Shipping |  Jan 04, 2011

The Enforcement of Malta-registered Mortgages, ‘In Rem’ Actions Against Vessels Sailing in Maltese Waters, and the Recognition of Foreign-Registered Mortgages – Part 1

One of the major attractions of the Maltese flag to financing banks is the ease and efficiency with which mortgages are registered over Malta-flagged vessels and the relative simplicity with which mortgage security rights can be enforced in terms of Maltese law. In this paper we shall be mainly considering (i) the procedures required for a mortgagee to enforce a registered mortgage over a Malta-flagged ship and (ii) the arresting of a vessel by a mortgagee in security of its maritime claims, giving rise to the ‘in rem’ jurisdiction of the Maltese courts.

Rights of Mortgages

Maltese law provides a high degree of protection to mortgagees . In the event of any default on the part of the mortgagor of its obligations as set out in the mortgage deed, the mortgagee may simply serve written notice on the mortgagor, take possession of the ship in respect of which the mortgagee has a registered interest and proceed with any one of the following courses of action:

  1. the private sale of the ship or any share/s therein; or
  2. file an application with the Civil Courts in Malta for the judicial sale of the vessel; or
  3. file an application with the Civil Courts in Malta for a court approved sale.

The three options available to a mortgagee seeking to enforce its rights shall be examined below.

Apart from the mortgagee’s rights to take possession and sell the vessel secured by the mortgage when the debtor is in default, the mortgagee is also empowered to maintain the status and validity of the registration of the ship, thereby safeguarding its ability to operate the ship commercially pending the sale procedure.

A mortgage may secure debts arising from any account current or overdraft or other credit facilities. Of particular interest is the fact that the procedure for the recovery of such debts is significantly expedited since validly registered mortgages are conferred the status of “executive titles” according to Maltese law, meaning that there is no need for any court judgment in order for the mortgagee to enforce its claim. The mortgagee’s security rights become immediately enforceable against the mortgagor without the requirement of resorting to lengthy and potentially costly court procedures. The mortgagee can summarily proceed with the private sale of the vessel, with an application filed in the Maltese courts requesting the judicial sale of the vessel or with an application to the Maltese courts for a court-approved sale.

Private Sales vs. Judicial Sales By Auction

As mentioned above in the event of any default on the part of the mortgagor, the mortgagee will have the absolute power to sell the vessel privately. However if there is more than one registered mortgage over the vessel, the mortgagee is only permitted to sell the vessel privately with the consent of prior ranking mortgagees. Once such consent is obtained the vessel may be sold privately. There is however one caveat that applies here- the purchaser of the vessel does not acquire the vessel as free and unencumbered and every registered mortgage will remain attached to the vessel until each one is discharged in full.

Where there is more than one mortgagee registered over a particular ship, the mortgagee may opt to enforce its security rights by virtue of a judicial sale by auction of the vessel, rather than have to obtain the consent of the other mortgagees for a private sale. This may indeed be a preferred avenue to a private sale explored by the mortgagee since under Maltese Law, the surplus from the proceeds of the judicial sale of the vessel, after discharging the mortgaged debt, is required to be deposited under the authority of the Maltese courts for the benefit of other subsequent mortgagees, preferred creditors, general creditors and the mortgagor, in that order. Such deposit has the effect of releasing the vessel from the unsatisfied mortgages, giving the purchaser a free and unencumbered title to the vessel. All unsatisfied claims against the vessel may only be enforced against the residual proceeds from the judicial sale, if any.

It is worth noting in this regard that whilst a judicial sale by auction of a vessel ensures that the vessel is being sold to the purchaser free and unencumbered – which assurance cannot be given to a buyer in a private sale of a vessel over which more than one mortgage is registered – one disadvantage typical of judicial sales by auction is that the price obtained for the sale of the vessel is relatively low compared to the price which would be obtained in the case of a private sale.

Where pursuant to a judicial sale of a vessel, the purchaser is not a person who is qualified to own a Maltese vessel, the Registrar of Shipping shall, upon receiving copies of the proceedings of the sale, make an entry of such sale in the register of the vessel and the register shall be considered as closed except in so far as it relates to any unsatisfied mortgages entered in the register. In the context of a private sale by a mortgagee, the Registrar of Shipping applies the same procedure for the closure of the registry upon production of the prescribed bill of sale form.

Court Approved Sales vs. Private Sales & Judicial Sales by Auction

A notable amendment to the Maltese Code of Organisation and Civil Procedure – Chapter 12 of the Laws of Malta (“COCP”), was introduced by Act XV of 2008, with “Court Approved Sales” being introduced to Maltese law. This procedure provides the mortgagee with an alternative to private sales and judicial sales by auction mentioned above. Under the new provisions of the COCP, any creditor with an executive title (which would therefore include a mortgagee, as already observed above), can file an application in court requesting it to approve the private sale of a vessel in favour of an identified buyer and in consideration of a determined price.

Should a mortgagee opt to pursue this route, he would be required to file together with the application, two separate valuations prepared by two independent valuers confirming the value of the vessel. Moreover, the mortgagee must also prove to the court that the private sale is in the interest of all the creditors and that the price offered by the buyer is reasonable in the circumstances, meaning that the price must be at least equal to or in excess of the two valuations obtained. In order to expedite the procedure, the application is appointed for hearing within 10 days of its filing. If the court approves the private sale, in its decree it shall nominate a person who will be entitled to transfer the vessel in accordance with terms and conditions approved by the court, as if he were the registered owner of the vessel and the nominated person shall deposit the price in court within 7 days for the date of completion of the sale.

This recent legal development which may be availed of by both the mortgagee and the mortgagor is more advantageous than a judicial sale by auction since the procedure for a court approved private sale is more expeditious than a judicial sale and a more adequate price for the vessel should be obtained. Moreover, whilst in the case of a private sale of the vessel over which more than one mortgage is registered and which is pursuant to the consent of every prior mortgagee, the purchaser’s title would not be free and unencumbered, on the other hand a court approved sale grants the purchaser a title which is free and unencumbered and after the sale all claims against the vessel may be enforced only against the proceeds of the sale and this alone acts as a direct incentive to third party buyers making it less cumbersome for the mortgagee to discharge the debt due by the mortgagor.

The Enforcement of Malta-registered Mortgages, ‘In Rem’ Actions Against Vessels Sailing in Maltese Waters, and the Recognition of Foreign-Registered Mortgages – Part 2

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