A Preliminary Study on the Procedure for Realizing Security Interests of Maritime Liens

—Conflict and Connection Between Ship Arrest, Auction, and the Procedure for Realizing Security Interests

Abstract: A maritime lien is the right of a creditor to take priority in compensation with regard to a ship. It is among the most important rights in maritime law. Maritime lien aims to protect the interests of lien holders, and its realization procedure constitutes a significant part of the Special Maritime Procedure Law of the People's Republic of China (the "Special Maritime Procedure Law"). There are no legal obstacles to the introduction of special procedure for realizing security interests in maritime law. Considering this, this article explores the application of special procedure for realizing security interests and examines its connection with existing procedures, with a view to offering new insights for the revision of the Special Maritime Procedure Law.

Keywords: Procedure for Realizing Security Interests, Maritime Lien, Substantive Dispute

A special procedure for realizing security interests was introduced in the Civil Procedure Law of the People's Republic of China revised in 2012 (the "Civil Procedure Law"), to address the complex and lengthy procedure for realizing security interests through litigation and more effectively safeguard the legitimate rights and interests of creditors. Specifically, under this procedure, those entitled to request the realization of such interests are not required to initiate substantive litigation first. Instead, they may directly apply to the court for the auction or sale of the secured property. When this procedure was first introduced, there were differing views within the academic community regarding its applicability to ship security interests in maritime law. Later, the Interpretations of the Supreme People's Court on the Applicability of the Civil Procedure Law of the People's Republic of China (the "Interpretations to the Civil Procedure Law") clarified that the procedure for realizing security interests applies to ship security interests. [1] However, many issues remain unresolved, particularly concerning the application of this procedure to maritime liens, a unique concept under the Maritime Code of the People's Republic of China (the "Maritime Code").

I. Methods for Realizing Maritime Liens

Maritime lien is a long-established legal concept, adopted or recognized by the laws of many maritime nations. The Maritime Code gives a clear definition of "maritime lien," stating in the section on maritime liens that "A maritime lien is the right of the claimant, subject to the provisions of Article 22 of this Code, to take priority in compensation against shipowners, bareboat charterers or ship operators with respect to the ship which gave rise to the said claim." Article 22 further specifies that only five types of maritime claimants shall be entitled to enjoy priority in compensation with respect to the ship which gave rise to the said claim.

In maritime judicial practice, a maritime lien is typically enforced through a litigation process that leads to an enforceable judgment. This judgment serves as the basis for requesting the court to auction the ship in order to satisfy the lien. Additionally, due to legal provisions and the unique characteristics of ships—such as their mobility and high value—maritime lien holders often apply for ship arrest before or during the litigation process. This ensures that the ship can later be sold at a judicial auction to satisfy the claim. Hence, in judicial practice, there are primarily two procedures for realizing maritime liens.

The first one involves confirming the maritime lien through court litigation, followed by a judicial auction to realize the claim. In this procedure, current judicial practice does not require maritime lien holders to apply for ship arrest. However, if they do so before litigation, they must file a lawsuit with the competent court within 30 days. After obtaining an effective judgment, they may then apply to the court for auction of the ship. Following the statutory processes of debt registration and rights confirmation lawsuit, the lien holders can receive the proceeds from the auction according to the legal compensation procedures.

The second procedure involves debt registration and confirmation litigation after a judicial auction of the ship, followed by compensation. This procedure applies when the ship has already been judicially auctioned by the court. Maritime lien holders then register their claims, initiate confirmation litigation, and ultimately participate in the distribution of the auction proceeds. If maritime lien holders have already filed a lawsuit or obtained an effective ruling before the court's compulsory auction, they may directly participate in the distribution of the auction proceeds after debt registration without undergoing confirmation litigation.

Clearly, these two procedures for realizing maritime liens are essentially the same, both involving a lawsuit, auction, debt registration, confirmation litigation, and distribution to ultimately realize the lien holders' priority in compensation. Since ship auctions must undergo a legal process of rights elimination, which is undeniably time-consuming, efficiently disposing of auctioned ships has long been a key issue in maritime enforcement practice, as it directly affects how quickly creditors can recover their funds. The second (or final) stage of substantive litigation inevitably leads to a lengthy, high-cost process for realizing maritime liens, which is not conducive to safeguarding creditors' interests.

The amendment of the Civil Procedure Law introduced the procedure for realizing security interests in its chapter on special procedure. Articles 196 and 197 of the law stipulate that the holder of security interests, along with other parties with the enforcement rights, may file an application with the basic people's court where the secured property is located or where the secured real rights are registered, in accordance with the Property Law and other laws. If the application meets the legal requirements upon examination, the court may issue a ruling for the auction or sale of the secured property, and the parties may request enforcement pursuant to the ruling. This indicates that the Civil Procedure Law specifies the applicability of non-litigation procedures for realizing security interests. Furthermore, the Civil Procedure Law's provision on special procedure requires that cases involving the realization of security interests must be concluded within 30 days from the date of filing, following a final judgment after the first-instance trial. This reflects the efficiency and convenience of the procedure, while balancing both efficiency and fairness. The Interpretations to the Civil Procedure Law also clarify that maritime courts have exclusive jurisdiction over cases involving the realization of security interests. With this, a legal basis is established for applying the special procedure for realizing security interests to maritime liens. Although the realization of the ship's real rights is still influenced by debt registration and confirmation litigation in ship auctions, this procedure minimizes both litigation and time costs for the parties. However, whether this procedure can be applied to maritime liens in maritime law has not yet been definitively settled. In the interpretation and application of the Interpretations to the Civil Procedure Law, a view on the priority of construction project payment, similar to maritime lien, holds that [2]: "The provisions of the Contract Law on the priority of construction project payment can be seen as a breakthrough in the realization of claims. However, whether the priority of construction payment claims constitutes a statutory mortgage remains controversial in both theory and practice. Some scholars argue that it is a statutory mortgage, while others consider it a statutory lien. For this reason, the judicial interpretations do not explicitly allow the priority of construction payment claims to apply to this procedure." This seems to leave no room for the application of the priority of construction project payment. The legal provisions on the procedure for realizing security interests do not appear to exclude maritime liens. The authors believe that the special procedure for realizing security interests under the Civil Procedure Law may apply to maritime liens.

II. Theoretical Analysis of the Application of the Procedure for Realizing Security Interests to Maritime Liens

The Maritime Code provides a complete system for the realization of maritime liens. To integrate the procedure for realizing security interests into this theoretical system, it is essential to ensure that the application of this procedure does not undermine the existing framework. Therefore, the legal basis and institutional design of maritime liens will determine whether the procedure for realizing security interests can be specifically applied.

(i) The Nature of Maritime Liens

The nature of maritime liens—whether they are substantive or procedural rights— has been a subject of debate both domestically and internationally. Some domestic viewpoints consider maritime liens to be procedural rights, while others view them as substantive rights, specifically as security interests within the scope of real rights or special creditor's rights. This debate remained unresolved when the Maritime Code was finalized, so the Maritime Code adopted a neutral stance to avoid controversy to avoid controversy. However, as the research on maritime liens has advanced, a consensus has emerged. Today, maritime liens are primarily regarded as substantive rights, specifically real rights over ships, i.e., a type of ship security interest. [3] This view holds that the purpose of maritime liens is to ensure the satisfaction of the debts they secure. Maritime liens align with the characteristics of security interests: they are established on specific ships, possess statutory, dependent, in rem, and tracing effects; they arise, transfer, and extinguish with the debts they secure, reflecting the subordinate nature of security interests; and they exhibit the priority characteristic of security interests, seeking priority in compensation without requiring the transfer of possession of the secured property. Given their inherent nature, essential characteristics, statutory foundation, and priority in compensation, maritime liens can be regarded as a type of security interest, making the application of the procedure for realizing security interests a natural conclusion.

(ii) The Extent of Maritime Liens

The Maritime Code defines a maritime lien as a right of the claimant to take priority in compensation against the ship that is the subject of the maritime claim. To realize this priority in compensation, Articles 24, 25, and 28 of the Maritime Code stipulate that the prerequisite for exercising maritime liens is the court's arrest of the ship in question, followed by the conversion of the ship from a physical asset to a monetary form through a judicial auction. The chapters on "Arrest and Auction of Ships" and "Procedure for Registration and Repayment of Debt" in the Special Maritime Procedure Law, along with the Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Arrest and Auction of Ships, define the realization of maritime liens as involving four main parts: ship arrest, ship auction, rights registration, and proceeds distribution. These statutory steps must be followed to realize maritime liens. Thus, the realization of a maritime lien requires the arrest and auction of the ship in question, which aligns with the special procedure for realizing security interests. Moreover, the statutory grounds for the extinction of maritime liens also demonstrate consistency with the special procedure for realizing security interests. Article 29 of the Maritime Code clearly states that a maritime lien can be extinguished either if the claimant fails to enforce it or if the ship is lost or sold through a court-ordered forced sale. In maritime judicial practice, the most common scenario for extinguishing a maritime lien is the court's forced auction of the ship. However, a maritime lien cannot be extinguished by a commercial auction or a general ship sale. Due to the dependent nature of maritime liens, they do not automatically terminate with the transfer of the ship’s ownership. Only a judicial auction by the court, following the statutory "cleaning" process, can terminate all claims attached to the ship, resulting in a "clean ship". This coincides with the "ruling to auction or sell the secured property" in the procedure for realizing security interests. Therefore, the ship auction process outlined in the Maritime Code for realizing maritime liens is consistent with the special procedure for realizing security interests, and there are no procedural obstacles to their application.

III. Regulation and Connection of the Procedure for Realizing Maritime Liens

In maritime judicial practice, the confirmation and realization of maritime liens follow a well-established theoretical framework. The confirmation of a maritime lien generally involves the court arresting the ship before or during litigation and confirming the lien through a judgment. The realization of a maritime lien then involves the lien holder applying to the court for the auction of the ship to achieve priority in compensation. In the non-litigation procedure for realizing security interests, the realization of ship mortgages and other ship security interests has been practiced for many years. Although legal provisions in this area remain somewhat rudimentary—such as the lack of detailed regulations on service of public announcement or jurisdictional issues—a theoretical system has gradually taken shape, awaiting unified legal provisions. As such, general issues can be addressed by referring to the special procedure for realizing maritime security interests. However, maritime liens have unique characteristics compared to other security interests. Therefore, the procedure for realizing the security interests of maritime liens must consider how it connects and transforms with the existing procedures for realizing maritime liens, based on the current non-litigation procedures for maritime security interests.

(i) Connection with Ship Arrest and Auction

The procedures most closely related to the realization of maritime liens are ship arrest and auction. Below, we explore the connection between these two procedures and the application of the special procedure for realizing security interests, along with regulations for situations where the realization of security interests procedure may not be suitable for ship arrest and auction.

1. Ship arrest procedure. Ship arrest includes arrest for preservation and arrest for enforcement. In China's legal system, the arrest for enforcement, which is an essential prerequisite for ship auction, aligns with the current civil enforcement system. Both are essential steps in property realization will not be discussed in further detail here. On the other hand, the arrest for preservation, as a property preservation measure, is also a necessary condition for exercising maritime liens. Although the current maritime judicial practice in China does not always require creditors to apply for ship arrest when asserting a maritime lien, arrest must occur before a ship can be auctioned, thereby guaranteeing the realization of the lien. Moreover, maritime liens have a statutory time limit for enforcement. If the time limit expires during the confirmation of a maritime lien, a ship arrest must be applied for to prevent the maritime lien from being extinguished. Therefore, ship arrest is a necessary and essential procedure for the realization of maritime liens.

Can preservation measures be applied in the procedure for realizing security interests? Ship arrest for preservation comprises pre-litigation preservation and during-litigation preservation. For pre-litigation preservation, applying to the court for ship arrest before litigation requires filing a lawsuit within the statutory period. Otherwise, the court will discharge the preservation, as set forth in the Special Maritime Procedure Law. "Filing a lawsuit" in this context does not exclude lawsuits for realizing security interests. Therefore, as long as the procedure for realizing security interests of maritime liens is initiated within the 30-day statutory period for pre-litigation ship arrest, this is permissible. In case of preservation during litigation, it is realistic to consider that the debtor or property possessor may maliciously transfer assets. If preservation measures are not allowed during the procedure for realizing security interests, dishonest debtors could transfer assets during the case review period, making it difficult for claimants to realize their rights and undermining the implementation of the procedure. Allowing preservation, especially for easily transferable or concealable assets, ensures the enforceability of the secured property and the validity of the ruling permitting auction or sale. Thus, the Interpretations to the Civil Procedure Law allows property preservation in cases involving the realization of security interests. [4] Accordingly, in the procedure for realizing security interest of maritime liens, lien holders may apply for ship arrest in accordance with the Civil Procedure Law and the Special Maritime Procedure Law.

2. Ship auction procedure. Under the general provisions of the procedure for realizing security interests, if the court finds the application compliant with legal requirements, it will issue a ruling permitting the sale or auction of the secured property. The main text of the ruling should be "permission to auction the property", and it will be enforceable. The security interest holder may then apply to the court for enforcement and auction. This is the basic effect of the ruling permitting the auction of the secured property and the purpose of the rights holder initiating the procedure. The Special Maritime Procedure Law provides for two forms of ship auction: auction during litigation and auction during enforcement. The auction during enforcement is a natural follow-up to the procedure for realizing security interests and a necessary path for realizing maritime liens. It does not conflict with the procedure for realizing security interests, so we will not discuss it further here.

Regarding the auction of ships during maritime litigation proceedings, Article 29 of the Special Maritime Procedure Law [5] provides detailed provisions. This is a derivative procedure following the arrest of the ship for preservation. The authors believe that the procedure for realizing security interests is a special procedure designed to quickly resolve controversies over security interests, where no substantive issues are in dispute between the parties, and promptly realize the legitimate rights and interests of security interest holders. It emphasizes efficiency, convenience, and cost-saving, while balancing fairness. Ship auction during litigation considers the unique characteristics of ships and protects the legitimate rights and interests of the claimants. When it is no longer inappropriate to continue the arrest and the respondent does not provide a guarantee, the ship can be liquidated in advance to save judicial auction costs. However, ship auctions have strict statutory procedures, and due to debt registration announcement period, the process and duration of liquidating ships can often be lengthy. The special procedure for realizing security interests aims for quick resolution through final judgment at first-instance trial, with a trial period of only 30 days. It is designed to quickly confirm the existence of legal facts and whether the claimant is entitled to exercise a specific right. In contrast to general litigation, the special procedure for realizing security interests has a much shorter trial period and process. Even when it is no longer appropriate to continue the arrest, liquidation can still occur during enforcement. Moreover, the time required for ship liquidation often exceeds 90 days, far exceeding the 30-day trial period of the special procedure. Allowing ship auctions within the special procedure would compromise the efficiency and simplicity of the process, contradicting its legislative intent. Therefore, the special procedure for realizing security interests of maritime liens should not include procedural measures such as ship liquidation and is not suitable for ship auction procedures during litigation.

As for issues derived from ship auctions, such as debt registration and confirmation litigation during the auction announcement period, the Special Maritime Procedure Law clearly provides that maritime liens or security interests must undergo confirmation litigation if the debt registration occurs during the announcement period following the ship auction. According to the Special Maritime Procedure Law, the provisions of the Civil Procedure Law apply only in cases not covered by the Special Maritime Procedure Law. In the authors' opinion, since the Special Maritime Procedure Law has clear provisions on debt registration and confirmation litigation, applying confirmation litigation after ship auctions would be inappropriate in the procedure for realizing security interests.

(ii) The Issue of Qualified Claimants in the Procedure for Realizing Maritime Liens

The scope of claimants in the procedure for realizing security interests directly determines the eligibility of the parties involved. For the general procedure for realizing security interests, Article 196 of the Civil Procedure Law stipulates that the claimants are "security interest holders and other parties entitled to request for the realization of security interests". The Interpretations to the Civil Procedure Law further specifies "mortgagees, pledgees, and lien holders" as security interest holders, while "mortgagors, pledgors, debtors whose properties are pledged, and owners of property" as other parties entitled to request for the realization of security interests. When applying this procedure to maritime law, particularly maritime liens, how should the claimants in the procedure for realizing security interest of maritime liens be defined? According to the authors, in line with the legislative intent of the procedure for realizing security interests, claimants in the procedure for realizing security interests of maritime liens can be broadly divided into two categories. The first category includes maritime lien holders. Article 22 of the Maritime Code specifies five types of maritime lien holders, all of whom may assert priority in compensation from the auction of ships through the special procedure for realizing security interests. This aligns with both legal theory and practice. The second category includes shipowners, who are specifically referred to by maritime liens. As stipulated in the Maritime Code, the claims of maritime lien holders are not always asserted against shipowners but may also be directed against bareboat charterers or ship operators. However, due to the in rem nature of maritime liens, the claimant can take priority in compensation with respect to the ship which gives rise to the said claim. In simple terms, the ship—owned by a third party—is used to "secure performance" by the bareboat charterer or ship operator, who incurs the debt. This situation is similar to third-party security in ordinary civil disputes, where the law allows the third party to initiate the procedure for realizing security interests. Thus, when maritime lien holders fail to exercise their rights, potentially leading to a decline in the ship's value or even damage or loss, the shipowner should be allowed to initiate the procedure for realizing security interests and be recognized as a qualified claimant.

(iii) Transformation with Litigation Procedures—Substantive Disputes in the Adjudication of Cases Involving the Realization of Security Interests

Given the simplicity and economic efficiency requirements of non-contentious procedures, the Civil Procedure Law stipulates that the procedure for realizing security interests should be subject to a final judgment after the first-instance trial. Similarly, the application of maritime liens should adhere to the single-instance final judgment with a 30-day trial period. Although the law does not allow appeals against the procedure for realizing security interests, it gives claimants alternative remedies. If the court determines that there is a substantive dispute among the parties regarding the realization of security interests, it will rule to dismiss the application and inform the claimant to file a lawsuit with the court. This provides a simple way to connect the special procedure with litigation. In cases involving substantive disputes, the transformation between the procedure for realizing security interests and the litigation procedure can be manifested in several forms.

The Interpretations to the Civil Procedure Law provides a clear definition of what constitutes a substantive dispute. The emergence of substantive disputes aims to balance procedural fairness and curb fraud litigation. Specifically, in the context of maritime liens, this article examines two prominent types of disputes that may qualify as substantive disputes.

First, a common dispute arises when the ship is not owned by the debtor but by a different actual owner. This kind of dispute is often encountered in cases involving the realization of security interests, particularly in enforcing ship mortgages. The prevalent practice of registering ships under nominal owners in the shipping industry leads to conflicts between registered owners and actual owners. This issue is especially evident in mortgage cases. If the court rules to permit the auction or sale of the ship, whether this constitutes "infringement of the lawful rights and interests of others" in substantive disputes is debatable. However, in cases involving maritime liens, the attachment and specificity of maritime liens ensure that the liens are not extinguished upon the transfer of the ship. Regardless of the ship transfer process or any change in the actual owner change, the specific maritime claim still enjoys priority in compensation against the designated ship. Hence, such a defense does not constitute a substantive dispute in the procedure for realizing security interests of maritime liens. In this scenario, if the court determines that the objection raised by the actual owner is unfounded and permits the sale or auction of the ship, how can the actual owner seek relief for their rights? The law does not provide clear guidance. Some argue that the actual owner should file an objection during the enforcement procedure, but since the actual owner has already participated in the litigation regarding the realization of security interests, they cannot file an objection to the enforcement subject as a third party under Article 227 of the Civil Procedure Law. Can they initiate a retrial? The authors are of the opinion that this is also not possible, as the special procedure for realizing security interests is based on undisputed facts. The review process will not change the substantive rights and obligations, meaning the ruling lacks res judicata effect, thus making a retrial untenable. In this situation, the actual owner has the right to file a separate lawsuit regarding the substantive rights and obligations involved in the ruling on the realization of security interests and initiate an ordinary civil lawsuit.

Second, a dispute may arise when a maritime lien holder with higher priority in the order of compensation raises an objection. This kind of dispute is particularly detrimental to the general concept of security interests, as they must ensure that higher-priority creditors are compensated first, with any remaining funds distributed to lower-priority creditors Therefore, when a higher-priority creditor raises an objection, it should be considered a substantive dispute that harms the legitimate rights and interests of others. However, in the context of maritime liens, the auction of a ship must undergo debt registration and confirmation litigation procedures. After these procedures, the enforcement agency can distribute the auction proceeds according to the statutory order of compensation. Thus, objections regarding priority claims against the ship should not be considered substantive disputes.

IV. Conclusions

The Civil Procedure Law (2012), based on comprehensive consideration of judicial practice, established the procedure for realizing security interests as a separate section under special procedure, clarifying this system from a legal perspective. However, due to its highly generalized provisions—consisting of only two articles—the practical application of this procedure has encountered numerous challenges. Subsequently, the Interpretations to the Civil Procedure Law addressed some of these obstacles in judicial practice. Nevertheless, when this system is applied to maritime law, the unique characteristics of ships as special movable property and the special nature of ship security interests and maritime liens make the procedure for realizing security interests in maritime law particularly difficult, with very limited applicability. A search of the China Judgments Online database using the keyword "application for realizing security interests" reveals only a few relevant cases from maritime courts nationwide. The original intent behind establishing the procedure for realizing security interests was to ensure the efficient and prompt realization of rights, thereby more fully protecting the legitimate rights and interests of various civil subjects. Ships, as iconic assets in maritime law, are frequently involved in cases concerning mortgages, liens, and priority rights. However, effectively "localizing" the procedure for realizing security interests in the maritime judicial practice requires further exploration and experimentation. This article represents the authors' preliminary investigation into relevant issues encountered in maritime judicial practice, as well as further research and discussion on whether and how this procedure can be applied, and how it can be connected with existing procedures in judicial practice. Given the particularities of ship security interests and maritime liens, it is recommended that the Supreme People's Court amend the Special Maritime Procedure Law or make specific provisions to address these issues.

Authors: Chang Weiping & Lin Xiaobin, Guangzhou Maritime Court

Notes: Omitted