Creditors in Indonesia can choose from several ways to secure their loans, including fiduciary security, mortgages over land, pledge over movable goods and hypothec over a ship. This latter option allows a creditor to secure his receivables against a vessel. Hypothec remains in place even if that ship then changes ownership.
Indonesia has now ratified the International Convention on Maritime Liens and Mortgages, which regulates prioritized maritime claims and hypothec over ships. Although hypothec over ships has long been regulated under the Indonesian commercial and civil codes, the convention will boost the practice among Indonesian fleet companies obtaining financing from domestic and international banks.
Article 314, paragraph 1, of the Indonesian commercial code states that each vessel with a gross tonnage of at least 20 cubic metres can be registered. Once registered, the ship is then legally recognised as immovable goods, which means it can be secured against a loan.
While a ship is being constructed it can be temporarily registered in the harbour master's office. After it is built and in a seaworthy condition, the ship can be registered under common regulation wherever the owner chooses.
If a creditor wishes to take encumbrance of a ship under hypothec, he must submit an application to the registration officer, who will issue the deed. The creditor must include:
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the related credit agreement;
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a document indicating the amount secured;
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a power of attorney to process the hypothec encumbrance and execute the deed on the creditor's behalf;
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a power of attorney made before a notary public entitling him to possess the ship;
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a deed of registration as proof of ownership.
The hypothec deed must be executed by the creditor (or his attorney), the registration officer and his assistant. The registration officer must also issue a gross deed of hypothec over the ship on the creditor's behalf.
A hypothec registered before another will have priority. Two hypothecs registered on the same day are considered to have equal priority.
Although creditors frequently use hypothec over a ship, it has fewer benefits than mortgages over land (known as Hak Tanggungan). This is for three reasons:
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Ships can become damaged over time without careful maintenance, which depreciates their value. This is not the case with land, where value is dependent on location.
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Ships are mobile, which makes it difficult for creditors to impound them.
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Because ships are mobile, they can potentially be registered in different places under different names. This could result in several encumbrances on one vessel, and a claim by each hypothec holder that they have priority. This situation cannot occur with property, since the title can only be registered at the land office within that area.