Ship mortgages and other liens over vesselsTypes 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 is 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 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 flip side 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 of the date of the sale.
Insofar 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 vessels; 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:
- claims to possession, ownership or title to ship;
- questions arising between co-owners;
- claims in respect of mortgage, hypothec or charge on a ship;
- claims arising out of a contract of sale;
- claims for damages received by the ship;
- claims for damage caused by ship;
- claims for loss of life or personal injury caused by ship;
- claims for loss of or damage to goods carried in a ship;
- claims arising out of agreement for carriage of goods or use or hire of ship;
- claims for salvage;
- claims for damage to the environment by ship;
- claims relating to wrecks;
- claims for towage;
- claims for pilotage;
- claims for supplies or services rendered to ship;
- claims for construction, repair, conversion or equipping ship;
- claims for port, dock or harbour dues;
- claims by crew for wages or repatriation;
- claims for disbursements made;
- claims for commissions, brokerage or agency fees;
- claims arising out of general average act;
- claims arising out of bottomry;
- claims for forfeiture of ship;
- claims for insurance premia; and
- 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:
- judicial costs incurred in respect of the sale of the ship and the distribution of the proceeds thereof;
- fees and other charges due to the Registrar of Shipping arising under the MSA;
- 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;
- tonnage dues;
- wages and expenses for assistance, recovery of salvage and pilotage;
- 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;
- rent of the warehouses in which the ship’s tackle and apparel are stored;
- 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;
- 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;
- damages and interest due to any seaman for death or personal injury and expenses attendant on the illness, hurt or injury of any seaman;
- 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
- 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.
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, 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 of 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 of 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:
- 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.
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 that 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. By 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 29 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 daysof 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 of 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 or the court-approved private sale of the vessel as the case may be, 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 or in favour of the buyer in a court-approved private sale. 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; and court fees calculated at 1 per cent (on the first €1 million of the price), 0.5 per cent (on the next €4 million of the price up to €5 million), 0.1 per cent (on the next €5 million of the price up to €10 million) and 0.01 per cent (on the balance of the price above €10 million) would be payable by the buyer in a court-approved private sale as the case may be.
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?
There are no statutory provisions under Maltese law, in particular under the MSA, that regulate the appointment of a receiver in a scenario of default under a mortgage, and that lay down the duties and powers of any such receiver appointed under applicable mortgage provisions. In practice, owing to the form of statutory mortgage that is mandated under Maltese law, contractual provisions stipulating the appointment of a receiver are provided for in a collateral deed of covenant. To the best of the authors’ knowledge, this point has never arisen and, therefore, has never been tested before a court of law in Malta. However, in the opinion of the authors, such dispositions not being offensive to principles of public policy, the court would be expected to respect the well-established principle of freedom of contract and would therefore uphold such provisions. However, insofar as concerns similar provisions as may be contained in deeds of covenants regulated by a foreign law, any reference therein to the powers of the receiver given to him or her by law and any reliance made thereon would necessitate proof of the relevant foreign law in accordance with applicable principles of conflicts of laws.
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 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, the mortgagee is obliged to deposit the same for the benefit of other creditors as well as of the mortgagor itself.
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 itself in the event that the mortgagee were to exercise its 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 itself 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 its 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 itself authorised, consented to or conspired to the act, failure or omission in consequence of which the vessel is forfeited.