Italy: Article 577 Of Italian Navigation Code: Interpretation Issues Involved With The Limitation Period Of Naval Mortgages

Last Updated: 24 July 2019
Article by Emanuele Caretti
Most Read Contributor in Italy, September 2019

Interest and criticism have arisen from among legal commentators and courts in relation to article 577 of the Italian Navigation Code, due to its poor wording: "The rights arising from the grant of a mortgage shall lapse after two years have passed since maturity of the obligation". We will try to clarify the interpretation issues involved with such wording.

Before analysing that, it is worth clarifying the difference between the provisions of article 577 of the Italian Navigation Code on naval mortgages and the general rules on mortgages set out in Italian law. Indeed, according to the general discipline of the Italian Civil Code on the limitation period applying to mortgage (Articles 2847 and 2878 of the Italian Civil Code), "the registration of a mortgage shall remain effective for twenty years" and "the mortgage shall lapse if registration is not renewed within 20 years".

The difference is thus immediately apparent between the general discipline, which provides for a twenty-year period of validity of the registration, and the provisions of the Italian Navigation Code, setting out a two-years statute of limitations for the rights arising from the grant of a mortgage.

When examining the interpretation issues relating to Article 577, the rule stemming from such provision is as follows: when the obligation lapses, the two years by which the rights arising from the mortgage must be enforced – with a focus on the right of pre-emption concerning the proceeds from the sale of the ship – will begin to run. Therefore, the creditor will have to enforce such rights no later than two years of the maturity of the obligation.

The first issue to be addressed is the reason why the legislator used the wording "rights arising from the grant of a mortgage", which differs from the wording of the general discipline of the Italian Civil Code, which relates to the statute of limitations of the mortgage and not of the rights arising therefrom. The reason for such wording as well as the reason why such short period of two years is envisaged can be explained by the fact that a ship is a registered movable asset subject to rapid deterioration and impairment. Furthermore, its circulation (to be also understood in the sense of the ease of selling the ship on the market) always requires the certainty of legal relationships when a ship is to be sold.

However, the above rule entails another interpretation issue as to when the limitation period should run, i.e. when the primary obligation should be deemed to have come to maturity. Maturity shall coincide with the time when the right is enforceable.

Therefore, in shipping finance transactions as well as in other finance transactions in general, maturity of an obligation usually means the final date on which a loan is due and payable. In this regard, it is worth underlining that the loan repayment plan is referred to in the ship mortgage deed or in the deed of drawdown and receipt and then entered in the shipping registry where the ship is registered along with the deed setting out the repayment plan (i.e. the mortgage deed or the deed of drawdown and receipt). However, since any default on the part of the debtor may lead to early maturity of the loan, one may wonder whether the term "maturity" should be understood as the original and final maturity date as set out in the repayment plan and entered in the shipping registry or cover also any earlier maturity date, e.g. having regard to the due date of each instalment of the loan or the date of early termination of the loan agreement, which are not entered in the shipping registry. There are different views on this among scholars, while courts have always gone for the first option (i.e. having regard to the date of the final maturity of the obligation set out in the registry).

For instance, in a recent case 1, a shipping company, which was subsequently adjudicated in bankruptcy, (before that) entered into a debt restructuring agreement under Article 182-bis of Italian Bankruptcy Law, subsequently validated by the competent court, likewise under Article 182-bis, and registered with the registry having regard to the individual mortgages over ships. Although the restructuring agreement envisaged a final maturity date, it was subsequently terminated by the lending banks due to default of the bankrupt company, which ultimately led to its bankruptcy.

Reportedly, in the context of the bankruptcy procedure and particularly at the time of examining the list of liabilities, the receiver alleged that, after the company entering into a debt restructuring agreement pursuant to Article 182-bis, the mortgagee banks concerned terminated the restructuring agreement, with involved the enforceability of the debt and, therefore, maturity of the obligation. This led the receiver to argue that the two years running from maturity of the obligation had expired after the exercise of the rights arising from the mortgages in the context of the bankruptcy procedure.

The delegated judge thus found himself in the position of having to decide either to allow the exercise by the mortgagees of the pre-emption right arising from the mortgages (in the receiver’s opinion, the mortgage rights had expired) or to prove all claims in bankruptcy without pre-emption, with the mortgagees being treated as unsecured creditors, with consequent huge implications in terms of the distribution of the proceeds from the sale of the ships (the delegated judge's opting for the second solution would have involved the banks having the same rank as the other creditors in the distribution of the proceeds).

However, the delegated judge opted for construing the maturity of the obligation having regard to the original maturity date, that is, the date entered in the shipping registry, and not to the date of termination of the restructuring agreement.

The above decision would seem to have settled the issue but nevertheless there is still some issue with the interpretation of the wording of the Article 577, which is very vague and may therefore cause certain doubts and questions to arise.

In this respect, a further issue to be mentioned relates to any act that may cause interruption of a limitation period, which may result in the above-mentioned two-year period running from scratch. Concerning this, in the opinion of legal commentators a mere formal notice to the debtor is not sufficient, whereas it seems necessary that a deed of acknowledgement of the debtor in relation to the mortgage deed be entered into, as a Notarial or an authenticated private deed, and registered with the shipping registry.


1 Which ended with a decree that, to date, does not seem to have been published yet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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