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02 March 2016
A creditor that wishes to enforce its claim against a vessel under Maltese law may opt for a judicial sale by auction or, alternatively, a court-approved private sale. The latter – which appears to be favoured by mortgagees – normally entails the executing creditor searching the open market for a potential purchaser. Once the best available offer is identified, the creditor and prospective buyer will conclude a memorandum of agreement which is subject to the approval of the Maltese courts. The creditor must then file an application before the court requesting approval of the sale at the pre-determined price indicated in the memorandum. The creditor must also present two valuations as proof to the court that the offer tabled is above the market value of the vessel and in the best interest of all other creditors. Once the sale is approved, the vessel is transferred free and unencumbered to the buyer.
In a recent court-approved private sale, the Maltese Civil Court unprecedentedly permitted a mortgagee to purchase the vessel. Moreover, the court allowed the same mortgagee to buy the vessel animo compensandi, meaning that rather than paying the purchase price from its own pocket, the amount was offset against the existing debt owed to the mortgagee.
The mortgagee of the MV KAY applied to the court to allow it to purchase the vessel for €195,782 and set off this amount against the owner's outstanding €45 million of debt. The court stated that such a request was not in itself incompatible with the provisions of Maltese law which regulate court-approved private sales. Further, the court noted by way of comparison that within the context of judicial sales by auction all creditors may bid animo compensandi during an auction. However, the presiding judge cautioned that in respect of court-approved private sales, the court was obliged to proceed with more care, to ensure that the purchase price was in the best interest of all other known creditors.
The court noted that the mortgagee had its valuations sworn on oath which, while not required by law, gave the content more weight and provided the court with additional peace of mind. Despite the fact that the MV KAY was a relatively large passenger vessel, one of the respective valuations described the vessel as "a stripped down hull with no machinery, no equipment and no furniture" and declared that it was good only for scrap metal.
In addition, the court pointed out that the only other known creditor of the vessel had not objected to the sale of the MV KAY. Accordingly, the presiding judge noted that no objections were brought forward in respect of the valuations. The court therefore approved the sale of the vessel in favour of the mortgagee and allowed for the purchase price to be offset against the outstanding debts owed to it.
In its decision, the court was clearly cautious about the potential risks which may be associated with these types of sale. Maltese law dictates that the creditor must adduce to the satisfaction of the court that the price offered is in the best interest of all creditors and reasonable in the circumstances. This usually translates to ensuring that the purchase price is the best available offer on the open market.
In the case at hand, given that the only other known creditor did not object to this sale and in light of the fact that the owners had no interest in the proceedings, the court had no valid grounds to fear that the price offered by the mortgagee was not in the best interest of all other creditors. That said, if the price offered or the valuations were challenged, the court would most likely have requested that the mortgagee provide additional evidence to disprove these allegations. In a normal scenario, the mortgagee would have had to produce evidence in the form of enquires made through various brokers, copies of any issued advertisements or, alternatively, proof of the various offers received. This could mean that, in the context of animo compensandi sales, a mortgagee wishing to buy a vessel may be reasonably expected to at least test the open market to see whether any other offers are available and if so, the mortgagee may be expected to propose a larger sum than the highest offer received. Otherwise, in a contentious scenario, it would be hard to bring tangible evidence that the mortgagee's offer is in the best interest of all creditors.
Nonetheless, this judgment is still significant, as it offers mortgagees more flexible enforcement options. Where no reasonable or better offers are available, the mortgagee may purchase the vessel, instead of gambling and selling the ship by judicial auction. Further, by allowing the mortgagee to set off the purchase price against the debts owed to it, an animo compensandi sale avoids creating further financial burdens on the mortgagee, which most likely would already be trying to cut its losses.
For further information on this topic please contact Adrian Attard at Fenech & Fenech Advocates by telephone (+356 2124 1232) or email (firstname.lastname@example.org). The Fenech & Fenech website can be accessed at www.fenechlaw.com.
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