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ANALYSIS ON THE SITUATION AND STRATEGY FOR SHIP FINANCE LEASE--Zhang Jifeng

发布:2018-07-19

Zhang Jifeng, graduated from Dalian Maritime University and joined China Shipping Group in 1999, served as liner operation, head of the claim section of China Shipping Agency Company. Mr. Zhang has been assistant general manager of project management division of China Shipping LNG since 2005. Now he is dealing with LNG ship building, operation and management.

 

 

 

ANALYSIS ON THE SITUATION AND STRATEGY FOR SHIP FINANCE LEASE


Finance lease first began from the fifties of last century, in May 1952 an American called H.Jerry Fed founded the first leasing company, and this was the origin of Finance Lease. In 1972 American Ship Financing Act regulated a new financing method-ship finance lease. With the development of financing and shipping, finance lease becomes the most important finance method. China have developed a lot on shipping and ship building for these last 30 years, to utilize finance lease, we can develop even more on the above, it’s meaningful especially on the background of making Shanghai an international shipping and financing center. 


I. Signification and advantage of finance lease
   (I) Signification of finance lease
    Finance lease means according to two parties contract and basis on the requirements on the lessee, the lessor buy a nominated ship by the lessee, on the premise of the lessor having the ownership of the ship, the lessee pay all the hire for a duration of a period(normally more than 10 years).
(II) Advantage of finance lease
i. Widen the financing method
The traditional finance method is very difficult for the development of shipping company, especially for the middle and small companies. They don’t have  big scale and good credit, so it’s difficult for them to get loan from the bank or the government, also it’s difficult to get money by means of issuing stocks or bond, then finance lease becomes the key factor for their survival and development.
ii. Lighten the refund burden
The management status divers according to the blossom season and insipid season, but the hire payment method of finance lease is much more flexible than bank loan, it doesn’t need to pay fixed amount with fixed interest in fixed term, it can be adjusted by the management status, which benefit a lot for the shipping company to utilize cash more abundantly and reasonably.
iii. Acquire government favorable policy
In order to encourage investment for the shipping industry, the government will provide favorable tax policy such as accelerative depreciation, then in the contract of finance lease, the lessor will release this favor to the lessee by means of lowering hire etc.
iv. Avail cash flow for big industry
Normally the big shipping companies have some eliminated model ships, the high remaining value on these ships becomes big pressure on cash for the companies, they can charter these ships to small companies by means of finance lease, which benefits both big and small companies at the same time.
v. Avail to enhance competition ability for shipping company
By means of charter back, shipping company can deliver the ship to the professional ship management company, then they can keep the right of employment and distract risk at the same time, which can help to enhance the unitary benefit and efficiency.
vi. Materialize the idea of modern logistics
The key idea of modern logistics is conformity. Big shipping company can use the method of finance lease to adjust asset structure, charter out non key asset and charter in key asset, which can help a lot to develop the service of integrated logistics.


II. Possible finance lease mode and the main pattern of Chinese finance lease company
    (I) Familiar mode of ship finance lease
In practice, familiar mode of ship finance lease:
i. Direct lease: On the request of the lessee, the lessor buy or build a ship  nominated by the lessee from the nominated seller or builder, then deliver the right of possession, usage and income to the lessee.
ii. Charter in lease: The lessee at the same time the provider, charter in the ship, which was already bought and used before the contract. The lessee sell the ship to the lessor then charter in the ship as a lease. The lessee then can get more money with no harm to the management.
iii. Attorney lease: On the written request of the client, the lessor accept the fund or lease from the client, then deal with the lease transaction for the lessee. The ownership of the lease belongs to the client during the lease term, the lessor only charge the commission but not responsible for the risk.
iv. Sublease: The lessee have the right to convey the possession, usage and income right of the lease to others during the lease term. There are at least three parties in the sublease relationship ( the former lessor, the former lessee, the new lessee) and two lease contracts( the former lessor with the former lessee, the former lessee with the new lessee).
v. Lever lease: Also called balance lease or reduce lease, is an advanced finance lease. The lessor have the legal full ownership of the ship but only pay 20%-40% of all the payment, the other 60%-80% payment is paid by the bank or other financial industry, as exchange, the lessee should mortgage the ship and convey the lease right and hire.
(I) Main pattern of Chinese finance lease company
Finance lease company can be set up by the big consignor, shipping company, ship builder and finance industry together, at the same time absorb folk capital in order to perfect the managing structure, assure marketable management and decision-making. They can also hold mutual stocks and participate in associated financing to enhance the ability of resisting risks, financing for all the parties. Ship finance lease is a new thing in China, nowadays there are three major categories of them, first, represented by business bank such as industry bank lease, construction bank lease, transportation bank lease, civil bank lease and merchant bank lease etc.; second, represented by government industry such as Sinochem far east lease etc.; last, represented by local lease company such as Shanghai international lease and Zhejiang lease etc..


III. Chinese law application for finance lease and main risks for the lessor
    (I) Chinese law application for finance lease
Chinese contract law, chapter fourteen “finance lease contract”, altogether 14 clauses, mainly regulate the concept, content of finance lease contract, the main right and duty for lessor, lessee, the relationship of finance lease contract and merchandise contract, composition of hire, the ownership of lease after lease term etc., this is the main law proof for ship finance lease contract.
“Managing measure for finance lease company” executed by CHINA PEOPLE’S BANK on 30th June 2000, contained with six chapters, i. general principles, ii. Organization set up and management, iii. Business scope, iv. Supervision, v. liquidation, handover and expiration, vi. annex, altogether 52 clauses, which is established according to “contract law”, “company law”, “China people’s bank law”(chapter i), now is the compulsive law for ship finance lease.
There are some other origins such as 1992 “Chinese maritime law” chapter six “ship charter contract”, highest court [1996] No.10 “regulations for cases relating to finance lease contract”, transportation bureau 10th April 2008 “notice for standardizing domestic ship finance lease management”(transportation bureau shipping division [2008]No.1.
According to law application, ship finance lease contract first should apply “contract law”, when which doesn’t regulate, it should complementarily apply 2000 “Managing measure for finance lease company” and highest court “regulations for cases relating to finance lease contract”.  Clauses of “Chinese maritime law” do not actually regulate ship finance lease, but we can refer to it according to its regulations for charter contract and “civil aviation law”.
(I) Main risks for the lessor in finance lease business
i. Risks for lessor as ship owner against priority and lien holder
Ship priority is a high imbursement assure substance right labeled on the ship, executed by some special maritime creditor. “Chinese maritime law” clause 22 regulate precisely for ship priority, which mainly contain crew salary, pay, injury compensation, port charges, salvage fee etc.
Ship lien means when the other party did not fulfill the contract, the ship builder, ship repairer can lien the possessing ship in order to ensure the ship building fee or repair fee can be reimbursed.
As to ship priority, in the dealing of ship finance lease, when the lessee break the contract or become bankrupted, the lessor can retake the ship, but if there is ship priority on the ship, it will block his right seriously. Ship priority is a legal guarantee right to protect special creditor, so it is impossible for the lessor to avoid this in the contract, although our “contract law” regulate that during the process of lessee having possession of the lease, the lease inducing harm to others, the lessee should not be responsible for this.” But special law precedes common law, ship priority in “maritime law” also have the force of preceding.
As to ship lien, although “explanation for fulfilling ‘Chinese guarantee law’ by high court” clause 108 regulate “The creditor can fulfill lien when he takes the possession of the portable substance but without knowing the debtor having no right to dispose it.” This regulation protects the right of the goodwill lien holder. But according to “maritime law”, there is no good-will or bad-will difference, as long as the other party did not carry out the contract, the ship builder, repairer can lien the possessing ship, no matter they know the ship belongs to the other party (debtor) or not.
     ii. Risks for lessor as ship owner against oil pollution damage compensation liability
“Oil pollution damage” means the liabilities, losses, damages, costs and expenses when and to the extent that they are caused by or incurred in consequence of the discharge or escape from an entered ship of oil or any other substance, or the threat of such discharge or escape. As to who should assume the liability, every country and international convention appoint it to the ship owner, so in the finance lease contract the lessor as the ship owners should be responsible for this potential risk.
From the view of protecting the victim of oil pollution damage, and the convenience and efficiency to solve the dispute, it is reasonable to assume it to the ship owner. So we need to research this question not only from view of finance lease but also from the regulations of maritime law. The lessor should have this idea in mind but not to assume he is not responsible for the damage brought to any third party. On condition of this, the lessor should buy oil pollution damage insurance in time, for big shipping company this is also compulsory, the insurance fee should be paid by the lessee.
iii. Risks for lessor as ship owner against ship detain and auction
In finance lease, ownership is always incomplete, i.e., the four functions of ship ownership are not concentrated to one body. The lessor convey the right of possession, usage and profit, but only keep disposal right. According to Chinese “contract law” clause 242 “ The lessor have the ownership on the lease. When the lessee become bankrupt, the lease do not belong to the lessee.”
But at the same time, this brings out a very complicated question: Can the ship under finance lease contract be detained? According to 1994 “High court regulations on ship detain before maritime court sue”(NO.iii ship detain scope), it can be detained. But the effectiveness of this regulation is questionable after the actualization of “Maritime Sue law”, which do not regulate this question. There are two completely different views on this question: i. “can be detained theory”, according to demonstration law thought, looking on finance lease contract as bare boat charter contract; ii. “can not be detained theory”, according to “Maritime Sue law” clause 23, it is prohibitive to detain a ship illegally. Some literates assume that if the ship condition under finance lease accords with the same under bare boat charter, contrasting with 2000 “Maritime Sue law”, it can be detained conditionally. Because according to 30th June 2000 “managing measure on finance lease company” (China People’s bank statute [2000] No.4), there are different kinds of ship finance lease, some are not the same as bare boat charter, i.e. under this condition, the ship can not be detained. Furthermore, the possibility of ship detain is also related to ship registry.
If the ship under finance lease can be detained, then according to “Maritime Sue law” clause 29, it can also be judicatory sold. But this collides with the regulations on clause 242 of “contract law” about repossession of the lease, especially more serious for the single ship company when it goes bankrupt. Moreover, it is also questionable if the lessor have registry and priority right on the ship after it has been sold. Normally assumed, the lessor can not take part in the creditor’s right registry or enjoy priority, because the ownership of the ship under finance lease contract does not convey, but this is only an individual guarantee, only substance guarantee can enjoy priority. According to “Maritime Sue law” clause 119, the remained fund after reimbursement from the sold ship should be given back to the former ship owner. In finance lease contract, normally this ownership is actualized by the deposit and individual guarantee clauses themselves.


IV. Meaning and suggestion on developing Chinese ship finance lease
Ship finance lease is a very active operation in the world, the very successful examples are Germany and Singapore. German KG mode rooted from the sixties and seventies of last century, it was a tax favorable method to encourage individual investing in ship building. Under this mode, many partners invest in one limited liability ship company, using this money to build new ships then charter to shipping company. At the same time, the German citizen can enjoy tax reduction if they invest their income in KG company. This policy attracted a large number of doctors and other middle or small investors to invest in shipping. In the whole world, the Germany KG mode fund contributed a lot to German as well as international shipping industry. In 2004, 56% of international container new orders were carried out by KG mode.
Singapore maritime financing plan was carried out in recent years with a series of favorable financing plan, which concretely include: within 10 years from buying the ship, the ship lease company, ship fund or ship business entrust can enjoy permanent tax free policy from the income as long as they accord to the conditions until the ship is sold out. The income of the investors who manage the ship fund or company can enjoy 10% tax favor as long as they accord to the conditions, which last 10 years. From 2006 this policy carried out, 3 companies were already attracted to set up maritime entrust fund in Singapore, and they financed more than 50 ships.
Now we are facing a high-speed developing period for ship industry, the new ship building quantity amount from 5%-6% about 10 years ago to nowadays 30% in the whole world. Although the shipping market is greatly bad influenced by the financial crisis and economy decline now, we believe the international economy will definitely revive and flourish in the future. We should utilize the good time left by the crisis to research the ship finance lease policy and financial environment, study from the modern pattern such as the German KG mode and Singapore maritime financing plan. Likewise, (I) Carry out tax deduction policy for finance lease, attract fund to invest in ship lease industry automatically. As to charter in the sold out ship, value-added tax free or sales tax free for selling.(II) Positively boost in ship industry fund, attract fund to invest in shipping industry, by doing so, we can not only attract the superfluous fund to shipping market but also enhance China shipping strength, when the international economy revives again in the future, this will help a lot to make China the biggest powerful ship building and shipping country in the world. (III) Strengthen the development of relative organizations such as ship broker, ship class, clasp with financial industry, set up and perfect finance lease evaluation system, fully exert the great effect of ship finance lease on financing and shipping.


Main reference:


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