Legal history was made on December 1 2011 when a Maltese civil court under Justice Mark Chetcuti granted an application in Danske Bank A/S v the MV Thor Spirit requesting the court to approve a private sale.

Until 2006 Maltese law provided vessel mortgagees with a number of remedies when faced with a defaulting owner. Maltese law has always offered mortgagees security and strength in difficult situations, allowing the popularity of the Maltese flag to continue to rise. It takes more than financial incentives to develop a registry - it particularly relies on the security that the chosen flag guarantees financiers if things turn sour.

Under Maltese law, in the event of a default by a mortgagor of any term or condition of a vessel's registered mortgage, the mortgagee can take possession of the vessel and sell it privately. In addition, a mortgage is an executive title, which means that the mortgagee can proceed directly with enforcement without the need to commence any form of action. Therefore, a mortgagee can apply directly to the Maltese courts for the judicial sale of the vessel.

Although these two remedies - private sale and an application for judicial sale - have advantages, they also have a number of disadvantages. While a private sale allows a mortgagee to negotiate the sale of the vessel with a private buyer at the right price, the vessel is not sold free and unencumbered; this in itself may dissuade potential buyers. In a judicial sale, on the other hand, the vessel is sold free and unencumbered (which attracts buyers), but the prices fetched at judicial sales by auction are frequently well below market value, especially as there can be no minimum reserve price.

In 2006 an important amendment to Malta's Code of Organisation and Civil Procedure was enacted. The amendment saw the introduction into Maltese law of the court-approved private sale. This is intended to address the disadvantages of private sales and judicial sales by auction.

Court-approved sales are conducted as follows:

  • A mortgagee finds a private buyer of a vessel at an agreed price, which should be equal to, or greater than, two previously obtained valuations of the vessel.
  • The mortgagee files an application in court, exhibiting copies of the memorandum of agreement and the valuations obtained, and requesting the court to approve the private sale and to appoint a person who can transfer the vessel by means of a bill of sale to the new buyer for the agreed price. This sale is effected free and unencumbered.
  • The mortgagee can therefore negotiate the best price for the sale of the vessel (thus resolving the difficulty created by a judicial sale by auction), which is effected free and unencumbered (thereby resolving the difficulty of a private sale).

Notwithstanding that this remedy has been on the statute book since 2006, it was tested for the first time in this case. The procedure was extremely efficient; the time taken from the date of the application for court approval of the private sale to the date of the order was approximately two weeks. Now that the procedure has been carried out successfully, it is likely that such procedures will be seen frequently in the coming months.

For further information on this topic please contact Ann Fenech at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email ([email protected]).