The Transport
Finance Law
Review
EditorHarry Theochari

Law Business Research

The Transport Finance Law Review

The Transport Finance Law Review
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Transport Finance Law Review - Edition 1(published in May 2015 – editor Harry Theochari).
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The Transport
Finance Law
Review
EditorHarry Theochari

Law Business Research Ltd

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The publisher acknowledges and thanks the following law firms for their learned
assistance throughout the preparation of this book:

CREEL, GARCÍA-CUÉLLAR, AIZA Y ENRIQUEZ SC
DE LUCA, DERENUSSON, SCHUTTOFF E AZEVEDO ADVOGADOSGORRISSEN FEDERSPIELINAL LAW OFFICEJURINFLOT INTERNATIONAL LAW OFFICE
LS LEXJUS SINACTA
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ARNTSEN & MARTÍNEZ DE HOZ)
SETTERWALLS ADVOKATBYRÅ AB
YOSHIDA & PARTNERSiCONTENTS

Editor’s Preface����������������������������������������������������������������������������������������������������v
Harry Theochari

Chapter 1

ARGENTINA�����������������������������������������������������������������������������1
Pablo Rueda and Guido Mariano Vázquez Vega

Chapter 2

BRAZIL������������������������������������������������������������������������������������11
Ana Luisa Castro Cunha Derenusson, Roberta Fagundes
Leal Andreoli and Willi Sebastian Künzli

Chapter 3

DENMARK������������������������������������������������������������������������������20
Morten L Jakobsen and Jens V Mathiasen

Chapter 4

INDIA��������������������������������������������������������������������������������������29
Shardul J Thacker

Chapter 5

ITALY���������������������������������������������������������������������������������������39
Anna Masutti, Claudio Perrella and Irene Otero Fernández

Chapter 6

JAPAN��������������������������������������������������������������������������������������52
Norio Nakamura and Taichi Hironaka

Chapter 7

MEXICO����������������������������������������������������������������������������������62
Pedro Velasco, Leonel Pereznieto and Christian Dorantes

Chapter 8

RUSSIA�������������������������������������������������������������������������������������72
Alexander Mednikov

Chapter 9

SWEDEN���������������������������������������������������������������������������������78
Maria Chambers, Jörgen Almelöv and Niclas Martinssoniii

Contents

Chapter 10

TURKEY����������������������������������������������������������������������������������86Şeyma İnal and Pınar Kara

Chapter 11

UNITED KINGDOM�������������������������������������������������������������99
Kenneth Gray, Richard Howley and Tom Johnson

Chapter 12

UNITED STATES�����������������������������������������������������������������111
Brad L Berman

Appendix 1

ABOUT THE AUTHORS�����������������������������������������������������119

Appendix 2

CONTRIBUTING LAW FIRMS’ CONTACT DETAILS���� 127

iv

EDITOR’S PREFACE

This inaugural edition of The Transport Finance Law Review is intended to provide theindustry with a guide to transport finance today, in each of the key jurisdictions globallyin which aircraft, rolling stock and ships are financed.
Traditional asset finance, in the form of bank debt, has long been the mainstayof the transport sector. It is apparent, however, that debt finance alone is no longer
sufficient to meet the needs of the global aviation, rail and shipping sectors. As a result,
the transport finance sector is undergoing a revolution, requiring its legal advisers to
respond by providing clients with a far broader set of legal skills and market knowledge.
The global financial crisis has had far-reaching consequences for the transport
sector, not limited to the immediate impact of a worldwide economic downturn. Following
the crisis, new regulation intended to prevent future crises has been introduced, notably
Basel III, which is designed to strengthen banks’ balance sheets by requiring them to holdadditional capital against their loan books. The impact on an industry as capital-intensive
as the transport sector is that long-term lending is now less attractive. This has led certain
banks to exit the asset finance market altogether, with a number of banks taking the decision
to sell all or part of their loan books to help them meet the new capital requirements.
The result of this is that asset finance in its traditional form is now available from
relatively few banks, who in turn are prepared to lend to relatively few names. Despite this,the majority of capital available to the transport sector continues to take the form of bankdebt. Tenors are shorter, however, and borrowing is more expensive. For an industry that
requires billions of dollars to fund itself annually, a shortfall in funding is inevitable.
In response to the financial crisis, many companies operating in the transport
sector reduced their debt, in preparation for more difficult trading conditions. Now,
however, the transport sector faces an upsurge in demand as passenger numbers andfreight volumes rise, particularly in fast-growing economies such as China. This is coupledwith the introduction of increasingly sophisticated and more costly technology, including
fuel-efficient jets, high-speed rail and high-specification liquified natural gas carriers.
As a result, new participants see significant opportunities in the transport sector
and are entering the market using innovative new structures.

v

Editor’s Preface
Capital markets and private equity structures now account for a substantial
proportion of the transport finance market. In the shipping industry, which continues
to feel the effects of the most severe and prolonged recession ever seen in the maritime
sector, well-known private equity players are investing their own cash, confident that thecyclical nature of shipping will result in attractive returns in the medium to long term.
In the aviation industry the popularity of operating leases is growing, and the players
entering this market are frequently supported by private equity players drawn by theever-increasing demand for air travel. In the case of rail, privatisation remains a major
theme in numerous markets and new investors are being attracted to the industry by thecommitments made by governments worldwide to improve existing infrastructure andinvest in new, sophisticated rail links.
The aviation, rail and shipping industries each have their own unique characteristics
and need lawyers with a deep understanding of how each of these complex industries
operates. A detailed knowledge of the principles of asset finance is now also required,combined with the ability to advise on new capital markets and corporate structures.
In addition, while the majority of asset financings in the transport sector tend to be
governed by New York or English law, an understanding of the principles of local law inthe key jurisdictions in which transport assets are registered is also of great importance.
We have sought contributions from jurisdictions that play a leading role in thefinancing of transport assets. Each chapter provides an overview of the transport financeindustry in these jurisdictions, with an analysis of how key lenders have changed overthe past five years and how the financing of assets has developed as a result. Contributors
have provided an overview of the legislative framework for transport finance and financial
regulation affecting lenders to the transport sector. Authors have also been asked toreview any significant innovations and notable recent and pending financings and cases,
and to provide assessments of how the transport sector is likely to continue to develop
in their markets.
I would like to thank the contributors to this first volume. Their efforts are deeply
appreciated and represent a substantial contribution to the transport law library during
a period of transformation for the sector.
Each contribution reflects the significance of the transport sector today, and theneed for readily available funding for industries that underpin the global economy bytransporting people and commodities around the world every day.
While we are now beginning to see new banks entering the asset finance market,
traditional asset finance is likely to remain in short supply in the coming years, andinnovation will remain at the centre of our industry. The days of one asset financed by
one bank have passed and, in response, lawyers have had to become increasingly nimble
as clients require advice on developing intricate joint-venture agreements and complex
capital markets products. It is an incredibly exciting time to be a lawyer in this field, as
our contributors demonstrate in the following chapters.
Harry Theochari
Norton Rose FulbrightLondonMay 2015

vi

Chapter 6

JAPAN
Norio Nakamura and Taichi Hironaka 1

I

INTRODUCTIONi

The transport finance industry

Aviation is one of the few growing fields for financiers given the recent opening up of
the market to low-cost carriers. The demand for air transportation is expanding, withan expected annual growth rate of around 5 per cent.2 Japanese financiers (includingbanks, leasing companies and trading companies) have ambitiously started to participatein aviation finance or investment focusing on the profits brought by the aeroplanes
themselves rather than the credit capabilities of the airlines. For example, in Japan, theDevelopment Bank of Japan (DBJ), a government financial institution, set up a teamdealing specifically with aircraft finance in 2011, and arranged syndicated loans in 2013
with BNP Paribas Tokyo involving 14 financiers, including five regional banks.3 In termsof tax reduction, investment in a scheme of silent partnership or voluntary partnership is
also attractive to general investors.
There has been fierce competition in the shipbuilding field in south-east Asia,
especially in Japan, China and Korea,4 there being many ship types,5 sizes6 and numbers,
a situation quite different to that of aircraft, where the majority are manufactured byBoeing and Airbus. Since the financial crisis triggered by the bankruptcy of Lehman
Brothers, order numbers for new vessels have improved following the inflow of surplus

1
2
3
4
5
6

Norio Nakamura is a partner and Taichi Hironaka is an associate at Yoshida & Partners.
Kazuki Sugiura, Kinyu Houmu Jijo, 10 October 2013, pp. 25–26.
Miyazaki, Oita, Miyazaki-Taiyo, Kagoshima and Higo; DBJ news, 30 June 2014).
For example, CSSC, Daewoo, Hyundai, Imabari, Samsung and SCIC.
For example, bulk carriers, container ships, oil tankers, chemical tankers or reefer ships.
For example, Handysize, Panamax or Capesize.

52

Japanfunds to combat the strength of the Japanese yen, and the increase in demand forliquefied natural gas (LNG) carriers.
In the rail business, the Ministry of Land, Infrastructure, Transport and Tourism(MLIT) is planning in 2015 to set up joint venture companies (special purpose vehicles,
or SPVs) for the lease of new types of vehicle to local governments, with the SPVs
being invested in by local governments, the Japan Railway Construction, Transport
and Technology Agency (JRTT),7 and a variety of other financial resources. It is also
investigating another scheme in which the JRTT directly finances local transport businesswithout the need for an SPV.8
In the general area of transport finance, financial institutions have had tobe careful in examining finance upon requirement of the Basel Capital Accords.
Liquidation of credit receivable, such as securitisation of aviation finance or loan
participation in ship finance, has gradually increased. Basel III, which deals withliquidity coverage ratios and net stable funding ratios (NSFRs), may also have a certain
influence on the field of transport finance.
ii

Recent changes

Aviation
As a result of amendments to the tax regime in fiscal year 2005, any benefits gained
from leveraged leases in aviation were removed and the operating lease has become themost frequently used structure for aviation finance; one version of this entails a silent
partnership scheme and the other is the direct ownership scheme. The JOLCO 9 is now
the most used vehicle in Japan, in which the total amount of the lease charge is set atless than the purchase price of the aircraft and the lessor bears the risk of shortfall in
the residual value at the maturity date, but may benefit from depreciation under the tax
laws.10 As yet, no services have been arranged through the Enhanced Equipment Trust
Certificate by Japanese finance institutions.
In recent times, financiers and trading companies have started to enter the leasing
business for aircraft engines looking for higher rates of earning, setting up joint ventures11
as well as financing aircraft.

7
8
9
10
11

An independent Japanese administrative institution.
Nikkei News, 21 September 2014.
Japanese operating lease with call option.
Hidehiko Suzuki and Keisuke Imon, ‘Theory and Practice of Aviation Finance’, Kinyu Houmu
Jijo, No.1994-1996.
For example, Mitsui & Co participated in GE9X engine development with Willis Lease
Finance in 2011; Sumitomo Corporation set up a joint venture with MTU Aero Engines in
2013; Mitsubishi UFJ Lease & Finance purchased all the shares of Engine Lease Finance in
2014; and NTT Finance collaborated with the DBJ in 2015.

53

JapanShipping
The financial condition of domestic shipowners has improved in recent trading resulting
from the weakness of the Japanese yen against foreign currencies, and so the attention offinanciers has focused on ships as objects of money supply.
Under Annex VI of MARPOL, vessels operating in emission control areas may
only burn bunker oil with a maximum 0.1 per cent sulphur content from 1 January 2015,
and so demand for LNG as a fuel is being seen in these waters. The Japanese governmentand shipping industry are trying to put LNG-fuelled vessels into practical use, which
will also lead to more demand for LNG tankers and LNG-bunkering vessels. In 2014
Nippon Yusen Kaisha placed an order with Hanjin Heavy Industries and Construction
for the world’s first LNG-bunkering vessel. It is likely that finance for LNG vessels or
projects will become progressively more attractive.
II

LEGISLATIVE FRAMEWORKi

Domestic and international law and regulation

Aviation
Aviation law broadly covers the relevant issues on safety of aircraft and air navigation andalso proper and rational management of the transport business by air.12
Ownership of aircraft can be perfected upon registration in Japan,13 but aircraft
owned by (1) non-Japanese nationals, (2) foreign governments or authorities, (3) legal
entities incorporated under foreign law or (4) corporations of which the representative
director or more than one-third of the executive officers are those who stipulated in(1) to (3) above, and those under a foreign state flags, may not be registered.14 A party
that intends to participate in the air transportation business must also have permission
by the MLIT.15
The 2006 Cape Town Convention on International Interests in Mobile
Equipment has not been ratified in respect of mortgages or liens on aircraft, so thedomestic Aviation Mortgage Law is applicable.
Shipping
There are statutory requirements for owners of Japanese-flagged vessels, which limits
ownership to (1) the Japanese government or public authorities, (2) Japanese nationalsor (3) legal entities incorporated under Japanese law of which the representative director
and two-thirds of the executive officers must be Japanese nationals. There are, however,no particular regulations applicable to owners of foreign-flagged vessels, who are always
subject to the law governing the registration of the vessels.

12
13
14
15

Section 4 of the Aviation Act.
Section 3-3 of the Aviation Act.
Section 4 of the Aviation Act.
Section 100 of the Railway Business Act.

54

JapanRegistration of ownership or mortgages on Japanese vessels takes place according
to the Ship Act,16 the Ship Registration Rules or the relevant regulations. In terms ofmaritime liens and ship mortgages, which concern financiers, Japan has ratified neither
the International Convention for the Unification of Certain Rules relating to Maritime
Liens and Mortgages in 1967 nor the International Convention on Maritime Liens andMortgages in 1993. Enforcement of liens and mortgages on ships is dealt with under the
Civil or the Commercial Codes. Chapter 3 of Commercial Code (maritime law) broadly
covers commercial transactions or issues concerning shipping, maritime and admiralty.
Railway
According to the Railway Business Act,17 parties who enter into railway business musthave permission from the Minister of Land, Infrastructure, Transport and Tourism.
Before 1999, railway business was licensed by the government taking into consideration
supply and demand, but competition was subsequently introduced into the field.
The Railway Mortgage Act makes provision for mortgages secured on complete
railway facilities, incorporated as ‘foundations’.
ii

Specific practices

Aviation
Aircraft to be operated by domestic airlines are in fact limited to those registered in Japan
who have perfected ownership, but to register aircraft in Japan, owners are required to be
Japanese nationals or corporation (see Section II.i, supra), and reservation of ownershipto foreign financiers or their affiliates (SPVs), regardless of whether incorporated inJapan, is not possible. In such a situation, the aircraft may be sold to the affiliate of aJapanese company and then sold back to the affiliate of the foreign financiers holding
ownership at the Japanese affiliate.
Shipping
Japanese maritime law was originally intended to cover Japanese-flagged vessels owned
by Japanese owners, and there have been many disputes on the issues of whether
mortgages on foreign-flagged vessels are recognised, or whether liens on foreign vessels
are created for credit or claims brought under contract governed by foreign law. Thisis a matter of international conflict law as no clear answer has yet been supported by
Japanese statute law.

16
17

Senpaku Hou (in Japanese), which regulates qualification, registration and national
certification for Japanese vessels.
Section 3 of the Railway Business Act.

55

JapanRailway
In Japan, in the established system, the JRTT gives direct finance to each railway
operator upon obtaining funds from a variety of financial resources.18 Railway operators
will obviously prefer to undertake railway construction or provide service in a stable
investment environment so that the balance of the account is exceeded in the long term.
Railway facilities are leased or assigned to railway operators by the JRTT, which retains
ownership. Finance for train construction is usually obtained by debt finance, vehicle
trust, lease or leveraged lease.
III

FINANCIAL REGULATIONi

Regulatory capital and liquidity

According to the Banking Act, the prime minister may set the levels for the capital
adequacy of financial institutions; under this Act, the minimum capital adequacy ratios
were set at 8 per cent for financial institutions subject to international standards and at 4
per cent for financial institution subject to domestic standards by the Notification of the
Financial Services Agency of 27 March 2006, in accordance with Basel I and II.
The Financial Services Agency published the revised notification following BaselIII (1) of the international standards for financial institutions on 30 March 2012, effectivefrom 31 March 2013, and (2) of the domestic standards for financial institutions on 8
March 2013, effective from 31 March 2014.
The liquidity coverage ratio (LCR) under Basel III was implemented on 31 March
2015 with a required level of at least 60 per cent; it will be fully phased in by 1 January
2019, by which time the required level will reach 100 per cent. The NSFR, which requires
financial institutions’ medium to long-term funding to be covered by their medium tolong-term financial resources, will be introduced on 1 January 2018. Financial institutions
are required to increase the stock volume of high-quality liquid assets to improve their LCRs
and should pay attention to any low returns on assets or the increasing cost of liability.19
In the meantime, the Deposit Insurance Act, which secures funds of depositors in
the event of a bank’s failure under the management of the Deposit Insurance Corporation,
was revised on 12 June 2013.
ii

Supervisory regime

Under Article 27 of the Foreign Exchange and Foreign Trade Act, foreign investors are
required to notify the Minister of Finance and the competent minister in advance should

18

19

The JRTT obtains certain funds from commercial banks, such as by way of syndicatedloan schemes. According to recent information from JRTT, it obtained finance by way of
syndicated loan, for example, in February 2015, ¥28.5 billion for one year arranged by Mituis
Sumitomo Bank and, in March 2015, ¥27 billion for four years arranged by Aozora Bank.
For Basel III, Yasuhiro Nakayama ‘Response to Basel III Liquidity Control’, Mizuho
Information and Research Institute Report in March 2013; Yoji Hamada ‘Risk Management
affected by Basel III Liquidity Control’, Kinzai Institute for Financial Affairs Inc, 2014.

56

Japanthey make inward direct investment to such business so that (1) national security isimpaired, public order is disturbed or public safety is compromised, or (2) significant
adverse effects are obvious on the management of the Japanese economy. The railway
transportation business is also a matter of significant public interest and as so would
follow the above regulation.
IV

SECURITY AND ENFORCEMENTi

Financing of contracts

Ships
In most cases newly built ocean-going vessels are registered in Panama or other tax-havencountries and owned by SPVs established in these countries. The finance schemes forsuch vessels depend on the laws of the countries in which they are to be registered, as theenforceability and effect of the security might be governed by such laws. There are two
major schemes that are used to finance these vessels: loan schemes and lease schemes.
Under a loan scheme, the vessel is owned by an SPV established and controlled by the
shipowner, and the following agreements are prepared:athe loan agreement between the financier and the SPV (guaranteed by the
shipowner);ba mortgage agreement;ca charter hire assignment; anddan insurance assignment.
Under a lease scheme, the vessel is owned by an SPV established and controlled by thefinancier, and the following agreements are prepared:aa bareboat charterparty between the SPV and the shipowner (or its subsidiary);b
a charter hire assignment from the shipowner (or its subsidiary) to the SPV; andcan insurance assignment.
New domestic vessels should be registered in Japan because foreign vessels are prohibitedfrom engaging in domestic transportation under Japanese law.20 They may be financed
by loan schemes, each of which needs a loan agreement and a mortgage agreement.
For the new building of domestic cargo vessels and passenger vessels, another option
is to apply to the Joint Ownership Shipbuilding Scheme, a low interest-rate financescheme offered by the JRTT. Under the project, the JRTT pays up to 70 or 80 per
cent of the building costs with corresponding co-ownership on the vessel and thenreceives repayment (as a lease payment towards the co-ownership of the JRTT) fromthe shipowner. When paid off, the shipowner owns 100 per cent of the vessel. This
project needs the following agreements:aa shipbuilding contract; andba co-ownership and lease agreement between the JRTT and the shipowner.

20

Section 3 of the Ship Act.

57

JapanRolling stock
Railway construction is characterised as public infrastructure development, even if it isoperated by a private railway company. Railways are constructed by the JRTT and soldto each railway company on an instalment basis, and there is a railway mortgage system
in place to secure such loans. Under this system, the railway, rolling stock and any otherfacilities necessary for railway operations are treated as a monolithic property known asa ‘railway foundation’ to prevent railway facilities being sold off in pieces by public sale.
In most cases rolling stock is self-financed, but is sometimes bought using a lease
scheme; for example, the new Keisei Skyliners – the airport express trains between Narita
International Airport and northern Tokyo – were financed by a lease scheme.21
Aircraft
Loan schemes and lease schemes are available to finance aircraft. Under a loan scheme,
the airline owns the aircraft, and the financiers hold the mortgage on the craft; this typeof scheme needs a loan agreement and a mortgage agreement. Under a lease scheme, thefinanciers set up an SPV, and the SPV owns the aircraft and leases it to the airlines inaccordance with a lease agreement between the SPV and the airline.
Since aircraft operated by Japanese airlines should be registered in Japan,22 a special
arrangement is necessary when such aircraft is financed by foreign financiers under a lease
scheme – this is called a ‘sale and conditional sale structure’. In this scheme, the foreign
financier sets up an SPV in a foreign country (‘the foreign SPV’) and a Japanese partner
sets up another SPV in Japan (‘the domestic SPV’). The foreign SPV buys the aircraft fromthe manufacturer and sells it to the domestic SPV, buys it back without the ownership of
the aircraft, and then the foreign SPV leases it to the Japanese airline. The foreign SPV
holds the mortgage on the aircraft and a pledge on the shares of the domestic SPV.23 This
scheme needs a lease agreement, an aircraft sales agreement, a conditional sales agreement,a participation agreement, a mortgage agreement and a share pledge agreement.
ii

Enforcement

Ships
Ship mortgages may be registered in Japan but may not be enforced against third parties
unless they are registered under Japanese law. Maritime liens on vessels arise with respect
to claims for pilotage, towage, bunker expenses, crew wages and salvage,24 and also claims
in connection with marine casualties such as collisions or oil pollution,25 and these havepriority over the ship mortgage.26 Under the Bankruptcy Act, loan claims under a ship’s
mortgage are treated as a right of separate satisfaction, and claimants may enforce their

21
22
23
24
25
26

See Nissay Leasing Co Ltd, www.nissay-lease.co.jp/service/index.html.
Section 5 of the Civil Aeronautics Act.
Hidehiko Suzuki and Keisuke Imon, ‘Theory and Practice of Aircraft Finance (v2)’, 1995,
Kinyu Houmu Jijo, 64, 65–6 (2014).
Section 842 of the Commercial Code.
Section 95 of the Act on Limitation of Liability of Shipowners.
Section 849 of the Commercial Code.

58

Japanrights during bankruptcy proceedings. Under the Corporate Reorganisation Act, they
are treated as secured reorganisation claims. Claimants may not enforce their rights
outside proceedings, and will be paid in accordance with the reorganisation plan, in suchamount reflecting their priority and claim.
A finance lease (full-payout lease) claim is also treated as a secured reorganisation
claim in corporate reorganisation proceedings since it is similar to a loan agreement;
thus, the financier will be paid in accordance with the reorganisation plan in the same
way as the mortgagee. The operating lease is treated as a pending contract and the trustee
has the option of continuing or terminating the lease, but the lessor may not terminate
the lease even should there be a clause giving the lessor such right in the event of thelessee’s application for such proceedings. Such clause is considered invalid in the context
of corporate reorganisation proceedings as it undermines the purpose of the Act.27
Rolling stock
The Railway Mortgage Act provides the railway mortgage system. Under this system
railway mortgages should be placed on the railway foundation, which is the collateral
railway facility, and may be registered.28 In bankruptcy proceedings and corporate
reorganisation proceedings, a railway foundation is treated as a single mortgaged item.
A lease on rolling stock is treated in the same way as that of a ship in corporate
reorganisation proceedings.
Aircraft
The Aircraft Mortgage Act and Civil Execution Act and Rules 29 provide the aircraft
mortgage system. Under this system, aircraft mortgages may not be asserted against third
parties unless they are registered.30 Formal mortgage registration is not, however, usuallyapplied due to the high charges incurred in the process, so only provisional registration isused. Provisional registration reserves the priority order as a security right of the mortgage
subject to the condition that the provisional registration is transformed into a formal one.
A lease on aircraft is treated in the same way as a ship in corporate reorganisation
proceedings.
iii

Arrest and judicial sale

Ships
Even if a vessel and mortgage are registered in a foreign country, the mortgagee may
apply for arrest and judicial sale of the vessel by submitting documentation proving theexistence of the mortgage on the vessel31 to the court, as long as it is in Japan. Usually,
the mortgagee will obtain a court order to obtain the certificate of the vessel’s nationality

27
28
29
30
31

If such termination were allowed, almost all pending contracts would be terminated, andpurported corporate reorganisations would probably fail.
Section 2 of the Railway Mortgage Act.
Section 84 of the Civil Execution Act.
Section 5 of the Aircraft Mortgage Act.
It is usually a certificate of registered matters.

59

Japanand any other documents necessary for its sailing before its arrival at a Japanese port;
upon arrival an enforcement officer then confiscates the foregoing documents from thevessel so that it cannot sail from the port.32 Within five days of the documents being
apprehended, the mortgagee must formally apply for commencement of the judicial
sale of the vessel to the court that has jurisdiction where the vessel arrested.33 The court
may decide to commence the judicial sale proceeding and appoint a trustee to manage
the vessel until completion of such sale.34 By this stage, the mortgagee will have had to
pay anticipated costs and expenses for the proceedings in advance, an amount that will
be returned out of the proceeds of the sale. For example, a mortgagee paid about ¥13
million in a case of judicial sale under a ship mortgage before the Hakodate District
Court.35 It usually takes about six months from the commencement of the judicial saleto distribution of dividends.
In such proceedings, other security holders such as other mortgagees andmaritime lien holders may also demand distributions from the proceeds of the judicial
sale. In a same way, in a judicial sale concerning a maritime lien, mortgagees may
also demand distribution. Under Japanese law, a variety of claims may be secured bymaritime liens, and all maritime liens have priority over the mortgages;36 thus, theexistence of maritime liens and the priority order between mortgages and maritime
liens are often disputed.
With respect to the governing law in terms of maritime liens, there are conflicting
precedents:aApplying only Japanese law as the forum law.37
b
Applying both the flag law and the governing law of the claim to be secured by themaritime lien.38 The maritime lien would be admitted only if it exists both under
the flag law and the governing law for the claim.
cApplying both the law of the vessel’s place when the maritime lien arises and thegoverning law for the claim.39 The maritime lien will be admitted only if it exists
under both the law of the vessel’s location when the maritime lien arises and thegoverning law for the claim.

32
33
34
35
36
37
38
39

Sections 115(1), 189 of the Civil Enforcement Act.
Id., Sections 115(4), 189.
Id., Sections 116, 189.
Yasumori Takase, ‘Introduction of the judicial sale case based on the mortgage before the
Hakodate District Court, 1941’, Kinyu Houmu Jijo 116 (2012).
Sections 842, 849, 704(2), 849 of the Commercial Code; Section 95 of the Act on Limitationof Liability of Shipowners; Section 19(1) of the Carriage of Goods by Sea Act.
Tokyo District Court, Decision 15 December 1992.
Takamatsu High Court, Decision 18 July 2008.
Mito District Court, Decision 20 March 2014.

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JapanAs to the priority order, there are also conflicting precedents:aApplying only Japanese law as the forum law.40 Maritime liens have priority overship mortgages.
b
Applying only the flag law.41 The court applies Panamanian law, and admits thepriority of ship mortgages over some maritime liens.
Since Japanese law might apply to the existence of maritime liens and the priority order
between mortgages and maritime liens, Japan may not prove to be an attractive forum
for arresting vessels for the mortgagee financiers.
Rolling stock
The mortgage on a railway foundation is enforceable by auction or compulsory
administration, at the mortgagee’s choice.42 If the mortgagee selects auction proceedings,
the railway foundation will be sold to a winning bidder as a single property. In 1934,
the mortgage on the railway foundation owned by Musashino Railway Company was
enforced by way of compulsory administration.43 There have been no further reported
cases of enforcement of railway mortgages since then.
Aircraft
Section 84 of the Civil Execution Act provides mutatis mutandis for application of theprovisions for ship arrest proceedings to aircraft arrest proceedings. Therefore, aircraft
arrest proceedings are very similar to ship arrest proceedings.
V

CURRENT DEVELOPMENTS

In Japan, an amendment to the Commercial Code has been discussed in the Legislative
Council of the Ministry of Justice, and a tentative proposal issued. At the time of writing,public comments are being heard (until 22 May 2015). It proposed that ship mortgages
take priority over some maritime liens, such as tort claims for property damages(including damages resulting from a collision) or claims arising from the necessity ofcontinuing a voyage (e.g., bunker payment claims). Although this proposal would beof benefit to mortgagee financiers, it is uncertain whether it will ultimately be adopted.

40
41
42
43

Takase, ‘Introduction of the judicial sale case based on the mortgage before the Hakodate
District Court’, 120.
Hiroshima High Court, Decision 9 March 1987.
Section 40 of the Railway Mortgage Act.
Takatoshi Tamekuni and Yoshio Hanzawa, ‘A Historical Study on Relationship between theManagement of the Tobu Railways and the Area along its Railway Lines before the WorldWar II,’ 16 Study on Civil Engineering History 547, 555.

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Appendix 1

ABOUT THE AUTHORSNORIO NAKAMURA
Yoshida & Partners
Since joining Yoshida & Partners in 1995, Norio Nakamura has dealt with all aspects ofmaritime law, including charterparties, ship finance, ship sale, ship building, collision,
salvage, cargo recovery or defence, marine insurance, personal injury, ship arrest,
bankruptcy and marine pollution. He was made a partner in 2002.
Mr Nakamura gained his LLB in 1986 from Keio University, and was called
to the Bar in 1992. From 2000 to 2001 he undertook practical training in the United
Kingdom and United States.
TAICHI HIRONAKA
Yoshida & Partners
Since joining Yoshida & Partners in 2002, Taichi Hironaka has handled a number ofmaritime cases, involving collision, grounding, engine-trouble, charterparty disputes,
and cargo defenses. He has also dealt with many disputes involving engineering mattersrelating to engine and hull structure, with his knowledge, understanding and keeninterest on technical issues. He is also well-versed in IP matters (especially patents andtrademarks) and architectural disputes.
Mr Hironaka graduated from Kyoto University in 2001 with a bachelor ofengineering degree, majoring in architecture. He was called to the Bar in 2002, and in
2013, received his LLM from the University of Southern California School of Law.

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About the Authors
YOSHIDA & PARTNERS
Suitengu Hokushin Bldg, 4th Floor
1-39-5 Nihonbashi-Kakigaracho
Chuo-ku
Tokyo 103-0014
Japan
Tel: +81 3 5695 4188
Fax: +81 3 5695 4187
norio@japanlaw.co.jp
hironaka@japanlaw.co.jp
www.japanlaw.co.jp/en120