The Malta’s Flag strength relies on a consolidated set of rules aimed at protecting creditor interests and confidence in our flag. Over the last few decades, this has facilitated owners’ access to credit facilities and led to a substantial growth for Malta’s flag. For this reason Malta decided to introduce additional tools in the recently approved amendments to the Merchant Shipping Act (the “Act”) meant to diversify Malta’s maritime offering and consolidate Malta’s position as a leading flag. These changes will come into force on 16th April, 2025.
The below mentioned amendments to the Act are the results of a continued dialogue between Maltese maritime authorities and industry practitioners aimed at updating Malta’s legal framework and aligning it with most recent industry practices originating from different jurisdictions across the world. One such change saw a shift from bank financed vessel purchases to models based on finance leases. Apart from cosmetic changes paving the way to the introduction of electronic tools, the Act will reduce the age of vessel allowed to be registered under the Malta flag from 25 to 20 years. This will consolidate the flag’s commitment to a younger fleet, more efficient in terms of energy consumption and safety standards. Other changes will see the removal of anachronistic requirements such as the need for vessels to include identification markings on the keel, delegation of certain powers from the Minister to the Registrar-General and more flexibility in correcting registration mistakes included in mortgages.
In addition to the above the Flag will now allow the possibility to register mortgages over ships under construction. This instrument will render registration of ships under construction more practical while allowing the ship builder to retain control in case the owner would not honour its commitment. The possibility to register ships under construction has also been extended from two to three years. The Act also introduced the possibility to record in the Malta Shipping Register mortgages registered abroad.
However, one of the most innovating novelties revolves around the possibility to register an interest in favour of lessors in a finance charter transaction in relation to Malta flagged vessels. Such provisions were introduced following the growth of sale and lease back financing transactions allowing financiers to benefit from additional security under Maltese law.
What is a Finance Charter?
A Finance Charter refers to “chartering or lease of a vessel following which a charter obtains possession and control of such vessel and where the principle objective is the financing of the operation, purchase, administration or management of the vessel”. The registration of an interest in favour of a lessor is meant to secure payment of hire, a principal sum and interest, an account current and any other obligation mentioned in the charter agreement.
The term “bareboat charterer” is separately defined as “a person who leases or sub-leases a ship, by means of a contract for a stipulated period of time, during which period such person shall acquire full control and complete possession of the ship, including the right to appoint her master and crew for the duration of the charter but excluding the right to sell or mortgage the ship”.
Once recorded, the finance charter becomes a charge over a ship with preference over all debts, claims or interests of any other unsecured creditor, save for any privileged claims which would rank in preference of a finance charter interest. The interest secured by a finance charter will always rank after any registered mortgage. Therefore the rights of the mortgagee shall in no way be prejudiced by the registration of the finance charter instrument. It is to be noted that since the only person to be able to grant a mortgage over a vessel can be the lessor, it will be highly unlikely to have a simultaneous registration of a mortgage and interest over a finance charter, unless the vessel is given as security through a mortgage for obligations with third parties other than the charterers.
Similarly to provisions governing registered mortgages, the bankruptcy or involvement in court winding up procedures of the charterer will not affect the registered interest hold, this notwithstanding the fact the ship was under the possession or not of the charterer. Therefore, a finance lessor becomes a secured creditor increasing its chances of recovering amounts due to it.
Although the mortgage holder will always rank before a finance lease interest holder, also for mortgages registered after the registration of an interest over a lease, such interest will still attach to a vessel. This, together with other security interests used commonly in financing transactions such as share pledges, assignments and guarantees, strengthen the position of the financier encouraging the use of the Maltese legal framework.
