All questions

Security and enforcement

i Shipping

The Merchant Shipping Act provides for three forms of security that may be created, by agreement or operation of law, over a vessel. A vessel may secure an obligation by means of: (1) a mortgage; (2) a general hypothec over all debtor's assets, including the vessel; or (3) a special privilege arising in terms of law.

A crucial feature of the rules on ships as security for debts is that ships constitute a particular class of movables whereby they form separate and distinct assets within the estate of their owners for the security of actions and claims to which the vessel is subject. In the event of bankruptcy of the owner of a ship, all actions and claims to which the ship may be subject shall have preference, on the said ship, over all other debts of the estate. In effect, this would mean that if, for instance, a ship owner has a number of creditors, each having various forms of security over various assets, a creditor having a mortgage over the ship would rank before all other creditors in respect of the ship, notwithstanding that the same creditor will rank after other creditors in respect of other assets.

Other than these three main forms, the Civil Code, Companies Act and other subsidiary legislation provide the framework for other forms of security commonly required by banks or other entities financing the acquisition or operation of ships, including, inter alia, assignments of rights and other receivables, pledges of shares, suretyship, together with such mechanisms as irrevocable powers of attorney, as well as security by title transfer.

The most common, and certainly one of the strongest forms of security available to lenders under Maltese law is the registered mortgage. A number of characteristics of the Maltese law mortgage make this form of security particularly attractive to lenders. Among these, the most salient are the following:

  1. a registered mortgage is not affected by bankruptcy of the mortgagor or shipowner and the mortgage shall therefore have preference on the said vessel, over all other debts, claims or interests of any other creditor of the bankrupt;
  2. a mortgage constitutes an executive title, allowing the creditor to proceed with enforcement tools without any requirement for judicial verification of the right being enforced. The creditor can therefore proceed directly to issuance of any warrants of arrest and proceed with the procedure for judicial sale by auction or private sale, including a court approved form of private sale; and
  3. the Merchant Shipping Act gives mortgagees extensive and easily enforceable rights in the event of a default of the debtor.

The procedure for registering a mortgage is straightforward. The mortgage is drawn up on the statutory form and delivered to the Ship Registrar, who will make the appropriate entry, indicating the exact time of registration, in the register kept for the purpose.

ii Aviation

Legislation governing security over aircraft largely follows that applicable in respect of ships. The Aircraft Registration Act was in fact modelled on the basis of the Merchant Shipping Act. There are, however, certain differences, resulting mainly from the implementation of the Cape Town Convention and related protocol on aircraft.

As is the case with ships, the legal framework allows for various forms of security to be granted in favour of creditors, including, among others, mortgages, privileges, hypothecs, share pledges, assignment of rights, sureties and irrevocable powers of attorney. The two main forms of security over aircraft are the registered Maltese mortgage and the international interest under Cape Town Convention.

The registered mortgage over aircraft shares many of the features applicable to mortgages over ships. The aircraft is a separate asset within the estate of the owner, and is unaffected by bankruptcy of the owner. Furthermore, it constitutes an executive title and affords the mortgagee various rights enabling expeditious enforcement.

The registration procedure is also similar to that for registration over vessels, with the mortgage being recorded on a statutory form and delivered for registration in the National Aircraft Register.

iii Financing of contractsShipping

A mortgage may also be registered over a vessel under construction. Banks and other institutions financing new buildings, however, must be aware that Maltese law favours the shipbuilder by imposing a possessory lien in the shipbuilder's favour over the vessel. This entitles the shipbuilder to retain possession of the ship until all debts due to the shipbuilder have been paid. A debt secured by a mortgage will rank after the debt secured by the statutory lien in favour of the shipbuilder. Similarly, any ship repairer or other creditor into whose care and authority a ship has been placed for the execution of works or other purposes shall also have a possessory lien over the relevant ship.

Aviation

A possessory lien is also granted ex lege to any aircraft repairer, aircraft manufacturer or any other creditor into whose authority an aircraft has been placed for the execution of works or other purposes.

iv Enforcement

Under general principles of Maltese law, creditors seeking to enforce their rights will generally institute court proceedings by sworn application. Once judgment is given in favour of the creditor, the latter may use any of the warrants available at law, including, inter alia, a warrant of arrest, seizure, or a garnishee order, to recover the relevant amount due from the assets of the judgment debtor. Such enforcement driven measures are also available as provisional remedies even prior to filing court proceedings, provided that the relevant filings follow thereafter.

Shipping

A creditor having a registered mortgage over a ship (or aircraft), on the other hand, will be in a significantly more advantageous position, in that a registered mortgagee enjoys extensive and easily enforceable rights to recover amounts due, including self-help remedies, such as the right to take possession of or sell the ship without any requirement for judicial involvement. Typically, however, an executing mortgagee would obtain an executive warrant of arrest of the vessel and request a judicial sale by auction or a court approved private sale thereof. Where the mortgage is not for an amount that is set, liquid and due, the mortgagee can easily ensure executive title status by means of an affidavit specifying the sum due at the time of enforcement, served on the mortgagor.

Where the mortgagee opts for a court-approved private sale of the vessel, the creditor would seek court approval of the sale for a determined price, and must include the name of the identified buyer besides submitting appraisements by two independent and reputable valuers. The creditor must also in such case adduce evidence that the private sale is reasonable in the circumstances and in the interest of all known creditors. A court approved private sale is often the preferred option, because it provides for a more certain outcome in terms of price obtained. Article 364 also provides title to the ship for the purchaser, which is free from all privileges and encumbrances. All other claims or demands against the ship (or aircraft) existing at the point of sale may thereafter be enforced only against the proceeds of sale.

The Merchant Shipping Act also contains provisions regarding ranking of creditors. A debt secured by a mortgage ranks in preference to all other claims other than the following specified privileged claims: (1) tonnage dues; (2) wages and expenses for assistance, recovery of salvage and for pilotage; (3) wages of watchmen and related expenses; (4) rent of warehouses; (5) expenses for preservation of the ship; (6) wages due to master, officers and members of the vessel's complement; (7) damages due to seamen for death or personal injury; (8) moneys due to creditors for labour, work, repairs prior to the departure of the ship on her most recent voyage; (9) ship agency fees due for the ship after her most recent entry into port; and (10) debts due to the ship repairer or shipbuilder for building or repairs. The registered mortgagee will rank prior to all other claims.

The significant advantage enjoyed by a registered mortgagee over other creditors was one of the factors that led to the introduction of the mortgage as a legal concept in Maltese law for ships and aircraft more than 40 years ago, in the early 1970s. The resultant asset finance regime has in turn been a major factor underlying the success of the Maltese ship registry. Judicial practice has followed in kind as the Maltese courts have generally distinguished themselves in generally dealing with claims involving vessels as a form of security rather expeditiously, recognising that delay in such matters is often highly prejudicial to the parties involved.

Aviation

The holder of a registered mortgage over an aircraft is afforded self-help remedies under the Aircraft Registration Act that are similar to those available to a ship mortgagee. In addition, the Aircraft Registration Act lists two particular remedies that in the past were not clearly considered available to holders of mortgages over vessels: (1) the right to lease the aircraft to generate income; and (2) the right to receive any payment of the price, lease payments and any other income that may be generated from the management of the aircraft. There is also express mention of the fact that the said rights may be exercised without the requirement of seeking leave of the court, as well as an additional right to obtain the support of the court should the mortgagee find any hindrance in the exercise of its self-help remedies. Further recent legislative amendment provides for application of funds received by a mortgagee after enforcement, as well as for circumstances where vesting of any mortgaged aircraft in the mortgagee (or controlled entity) in or towards the satisfaction of secured obligations, after due notice, is possible.

Mortgagees may also enforce their rights by obtaining an executive warrant of arrest, leading to a judicial sale by auction of the aircraft, or by seeking a court-approved private sale, the latter two procedures being regulated under the provisions of the Code of Organisation and Civil Procedure.

Furthermore, Malta is a party to and has fully implemented the Cape Town Convention and its Aircraft Protocol. Therefore, creditors secured by an international interest registered with the International Registry, may exercise all the remedies available under the Convention in satisfaction of their claim.

As in the case of ships, the Aircraft Registration Act also provides for the ranking of creditors depending on the type of claim. A claim secured by a registered mortgagee or by a charge in the International Registry ranks before all other claims except claims for judicial costs incurred in the enforcement of an executive title, as well as the following privileged claims: (1) sums due to the director general in respect of the aircraft; (2) crew wages; (3) debts due to the holder of a possessory lien for the repair or preservation of the aircraft; (4) expenses incurred for repair or preservation of the aircraft; (5) wages and expenses for salvage; and (6) debts secured by possessory liens.

v Arrest and judicial saleShipping

Ship arrests are governed by the Code of Organisation and Civil Procedure. The said Code lays down the procedure, conditions and rules relating to the issuing of a warrant of arrest of a sea vessel.

The Code distinguishes between precautionary and executive warrants of arrest. The former may be issued by any person, without the necessity of a prior judgment or other executive title, to secure in personam or in rem debts or claims, that could be frustrated by the departure of the ship. The precautionary warrant is issued and carried into effect on the responsibility of the person at whose request the warrant is issued. The claimant may therefore be liable for payment of damages and penalties where a warrant issued out maliciously. Once a precautionary warrant is issued, the applicant has 20 days within which to bring the action in respect of the right stated in the warrant.

An executive warrant of arrest, on the other hand, can be sought where the claimant already has an executive title, such as a judgment in its favour, or a registered mortgage. On demand for issue of an executive warrant, the court may, in its discretion, order the sale of the vessel, or fix a time limit within which the debtor must pay the amount due. On expiry of the time limit, the court is bound to order the sale if the debtor has not yet paid.

The fact that registered mortgages under Maltese law are considered an executive title enables the mortgagee to enforce directly through an executive warrant of arrest, without first having to seek judgment confirming that the debt is due. The mortgagee will only be required to serve the debtor with an intimation to effect payment by means of a judicial act, following which the creditor can directly seek a warrant of arrest to proceed with the sale of the vessel in settlement of the debt.

In proceeding with the arrest, the mortgagee files an application to the court containing the demand for the warrant to be issued. Once the court formally ratifies the request, the relevant executing officer of the court can exercise all such powers as are necessary to arrest the vessel. No opposition to the execution of any warrant is possible until the execution has been effected. The debtor is notified of the warrant and may bring an action for revocation of the warrant, if there is any reason valid at law for doing so.

It is possible, in certain cases, to arrest a sister ship under Maltese law. The Code of Organisation and Civil Procedure lists the claims in rem that may be brought against a vessel. It goes on to specify that in respect of a number of these claims, an action in rem may be brought against any vessel where the person who would be liable on the claim for an action in personam, is, at the time the action is brought, the owner or beneficial owner of the relevant vessel. Therefore, where there is a right to bring an action in rem against a sister ship, the creditor of the claim may obtain a warrant of arrest over that ship, as security or in execution of that right.

The procedure for judicial sale by auction of ships is the ordinary procedure applicable to judicial sale of movables in general. The Court Registrar regularly publishes lists of judicial sales by auction in the local press, but the law provides that the debtor, creditor or any other interested person may further publicise the relevant auction at their own expense. Creditors may also bid for the vessel on animo compensandi or set-off terms, by registering their name prior to commencement of the auction and filing a sworn statement confirming certain details. The judicial auction is conducted by a public auctioneer, who has the right to demand that a person submitting an offer should be in possession of the necessary guarantees. A purchaser would be required to deposit the price in court within seven days of the date of final adjudication. Any creditor having a judgment in his or her favour or other executive title may bid animo compensandi, that is, in set-off of the debt owing to him or her. In such cases, the purchaser animo compensandi will not be required to deposit the price in court, unless the price exceeds the amount of the debt, in which case the purchaser would deposit only the surplus.

Delivery of the ship to the purchaser takes place upon the payment of the price or the approval of the set-off. However, the court may, in terms of Article 331(3) provide for immediate delivery of the relevant ship to the purchaser upon the latter putting up appropriate security to safeguard any claims of the parties to the procedure.

Aviation

Aircraft arrests are also governed by the Code of Organisation and Civil Procedure. The same rules regarding precautionary and executive warrants apply in respect of aircraft. The list of possible claims in rem against aircraft, however, are more limited than those that may be brought against a vessel. Nevertheless, a claim in respect of a mortgage or international interest is included in the list.

It should, however, be noted that the situation regarding arrest of aircraft differs from that of arrest of ships in that it is only possible to institute proceedings in rem against the aircraft in connection with which the claim arose, and not against other aircraft of which the person who would be liable on a claim in personam is the owner or beneficial owner. The procedure for judicial sale of an aircraft is practically identical to the same procedure applicable in respect of vessels and movables in general.