We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
09 September 2009
The financial crisis has brought with it increased requests from mortgagees about how best to protect their interests. The past 10 months have not been happy for the international shipping community. Banks are increasingly having to decide whether to renegotiate loan agreements, contract terms and covenants, or whether to pull the plug and foreclose.
Malta has featured substantially in these requests, either because the vessels concerned are registered under the Maltese flag or because the vessels themselves are physically situated around Malta. This is because just outside Maltese territorial waters, to the north-east of Malta lies Hurd's bank - a shallow sandy bank which is fast becoming an ideal location for laid-up vessels to anchor temporarily outside the territorial waters of any country, while at the same time being in the middle of the Mediterranean Sea, equidistant from Italy and north Africa to the north and south, and from the straights of Gibraltar and the Suez Canal to the west and east.
The Merchant Shipping Act gives mortgagees of vessels registered in Malta a great deal of comfort, which has always been one of the reasons behind the success and strength of the Maltese flag. The law grants mortgagees a privileged position because a mortgage duly registered in the Shipping Register is an executive title and therefore equivalent to a judgment. This means that in case of default, the mortgagee need not prove title or go through any lengthy and laborious court procedures in order to enforce the mortgage. Instead, and because the mortgage is in itself an executive title, the mortgagee can proceed immediately with the enforcement of its rights and the private sale of the vessel, or if the vessel is in Malta, the mortgagee may proceed with an application requesting the judicial sale of the vessel.
During the first half of 2009, three judicial sales took place. Judicial sales can be fairly swift, often taking only five to six weeks from the date of the vessel's arrest through to the date of sale. The only disadvantage with a judicial sale by auction is that often the price obtained is a fraction of what would normally be achieved in a private sale. In a normal private sale the mortgagee cannot sell the vessel free and unencumbered. Therefore, when the bank takes possession of the vessel and attempts to sell it in a private sale, the fact that the vessel cannot be transferred free and unencumbered often acts as a direct disincentive to third-party buyers.
Thus, in early 2008, well ahead of the looming financial crisis, the legislature introduced the concept of court-approved private sales. Any creditor with an executive title (the mortgagee being one of them) can now file an application requesting the court to approve the private sale of a vessel for a given price to a given buyer. The advantage of this is that the price is negotiated beforehand, to the advantage of both the mortgagee and the mortgagor. Furthermore, because it is a court-approved sale, the vessel is transferred free and unencumbered as in a judicial sale by auction.
The law now provides that the applicant requesting approval for the private sale must obtain two valuations of the vessel. The applicant must show that the price obtained is reasonable under the circumstances (ie, the price must be at least equal to or in excess of the valuations obtained).
Surprisingly, mortgagees have not made extensive use of this new procedure. Perhaps this is because it is a new introduction to the statute book. However, it is anticipated that as more financiers consider pulling the plug and foreclosing, they will be advised that this new procedure is beneficial to both mortgagees and mortgagors, who can expect to get more for their assets.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.