Finance Charter Instrument: FAQs

By virtue of recent amendments to Malta's Merchant Shipping Act ("MSA") introduced through Act No. I of 2025 (the "Act"), on 4 February 2025, ship financiers may now register a Finance Charter Instrument (FCI) as security for their interests. These FAQs outline the scope and practical application of the FCI within the Maltese legal framework.

1. What is a Finance Charter Instrument?

Typically, a finance charter or a finance lease is a financing arrangement under which a ship is leased to a lessee, as the finance charterer, on terms designed to facilitate the financing of the construction, acquisition, or operation of the vessel, typically through the execution of a bareboat or demise charter. The finance charterer assumes responsibility for the vessel's operation and control, much like an owner, while legal title remains vested in the financier until all financing obligations are discharged. Once the charterer has honoured all its payment obligations, they would generally exercise their purchase obligation or option, as applicable, upon which title shall be transferred from the finance lessor to the charterer.

Under Maltese law a 'finance charter' is defined as meaning "the chartering or lease of a ship under terms where the possession, operation or control of that ship is given to a bareboat charterer or to a lessee including through a demise or bareboat charter or a similar agreement, the principal purpose and intention of which is to finance the acquisition, operation, administration or management of that ship."

To this end, Article 49B of the MSA was enacted to seek to provide statutory security rights to a lessor who has acquired ownership of a vessel as part of an arrangement primarily intended to finance the eventual acquisition of that ship by the lessee.

2. What security does the FCI provide to a financier?

A lessor may register with the Maltese Ship Registry its security interests over a leased vessel flying the Malta flag in a manner similar to a registered mortgage, regardless of whether the vessel is bareboat-registered under the Malta flag. While the registration of an FCI does not provide the same level of security as a Maltese law mortgage, it introduces an additional layer of protection directly attached to the vessel.

The lessor may secure any right arising in its favour in a finance charter agreement, this including the payment of hire, a principal sum and interest, an account current, as well as the performance of any other obligation. Notably, however, future obligations cannot be secured under the FCI. Consequently, there is no need to expressly stipulate any maximum secured sum, and the law covers most obligations typically undertaken in a finance lease arrangement. When combined with traditional security mechanisms such as share pledges, assignments, or guarantees, the FCI may offer further comfort to lenders financing Malta flagged vessels.

3. How is the registration of an FCI completed?

A standard form FCI instrument is to be executed by the finance charterer in favour of the financier who then must sign the instrument in acknowledgement. Each signatory's execution of the FCI must then be witnessed.

The instrument must be submitted to the Registrar of Ships in Malta, who records it in the ship's register, noting the date and time of registration. Upon registration, the FCI constitutes a charge in favour of the lessor, in its capacity as shipowner, and remains registered and enforceable erga omnes until formally discharged or sold through judicial sale

Registration in the public ship register serves as formal notice of the lessor's rights over the vessel, ensuring legal recognition and protection of the financing arrangement. It also renders the FCI enforceable against third parties, with the encumbrance duly reflected by an annotation on the vessel's Transcript of Register.

4. What documents need to be produced for the registration of an FCI with the Malta Ships Registry?

It is general practice that each of the finance charterer and the financier issue a Power of Attorney appointing local attorneys to execute the statutory form. In addition, if the vessel is already subject to a registered mortgage, said mortgagee's consent must be obtained and filed with the Malta Ships Registry. All such documents must be notarised, expressly confirming the binding authority of the signatory, and duly apostilled.

5. How lengthy is the procedure to register an FCI?

The registration process is generally straightforward and is typically completed concurrently with the execution of the bareboat charterparty agreement. However, registration may also be affected at a later stage, if required. It is also worth noting that the Malta Ships Registry usually requires approximately two to three working days to review and pre-clear the draft FCI instrument along with the necessary Powers of Attorney.

6. Can an amendment to the FCI be affected once it is registered?

An amendment of the FCI may be registered for any purpose, how it is mandatory where there is:

• an increase in the amount of capital secured by such FCI; and

• the intention to extend FCI to secure any other obligation of the finance charterer in favour of the lessor under and in accordance with the terms of a finance charter.

When a registered FCI is amended, the registrar records the amendment in the register upon submission of the amended instrument, executed in accordance with Article 49B, along with the lessor's written consent. Once registered, the amendment becomes an integral part of the FCI and continues to enjoy the same priority that it held prior to the amendment.

7. Can a vessel in Malta have both a mortgage and a FCI registered over it simultaneously?

Under Maltese law, a vessel may be encumbered with a registered mortgage and an FCI concurrently. This contrasts with other jurisdictions offering this form of security, which typically permit the registration of only one type of security instrument at a time. This dual registration provides finance lessors with greater flexibility, as it allows them to formally record their rights as lessors while enabling the vessel to serve as collateral for another lender through a mortgage, assuming the underlying bareboat charter does not prohibit it.

However, if a FCI is to be registered over a vessel that already has a mortgage, the prior written consent of the mortgagee is required before the FCI can be registered. This ensures that the rights of the existing mortgagee are respected while allowing the versatile structuring of ship finance transactions under Maltese law.

8. How does the ranking of a FCI compare to that of a Maltese statutory mortgage and other privileged maritime claims?

The finance charter instrument enjoys a privileged ranking among claims over a financed vessel. Its status arises from its legal character as a charge over the ship, enforceable against all third parties.

However, this priority is not absolute. The finance charter instrument does not take precedence over existing mortgages or certain statutory privileged claims. Specifically, it ranks after mortgage debts and protected claims such as crew wages, port dues, and salvage claims, but before other secured and unsecured claims. It also ranks below any special privileges that arise prior to its registration. Accordingly, while the instrument enjoys a degree of privileged status, it remains subordinate to these higher-ranking maritime claims.

This ranking is preserved in the event of a judicial or court-approved sale of the vessel. In such circumstances, the lessor's rights under the registered finance charter instrument are transferred from the vessel to the proceeds of sale, thereby ensuring recognition and protection as a secured maritime claim.

9. Would the insolvency of the charterer affect the rights of a financier holding a registered FCI?

Article 37(1a) of the MSA establishes that a FCI registered over a Maltese-flagged vessel remains unaffected by the bankruptcy of the finance charterer occurring after the FCI's registration date. This protection applies even if, at the commencement of the bankruptcy, the finance charterer had possession, control, or disposition of the vessel.

The registered FCI is granted priority over all other debts, claims, or interests of any other creditor, curator, trustee, or receiver acting on behalf of other creditors, except for those claims which, under the provisions of the MSA, would rank above an FCI.

10. How can a financier enforce his rights under an FCI?

A financier can enforce their rights under an FCI primarily through the statutory right of repossession provided under Article 49B. Should the finance charterer default, the lessor can retake possession of the vessel by serving written notice on the master, the local agent or a court appointed curator. This statutory right reinforces the contractual re-possessory rights typically included in finance charter agreements. This framework ensures that the lessor can effectively protect and enforce their security in both contractual and statutory terms.

Finance charter agreements are generally governed by foreign law and include a foreign jurisdiction clause, which Maltese courts typically recognise and uphold. The introduction of the FCI into Maltese law offers additional reassurance to financiers, as it takes precedence over certain provisions of the Civil Code, some of which may be considered outdated and less suited to the sophisticated transactions that we are seeing in today's market.

11. How does the Finance Charter support Malta's position as a maritime finance hub?

Until recently finance lessors had access to only a limited range of security options, particularly in cases where the lessee is established outside Malta. To address this and to maintain Malta's long-standing reputation as a creditor-friendly jurisdiction, the legislator working together with key industry stakeholders implemented the FCI into law.

With the introduction of the FCI, Maltese law is building on its mortgage framework to provide financiers with a streamlined, transparent, and enforceable security mechanism, thereby strengthening Malta's reputation as a trusted hub for ship finance and leasing. Beyond granting finance lessors a statutory right of repossession, the FCI also provides an added layer of protection by giving lessors a secured preference over other unsecured creditors who may also have a claim in rem over the vessel.

The incorporation of the FCI into Maltese law thus underscores the legislator's commitment to adapting the legal framework to the evolving nature of ship finance transactions, reflecting the practical realities of the modern shipping industry.

Our experience with the registration of an FCI

Registering a Finance Charter Instrument in Malta is a strategic step for financiers, providing a legally enforceable security over the vessel and a recognized priority against third-party claims ensuring that lenders' interests are effectively protected in asset backed lending. The registration process in Malta is streamlined and efficient, allowing parties in a such transactions to implement security quickly and with minimal administrative burden. For both shipowners and financiers, a properly registered FCI is a critical tool for securing capital, mitigating risk, and maintaining confidence in ship financing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.