Ship Mortgages in Brazil – continuing uncertainty for secured creditors

UK, Brazil


In a significant ruling issued on 1 June 2016, the appellate court in São Paulo refused an appeal by a secured creditor and confirmed the decision of an earlier court-ruling in February 2016 that a Liberian ship mortgage over a vessel operating in Brazil is invalid as a matter of Brazilian law.

The implications of such a ruling, if not successfully appealed, are profound, potentially impacting creditors and borrowers in secured lending transactions in the Brazilian offshore oil and gas and wider shipping sectors.


The case: BTG Pactual Banco S/A – Cayman Branch v Nordic Trustee ASA.

A claim for the immediate repayment of a $28 million indemnity payment was brought by BTG Pactual Banco S/A (BTG) as an unsecured creditor of OSX 3 Leasing B.V, a Dutch company (OSX 3) against its asset the FPSO OSX 3 (the FPSO).

The claim was contested by Nordic Trustee ASA (the Nordic Trustee) as the trustee of certain bondholders whose $500m+ debt was secured by way of a Liberian-law governed ship mortgage over the FPSO, registered with first ranking priority at the Liberian Registry (the Mortgage).

In response, BTG claimed to have a lien over the FPSO and contended that, despite the Mortgage, Nordic Trustee did not have valid security over the vessel in Brazil so did not rank in priority to its own claim.


The appeal court upheld the original judgement stating that the Mortgage was invalid for the following reasons:
  1. for the Mortgage to be valid in Brazil, an international treaty must be in place between Brazil and Liberia. There is no such treaty in place;

  2. the Mortgage may have been valid if there was shown to be international customary law that recognises the validity of the Mortgage in the jurisdiction of the FPSO’s location. This was not sufficiently evidenced; and

  3. the fact that the Mortgage was incapable of registration in Brazil was irrelevant.
In respect of point (1) above, Nordic Trustee argued that as Brazil is a signatory to the 1926 Brussels Convention on Maritime Liens and Mortgages and the 1928 Bustamante Code, the principle behind them (that both grant effect to foreign ship mortgages in Brazil) should apply, regardless of Liberia not being a signatory. This was rejected by the court.


The decision goes against international practice in failing to recognise such foreign-law governed security interests and creates continuing uncertainty for existing and future financings secured, or to be secured, over vessels operating in Brazilian waters. This uncertainty not only impacts mortgagees, but also vessel owners who may now find themselves in breach of various representations and undertakings as to validity of security in their existing financings.

However, this decision is not final and it is expected that Nordic Trustee will appeal to Brazil’s Supreme Justice Tribunal (the country’s highest court of appeal) for a reversal of the decision.


Until any successful appeal of this decision, we would recommend that lenders and borrowers in existing and proposed financings examine their overall security package, along with the representation and covenant provisions and consider whether appropriate qualifications are needed to avoid defaults being triggered. If structuring a new financing, then parties will wish to consider flagging and mortgaging the relevant vessel in a jurisdiction that is party to the relevant international treaties confirming the validity of such security interests.

Members of CMS’ shipping and offshore finance team acted for OSX Brasil S.A. and OSX 3 Leasing B.V. on the Norwegian bond financing for the construction and operation of the OSX 3 FPSO.