel for a certain time (usually that of the charter party). A letter from the original flag agreeing to the deal.

Parallel registration comes to an end in the following cases: If the bareboat charter party period comes to an end and it is not renewed. ( The same applies also in case of an accident). If the period to which the receiving flag has agreed to bareboat-in ends (in case different to the above). If the original flag revokes its agreement to this transaction. In case of a legal reason obliging the deletion of the vessel from the parallel registry. In all the above cases the vessel returns to its original registry. A vessel on bareboat-out can be sold during the period of the charter in conformance with the legislation of the original flag respecting the charter party obligations with a notification to the receiving registry.

Thank you for your attention.