Thought leadership from our experts

Protection of mortgagees under Maltese law

One of the reasons behind the success of the Malta flag as the largest flag in Europe with over 65 million tons and the 6th largest world-wide is the protection which the flag offers the mortgagee.

In a world of great economic uncertainty which has prevailed since 2008, the shipping and maritime industry has certainly not escaped unscathed and we still have a very challenging economic environment. A number of banks have been bitten rather badly since the recent recession, some more than others. Those banks and financiers who lent to owners who registered their vessels in Malta fared better than others and the reason is that Maltese law offers a very robust level of protection to the financiers, to the mortgagees. This was always important but post-recession it has become even more so. As a result the Malta flag today is even more sought after particularly since the protection that it offers is not on paper alone but we have seen over the past 6 years how truly effective the level of protection actually is.

Under Maltese law if an owner is in default the law provides a substantial array of remedies.

The mortgagee may take possession of the vessel and may use the vessel and operate the vessel as he deems fit. He can perform any acts relating to the vessel and can manage the vessel. The only thing that he cannot do is claim the vessel to be his. The vessel remains within the registered ownership of the owner.

The mortgagee may also sell the vessel privately. This could be a useful remedy because naturally if the vessel is sold privately then the mortgagee has full control over the sale price. This is normally perceived to be the advantage over a judicial sale by auction, because in a judicial sale by auction, the executing creditor is never sure of the price that would be fetched for the vessel at the auction. However one major disadvantage with a private sale is that in a private sale, the vessel is not sold free and unencumbered and very frequently in such situations there would be a number of outstanding creditors who may have liens or privileges against the vessel which would follow the vessel irrespective of the sale and in the hands of 3rd party buyers.

Most importantly however the mortgage under Maltese law is considered to be what is called an executive title. This means that it is equivalent to a judgement and therefore if the owner is in terms of the deed of covenants in default, the mortgagee can proceed directly with the enforcement of the mortgage through any of the enforcement provisions of our law.

The two most important enforcement tools are the judicial sale by auction and the court approved private sale.

The Judicial Sale by auction was the preferred route for most financiers for many years. If the mortgagor is in default and the financier decides to enforce his mortgage through a Judicial Sale, what happens is that the mortgagee files an application in court explaining that the mortgagor is in default, explaining that the mortgage is an executive title according to Maltese law, and requests the court to order the Judicial Sale of the vessel. The court would normally approve such a request and would set a date. The Judicial sale is held in court and the vessel will be sold to the highest bidder. The vessel is sold to the highest bidder free from encumbrances and therefore on the payment of the purchase price into court and the execution of the bill of sale and the transfer, all creditors of the vessel would then need to make a claim against the purchase price deposited in court. There is no system of reserved price. What this means very often is that vessels in judicial sales tend to be sold at under their actual value and that is obviously bad news for both the creditors of the vessel as well as the owner himself.

The fact that in a private sale a number of the vessel's debts follow the vessel even in case of a sale of the vessel to a third party, and the fact that in a judicial sale by auction, the creditor has no control whatsoever over the sale price, presented an unsatisfactory situation for years.

However Maltese law was amended in 2005 to deal precisely with this gap in the system. In 2005 the Code of Organisation and Civil Procedure was amended and sections 358 through to 364 were created providing for the Court Approved Private Sale.

This new enforcement tool proved to be very successful indeed and has been used by numerous financiers including Deutsche Bank, Danske Bank, Commerz Bank, Hyundai Heavy Industries, Bank of America, Macquarie Bank Ltd and a host of others. By virtue of the court approved private sale, a mortgagee can source a private buyer and can agree on the sale of the vessel with an identified buyer for an agreed price. The price would have to be in excess of the highest of 2 valuations that would have to be obtained by the mortgagee.

An MOA is signed with the buyer subject to the approval of the court. Following that the mortgagee would file an application in court informing the court of the mortgagor's default and at the same time would present the two valuations and the MOA. The mortgagee would request the court to approve the private sale. Once the court approves the private sale, a date is fixed for the sale to take place in court, the sale price is paid into court and a bill of sale is executed. The vessel is sold to the buyer free and unencumbered.

As a result this measure takes the best of a private sale, because a sale would have been made at a pre agreed price, and the best of a judicial sale by auction, because it is sold free and unencumbered.

This has proved to be an exceptionally useful remedy even in the most complex of scenarios such as in the case of the bankruptcy of Today Makes Tomorrow (TMT) associated with the Mr. Nobu Su of Taiwan which made the headlines for a number of weeks some years back. In that case, a number of vessels of the Lady bug range were in fact sold off in Malta by virtue of a court approved private sale after Megabank had successfully obtained relief from a stay order in Chapter 11 proceedings before the courts in Texas. This relief enabled us to proceed with the court approved private sale in Malta to safeguard the mortgagee's position.