Everyone in the yachting industry knows the old adagio in which the best moments in a yacht owner’s life are the day of the purchase of a yacht and the day when the yacht is sold. Buying or building a yacht is certainly a rewarding experience marking a moment of success and happiness in a person’s life. However, the long-awaited day of celebration for the delivery of a yacht may be ruined by some dreadful event such as the declaration of insolvency of the yard that is building the dream of a lifetime.
After having spent millions to build the object of desire, the unexpected bankruptcy of a yard when a yacht is halfway to completion can give a serious blow even to a strong-minded and experienced businessperson, as it often means that the yacht will never be finished and the money will never be refunded. Several yacht owners have had this tragic experience. And, only those who received good legal advice at the start of negotiations of a yachtbuilding agreement were not severely harmed.
This article will briefly analyze what a savvy yacht owner should do to minimize the risk of losing money and/or the yacht in case the shipyard goes insolvent. (In the example used here, the shipyard is located in Italy.)
Legal framework
According to Italian law, the general rule is that the ownership of a yacht under construction is transferred to the buyer after the successful performance of final tests and trials, the acceptance of the yacht and the payment of the full price. Therefore, it is the yard that owns the yacht until the price is fully paid and the yacht is delivered.
Yacht construction contracts, most of which are regulated by British or any other country’s law, often provide that the ownership of a yacht under construction passes to the buyer as construction progresses and the installments of the price are paid. However, in case of insolvency of a yard based in Italy, Italian bankruptcy law applies regardless of the law governing the agreement. In other words, the bankruptcy law of the country where the shipyard is based will prevail over the contract’s provisions.
In most cases, in the event of insolvency, the buyer of a yacht under construction is an unsecured creditor. This means that he or she will rank very low in the list of creditors that are entitled to be paid back by the trustee of a bankruptcy.
In Italy, unsecured creditors of an insolvent yard should consider themselves lucky if they manage to collect 20 percent of what they are entitled to. The first ranking creditors that will receive most of the money, if there is any, are the social security agency for unpaid social security charges (INPS), the tax authorities for unpaid taxes (Agenzia delle Entrate), workers and employees of the yard and secured creditors (i.e., banks, other creditors that have mortgages or any other for security). Only in the end, if there is any money left, will the buyer recoup any of the sums paid to the yard to build the yacht.
Yacht construction agreements often provide for bank guarantees (so called “refund guarantees”) that the yard should give to the buyer of a yacht as security for the payments. However, even such bank guarantees, unless these are autonomous and first demand guarantees, may be subject to possible attacks by a trustee in bankruptcy who would immediately notify the issuing bank that the yard is insolvent, and no money should be paid to the buyer. In other words, the insolvency of a yard leaves the buyer stranded unless the right protection tools have been put in place as of the outset of the negotiations with the yard.
Possible remedies
During the construction of a yacht, the owner has paid large sums of money to the yard to build the vessel. When the shipyard is declared insolvent while the yacht is halfway (or less) finished, the owner has no title over the vessel, and he is an unsecured creditor who must wait for the liquidation of the assets to be completed. All other preferential creditors are paid.
The most important step a yacht buyer should consider is to acquire title as soon as possible to avoid disputes with the trustee in bankruptcy. Since the usual provisions set out in a yacht-building contract would not be sufficient to stop the trustee from claiming ownership of the yacht, the owner should require that the construction contract be registered with the Registry of the Vessels in Construction (Registro delle Navi in Costruzione) managed by the Harbor Master (Capitaneria di Porto) having jurisdiction over the region where the shipyard is based.
There are Harbor Master offices in almost all major shipyards and the procedure for the registration of the contract is relatively simple. The contract’s registration is essential in the case of insolvency as it would prove to the trustee that the yacht is being built for the buyer and does not belong to the shipyard, contrarily to the general provision of Italian law.
Pursuant to article 45 of the Italian Bankruptcy Law, any registration made after the declaration of insolvency will not have any effects. Therefore, registration is fundamental in order to make the title of ownership binding and legally enforceable against all creditors in the insolvency procedure.
In addition to the registration of the contract, the buyer of a yacht should insert in a construction agreement the yard’s obligation to register the transfer of ownership of each single installment paid by the buyer according to the stage of construction of the vessel. In other terms, once the owner’s representative has ascertained that the yard has reached a certain milestone and that payment is due, then immediately after the payment, or concurrently with it, the buyer and the yard must sign a so-called Atto Ricognitivo (Acknowledgment Deed) transferring the ownership of the partly built yacht to the buyer.
Pursuant to article 242 of the Italian Navigation Code, the so called Acknowledgement Deeds, are any deeds of creation, transfer or termination of ownership that shall be registered with the Registry of Vessels Under Construction. This tool would allow the owner to move the partially built yacht to another shipyard to finish it.
In addition, we strongly recommend including guarantees in the relevant construction agreement to protect the buyer and to obtain a refund of the installments that already have been paid. In case of absence of any guarantees, the buyer may risk losing, wholly or partially, the sums paid. Specifically, a refund guarantee consists of a guarantee issued by the bank of the shipyard for the refund of each paid installment. The guarantee may be satisfied upon first request of the buyer (this form is not often used) or upon the declaration of insolvency of the shipyard.
If the yard is reluctant to provide a refund guarantee, it is a warning a sign of a weak financial situation. The buyer should also be ready to pay for the cost of issuing the bank guarantee rather than not having one.
Finally, another form of protection of the buyer’s interest is to request the yard’s obligation to allow the buyer the right to register a mortgage (ipoteca) on the yacht under construction. The mortgage of a yacht in favor of the buyer is also registered with the Registry of Yachts Under Construction and it is therefore an effective form of protection in case of bankruptcy.
Conclusions
From the brief analysis above it is safe to say the scenarios in case of a yard’s insolvency during the yacht construction are rather complex. Therefore, we recommend engaging a good team of lawyers at the outset of negotiations of a yacht construction contract to perform a due diligence on the yard. This helps to ensure that the right clauses of Italian law are inserted in the agreement regardless of whether the governing law is not the Italian one.