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 of such a vessel) may become security for any debt or other obligation by means of an instrument creating the security (the Merchant Shipping Act (MSA) terms this a ‘mortgage’).

A mortgage must be executed by the mortgagor in favour of the mortgagee in the presence of and attested by witnesses. It may be drawn up to secure:

  • the payment of a principal sum and interest;
  • an account current; and
  • the performance of an obligation, including future obligations 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 to another organisation so permitted by means of a notice issued by the minister. In such cases, the maximum sum the mortgage is granted for (the principal) must be expressly stated in the registered instrument. This is 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 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 be employed. This is found in the Second Schedule of 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 and prohibitions on the creation of further mortgages, or to transfer the ship being mortgaged as stated in the mortgage instrument. Mortgages are entered in the vessel’s register by both date and time. This registration is required for a mortgage to be effective with regard to third parties.

The vessel’s register also indicates powers of attorney or mandates (irrevocable or not), granted as part of the security by the mortgagor and registered with the registrar.

Any agreement or unilateral declaration, made by means of an annotation pursuant to article 1996A of the Civil Code, enabling a mortgagee’s existing or future rights of payment to be modified, subrogated, postponed or waived, or their rights regarding enforcement and ranking (or similar) put in favour of another person registered at the ship registry, by any party to the agreement or by the maker of the declaration, would also appear on a search of the vessel’s register. Such an agreement or declaration would have effect in relation to third parties.  

A vessel’s register entry will also record caveats prohibiting any further dealings in it. A competent court may issue such a caveat at the instance of any creditor of a security of a maritime claim on that vessel.

Any transfer or discharge of a registered mortgage is recorded in the vessel’s register when it is registered.

Mortgages provided by a Maltese-registered company are not recorded in the company’s entry in the Companies Register.

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?

Unless it is taken out to secure a principal amount and interest, the amount secured by a mortgage expressed in current account form and those securing the performance of another obligation do not need to be stated, provided that the amount can be ascertained by referring to the underlying documents secured by the mortgage. This does not apply if the mortgage is taken out to secure a principal amount plus interest. However, if a mortgage secures an underlying debt up to a capped amount, the maximum limit secured by that mortgage must be stated in the mortgage instrument. Furthermore, if a mortgage is taken out to secure a future obligation, the maximum sum the mortgage is granted for must be expressly stated and recorded in the vessel’s register.

The mortgage does not need to contain a maturity date. The underlying debt instrument is not in itself a registrable document, and so is not filed with the mortgage. In rare instances, the underlying debt instrument is attached as a document to the mortgage deed, but this is not necessary and is not industry practice.

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. This is very useful in 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?

When a mortgage is 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?

To transfer a mortgage, the statutory instrument of transfer that features on the flip side of the statutory instrument of mortgage must be executed by the transferring mortgagee in favour of the transferee mortgagee. The transfer is then recorded in the vessel’s register, as maintained by the registrar of shipping. The transfer does not require the mortgagor’s consent.

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 as a security for the balance of price, and special privileges on vessels.

 

Possessory liens

Possessory liens over a vessel are recognised in favour of any ship repairer, shipbuilder or other creditors 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 they are 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.

The law grants a privilege in favour of the unpaid seller of a vessel as a security for the balance of price, and requires the privilege to be recorded in the vessel’s register within two days of the date of the sale for it to be effective.

 

Special privileges

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 that rank in priority to claims secured by a registered mortgage are as follows:

  1. judicial costs incurred in respect of the sale of the ship and the distribution of the proceeds thereof;
  2. fees and other charges due to the Registrar of Shipping arising under the MSA;
  3. 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 (4) to (11), otherwise such debt ranks immediately after such special privilege;
  4. tonnage dues;
  5. wages and expenses for assistance, recovery of salvage and pilotage;
  6. 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;
  7. rent of the warehouses in which the ship’s tackle and apparel are stored;
  8. 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;
  9. 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;
  10. damages and interest due to any seaman for death or personal injury and expenses attendant on the illness, hurt or injury of any seaman;
  11. monies due to creditors for labour, work and repairs made before the ship departed 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
  12. 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 (1), (2) and (4) to (10) above, although in any case for a sum in the aggregate not exceeding 4,000 units.

 

The following claims also give rise to special privileges, but rank lower than a registered mortgage:

  • monies 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;
  • monies 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 a collision between vessels; and
  • unpaid balance of the price from the sale of a ship.

 

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

  1. claims to possession, ownership or title to ship;
  2. questions arising between co-owners;
  3. claims in respect of mortgage, hypothec or charge on a ship;
  4. claims arising out of a contract of sale;
  5. claims for damages received by the ship;
  6. claims for damage caused by ship;
  7. claims for loss of life or personal injury caused by ship;
  8. claims for loss of or damage to goods carried in a ship;
  9. claims arising out of an agreement for carriage of goods or use or hire of the ship;
  10. claims for salvage;
  11. claims for damage to the environment by ship;
  12. claims relating to wrecks;
  13. claims for towage;
  14. claims for pilotage;
  15. claims for supplies or services rendered to ship;
  16. claims for construction, repair, conversion or equipping ship;
  17. claims for port, dock or harbour dues;
  18. claims by crew for wages or repatriation;
  19. claims for disbursements made;
  20. claims for commissions, brokerage or agency fees;
  21. claims arising out of general average act;
  22. claims arising out of bottomry;
  23. claims for forfeiture of the ship;
  24. claims for insurance premia; and
  25. claims for fees due to the Registrar or tonnage dues.

 

In cases concerning any one of the maritime claims listed in (1) to (3), an action in rem may only be brought against the particular ship in connection with which the claim arose.

In the remaining maritime claims listed in (4) to (25), an action in rem may be brought against that ship when the person liable for the action in personam (the relevant person) was:

  • the owner or charterer, or was in possession or control, of the vessel at the time the cause arose; or
  • the owner, beneficial owner or the bareboat charterer of the ship when the action was brought.

 

The requirement for the relevant person to be the owner, beneficial owner or the bareboat charterer of the ship when the action is brought does not apply to maritime claims secured by special privilege and that survive the voluntary sale of the vessel by up to one year.

If the relevant person is the owner, beneficial owner or the bareboat charterer of another ship, or the owner or beneficial owner with regard to shares when the action is brought, the arrest of sister and associated ships is possible.

What maritime liens rank higher than a mortgage lien?

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

  1. judicial costs incurred in respect of the sale of the ship and the distribution of the proceeds thereof;
  2. fees and other charges due to the Registrar of Shipping arising under the MSA;
  3. 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 (4) to (11), otherwise such debt ranks immediately after such special privilege;
  4. tonnage dues;
  5. wages and expenses for assistance, recovery of salvage and pilotage;
  6. 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;
  7. rent of the warehouses in which the ship’s tackle and apparel are stored;
  8. 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;
  9. 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;
  10. damages and interest due to any seaman for death or personal injury and expenses attendant on the illness, hurt or injury of any seaman;
  11. monies due to creditors for labour, work and repairs made before the ship departed 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
  12. 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 (1), (2) and (4) to (10) above, although 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 to an unpaid seller as security of the payment of the balance of the price of a vessel taken out pursuant to the provisions of article 2009(d) of the Civil Code. This privilege must be recorded in the vessel’s register within two days of its sale. This is done by delivering the prescribed form, completed and signed by the seller, to the registrar. Furthermore, the privilege is not effective against the seller’s other vessels, unless the claim for the price is also registered in the Public Registry within two days of the date of the sale.

Maltese law provides for any creditor having a separate privilege or charges over any part, appurtenance or accessory of a ship to register the privilege or charge in a ship’s register using an instrument executed by the owner in the presence of a witness in the form specified by the minister. On production of this instrument to the registrar, the registrar notifies each charge that has been recorded, stating the day and hour of the record.

Although it is not tantamount to a lien, a seller reserving ownership rights in any part, appurtenance or accessory of a ship may also record his or her interest in the ship’s register at any time prior to the registration of a mortgage. The registration of such a charge or reservation of ownership rights preserves 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 prohibiting, for a specified time, any further dealings with that vessel. The registrar is obliged to comply with this order, once served with it. They are also obligated to enter a note in the vessel’s register recording the order, which would be seen by a third party carrying out a search on the vessel’s register. Claims of a right in or over a vessel are based on:

  • a right of ownership;
  • being secured by a mortgage;
  • being secured by a registered encumbrance;
  • 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
  • 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:

  • the mortgage is validly recorded in the registry of ships of the country under whose laws the ship is documented;
  • that registry is a public registry;
  • the mortgage appears upon a search of the registry; and
  • the 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 have the same status, rights and 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 in the event of default, and upon giving notice of default in writing to the mortgagor. These include the rights to take possession of the ship and to sell the ship privately. By virtue of recent amendments to the Aircraft Registration Act and other related laws that apply to shipping, the mortgagee may also ask the court for an order authorising or directing the taking of possession of a vessel, and the court is bound to render full support to the mortgagee as expeditiously as possible.

The notice of default is deemed to have been received by and notified to the mortgagee if it is sent by registered post to the owner’s last address that is held by the registrar.

Alternatively, the mortgagee may opt to enforce the mortgage by judicial means, following the precautionary arrest of the mortgaged vessel. The vessel must be physically present within Maltese territorial waters to vest the competent Maltese court with the requisite jurisdiction. A mortgage constitutes an executive title according to law. As such, in the event of default, it becomes enforceable by the mortgagee two days after an official letter or other judicial act (accompanied, in appropriate cases, by an affidavit quantifying the amount due) is served on the mortgagor. Once this time has passed, 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 may ask the court’s approval for the private sale of the vessel in favour of an identified buyer, in consideration of a determined price. This application must be supported by appraisals by two independent and reputable valuers, and evidence that the sale is in the interest of all known creditors and that the price offered is reasonable in the circumstances. Such an application will receive a hearing date within 10 days of filing, but the court will not make any order before the application has been served on such persons that the court, based on circumstances and information given by the applicant, wishes to make submissions. In the decree accepting the application, the court nominates a person entitled to transfer the vessel, in accordance with terms and conditions approved by the court, as though he or she were the vessel’s registered owner. This person is required to deposit the price realised with the court within seven days of the sale being completed. A court-approved private sale is an efficient tool for enforcing mortgages under Maltese law.

As an estimate, the process of judicial enforcement of a registered mortgage, starting from the precautionary arrest and culminating in the judicial sale of the vessel, takes four months. If multiple creditors file demands for payment from the proceeds, the court will commence additional proceedings, according to the creditors’ rankings as established by law. The mortgagee, being a creditor to whom a liquidated debt is due under an executive title, can apply to the court for authorisation to bid in the judicial auction animo compensandi (that is, bid for the vessel, with the original amount owed to the bidder being set off and, should the vessel’s sale price exceed the total amount of the bidder’s debts and costs, deposit the surplus monies with the court).

Associated costs 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 or the court-approved private sale of the vessel, including all publication costs and expenses for obtaining any necessary valuations. Such fees and costs are determined on a case-by-case basis and depend upon the amount being claimed as well as any complexities for service arising from the vessel’s physical location.

Ultimately, all judicial fees and costs are taxable by the Registrar of Courts, which may be asked to issue a taxed bill of costs. Such officially taxed judicial fees and costs would be recoverable together with the mortgagee’s claim. In addition, fees of up to €585 (exclusive of VAT at 18 per cent) are payable to any curator appointed by the court for the purpose of executing the eventual bill of sale in favour of the successful bidder or buyer.

Finally, court fees calculated at 1 per cent of the price realised at judicial auction, auctioneer’s fees at 0.2 per cent of the purchase price and VAT at 18 per cent are payable by the successful bidder.

Also, the buyer in a court-approved private sale pays court fees calculated at:

  • 1 per cent, on the first €1 million of the price);
  • 0.5 per cent (on the next €4 million to €5 million of the price);
  • 0.1 per cent (on the next €5 million to €10 million of the price); and
  • 0.01 per cent (on the balance of the price above €10 million).

 

Interlocutory sales of vessels are permitted under Maltese law. Indeed, the court may order the sale of an arrested ship, depending on the outcome of litigation if, on the creditor’s application, it appears that the debtor is insolvent or is unlikely to be able to continue trading and to maintain 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 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?

Once a notice of default has been given to the mortgagor, the mortgagee has the right to sell the vessel privately. However, such a sale would not discharge unsatisfied special privileges over the vessel; these 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. Only court-approved private sales discharge all special privileges over a vessel. However, these require the vessel to be physically present within Maltese territorial waters for the competent court to have jurisdiction.

Default under mortgage

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

There are no statutory provisions under Maltese law that regulate the appointment of a receiver in the event of a default under a mortgage, or that lay down the duties and powers of a receiver appointed under applicable mortgage provisions. In practice, due owing to the form of statutory mortgage that is mandated under Maltese law, contractual provisions stipulating a receiver’s appointment are provided for in a collateral deed of covenant. While this point has never been tested before a court of law in Malta, a court would probably respect the established principle of freedom of contract, and so would probably uphold such provisions, if they were not offensive to principles of public policy. However, if similar provisions were to be contained in deeds of covenants that are regulated by foreign law, any references to the receiver’s powers granted by law, and any reliance made thereon, would require proof of the relevant foreign law, in accordance with the applicable principles of conflicts between laws.

Limitations on rights of self-help

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

Mortgagees have various rights of self-help in the event of a default of any term or condition of a registered mortgage or of any document or agreement referred to therein. The rights are exercisable upon giving the mortgagor prior notice in writing.

A mortgagee’s entitlement to take possession of the vessel subject to the mortgage is one of the main rights available to them. However, this is not an absolute right, since the law provides that a mortgagee is not the owner of a ship or a share, and the mortgagor does not cease to be owner, except as far as is necessary to make the vessel available as a security for the mortgage debt.

Another important right is the mortgagee’s power to sell the mortgaged vessel. However, where more than one person is registered as mortgagee of the same vessel, a mortgagee cannot sell the ship or share without the agreement of the other mortgagees, except under the order of a court of competent jurisdiction. Furthermore, if the proceeds of sale show a surplus after discharging the mortgage debt, the mortgagee is obliged to deposit the surplus for the benefit of other creditors as well as the mortgagor.

The rights of the mortgagee are not affected by orders issued by a competent court, at the request of a person claiming a right in or over a vessel, that prohibit the mortgagee having any further dealings with 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 mortgagee’s rights, it does not specify any particular statutory duties that the mortgagee owes towards the owner or third-party creditors, other than the obligation to deposit any surplus proceeds of a sale to the court for the benefit of other creditors and the mortgagee, in the event that the mortgagee exercises its power to sell a mortgaged vessel. However, a mortgagee would owe a duty of care towards the owner and third-party creditors. Therefore, a mortgagee exercising his or her rights is required to act with the diligence and prudence of a bonus paterfamilias. Furthermore, when exercising his or her rights, the mortgagee must act lawfully within the ambits of established law and procedure.

Thus, for example, 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 the security instrument does not state the maximum sum secured by the mortgage and this amount 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, the mortgagee is required to specify the sum due at the time of enforcement by means of an affidavit served on the mortgagor. This gives the mortgagee and third-party creditors the opportunity to contest the amount as interested parties.

In a court-approved private sale, along with its application, the mortgagee must provide a court with two appraisals by independent and reputable valuers confirming the vessel’s value, and evidence that a private sale is in the interest of all known creditors and the price being offered is reasonable under the circumstances.

Finally, while a registered mortgage is attached to the mortgaged vessel until it is discharged, if a mortgaged vessel is forfeited for any reason permissible at law, the mortgagee’s interest in the vessel terminates if they have authorised, consented to or conspired in the act, failure or omission leading to the vessel’s forfiture.

Law stated date

Correct on

Give the date on which the information above is accurate.

1 June 2020.