The interface between Shipowner & Cash Buyer

andCash Buyer & Recycling Yard

byDr Nikos Mikelis

Non executive director, GMS, U.A.E.

Ship Recycling WorkshopVerband Deutscher ReederHamburg, 28 October 2013

Cash Buyers provide a key commercial service to shipowners and to ship recyclers and this is why the majority of recycling deals go through Cash Buyers.

The shipowner receives from the Cash Buyer the following services:• intimate knowledge of the individual recycling markets; • cash payment instead of payment via Letters of Credit; • the ability to pay, in cash, a sizeable deposit; and • comfort to the shipowner that his risk is mitigated, especially in cases of

a falling scrap market.

The recycler receives from the Cash Buyer the following services:• access to the international shipping market; • acceptance of the recycler’s Letter of Credit.

Historically, the role of the Cash Buyer has been that of a commercial facilitator who mitigates financial risk.

Currently, the legal responsibilities and obligations of a shipowner selling his ship for recycling terminate at the time of transfer of ownership to the Cash Buyer.

In other words, selling a ship for recycling has not been different to selling it for further trading in the sense that, once the transfer of ownership has taken place, all benefits and all liabilities pass to the new owner.

The role of the Cash Buyer and his contractual relations with the shipowner and with the recycling yard will be subject to change when the European Regulation on Ship Recycling becomes mandatory for European flagged ships, in probably three to four years time, and thereafter when the Hong Kong Convention enters into force.

The changes the regulatory regimes will bring to the role of the Cash Buyer and to the established way of doing business are as yet untested.

Both, the European Regulation and the Hong Kong Convention simply define the Cash Buyer as a shipowner.

The following definition of “shipowner” is from the European Regulation. Similar text exists in the Hong Kong Convention:

"ship owner" means the natural or legal person registered as the owner of the ship, including the natural or legal person owning the ship for a limited period pending its sale or handover to a ship recycling facility, or, in the absence of registration, the natural or legal person owning the ship or any other organisation or person, such as the manager or the bareboat charterer, who has assumed the responsibility for operation of the ship from the owner of the ship as well as a legal person operating a state-owned ship

In doing so, the regulators of both instruments have avoided to specify, or dictate, which shipowner (i.e. the operating shipowner or the Cash Buyer) will be responsible: for selecting an approved recycling yard; for finalising the Inventory of Hazardous Materials; for receiving the Ship Recycling Plan; for requesting the conduct of the final survey; and for delivering the ship for recycling in accordance with the regulations.

Had the legislation tried to address separately the obligations of the shipowner and of the Cash Buyer, this would have either resulted into impractically complex regulations (if the attempt had been made to capture the different ways and timings of selling and delivering a ship to the Cash Buyer), or into inflexible and therefore restrictive arrangements (if the regulator had dictated specific arrangements).

The consequence of merging and not separating the roles of the operating shipowner and the Cash Buyer is that the sale process is not defined in the regulation.

A further complication results from the change of ownership that takes place in a sale.

Obligations for ships under international law are enforced by the flag State a ship is flying. Before a ship is sold by its operating shipowner for recycling, the flag State has no power to enforce any requirements on the future owner of the ship (i.e. the Cash Buyer). When a ship is sold to the Cash Buyer, it has to be de-registered by the seller and thereafter the seller’s flag State has no further influence (or interest) on the ship.

Most recycling sales are completed at the anchorage outside the recycling yard. In these cases the Cash Buyer has no reason to register the ship under another flag, as the ship is not due to carry an international voyage.

If however the ship is delivered on an “as-is where-is” basis, the Cash Buyer will reflag and certificate the ship, usually under a provisional registration.

The HKC implicitly assumes that if a ship is sold on an “as-is where-is” basis, and if the flag State of the Cash Buyer is a Party to the Convention, the new flag State will oversee the implementation of its requirements. If the new flag State is not a Party to the Convention then the ship falls outside the scope of the Convention and there is nothing more to do.

If on the other hand the ship is sold on a “delivered” basis, the Convention and its Guidelines are silent on what should happen to any certificates issued under the authority of the seller’s de-registered flag (Certificate on Inventory of Hazardous Materials, and Ready for Recycling Certificate), as strictly speaking any certification issued by that flag ought to become invalid on de-registration.

IMO’s MEPC agreed sometime ago to consider this issue when it completes its work on the development of the guidelines to the HKC, with the view to issuing appropriate guidance. (Note that a possible practical solution would be for the coastal State that receives the ship, i.e. the recycling State, to endorse and thus revalidate the expired certificates.)

Similar considerations apply in the case of the new European Regulation, as shown below:

a) Ship sold to Cash Buyer on “as-is where-is” basis

• If the Cash Buyer re-registers the ship outside the EU then the Cash Buyer can either: o sell the ship to a yard that is not in the European List and avoid

compliance with the European Regulation; oro sell the ship to a yard that is in the European List and comply with

the European Regulation• If the Cash Buyer re-registers the ship in the EU then the Cash Buyer

would have to proceed by selling the ship to a yard that is in the European List of approved yards.

b) Ship sold to Cash Buyer on “delivered” basis and is delivered at the anchorage. It is then either taken to:

• a yard on the European List (compliance with the European Regulation); or

• a yard not on the European List (avoidance of the European Regulation).

The early version of the text of the European Regulation had attempted to penalise evasion through re-flagging (Article 23.5 of first draft):

Where a ship is sold and, within less than six months after the selling, is sent for recycling in a facility which is not included in the European list, the penalties shall be:

(a) jointly imposed to the last and penultimate owner if the ship is still flying the flag of an European Member State;

(b) only imposed to the penultimate owner if a ship is not flying anymore the flag of an European Member State.

Nevertheless, the European Council realised that these provisions are unenforceable and problematic and managed to negotiate their deletion.

The plain fact is that the HKC, and to a greater extent the European Regulation are unable to guarantee their enforcement. However, in the case of the HKC, its ratification by the five main ship recycling countries would de facto ensure its universal enforcement, as very little recycling capacity exists outside South Asia, China and Turkey. In the meantime the environmental NGOs are very active.

Source: NGO Shipbreaking Platform Press Release 5 February 2013

“Of the top 10 European “global dumpers” in 2012, Greekshipowners were number one, dumping 167 ships on South Asianbeaches, or nearly half of all ships sent by European shipownersin 2012.German shipowners represented the second largest group of toxicship dumpers (48 ships) followed by shipowners from the UK (30ships), Norway (23 ships), Cyprus (13 ships), Bulgaria (8 ships),Denmark (6 ships) and the Netherlands (5 ships).”

Major Norwegian newspaper, 6 February 2013:“Norwegian ships are damaging Asian beaches”

Source: NGO Shipbreaking Platform Press Release 3 October 2013

“The NGO Shipbreaking Platform and its 18 member organisations are calling on India, Pakistan, and Bangladesh to halt the import of the damaged, presumably toxic ship Hansa Brandenburg. It is suspected that the German owner, the Leonhardt & Blumberg group, has sold the Hansa Brandenburg for breaking in South Asia, most likely to India. The container ship caught fire in July and was later towed to Port-Louis in Mauritius.”

“… another typical case of bad practice where a wealthy shipping company rids itself of its environmental and social responsibility by dumping waste in a substandard yard in South Asia – just because it is more profitable”

“With about 4,000 merchant ships, Germany owns the world’s biggest commercial shipping fleet. It is also one of the worst dumpers of toxic ships: in 2012, 58 German-owned ships were beached in South Asia, and another 34 have already been sent between January and June 2013. Last year, 365 end-of-life ships owned by European companies were dumped in South Asia.”

We can conclude this discussion by agreeing that a shipowner who wants to avoid regulatory requirements and who is not concerned by the pressures from NGO activists, will have the option to do so for the foreseeable future. The same conclusion generally applies for the Cash Buyer.

We can also conclude that the shipowner who wants to recycle his ships in a responsible manner:

• can voluntarily do so now; • will have to do it in accordance with the European Regulation in three to

four years’ time, if his ships fly an EU flag; and • will have to do it in accordance with the HKC when the Convention

enters into force.

Owners who chose the route of responsible recycling, either voluntarily, or under the requirements of the European Regulation, or the HKC, will need to develop and agree certain practical arrangements with their Cash Buyer that will ensure that the recycling takes place as per the intended standards.

According to these arrangements the Cash Buyer will have to accept contractual obligations that will survive the change of ownership. These obligations would then have to be transposed to the selected recycling facility, which has to be willing and capable to conduct recycling in the intended clean and safe manner.

Our experience at GMS is that, presently, less than one per cent of our deals (and we are involved in around a third of all recycled tonnage) make provisions for the higher standards that are evolving. However, with the forthcoming entry into force of the European Regulation it is expected that many more owners will select the path towards responsible recycling.

Now, around three months before the entry into force of the European Regulation, the way shipowners contract to sell their ships to Cash Buyers is at a crossroads.

One way forward is for the evolution of the new arrangements to take place by trial and error over a period of time and over many deals involving many sellers and a few buyers (there are many shipowners but only a few Cash Buyers).

The other way forward is through the development of a best management practice by industry experts who understand shipping practices, sale & purchase of ships, and the recycling business.

Either way, a number of issues will need to be considered before reaching consensus across the industry.

GMS has already recognised a need to establish a ship recycling programme comprising of contractual and procedural arrangements which ensure that end-of-life ships of its shipowner clients are recycled in a responsible way, that considers issues of safety, occupational health, welfare and environmental protection.

Accordingly, GMS now offers the Responsible Recycling Initiative as a voluntary option for shipowners who want to recycle their ships using the technical standards of the Hong Kong Convention before its entry into force. A key to the Initiative is that it encourages individual recyclers to implement improvements, and to market their recycling yards through these improvements.

The elements of the GMS Initiative can also be used to ensure that the interface between Shipowner & Cash Buyer and Cash Buyer & Recycling Yard is in line with the implementation of the European Regulation.

THE SHIPOWNER & THE CASH BUYER (1/3)

Though the Memorandum of Agreement that is signed with the owner, GMS will undertake to sell the vessel to a ship recycling facility that satisfies those technical standards of the HKC that can be applied now.

The owner will agree to provide GMS, for onward transmission to the recycling facility, an Inventory of Hazardous Materials that is developed taking into account IMO’s Inventory Guidelines.

Alternatively, the owner may request GMS to arrange the preparation of the Inventory of Hazardous Materials.

In either case, the Inventory of Hazardous Materials, together with finished drawings and final specifications of the ship, need to be made available to the recycling facility for the preparation of the ship-specific Ship Recycling Plan.

THE SHIPOWNER & THE CASH BUYER (2/3)

Through the MoA, the owner will retain the right to request information and/or documentation relating to the progress of the vessel’s recycling, including receipt of the Ship Recycling Plan (normally before delivery). Also, the owner will retain the right to inspect the recycling facility at any time during the recycling process in order to monitor that recycling is performed in accordance with the standards of the HKC.

Also, through the MoA, and in line with regulation 25 of the HKC, GMS will warrant that, on completion of recycling, it will provide a detailed Completion Report on the recycling process, including photographs, documents and certificates giving evidence that the vessel’s recycling has been executed in accordance with the applicable requirements of the Hong Kong Convention. This Completion Report will include a section on any incidents and accidents damaging human health and/or the environment.

THE SHIPOWNER & THE CASH BUYER (3/3)

Furthermore, if the owner requires it and specifies it in the MoA, GMS will provide a weekly report, indicating, primarily through photographic material, the status and progress of the vessel’s recycling.