Generally, financial institutions like banks or leasing companies either:
- own a ship and lease it under a bareboat charter to a person who will operate it
- lend a ship to ship owner or operator and take back a ship mortgage as security for the loan
Ship owners are offered potentially significant tax advantages but potentially at the expense of liability to the financier (financial institutions like banks or leasing companies). Ship mortgages provide special security under United Sates law but do not take precedence over all ship obligations. There are significant differences in terms of possible liability, citizenship and other requirements between owning a ship and leasing it to someone, versus holding a mortgage secured by the ship.
Generally, a mortgagee is not liable for ship related liabilities like oil pollution. On the other hand, a ship owner is liable for such items. Ship financiers (financial institutions like banks or leasing companies) are not liable for all potential liabilities arising from a ship like oil pollution, as long as ship financiers are not participating in the management of the ship. Furthermore, United Sates federal law shields persons who own ships from oil pollution liability and hazardous substance release liability so long as they essentially avoid participating in the management of the ship. Nevertheless, other liabilities may arise from state law or common law.
When a ship is involved in an accident or incident otherwise giving rise to third-party liability, the ship itself is at risk and therefore so is the ship owner’s property regardless of whether they stand in an innocent position with respect to that accident or incident. Furthermore, even innocent ship owners should consider the risks of third-party liabilities and take appropriate steps in due diligence, contracting and with respect to insurance coverage.
According to federal law, ship owner is strictly liable regardless of fault for oil spilled by the owned ship. Oil Pollution Act 1990, shields ship owners who do not participate in the management of the ship and who own the ship purely to protect a security interest. According to Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), shields ship owners who do not participate in the management of the ship when a ship discharge hazardous substance.
Ship financier (financial institutions like banks or leasing companies) should also consider whether the bank qualifies under the citizenship requirements of the ship’s register. For example, United States, strictly regulates the citizenship of ship owners. Citizenship requirements are checked and controlled by United States Coast Guard which also maintains the registry of ships entitled to fly the U.S. flag.
A ship owning company that owns ship in United States must be organized in United States and meet certain management citizenship tests. For example, a corporation must have a United States citizen CEO (Chief Executive Officer) and Chairman of the BOD (Board of Directors) and no more than a minority of the number of directors necessary to constitute a quorum can be non-citizens. Furthermore, U.S.-flag ship to be able to trade in the United States coast-wise trade (Jones Act trade), ship owning corporation must be beneficially owned at least 75% by United States citizens.