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Due diligence

Demonstrating title or legal ownership

How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction?

Registration of a vessel, as supported by a Certificate of Registry, constitutes prima facie evidence of ownership title to a vessel. Legal ownership of a vessel registered under Maltese law is demonstrated through a builder’s certificate or bill of sale or other document through which ownership of a vessel is transferred.

Although in terms of Maltese law the shipowner is obliged to provide the Maltese Registrar of Ships with the original builder’s certificate or, if there has been any sale, with the original bill of sale or other document of title under which the ship was transferred to the shipowner within one month of provisional registry, extendable for good reason for another period of two months, in practice the registrar requires a scanned copy of the builder’s certificate or bill of sale on the basis of which the vessel is being registered under the Maltese flag prior to provisional registration.

The Merchant Shipping Act (MSA) furthermore mandatorily stipulates that a registered ship or a share therein shall be transferred by a bill of sale, and there is then the additional requirement for such bill of sale to be produced to the registrar, who enters in the vessel’s register the name of the transferee as owner of the vessel and endorses on the bill of sale the fact of that entry having been made, together with the day and hour thereof.

In case of a transmission of a vessel causa mortis brought about by the death of an individual owner, the beneficiary, provided that he or she is a person qualified to own a Maltese ship, must sign a Declaration of Transmission in the manner required by law and such declaration is to be accompanied by such evidence of transmission as would be acceptable by a competent court as proof of such transmission. Similarly to a bill of sale, such declaration of transmission is to be produced to the registrar, who enters in the vessel’s register the name of the person entitled under the transmission as the new owner of the vessel.

All the above entries in the vessel’s register are ascertainable on a search of the vessel’s public register as maintained by the registrar, and the current ownership position would feature in a Transcript of Register issued by the registrar.

Liens

How can one determine whether there are any liens recorded over a vessel?

Maltese law refers to mortgages, certain possessory liens and special privileges over vessels. In addition, there is also the privilege granted to the seller for the price of an item sold under the provisions of article 2009(d) of the Civil Code.

Special privileges are akin to maritime liens, in that they attach to the vessel and enjoy a droit de suite in the event of a private sale of the vessel; they constitute a maritime claim in rem against the vessel; and they also give rise to an established ranking priority. However, they are not recorded in the vessel’s register. Therefore, there is no objective manner in which one may ascertain whether a vessel is subject to any particular special privilege. In this context one must also bear in mind that special privileges are temporal in nature, so that a maritime claim that at one particular point in time might have constituted a special privilege over a vessel would, with the passage of time and change of circumstances, no longer constitute a special privilege. Therefore, whether or not a maritime claim gives rise to a special privilege must be determined on a case-by-case basis as and when the claim is advanced.

Mortgages, as well as any privilege granted by law in favour of the unpaid seller, must be drawn up on the applicable statutory forms and registered according to law. Therefore, their existence may be determined upon a search of the vessel’s register and they would feature in any transcript of register issued by the registrar of shipping.

In the case of a vessel entered in the Maltese bareboat charter registry, details of any registered encumbrances would need to be ascertained from that vessel’s underlying or principal registry.

How does one determine whether there are any security agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance transaction?

As mentioned above, it is only mortgages and the privilege granted to the unpaid seller in security of the balance of price of a vessel that are recorded in the vessel’s register.

The mortgage would of course then refer to the underlying documents, such as a loan agreement or guarantee agreement as the case may be, the obligations whereunder are secured by the mortgage, as well as to the mortgagee concerned in whose favour the mortgage is executed.

A similar position would pertain in relation to any privilege registered in favour of the unpaid seller. The law requires that in order to be effectual in regard to the vessel concerned, such privilege is to be registered in the register of the vessel within two days from the date of the sale.

It is pertinent to note that where a mortgagor has issued a power of attorney or mandate, whether irrevocable or otherwise, granting powers relating to the exercise of rights relating to the vessel or the closure of the register on behalf of the registered owner or grantor, where he or she is not the registered owner, it is possible for such power of attorney to be recorded in the vessel’s register.

Additionally, in case of a pledge of shares affecting the securities of a Maltese-registered company, a Notice of Pledge is recorded in that company’s public register as maintained by the Registrar of Companies. This provides information concerning the date of the pledge and the names of the pledgor and of the pledgee, as well as the particular securities that have been pledged.

Maltese company law does not provide for a register of charges or similar, so that other than for the aforementioned notice of pledge, no other recording of charges is made in the company’s public register.

Public registry searches

Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search of a public registry?

If the obligor is a Maltese-registered company, then a search may be carried out on that company’s public register, as this is maintained by the Registrar of Companies. An official Certificate of Good Standing may also be obtained.

The company’s public register may also contain other useful information, such as the existence of a pledge of shares; whether any notice of voluntary dissolution and consequential appointment of liquidator has been filed; or whether any Court application has been filed by a creditor for the dissolution and winding up of the Company and notified to the Registrar of Companies.

Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily identified?

Malta does not operate an offshore regime, so that the names of all registered shareholders, debenture holders, directors, legal representatives and any appointed secretary where this is required would feature and may be determined from a search of the public registry. Such searches could also be carried out online. In the event of any fiduciary shareholder, the name of the ultimate beneficial owner would not appear. However, pursuant to the Companies Act (Register of Beneficial Owners) Regulations 2017, with effect from 1 January 2018 details of relevant ultimate beneficial owners of companies are recorded in a Register of Beneficial Owners maintained by the Registrar of Companies. This particular register is unrestrictedly accessible by the authorities in accordance with data protection requirements, while any other person or organisation may accede thereto upon a written request satisfactorily demonstrating and justifying a legitimate interest.

Debt obligation

What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by the board of directors or other governing body required? Must shareholders approve a guarantee?

Much will depend upon the particular provisions of the memorandum and articles of association of the company concerned. In so far as a Maltese company is concerned, typically legal representation of a company would be vested in the board of directors or even in the person of one or more directors. In all cases it would certainly be prudent to procure appropriate resolutions of the board of directors resolving to enter into the obligation concerned and appointing one or more persons as attorneys of the company for the purpose of executing the transactions authorised by the board. Shareholders are not required to approve a guarantee unless the necessity for any such ratification emerges from the provisions of the memorandum and articles of association. However, once again it might be considered prudent to obtain such shareholder approval. In all cases, especially when dealing with third-party debt guarantees, one must always check to ensure that the objects clause in the memorandum of association does in fact authorise the company to make available such security.

Obligations of foreign lenders

Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organised in your jurisdiction? Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your jurisdiction?

Foreign lenders, unless actually wishing to operate as a financial institution in or from Malta, do not require to qualify to do business in Malta in order to extend credit to a borrower who may be organised and established in Malta. Furthermore, foreign creditors will not be deemed to be resident in Malta as a consequence of making a loan or other extension of credit to an obligor who may be organised and established in Malta.

Repayment

Central bank and regulatory approval

Is central bank or other regulatory approval required for repayment of a loan in foreign currency?

Malta is a member state of the European Union (EU) and does not operate an exchange control system. Therefore, no central bank or other regulatory approval is required for repayment of any loan expressed in a foreign currency.

Usury laws

Do usury laws limit the interest payable to a lender in respect of a vessel financing?

The Interest Rate (Exemption) Regulations make it very clear that the relevant provisions of the Civil Code or of any other law, in so far as they seek to limit or restrict the charging of interest and the compounding of interest, are not to apply to any debts or other obligations that are (i) secured by a mortgage over or (ii) due under a lease of a ship whether registered in Malta or otherwise and whether governed by Maltese law or otherwise.

Withholding taxes

Are withholding taxes payable on principal or interest payments to non-resident lenders?

There are no withholding taxes payable on principal or interest to non-resident lenders. Furthermore, the MSA expressly provides that notwithstanding anything contained in the Income Tax Act, no tax under that Act shall be payable by any person on interest or other income payable to him or her in relation to any financing of the operations referred to in article 84Z(1) of the MSA and any regulations issued thereunder of licensed shipping organisations or the financing of any tonnage tax ship. These operations in particular include the ownership, operation (under charter or otherwise), administration and management of a ship or ships registered as a Maltese ship in terms of the MSA and the carrying on of all ancillary financial, security and commercial activities in connection therewith.

There is then, however, a proviso inserted to the effect that the application of such exemption to persons who are resident in Malta shall be restricted to such persons who are licensed banks, credit or financial institutions under the provisions of applicable law.

Registration of vessels

Eligibility for registration

What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units considered vessels under the laws of your jurisdiction? What is the effect of registration?

The MSA defines the term ‘ship’, for the purposes of that Act, to mean every description of vessel used in navigation, whether self-propelled or not. The term also specifically includes barges, pontoons, floating establishments, installations or structures, oil rigs and other similar vessels, as well as a ship under construction. Therefore, for purposes of registration, offshore drilling rigs or mobile offshore drilling units are considered to be vessels under the laws of Malta, even though they would not fall within the definition of a tonnage tax ship since they would not be considered to be vessels engaged in ‘shipping activities’, meaning the international carriage of goods or passengers by sea. As a consequence of registration, the vessel concerned will for all effects and purposes of law be considered to be a Maltese ship.

Who may register a vessel in your jurisdiction?

A vessel shall only be eligible for registration under the MSA if it is wholly owned by persons of the following description:

  • citizens of Malta;
  • bodies corporate established under and subject to the laws of Malta having their principal place of business in Malta or having a place of business in Malta and satisfying the Minister responsible for shipping that they can and will ensure due observance of the laws of Malta relating to merchant shipping; or
  • such other persons as the Minister responsible for shipping may prescribe.

By virtue of the Ships Eligible for Registration Regulations the Minister has in fact extended ownership eligibility in favour of (i) foreign companies or other entities enjoying a legal personality of their own in terms of the law under which they are constituted; and (ii) citizens of the EU or of the European Economic Area or of Switzerland not residing in Malta. There is, however, a requirement for such persons to register as an international owner with the registrar of ships and to appoint a resident agent in Malta. Such registration and appointment is not tantamount to the establishment of a permanent establishment in Malta.

Any registered vessel ceasing to be owned wholly by persons qualified to own a Maltese ship shall cease to be a Maltese ship.

Registry for international shipping operations

Is there an alternate registry for international shipping operations?

There is only a national register operative in Malta, which also caters for bareboat charter registration. However, this national register also allows for the foreign ownership of vessels registered thereunder. This is achieved by the registration of the foreign corporate or individual owner concerned as an International Owner with the Registrar of Shipping in Malta pursuant to the Ships Eligible for Registration Regulations.

Ship mortgages and other liens over vessels

Types of ship mortgage

What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardised forms?

A registered ship or a share therein may be made a security for any debt or other obligation by means of an instrument creating the security (in the MSA called a ‘mortgage’) executed by the mortgagor in favour of the mortgagee in the presence of, and attested by, a witness or witnesses.

A mortgage may be drawn up to secure the payment of a principal sum and interest and an account current, as well as the performance of any other obligation, including a future obligation due by the debtor to the creditor.

A mortgage to secure a future obligation may only be granted in favour of a credit institution in an approved jurisdiction or such other organisation as may be permitted by means of a notice issued by the Minister. In such case a maximum sum by way of principal for which the mortgage is granted must be expressly stated in the registered instrument, and such sum shall be recorded in the register by the registrar.

Contingent obligations, including swap obligations, may also be secured.

There is a statutory form of mortgage that must be employed, which is based closely on the English model of a short form of mortgage. This is typically supported by a collateral deed of covenants.

Required form

Give details of any required form for ship mortgages in your jurisdiction.

There is a statutory form of mortgage that must perforce be employed. This is to be found in the Second Schedule to the MSA.

Registration of mortgages

Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the effect of registration?

Mortgages are recorded in the vessel’s register, which is a public register available for inspection by any person. The Registrar of Shipping records a synopsis of the mortgage recital. Mortgages are entered in the vessel’s register by both date and time. Registration of a mortgage in the vessel’s register is a sine qua non requisite for the effectiveness of the mortgage concerned with regard to third parties.

The vessel’s register would also indicate whether any power of attorney or mandate, whether irrevocable or not, which may have been granted as part of the security by the mortgagor in such power of attorney or mandate has been registered with the registrar.

Any transfer or discharge of a registered mortgage would, upon being produced to the registrar for registration, also be recorded in the vessel’s register

In the event of the mortgagor being a Maltese-registered company, there is no recording of the mortgage having been granted by the company in that company’s register as maintained by the Registrar of Companies.

Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt instrument be filed with or attached to the recorded mortgage?

Generally, the mortgage need not state the amount secured by that mortgage, provided that such amount would be ascertainable by reference to the underlying documents secured by that mortgage. However, in the case of a mortgage taken out to secure a future obligation it will be necessary to state expressly the maximum sum for which the mortgage is granted, and such sum is to be recorded in the vessel’s register by the Registrar.

Furthermore, the mortgage need not contain any maturity date. The underlying debt instrument is not in itself a registrable document and is therefore not filed with the mortgage. In rare instances the underlying debt instrument has been attached as a document to the mortgage deed, but this is not necessary, and is certainly not the practice within the industry.

Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?

Maltese law allows for a mortgage to be registered in the name of a security trustee for the benefit of multiple lenders, and this is of course very useful in the case of a syndicated financing. However, a mortgage cannot be registered in favour of an agent.

Filings on transfer

If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender?

In case of a mortgage taken out in favour of a security trustee, there is no requirement for any filings to be made upon any transfer of a portion of the underlying debt among existing lenders or even to a new lender.

If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?

In the event of a transfer of mortgage, the statutory instrument of transfer that features on the flipside of the statutory instrument of mortgage is to be executed by the transferring mortgagee in favour of the transferee mortgagee, and this is then to be registered in the vessel’s register as maintained by the Registrar of Shipping. The mortgagor’s consent is not required for any such transfer.

Maritime liens

What other maritime liens over vessels are recognised in your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?

Maltese law recognises possessory liens, the privilege granted by law to the unpaid seller of a vessel in security of the balance of price, and special privileges on vessels.

Possessory liens over a vessel are recognised in favour of any ship repairer, shipbuilder or other creditor into whose care and authority a vessel has been placed for the execution of works or other purposes. Such possessory liens entitle the creditor to retain possession over the vessel on which he or she has worked or carried out activity until such creditor is paid the debts due to him or her for such building, repairs or activity. The voluntary release of the vessel from the possession of the creditor serves to extinguish the lien.

As already indicated above, the law grants a privilege in favour of the unpaid seller of a vessel in security of the balance of price. The law requires that in order to be effectual with regard to the vessel concerned such privilege is to be registered in the register of the vessel within two days from the date of the sale.

In so far as special privileges are concerned, the law lists certain debts that are secured by a special privilege on the vessel, as well as any proceeds from any indemnity arising from collisions and other mishaps in addition to any insurance proceeds.

The particular special privileges recognised by law are referred to in more detail in answer to the immediately following question concerning those special privileges that rank higher than a registered mortgage. There are then the following claims, which additionally give rise to a special privilege, albeit ranking lower than a registered mortgage:

  • moneys lent to the master for the necessary expenses of the vessel during her last voyage, and the reimbursement of the price of goods sold by him or her for the same purpose;
  • moneys due to creditors for provisions, victuals, outfit and apparel, previously to the departure of the ship on her last voyage (as long as the debt has been contracted directly by the owner of the ship, or by the master, or by an authorised agent of the owner);
  • damages and interest due to the freighters for non-delivery of the goods shipped, and for injuries sustained by such goods through the fault of the master or the crew;
  • damages and interest due to another vessel or to her cargo in cases of collision of vessel; and
  • unpaid balance of the price from the sale of a ship.

All the above claims constitute maritime claims, and consequently give rise to a right to arrest the vessel concerned.

However, it should be noted that the in rem jurisdiction of the Maltese courts is somewhat wider than this in that article 742B of the Code of Organisation and Civil Procedure lists a whole series of maritime claims that give rise to such jurisdiction, and therefore to the right to arrest the vessel concerned. In summary, these are as follows:

(a) claims to possession, ownership or title to ship;

(b) questions arising between co-owners;

(c) claims in respect of mortgage, hypothec or charge on a ship;

(d) claims arising out of a contract of sale;

(e) claims for damages received by the ship;

(f) claims for damage caused by ship;

(g) claims for loss of life or personal injury caused by ship;

(h) claims for loss of or damage to goods carried in a ship;

(i) claims arising out of agreement for carriage of goods or use or hire of ship;

(j) claims for salvage;

(k) claims for damage to the environment by ship;

(l) claims relating to wrecks;

(m) claims for towage;

(n) claims for pilotage;

(o) claims for supplies or services rendered to ship;

(p) claims for construction, repair, conversion or equipping ship;

(q) claims for port, dock or harbour dues;

(r) claims by crew for wages or repatriation;

(s) claims for disbursements made;

(t) claims for commissions, brokerage or agency fees;

(u) claims arising out of general average act;

(v) claims arising out of bottomry;

(w) claims for forfeiture of ship;

(x) claims for insurance premia; and

(y) claims for fees due to the Registrar or tonnage dues.

In cases concerning any one of the maritime claims listed in (a), (b) and (c) above, an action in rem may only be brought against the particular ship in connection with which the claim arose. In all other cases, concerning the remaining maritime claims listed in (d)-(y), an action in rem may be brought against (i) that ship, where the person who would have been liable on the claim for an action in personam (the Relevant Person) was, when the cause of action arose, an owner or charterer of or in possession or in control of, the ship if at the time when the action is brought the Relevant Person is either an owner or beneficial owner of the ship or the bareboat charterer of it, or (ii) any other ship of which, at the time when the action is brought, the Relevant Person is the owner or beneficial owner as respects all the shares in it. In these cases, therefore, sister ship and associated ship arrests are possible.

Of course the requirement under (i) above of the Relevant Person being the owner or beneficial owner of the ship or the bareboat charterer of it at the time when the action is brought does not apply in regard to those maritime claims secured by a special privilege and that survive the voluntary sale of the vessel by up to one year.

What maritime liens rank higher than a mortgage lien?

Maritime claims secured by the following special privileges and possessory liens would rank in priority to claims secured by a registered mortgage:

(a) judicial costs incurred in respect of the sale of the ship and the distribution of the proceeds thereof;

(b) fees and other charges due to the Registrar of Maltese Ships arising under the MSA;

(c) any debt secured by a possessory lien or privilege (according to article 54 of the MSA) over a ship, provided that such debt arose prior to the debts of the creditors enjoying any one of the special privileges listed in paragraphs (d)-(k) hereunder; in the event that such debt as secured by a possessory lien or privilege arose after any of the debts of the creditors enjoying any one of the special privileges listed in paragraphs (d)-(k) hereunder, then such debt as secured by a possessory lien or privilege would rank immediately after such special privilege;

(d) tonnage dues;

(e) wages and expenses for assistance, recovery of salvage and pilotage;

(f) the wages of watchmen, and the expenses of watching the ship from the time of her entry into port up to the time of her sale;

(g) rent of the warehouses in which the ship’s tackle and apparel are stored;

(h) the expenses incurred for the preservation of the ship and of her tackle, including supplies and provisions to her crew incurred after her last entry into port;

(i) wages and other sums due to the master, officers and other members of the vessel’s complement in respect of their employment on the vessel, including costs of repatriation and social insurance contributions payable on their behalf;

(j) damages and interest due to any seaman for death or personal injury and expenses attendant on the illness, hurt or injury of any seaman;

(k) monies due to creditors for labour, work and repairs previously to the departure of the ship on her last voyage, provided the debt has been contracted directly by the owner of the ship, or by the master, or by an authorised agent of the owner; and

(l) ship agency fees due for the ship after her last entry into port, in accordance with port tariffs, and any disbursements incurred during such period not enjoying a privilege in paragraphs (a), (b), (d), (e), (f), (g), (h), (i) and (j) above, though in any case for a sum in the aggregate not exceeding 4,000 units.

Non-mortgage liens

May non-mortgage liens be recorded over a vessel?

Non-mortgage liens may not be recorded over a vessel. The only exception relates to a privilege granted in favour of the unpaid seller in security of the payment of the balance of price of a vessel taken out pursuant to the provisions of article 2009(d) of the Civil Code. As previously mentioned, in order for this privilege to be effectual in regard to a vessel, it must be registered in the register of the vessel concerned within two days from the date of the sale. This is done by delivery to the registrar on the prescribed form, which is to be duly completed and signed by the seller. Furthermore, the privilege will not be effectual in regard to any other vessel in the same ownership of the seller unless the claim for such price is also registered in the Public Registry within two days from the date of the sale.

Maltese law provides for any creditor having a separate privilege or charge over any part, appurtenance or accessory of a ship to register such privilege or charge in the register of the ship by means of an instrument executed by the owner in the presence of a witness in the form specified by the Minister; and on the production of such instrument the registrar shall by memorandum under his or her hand notify on each charge that it has been recorded by him or her, stating the day and hour of that record.

Although not tantamount to a lien as such, a seller reserving ownership rights in any part, appurtenance or accessory of a ship may also register his or her interest in the register of the ship at any time prior to the registration of a mortgage.

The registration of such a charge or reservation of ownership rights prior to the registration of a mortgage shall preserve the creditor’s rights on that part, appurtenance or accessory in relation to any subsequent mortgagee.

Finally, a person claiming a right in or over a vessel pursuant to the provisions of section 37 of the MSA may petition the competent court for an order to be issued prohibiting for a specified time any further dealings with that vessel, and the registrar, upon being served with the same, is obliged to comply with such order. The registrar is also obligated to enter a note in respect thereof in the vessel’s register as maintained by him or her, and this would therefore come to the notice of any third party carrying out a search on the vessel’s register. A right in or over a vessel shall be a claim based on:

(i) a right of ownership;

(ii) being secured by a mortgage;

(iii) being secured by a registered encumbrance;

(iv) being secured by a privilege or a lien over the ship arising by operation of Maltese law or the law applicable to the claim; or

(v) any other claim that gives rise to a claim in rem against a vessel under Maltese law.

Foreign’ flag vessels

Will mortgages on ‘foreign’ flag vessels be recognised in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?

Mortgages on foreign flag vessels are recognised under Maltese law, provided that they meet the following conditions:

  • such mortgage has been validly recorded in the registry of ships of the country under whose laws the ship is documented;
  • such registry is a public registry;
  • such mortgage appears upon a search of the registry; and
  • such mortgage is granted a preferential and generally equivalent status as a mortgage under the MSA under the laws of the country where the mortgage is registered.

Once recognised, such mortgages on foreign flag vessels shall have exactly the same status, give rise to the same rights and enjoy the same priority as mortgages registered on Maltese vessels.

Enforcement of mortgages

What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?

A mortgage gives rise to various rights in favour of a mortgagee which become competent to it in the event of default, and upon giving notice of default in writing to the mortgagor. These rights include the right to take possession of the ship and the right to sell the ship privately. In virtue of recent amendments to the Aircraft Registration Act and other related laws that also apply in the shipping context, the mortgagee may also ask the court for an order authorising or directing the taking of possession, and the court is bound to render full support to the mortgagee as expeditiously as possible.

Such notice of default shall be deemed to have been duly received by and notified to the mortgagee if sent by registered post to the last address of the owner registered with the registrar.

Alternatively, the mortgagee may opt to enforce the mortgage by judicial means, following the precautionary arrest of the mortgaged vessel, which must be physically present within Maltese territorial waters in order to vest the competent Maltese court with the requisite jurisdiction in the matter. A mortgage constitutes an executive title according to law. As such, in the event of default it is rendered enforceable by the mortgagee after the lapse of two days following the service of an official letter or other judicial act against the mortgagor, accompanied in appropriate cases referred to in answer to question 28 below by an affidavit quantifying the amount due, whereupon the mortgagee may proceed to apply for the judicial sale by auction of the arrested vessel.

The mortgagee in possession of an enforceable executive title as above may instead apply to the court to seek its approval for the private sale of the vessel in favour of an identified buyer and in consideration of a determined price. Such application is to be supported by appraisements made by two independent and reputable valuers, together with evidence that such sale is in the interest of all known creditors and that the price offered by the proposed buyer is reasonable in the circumstances. Such application is to be appointed for hearing by the court within 10 days from its filing, but no order shall be made by the court before the application has been served on such persons as the court in the circumstances and upon information given by the applicant deems appropriate to call upon to make their submissions. Once the application is acceded to, the court nominates in its same decree a person entitled to transfer the vessel in accordance with the terms and conditions approved by the court as though he or she were the registered owner thereof, and such person is required to deposit the price realised in court within seven days from the date of completion of the sale. This court-approved private sale is therefore a very efficient tool competent to the mortgagee in the enforcement arsenal available under Maltese law.

As an approximate estimate, one could reasonably expect the whole process of judicial enforcement of a registered mortgage starting from the time of precautionary arrest and culminating in the judicial sale of the vessel and the lodgement in court of the sale proceeds to take up to four months. In the event of there being more than one creditor filing a demand for payment from the proceeds in such manner that a competition of creditors would be required to take place, according to the ranking of creditors established by law, the same court that would have ordered the judicial sale of the vessel commences such additional proceedings. In appropriate cases it is also possible for the mortgagee, being a creditor to whom a liquidated debt is due under executive title, to make application to the court for authorisation to bid in the judicial auction animo compensandi.

As regards associated costs, these in particular would include all fees and costs relating to the filing and service of all necessary judicial acts, including the precautionary warrant of arrest, the judicial letter rendering the mortgage enforceable and the application demanding the judicial sale by auction of the vessel, including all publication costs as well as expenses for obtaining any necessary valuations. Such fees and costs would need to be determined on a case-by-case basis and much would depend upon the amount being claimed as well as any complexities for service arising from the physical location of the vessel. Ultimately, all judicial fees and costs are taxable by the Registrar of Courts, who may be requested to issue a taxed bill of costs, and such officially taxed judicial fees and costs would be recoverable together with the mortgagee’s claim. In addition, fees of up to €585, together with VAT at 18 per cent thereon, would also be payable to any curator appointed by the court for the purpose of executing the eventual bill of sale in favour of the successful bidder at auction. Finally, it ought also to be mentioned that court fees calculated at 1 per cent of the eventual purchase price realised at judicial auction as well as auctioneer’s fees taxed at 0.2 per cent of the same purchase price, together with VAT at 18 per cent thereon, would be payable by the successful bidder.

Interlocutory sales of vessels are permitted under Maltese law. Indeed, the court may order the sale of an arrested ship pendente lite if, on application of the creditor, it appears that the debtor is insolvent or unlikely to continue trading and maintaining the asset. In reaching its conclusion, the court will have regard to all the circumstances, including the nature of the claim and of the defence, as well as to such steps as the defendant shipowner may have taken to secure the claim or otherwise to preserve the ship.

Sale by mortgagee

May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?

As mentioned above, one of the rights competent to a mortgagee at law, once notice of default has been given to the mortgagor, is to sell the vessel privately. However, such a sale would not have the effect of discharging any unsatisfied special privileges over the vessel that would enjoy a droit de suite over that vessel for a period of one year from the date on which the private sale is recorded in the vessel’s register. A private sale would only achieve a discharge of all special privileges over the vessel in the event of a court-approved private sale. For this to happen, however, the vessel concerned would need to be physically present within Maltese territorial waters in order to vest the competent court with jurisdiction in the matter.

Default under mortgage

Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?

Limitations on rights of self-help

What are the limitations on rights of self-help by a mortgagee?

There are various rights of self-help competent to a mortgagee, always in the event of default of any term or condition of a registered mortgage or of any document or agreement referred to therein, exercisable always upon giving prior notice in writing to the mortgagor.

The entitlement of the mortgagee to take possession of the vessel subject to the mortgage is one of the main rights so available to the mortgagee. However, this is not an absolute right, since the law clearly provides that except so far as may be necessary for making such mortgaged vessel available as a security for the mortgage debt, the mortgagee shall not by reason of the mortgage be deemed to be the owner of the ship or share, nor shall the mortgagor be deemed to have ceased to be the owner thereof.

Another important right is the power granted to the mortgagee absolutely to sell the mortgaged vessel. However, where there are more persons than one registered as mortgagees of the same vessel, a subsequent mortgagee shall not, except under the order of a court of competent jurisdiction, sell the ship or share without the concurrence of every prior mortgagee. Furthermore, if the proceeds of sale, after discharging the mortgage debt, show a surplus in his or her hands, the mortgagee is obliged to deposit the same for the benefit of other creditors as well as of the mortgagor him- or herself.

In this context it is also useful to point out that the rights of the mortgagee shall not be in any manner affected by any order prohibiting any further dealings with a vessel as may be issued by the competent court according to law on the demand of any person claiming a right in or over a vessel.

Duties to owner or third-party creditors

What duties does a mortgagee owe to an owner or third-party creditors?

While the law speaks of the rights of the mortgagee, it does not specify any particular statutory duties ut sic that the mortgagee may owe, whether towards the owner or third-party creditors, other than for the aforementioned obligation to deposit any surplus proceeds of sale for the benefit of other creditors as well as of the mortgagee him- or herself in the event that the mortgagee were to exercise his or her power to sell the mortgaged vessel.

In general, however, it may be said that a mortgagee exercising any rights of self-help, in particular the right to take possession of and the right to sell the mortgaged vessel, would owe a duty of care towards the owner and third-party creditors. Therefore, any exercise of such rights by the mortgagee would require the mortgagee to act with the diligence and prudence of a bonus paterfamilias.

Furthermore, in the exercise of any of its rights, the mortgagee must at all times act lawfully within the ambits of established law and procedure.

Thus, for instance, in connection with any procedures undertaken by the mortgagee seeking the judicial sale of a mortgaged vessel in cases where the obligation secured by the mortgage is not a debt certain, liquidated and due, or where a maximum sum secured by the mortgage is not expressly stated in the instrument creating the security and such figure is not recorded in the register for public notice, for the purpose of determining the amount certain, liquidated and due or the actual sum due when the mortgage secures a future debt within an expressly stated maximum, the mortgagee is required to specify the sum due at the time of enforcement by means of an affidavit served on the mortgagor. This in turn affords an opportunity both for the mortgagee him- or herself as well as for any third-party creditor as an interested party to contest such amount according to law.

Then, in the context of a court-approved private sale, the mortgagee would be obliged to submit to the court, together with his or her relevant application, appraisements drawn up by two independent and reputable valuers confirming the value of the vessel; and it shall also be incumbent on the mortgagee to adduce to the court sufficient evidence to demonstrate that such private sale is in the interest of all known creditors and that the price offered by the proposed buyer is reasonable in the circumstances of the case.

Finally, it is worth noting that while the principle is to the effect that a registered mortgage attaches to the vessel in respect of which it is registered until such time as it is discharged, yet in any instance where the mortgaged vessel is forfeited for any reason permissible at law, the interest of the mortgagee in the vessel would terminate if the mortgagee has him- or herself authorised, consented to or conspired to the act, failure or omission in consequence of which the vessel is forfeited.

Collateral

Finance leases

May finance leases or other charters be recorded over vessels flagged under the laws of your jurisdiction?

Finance leases as such are not registrable, and it is consequently not possible to record the same over vessels flagged in Malta.

However, it is possible for the Registrar of Ships to issue a certificate of registry in the name of the charterer or the lessee in those cases where a Maltese-flagged vessel is being operated under charter or is leased when the conditions below are satisfied:

  • payment by the charterer or lessee of annual registration fees in respect of the vessel in addition to that paid by the owner;
  • such ship not being bareboat charter registered in a foreign registry;
  • the submission to the Registrar-General of an application made by such charterer or the lessee accompanied by a copy of the charter agreement or the lease agreement; and
  • the consent in writing of the owners of the ship and all registered mortgagees is procured.

May finance leases be recharacterised by a court as a financing contract? If so, is there any procedure for protecting the lessor’s interest against third-party creditors?

There are no known provisions of Maltese law that specifically allow for a court to recharacterise a finance lease as a financing contract. However, in interpreting any contract that may be referred to them, the courts will always look to the object and substance of the transaction and would not be unduly influenced by whatever name may have been ascribed by the parties to the particular covenant transacted between them. That having been premised, we are not aware of any decision of the Maltese courts whereby any finance lease has been recharacterised as a financing contract.

Security interests

How is a security interest created over earnings of a vessel, charter contracts, insurances, etc? How are these security interests perfected?

A ship-financing operation would typically also include the entering into by the shipowner, in favour of the mortgagee, of a general assignment of earnings, insurances and requisition compensation. Such general assignment is created contractually, by private agreement between the parties concerned. There is a requirement for any assignment to be notified to the debtor, unless the debtor has him- or herself acknowledged such assignment. There are no additional requirements to be satisfied in order for such general assignment to be perfected. Also, in the event that the particular general assignment is expressed to be regulated by a foreign law, then any specific requirements of that law dealing with validity would be overriding and would undoubtedly need to be satisfied. Unlike a mortgage, or a privilege in favour of the unpaid seller, such general assignment is not a registrable document, and neither is any charge registered against the shipowner in the registry of companies. To this extent, therefore, such general assignment does not constitute a security interest under Maltese law.

Must security interests against non-vessel collateral be registered to be enforceable? If so, where are such filings made?

The only typical security interests against non-vessel collateral that need to be registered in order to be enforceable are pledges of securities of Maltese registered companies. This is done by filing a Notice of Pledge on the statutory form with the Registrar of Companies within 14 days from the granting of the pledge. However, in the event of any security interests being taken out in the form of a general hypothec over all the property of a Maltese debtor or other obligee, or in the event of any security interests being taken out in the form of a special hypothec or of a special privilege on any specified immovable property situated in Malta, then such security must ad validitatem be granted in the form of a public notarial deed. In addition, in order to be enforceable the security interests concerned would need to be enrolled in the Public Registry and (if the property concerned is situated within a compulsory land registration area) in the Land Registry.

How is a security interest over a deposit account established? How is a security interest perfected?

A security interest over an account held with a bank in Malta may be established by the granting of a pledge by the pledger in favour of the pledgee. Such pledge is effected by instrument in writing, whether by public deed or private writing, pursuant to the applicable provisions of the Civil Code. The execution of such pledge agreement by the pledgor in favour of the pledgee serves as written acknowledgement of the pledge for all effects and purposes of law, giving rise to the cause of preference referred to below. Although such pledge constitutes a security interest in the thing pledged, there is no applicable registration requirement.

Such pledge confers upon the creditor the right to obtain payment out of the thing pledged with privilege over other creditors as provided in Title XXIII of the Civil Code. Essentially, the debt due to a pledgee over the thing that he or she holds as pledge constitutes one of the special privileged debts over particular movables, conferring upon the pledgee a right of preference over the other creditors including hypothecary creditors.

How are security interests in non-vessel collateral enforced?

In so far as enforcement of a pledge of shares in a Maltese company is concerned, on the occurrence of an event of default, the pledgee may apply for the judicial sale of the shares, and in addition, may, after giving notice by judicial act to the pledgor and the company, dispose of the pledged shares or appropriate and acquire the shares in settlement of the debt due. In cases where the Financial Collateral Arrangements Regulations apply, the provisions contained in the relevant agreement will be followed.

In so far as concerns a pledge over a deposit account in Malta, the law provides that where the thing pledged is a debt, the pledgee shall be responsible for the collection of such debt on maturity, and shall place the moneys or other things received either as agreed or, failing such agreement, as the court may determine. Furthermore, if the debt secured by the pledge is due, the pledgee may retain, from any moneys received as aforesaid, an amount sufficient to satisfy his or her rights and shall deliver the remainder to the pledger.

In the case of other security interests in non-vessel collateral, typically in the form of a general assignment of earnings, insurances and requisition compensation, these would be enforceable in accordance with their own governing law.

Finally, in the event of any general hypothec over all the property of a Maltese debtor or other obligee, or in the event of any security interests being taken out in the form of a special hypothec or of a special privilege on any specified immovable property situated in Malta, as would need to be given in virtue of a public deed drawn up by a notary public, then provided that the debt referred to in the deed is certain, liquidated and due and not consisting in the performance of an act, the creditor could proceed to enforce the same by filing any one of the recognised executive acts, in particular the judicial sale by auction of the immovable property concerned, after the lapse of two days from the service upon the debtor of an intimation for payment made by means of a judicial act.

Share pledges

How are share pledges for vessel financings established? Are share pledges or share charges common in your jurisdiction?

Pledges of securities are established by instrument in writing. There is complete freedom of contract, with no statutory form or other type of formality involved, and neither is it necessary to deliver the physical share certificates. As already mentioned, the only requirement is to file Notice of Pledge with the Registrar of Companies and this is recorded in the register of the company concerned whose securities are pledged for the notice of third parties. Maltese law does not allow the issuance of bearer share certificates. Share pledges are quite commonly sought after by lenders as part of the total security package in a ship-financing transaction involving a Maltese company as borrower or other obligee.

Is there a risk that a pledgee, before or after exercise of the share pledge, may be exposed to debts or other liabilities of the pledged company?

There is no risk that a pledgee may be exposed to any debts or other liabilities of the company whose shares are pledged in its favour, whether prior or subsequent to the enforcement of the share pledge. No such liability arises at law.

Tax considerations for vessel owners

Domestic taxation

Is the income earned by the owners of vessels registered in your jurisdiction subject to domestic taxation? At what rate?

The general rule is to the effect that a company that is both registered in, and effectively managed and controlled from, Malta, would be deemed to be resident and domiciled in Malta for all purposes of the Income Tax Act, and thus liable to income tax in Malta in respect of taxable income wheresoever derived as may result from its Maltese audited accounts. The corporate rate of tax in Malta is 35 per cent on taxable profits, being total income less deductible expenses. The effective Malta tax leakage may be substantially reduced by application of the various forms of relief from double taxation that are available, both under any applicable double tax treaty as well as under the various provisions for unilateral relief from double taxation including the flat rate foreign tax credit. In addition, by application of Malta’s unique tax imputation system, upon the distribution of a dividend to them, the shareholders of the Maltese company concerned may be eligible to claim a six-sevenths or two-thirds tax refund, depending on whether any relief from double taxation has been claimed, in respect of the Malta tax suffered at corporate level.

However, should a Maltese-registered company own and operate a Maltese-registered ship, then, provided that such ship has been declared to be a tonnage tax ship, and provided that all applicable conditions including the payment of tonnage taxes are satisfied, under the provisions of the Merchant Shipping (Taxation and Other Matters Relating to Shipping Organisations) Regulations (the Tax Regulations), as recently updated following the conclusion of the EU’s investigation into Malta’s tonnage tax regime, any profits derived by such owner from the operation of that ship in shipping activities, whether under charter or under any other commercial arrangement (but see the reply to question 38 hereunder in relation to income derived from bareboat charter), would not be subject to any domestic taxation in Malta.

A vessel may also be registered in Malta in the ownership of a foreign company that appoints a resident agent in Malta and registers itself as an international owner with the Registrar of Shipping. Such an owner, not being tax-resident in Malta, would not be subject to any domestic taxation in Malta. Such registration with the Registrar of Shipping and such appointment of a resident agent is not tantamount to the establishment of a branch or other permanent establishment in Malta. However, even in the event that a foreign company were to establish a branch in Malta by registering itself as an overseas company pursuant to the provisions of the Companies Act, such branch would only be taxable in Malta in respect of income arising in or remitted to Malta, and then always subject to any relevant provision concerning the taxation of shipping income as may be contained in any applicable double taxation treaty, which would typically provide that profits derived from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

Tonnage tax

Is there an optional tonnage tax exempting vessel owners from tax on income?

An optional tonnage tax system is available to shipping organisations wishing to own or operate vessels as tonnage tax ships. For the purpose of the Tax Regulations, such shipping organisations must be duly organised and existing under the laws of a member state of the EU or of the European Economic Area (Union State). A ship registered under the laws of a Union State (Union Ship) would qualify as a tonnage tax ship, always provided all applicable conditions relating to the tonnage tax system are satisfied. In addition, a ship not being a Union Ship may also qualify as a tonnage tax ship if the strategic and commercial management of all ships owned, managed or operated by the shipping organisation is actually carried out from the EU and the minister responsible for shipping is satisfied with the relevant thresholds relating to the ownership and operation of the Union-flagged fleet by that shipping organisation.

The tonnage tax system has the effect of exempting such vessel owners from Malta income tax in respect of any profits derived from the operation of such tonnage tax vessels in shipping activities while they were tonnage tax vessels. Shipping activities are defined to mean the international carriage of goods or passengers by sea in terms of the EU Maritime State Aid Guidelines and such other activities that have been approved or considered as eligible for tonnage tax purposed by the European Commission. They also include such activities as are integral or directly linked to the business of operating tonnage tax ships, when carried out in conjunction with the above-described activities. In this context, note is to be taken of the fact that where a ship has been chartered out on bareboat charter terms, such operation would not be considered to fall within the definition of shipping activities to which the tonnage tax regime would be applicable unless the ship is bareboat-chartered to a shipping organisation forming part of the same group, or the ship was bareboat-chartered due to short-term over-capacity and the term of the bareboat charter does not exceed three years.

In order to benefit from this tonnage tax regime, vessel owners must submit an application to the Registrar General, containing the name and registered office of the shipping organisation as well as the name and tonnage of the vessel that they wish to own, manage or operate. Tonnage tax status, irrespective of the net tonnage of the vessel, is then declared by the minister responsible for shipping with the concurrence of the minister responsible for finance. Should such application not be made, or should a vessel owner opt out of this regime, Malta’s standard corporate tax regime, as explained in the reply to question 37, would then apply to the company concerned.

A vessel owner may opt out of the tonnage tax regime by tendering notice in writing to the Registrar General. Once such notice is given, the vessel owner irrevocably waives all concessions, exemptions, privileges and other benefits granted or allowed by the Tax Regulations.

Tax incentives

What special tax incentives are available to shipowners registering vessels in your jurisdiction?

In addition to the exemption from income tax that is available to owners of tonnage tax ships as explained above, the Tax Regulations, in a situation where a non-Maltese registered ship has been declared to be a tonnage tax ship, grant relief for any tonnage tax imposed under the laws of its flag state is subject to the payment in Malta of a minimum tonnage tax of 25 per cent of the applicable Malta tonnage tax..

The Tax Regulations also provide that no further tax under the Income Tax Act shall be charged or payable on any income, profits or gains of a shipping organisation derived from the sale or other transfer of a tonnage tax ship that had been acquired and sold whilst under the tonnage tax system or from the disposal of any rights to acquire a ship that when delivered or completed would qualify as a tonnage tax ship.

Furthermore, the distribution of profits derived from shipping activities shall be exempt from tax under the Income Tax Act in the hands of the shareholders, provided that where the person in receipt of such dividend is itself a company (‘the second company’), any dividend paid to the members of the second company shall, to the extent that such dividend is paid out of profits derived from shipping activities, not be charged tax under that act and where a member of the second company is again a company, the provisions of this proviso shall apply mutatis mutandis as though references to the licensed shipping organisation were references to the second company and as though references therein to the second company were references to that member, and the principle set out in this proviso shall continue to be applied for as long as the profits derived from shipping activities are distributed by way of dividends.

In addition, under the Duty on Documents and Transfers Act, a company registered in Malta and the majority of whose business interests are outside Malta as may be determined by the Commissioner of Inland Revenue, can apply for an exemption from duty on documents on acquisitions or disposals of marketable securities in or by it. These are cases where more than half of the ordinary share capital, voting rights and rights to profits in such company are held by any person who is not resident in Malta, and who is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual who is ordinarily resident and domiciled in Malta.

Finally, the provisions of the External Transactions Act shall not apply to any shipping companies in relation to any transaction connected with the ownership, operation, administration, management, purchase or financing of a tonnage tax ship or to any other shipping activity or transaction ancillary thereto. The position in Malta today is to the effect that all external transactions and related payments may be carried out without restriction. However, in exceptional circumstances the Minister of Finance may, pursuant to the powers vested in him or her under the legislation in question, and on the recommendation of the Central Bank of Malta, make regulations imposing such restrictions on capital transactions and related payments, whether of a specific or a generic nature, as may be deemed necessary, with the additional caveat to the effect that any such restrictions cannot be imposed in relation to a member state of the EU.

Other tax provisions

Are there any other noteworthy tax provisions specifically applicable to shipping, shipping income or ship finance?

Tax provisions specifically applicable to income derived from shipping activities, including income derived by a ship manager from ship management activities, are contained in the MSA as well as in the Tax Regulations. There are no particular tax provisions specifically applicable to ship finance.

Insolvency and restructuring

General scheme of reorganisation or insolvency administration

Is there a general scheme of reorganisation or insolvency administration in your jurisdiction?

Shipping companies in Malta are generally regulated by the special provisions of the Merchant Shipping (Shipping Organisations - Private Company) Regulations. Article 164 of these regulations in turn makes express cross-reference to the provisions contained in the Companies Act dealing with company reconstructions, which are therefore also applicable to shipping companies, and which may have the beneficial effect of avoiding the need to resort to winding-up procedures.

Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between the company and its members, or any class of them, the court may, on the application of the company or any creditor or member of it or, in the case of a company being wound up, the liquidator, order a meeting of the creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

The company or any creditor, with the sanction of not less than two-thirds of the creditors or class of creditors, may alternatively seek the appointment of a mediator in terms of article 20 of the Mediation Act. Such mediator is to organise a meeting of the creditors, or class of creditors, as the case may be, in order for such creditors and the company to reach a compromise or arrangement.

The competent court seized of a winding-up application may furthermore, at any time after the filing of that application, proceed to make a provisional order appointing a provisional administrator, enjoying such powers as may be conferred on him or her by the court in the order appointing him or her. Such provisional administrator would hold office until such time as the winding-up order is made or the winding-up application is dismissed.

The court is also empowered, at any time after the filing of a winding-up application, and before a winding-up order is made if any, upon application made to it by the company itself, or by any one of its creditors, order a stay of proceedings

Once a winding-up order has been made by the court, a liquidator is appointed who takes into his or her custody or under his or her control all the property and all the rights to which he or she has reasonable cause to believe the company to be entitled.

The law expressly provides however that the liquidator shall not be entitled to dispossess a mortgagee in possession of a ship subject to a registered mortgage, or the holder of any recognised possessory lien; not to do anything which may in any manner hinder or obstruct the exercise of any of the rights competent to a registered mortgagee including the right to take possession of the ship according to law.

The law furthermore provides that any disposition of the property of the company, other than a ship by a mortgagee; any transfer of shares, other than of pledged shares by the pledgee or any transaction involving the closing out of a netting provision in terms of the Set-off and Netting on Insolvency Act, made after the date of filing of the winding-up application (the ‘deemed date of dissolution’), shall be void, unless the court otherwise orders.

Finally, the court is also empowered, at any time after the filing of a winding-up application, and before a winding-up order is made, if any, upon application made to it by the company itself, or by any one of its creditors, to order a stay of any judicial proceedings as may be pending against the company, on such terms and conditions as it may think fit. However, no proceedings instituted by the holder of a registered mortgage or a privileged creditor over a ship owned by the company may be stayed.

Foreign court rulings

Will the courts of your jurisdiction respect the rulings of a foreign court presiding over reorganisation or liquidation proceedings?

It is to be generally assumed that reference is being made here to the rulings of a competent foreign court presiding over reorganisation or liquidation proceedings concerning non-Maltese registered companies. With the exception of Council Regulation (EC) 1346/2000 on insolvency proceedings (replaced and superseded by the Recast Insolvency Regulation for insolvencies beginning on or after 26 June 2017), reorganisation of liquidation proceedings treating with Maltese-registered companies would by their very nature perforce only fall under the jurisdiction of the competent Maltese courts, where the subject companies are incorporated, and such proceedings would be regulated by Maltese law, under which law the same companies are incorporated and to which law they are consequently subject and by which they are regulated.

Malta being an EU member state, the provisions of the aforementioned regulation would have direct effect of law in Malta. Pursuant to the regulation, while it is the courts of the member state that is the debtor’s centre of main interests that have jurisdiction to open insolvency proceedings, secondary proceedings may also be opened in other member states within which the debtor has an establishment, although it remains the law of the member state within which main proceedings have been opened that governs the opening, conduct and closure of insolvency proceedings, including the determination of any claims.

In terms of the regulation, the Maltese courts would be obliged to recognise a request for the recognition of the opening of foreign insolvency proceedings as may have been handed down by a competent court in any other EU member state.

With respect to any reorganisation or insolvency proceedings commenced outside the EU, and always with respect to proceedings concerning non-Maltese-registered companies for reasons given above, then this would be subject to the applicable provisions of the Code of Organisation and Civil Procedure relative to the recognition and enforcement of foreign judgments where an exequatur by the competent Maltese court would need to be obtained.

Model Law on Cross-Border Insolvency

Has your jurisdiction adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law?

Malta has not adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law. However, EU Regulation 1346/2000 on insolvency proceedings has direct effect in Malta as an EU member state. This applies to proceedings where the centre of the debtor’s main interests is located in the EU. Any judgment opening insolvency proceedings handed down by a court in an EU member state that has jurisdiction pursuant to article 3 of the regulation will be recognised in all the other member states from the time that it becomes effective in the state of the opening of proceedings. Otherwise, any judgment given in the context of foreign insolvency proceedings must be recognised and enforced in Malta in accordance with national law.

Order of priority

What is the order of priority among creditors? In what circumstances will creditors be required to disgorge payments from an insolvent company?

The important general rule is to the effect that ships and other vessels, including all equipment, machinery and other appurtenances as accessories belonging thereto, whether on board or temporarily removed therefrom, are deemed by law to constitute a particular class of movables forming separate and distinct assets within the estate of their owners for the security of actions and claims to which the vessel is subject. In case 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.

Following a judicial sale by auction of the arrested vessel, all claims against the vessel are transferred to the resulting fund deposited under the authority of the court. The same situation would obtain in case of a court-approved private sale.

The above having been premised, in so far as the ranking of maritime creditors is concerned, reference may be made to the answers given to question 21 (listing those special privileges that would rank subsequently to a registered mortgage) and question 22 (listing those special privileges and possessory liens that would rank in priority to a registered mortgage). Registered mortgages would then rank among themselves in order of priority of date and time. All other maritime claims not enjoying any cause of ranking preference would then rank pari passu.

Finally, in so far as fraudulent preference is concerned, reference may then be made to the answer given to question 46, since the particular provisions of law treating with the effects of winding up on antecedent transactions, which in the opinion of the writers also apply to shipping companies, extend to any payment, execution or other act relating to property or rights made or done by or against a company, and any obligation incurred by the company within six months before the dissolution of the company. Such payment is also deemed by law to be a fraudulent preference against the company’s creditors, whether it is of a gratuitous nature or an onerous nature if it constitutes a transaction at an undervalue or if a preference is given as these terms are then defined by the Companies Act.

Security provision by vessel owner

May a vessel owner provide security on behalf of other related or unrelated companies? What are the requirements for it to be enforceable?

A vessel owner may provide security in favour of other related or unrelated companies, provided that this particular type of transaction falls within the ambits of the objects clause of the memorandum of association of the guarantor company concerned, and provided always that the provision of the security in question is duly authorised in terms of the applicable provisions of its memorandum and articles of association. There are no particular requirements beyond ensuring such authorisation, even though it would be at least prudent to establish some commercial interest on the part of the vessel owner in providing this security. Such security would typically be granted pursuant to a guarantee agreement which would in turn be secured by a mortgage over the guarantor’s vessel. It is also possible for such guarantee to be granted directly in virtue of a mortgage on the guarantor’s vessel without the necessity of any underlying guarantee agreement. There are no particular requisites for the enforcement of such third security, but if a mortgage is involved then the normal procedures applicable to the enforcement of a mortgage would of course apply.

Law of fraudulent transfer

Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant of the mortgage?

Article 303(1) of the Companies Act, which in the opinion of the writers is also applicable to shipping companies in virtue of a lacuna in the Merchant Shipping (Shipping Organisations - Private Companies) Regulations in this regard, provides that the granting of, inter alia, a privilege, hypothec or other charge (and therefore including a mortgage) by a company and any obligation incurred by a company within six months before the dissolution of the company shall be deemed to be a fraudulent preference against its creditors whether it is of a gratuitous nature or an onerous nature if it constitutes a transaction at an undervalue or if a preference is given, unless the person in whose favour it is made or incurred proves that he or she did not know and did not have reason to believe that the company was likely to be dissolved by reason of insolvency, and in the event of the company being so dissolved every such fraudulent preference shall be considered to be void. The law then goes on to provide details as to when a company is considered to have entered into a transaction at undervalue, and when a company is considered to have given a preference to a person.

Then, in more general terms, it could possibly be open to a third-party creditor to challenge the grant of a mortgage by instituting the actio pauliana afforded in virtue of article 1144 of the Civil Code in virtue whereof it is competent to any creditor to impeach any act made by his or her debtor in fraud of his or her claims. In such a case, since a mortgage would be considered to be an act under onerous title in spite of the fact that a mortgage is executed unilaterally by the mortgagor, the creditor would need to prove that there was fraud on the part of both contracting parties.

Otherwise, the law expressly provides that a registered mortgage will not be affected by the bankruptcy of the mortgagor happening subsequent to the date of registration of the mortgage; and such mortgage, privilege, action or claim shall have preference, on the said vessel, over all other debts, claims or interests of any other creditor of the bankrupt or of any curator, trustee or receiver, acting on behalf of any other creditors.

Petitions by creditors

How may a creditor petition the courts of your jurisdiction to declare a debtor bankrupt or compel liquidation of an insolvent obligor?

Any creditor having a debt due and unpaid being in excess of €23,000 may file an application before the competent court for the winding up of the company. On hearing of the winding-up application, the court may either dismiss the application or make an order acceding thereto together with such other orders, including provisional orders, as the court may deem fit.

It is noteworthy to point out that where the sole asset of the company is a ship subject to a registered mortgage or other maritime claims, and the outstanding sums due under the mortgage or such maritime claims exceed the value of the ship, the court shall not issue a winding-up order in respect of the debtor company until it is satisfied that there are excess funds deriving to the company in Malta in relation to which such winding-up order may usefully be made. Furthermore the court must first await the outcome of any enforcement proceedings instituted according to law by the mortgagee or maritime claimants, whether in Malta or overseas, and whether private or public, and shall only determine the issue thereafter.

Model Netting Act

Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency?

Since 2003, the Set-off and Netting on Insolvency Act (Chapter 459, Laws of Malta) was introduced in Maltese law. Although this Act does not directly adopt the ISDA Model Netting Act, the provisions thereof and the regulations issued thereunder reflect the ISDA provisions and allow for the enforcement of close-out netting provisions, whether before or after bankruptcy or insolvency in respect of mutual debts, credits or dealings that have arisen or occurred before the bankruptcy or insolvency of one of the parties, against the other contracting party, a security provider, the liquidator and other creditors of the parties to the contract, such that the provisions of an ISDA master agreement would generally be enforceable in Malta.

Update and trends

Current developments

Are there any emerging trends or hot topics that may affect shipping finance law and regulation in your jurisdiction in the foreseeable future?

The EU’s investigation into Malta’s Tonnage Tax regime, which had been pending for a number of years, has now been successfully concluded, providing much valued certainty on the most important topic of taxation of shipping organisations in Malta.