Malta Registration and Discharge of Mortgages

| 08 Feb 2012

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Maritime mortgages have become accepted as a major source of finance for ship owners who are willing to use their interest in the ship as a security for a loan. Through this mechanism, a ship owner provides the creditor with security for the repayment of a loan, or the performance of some other obligation, by the acquisition of a property interest in the ship.

Under Maltese law, the mortgage regime provides a high degree of security to financiers such as banks willing to fund the purchase of ships and yachts. Vessels act as security of a debt or obligation generally through an agreement between the ship owner, acting as the mortgagor, and the mortgagee, or instead by operation of law.

Ships are considered under Maltese law as movable property. For the purposes of maritime claims, a ship includes the hull and all of the equipment, machinery and other accessories belonging to the ship, and including those on board or those which have been temporarily removed. More importantly, ships enjoy under Maltese law, a unique status by regarding them as a separate legal entity from the patrimony of their owner when acting as a security of actions and claims to which they are subject to.

A mortgage is not a personal obligation of the ship owner and therefore any transfer of ownership or  death of the owner does not extinguish the rights of the mortgagees.

An important element in such mechanism is the registration of mortgages. Registration bestows on mortgages the necessary legal validity vis-à-vis third parties. This allows ship financiers to be aware of the existence or otherwise of other mortgages or privileges attached to the ship prior to the issuing of a loan. Mortgage registration involves an instrument to be drawn up in a prescribed form that creates the security executed by the mortgagor in favour of the mortgagee in the presence of, and attested, by a witness or witnesses.

Since mortgages are recorded in the manner and time in which they are filed, there is an order of priority between mortgages themselves with earlier mortgages ranking prior to subsequent ones. Through this system, the Maltese legislator is giving subsequent financiers the possibility of assessing their position prior to registration of a mortgage. However, this does not restrict them from obtaining security over ships on which mortgages have already been registered. On the other hand, a mortgagee is empowered by law to prohibit the ship owner from registering further mortgages over the vessel without his formal prior consent. In these cases, the Registrar General shall make a note in the local Register of Ships and shall be prohibited from recording any other mortgages unless the consent in writing of the holder of the prior mortgage is obtained.

Maltese legislation provides that all registered mortgages, any special privileges and all actions and claims to which a vessel may be subject are not to be affected by the bankruptcy of the mortgagor of the ship owner. Hence, mortgages in relation to a vessel have preference over all other debts, claims or interests of any creditor or of any curator, trustee or receiver. Such practice is possible in view of the fact that under Maltese law the claims are deemed as procedurally and materially distinct.

The local mortgage system grants a mortgagee the right of assignment (including partial assignment) of his rights over the ship to a third party, which is to be recorded by the Registrar-General who shall enter in the register the name of the transferee. Nevertheless, one must keep in mind that a mortgage is indivisible, notwithstanding the divisibility of the underlying debt or other obligations that the mortgage may secure. It also allows the mortgagee the right to restrain the debtor from selling, alienating, transferring or disposing inter vivos such property by onerous or gratuitous title.

A key aspect with regard to the nature of mortgages registered on Maltese-flagged vessels, is the fact that they enjoy the status of an executive title under Maltese Law. Thus, rights of the mortgagees may be enforced upon default through the service of a notice on the debtor, without necessitating a Court’s judgement. Thereafter, mortgagee is entitled to take possession and sell the ship to third parties. Prior to 2006, Maltese law offered mortgagees the possibility to enforce their rights over a mortgaged vessel either by way of a judicial sale by auction or otherwise by means of a private sale. The latter procedure offers the mortgagee the possibility to negotiate the best price with the right buyer, however the vessel is not sold as free and unencumbered. Hence, potential buyers tend to thread rather cautiously in such instances. Alternatively, a mortgagee could opt to go for a judicial sale by auction of the ship given that a mortgage is deemed to be an executive title under Maltese law. In contrast to the private sale, a judicial sale offers security to potential buyers since the vessel is sold as free and unencumbered, albeit in judicial sales, vessels are sold for a price considerably lower than the actual market value of the boat.

In 2006 a third option was provided by Maltese law to mortgagees in the form of a court-approved private sale. This  allows a mortgagee to negotiate the best price while also offering potential buyers the guarantee of a free and unencumbered sale. This procedure has been put to the test only recently, more specifically in December 2011, in the case Danske Bank A/S vs MV Thor Spirit, and has proved to be very efficient taking approximately two weeks from the filing of the application until the final judgement delivered by the Maltese Court.

With regard to foreign mortgages, recognition is only granted if the mortgage is validly recorded in the registry, which must be public, of the country under whose laws the ship is documented and that upon a search of the registry such foreign mortgage appears. Additionally, the mortgage must be granted a preferential and general status under the laws of the country where the mortgage is registered.

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