Court further confirms rights of mortgagees under Maltese law

Introduction
Rights of mortgagees
Facts
Decision
Comment

Introduction

In 2006 a procedure was inserted in the Code of Organisation and Civil Procedure that gives the mortgagees of vessels further enhanced rights and by which a mortgagee can enforce his or her rights through a court-approved private sale (for further details please see "Court announces additional advantages for mortgagees of Maltese vessels"). This remedy attempts to bridge the distance between the two previously available remedies (private sales and judicial sales by auction), neither of which was 100% satisfactory.

Through the court-approved private sale, the law seeks to support the mortgagee and other creditors of a defaulting owner by ensuring the best price for the vessel (which is associated with a private sale and not a judicial sale by auction), while ensuring that the vessel is sold free and unencumbered (which a judicial sale by auction can guarantee and which a private sale cannot).

In line with his ruling in Danske Bank v the MV Thor Spirit, on November 24 2011 Justice Mark Chetcuti confirmed the substantial and useful rights of the mortgagee granted by the law in Norddeutsche Landesbank Girozentrale v Chemstar Shipping Ltd.

Rights of mortgagees

Section 42 of the Merchant Shipping Act lays down the rights of the mortgagee in the eventuality that the owner is in default of his or her obligations. One of the rights listed is that of the mortgagee to take possession of the vessel.

While this may be obvious on paper, from a practical perspective the situation can present a number of challenges, as follows. The owner of a vessel is in default of a term in his or her mortgage. The mortgagee gives notice to the mortgagor to no avail, as the owner remains in default and the vessel is in a far-flung jurisdiction. The mortgagee wishes to take possession, so it informs the owner that it intends to do so. The mortgagee may instruct the owner to take the vessel and to deliver it into the possession of the mortgagee in a more efficient or reliable jurisdiction, where the mortgagee can then take the necessary steps to enforce his or her mortgage through any remedy provided by Maltese law.

From experience, owners generally comply with such requests. However, there will be occasions when the owner, irrespective of the fact that the mortgagee would be fully within his or her rights to take possession of the vessel and order the owner to deliver the vessel to, say, Malta, the owner consciously refuses. What can the mortgagee do about this situation?

Facts

This was the position in which Norddeutsche Landesbank Girozentrale recently found itself. Following the default of Chemstar Shipping Ltd on its mortgage payments for the MV Star 1 (which was registered under the Malta flag), the bank sent the mortgagor a notice of default. This was not actioned by the owner, which remained in default of its obligations. The mortgagee then issued the owner with a sailing advice ordering them not to allow the vessel to proceed to Turkey, but to proceed to Malta instead. The owner ignored this advice and proceeded to Turkey.

The bank issued the owner with a further sailing advice to proceed immediately to Malta, as it was entitled to in terms of its loan agreement. The owner refused to comply. The bank representatives then attempted to board the vessel in Turkey to serve the master with a notice of possession, but were barred from boarding. A notice of possession was then served on the registered owner. The owner refused to hand over possession to the bank.

The bank was therefore forced to file an application before the Maltese court requesting that the court:

• confirm that the bank had the right to take possession of the vessel, given the owner's default; and
• fix a period of time within which the owner must deliver the vessel to the bank.

If these measures failed, the bank further requested that the court:

• authorise the bank to take possession of the vessel, if necessary by appointing new crew;
• order the owner to refrain from doing anything that would, either directly or indirectly, hinder the bank from taking possession of the vessel; and
• make all orders necessary to enable the bank to take possession of the vessel.

The owner attempted to defend the application by stating that:

• the Maltese court had no jurisdiction over the matter because the vessel was not in Maltese territorial waters;
• the law did not contemplate the mortgagee having a right to file such an application;
• it was not the fault of the owner that led to it being in default;
• the mortgagee had taken none of the steps associated with obtaining an executive title; and
• the mortgagee first had to file an official letter, which it had not.

Decision

The judge threw out the defence of lack of jurisdiction on the grounds that:

• the defendant was a Maltese registered company and therefore the jurisdiction of the Maltese court was beyond question;
• a jurisdiction clause in the deed of covenants indicated the Maltese courts as one of the courts to which disputes could be referred; and
• Section 2(1) of EU Regulation 44/2001 applied.

The judge also threw out the other defences, highlighting the fact that the right of the mortgagee to take possession was conditioned only by the need for the mortgagee to give notice to the owner in writing, as stipulated in Article 42 of the Merchant Shipping Act, and the need to ensure that all of the criteria established by the loan agreement and deed of covenants had been satisfied.

He therefore accepted all of the bank's requests and declared that the bank had a right to take possession of the vessel. He ordered the defendant to deliver the vessel to the bank within one week. If the owner failed to do so, the judge authorised the bank to take possession of MV Star 1 and ordered the owner to refrain from obstructing the bank from doing so.

Comment

By dealing with each defence separately in his decision, the judge made a number of interesting remarks and observations that may open up a Pandora's box of further claims. In this particularly sensitive commercial area, the strength of the flag lies in the comfort that it can give the financiers. However, this ruling should reassure international financiers of vessels registered under the Malta flag. Provided that the contracts into which they enter are in line with the provisions of the Merchant Shipping Act, financiers can rest assured that their rights will be fully upheld and safeguarded.

For further information on this topic please contact Ann Fenech at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email (ann.fenech@fenlex.com).