Malta's maritime industry is largely governed by the Merchant Shipping Act of 1973, Chapter 234 of the Laws of Malta (the "Merchant Shipping Act"), a legislative cornerstone regulating among others, vessel registration, security interests such as mortgages, safety standards, seafarers' rights and shipowner obligations. Over the years, the Merchant Shipping Act has evolved to keep pace with global maritime trends, and now, it stands on the brink of another major transformation through Act No. I of 2025 (the "Act").
A key aspect of the Act is the introduction of the finance charter instrument, formalising the concept of a finance charter interest as a legal mechanism for securing the rights of a finance lessor. This article explores the implications of this security instrument and its potential impact on ship financing in Malta.
What is a finance charter?
Briefly, a finance charter refers to an arrangement where a ship is leased to a party, as the finance charterer, under specific terms designed to facilitate the financing of the vessel's building, acquisition, operation and/or management. This type of charter is typically structured as a bareboat or demise charter, where the finance charterer assumes responsibility for the operation and control of the ship, much like an owner, yet with ownership title being vested in the finance lessor.
This structure enables financiers to secure their investment by holding legal title to the vessel while avoiding the responsibilities of day-to-day operation. It also offers finance charterers a structured path to eventual ownership while maintaining operational independence.
Before delving into the specificities of the amendments proposed, it is key to firstly appreciate their scope. The Act defines a 'finance charter' as follows:
"the term 'finance charter' shall refer to 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".
This definition is influenced and in line with the definition of the term 'lease' in Article 1526(7) of the Civil Code, Chapter 16 of the Laws of Malta (the "Civil Code") when addressing the lease of ships and aircraft.
Therefore, the application of the amendments and the creation of rights in favour of a registered owner of a ship qua lessor1, is limited to those structures or arrangements, the primary purpose of which is to serve as a mechanism for financing the vessel.
The Act introduces Article 49B, which sets out the legal framework and formal process for the registration of a finance charter instrument. It includes several important provisions as follows:
1. Registration of Finance Charter Instruments
A finance charter instrument is executed by the finance charterer in favour of the lessor being the shipowner and must be attested by a witness. The registration of the instrument in the ship's public register serves as formal notice of the lessor's rights over the vessel, ensuring legal recognition and protection of the financing arrangement.
2. Scope of Obligations Covered
The proposed security is designed to secure various financial and other obligations arising from the finance charter agreement. These include the payment of hire for the secured vessel, payment of principal sums and interest, as well as performance of any other obligations. This encompasses the multiple operational obligations typically imposed on a lessee or charterer. Through the registration of a finance charter instrument, a lessor can secure these obligations effectively.
3. Prior Consent of Mortgagees
Before a finance charter instrument can be registered, the written consent of any registered mortgagee must be obtained. This ensures that the rights of the lessor are not in conflict with the interests of existing creditors, notably senior lenders which have in turn secured their interests with a mortgage over the financed ship.
4. The Priority of Claims
A crucial feature of the finance charter instrument is the privileged status it is granted versus other maritime claimants of the financed ship including non-maritime claimants of the finance charterer. This is a consequence of the nature of the finance charter instrument as a charge over the vessel, enforceable against all third parties. Therefore, a finance charter instrument "attaches" to a vessel in the same manner as any other privileged claim listed under Article 50 of the Merchant Shipping Act, including a registered mortgage.
However, this charge does not rank prior to existing mortgages or certain privileged claims. Specifically, the finance charter instrument ranks after the debts secured by a mortgage and certain privileged claims, but before other secured and unsecured claims. This means that while the finance charter instrument has a privileged status, it does not override the priority of claims like crew wages, port dues, salvage claims and claims for damages due to loss of life or personal injury.
The privileged status of a finance charter instrument is also catered for, should the financed ship be sold pursuant to an order or with the approval of the competent court. As a secured maritime claimant, the claims of a lessor with a registered finance charter instrument will be passed on to the proceeds of the sale of the ship.
5. Preservation of Mortgage Rights
Despite the registration of the finance charter instrument, the rights of an existing mortgagee remain unaffected. Whether a mortgage is registered prior or after the finance charter instrument, the mortgagee's rights are preserved, shall rank higher than the financial charter instrument and shall not be prejudiced. Additionally, the registration of a finance charter instrument over a ship shall not prohibit the registration of any new mortgage or the amendment or discharge of existing mortgages.
Ensuring that a mortgagee's rights remain intact notwithstanding the registration of a finance charter instrument grants the required flexibility to those finance lessors which seek to obtain their own financing from other lenders. In turn, such senior lenders benefit from the comfort of holding a mortgage in their favour in addition to any subordination agreement awarding preference to their claims and entered into with the finance lessor concerned.
6. Enforcement of Repossession Rights
Article 49B allows for a statutory right of repossession by the lessor should the finance charterer default on the finance charter agreement. This right is enforceable once the lessor provides written notice to the finance charterer.
The power to retake possession granted to a lessor is similar to that available to the mortgagee under the existing provisions in the Merchant Shipping Act as well as to that of a lessor in the amended provisions in the Civil Code dealing with the letting of ships and aircraft. The statutory power of repossession reinforces a lessor's contractual rights to do so generally referred to in finance charter agreements.
7. Transfer of Ownership
If the ship is transferred, the finance charter instrument must either be discharged or transferred alongside the ship to the new owner. This transfer of ownership is a functional matter that can arise irrespective of any default by the finance charterer.
8. Judicial Proceedings
The process for initiating any judicial proceedings in Malta for a breach of an obligation secured by a finance charter instrument is identical to that for a mortgage. Therefore, the lessor must serve notice to the master of the ship, or if the master is absent from Malta to the local agent, or if absent, to curators appointed by the court to represent the finance charterer.
9. Priority in Bankruptcy Proceedings
The holder of a finance charter instrument is not affected by the bankruptcy of the finance charterer and enjoys preferential rights on the secured vessel over all other debts, claims or interests except for those ranking higher than a finance charter interest. Therefore, a lessor secured with a registered finance charter instrument receives similar protection to that of a mortgagee, other privileged creditors and maritime claimants.
10. Miscellaneous Provisions
Article 49B aligns with existing sections of the Merchant Shipping Act, ensuring the protection of the lessor's rights, enforcement of obligations, and resolution of disputes. Notably, Article 49B(11) applies mutatis mutandis to a finance charter instrument, incorporating provisions such as, inter alia, the registration of a mortgage in favour of a security trustee (Art.38(4)), the definition of "account current" (Art.38(7)), the transfer of mortgage (Art.44), the assignment of part of a debt or other obligation (Art.44A), the transmission of interest of mortgagee by death (Art.45), the discharge of mortgage (Art.46), the obligation or registration with the Registry (Art.47), and the loss of original mortgage deed (Art.48). These provisions ensure that the finance charter instrument operates seamlessly within the broader legal framework.
11. Judicial perspective
Malta is exceptionally well positioned, from a judicial perspective, to handle new security mechanisms in the maritime sector. The Maltese courts have consistently proven themselves as experts in enforcing security interests in maritime matters, making Malta an ideal jurisdiction for these innovative instruments.
Malta's well-established legal framework and experienced judiciary ensure that these new security mechanisms, such as the finance charter instrument, can be effectively enforced and protected, reinforcing Malta's stature as a key maritime jurisdiction.
12. Relationship With Existing Provisions
The Act complements and further strengthens existing legal provisions on the subject matter.
Consequent to the amendments made through Legal Notice 210 of 2016, a lessor and a lessee party to a financial lease or sale and leaseback transaction may avail themselves of the dual registration option in the Maltese Register of Ships. Registration is wholly and exclusively retained within the Maltese Register of Ships. This is distinct from bareboat charter registration, which falls under separate provisions.
Briefly, article 19A of the Merchant Shipping Act permits a financing entity/lessor, to register title over the vessel as registered owner in the Maltese register of ships whilst simultaneously allowing another entity, as lessee, to have the operational certificate of Malta registry and any other certificates issued by the Maltese flag authorities, in its name as lessee. This option is also available in those instances where the lessee has subsequently chartered the vessel to a third-party charterer that wishes to have the registration certificate issued in its name as charterer, subject of course to both the registered owner's and the lessor's consent. The consent of any registered mortgagee is also necessary.
Furthermore, Act No. LII of 2016 amended the Civil Code's provisions on the sale and lease of assets, awarding priority to the terms of the agreement/s reached between the parties over the more traditional rules in the Civil Code. This ensures that any ill-suited provisions contained in the legal institutes of sale and of lease in the Civil Code, and which contextually do not apply to the realities of a modern shipping finance arrangement or ship sale and leaseback transaction, are effectively blocked from regulating the parties' relationship and consequently being applied by the courts in a dispute. Of course, the choice of the usually selected foreign laws in a sale and/ or lease agreement will do this admirably well and Maltese law will recognise the choice.
Hence, this clarification on the subordination of Maltese law to the contract is essentially a defence against any purely local public policy arguments which could potentially upset the parties' choice of law. The said amendments further empower lessors (qua financiers) by overturning the bias that exists in Maltese civil law in favour of the possessor of an object subject to lease.
Article 49B applies regardless of whether the finance charterer opts for the charterer flag registration under Article 19A of the Merchant Shipping Act. This means that a lessor as a registered owner of the financed vessel is still able to register and obtain security from a finance charter instrument notwithstanding that the finance charterer or lessee does not register as charterer under the Malta flag or decides for an alternative bareboat flag registry altogether. Therefore, it shall be possible for a registered owner qua lessor to register title and security in Malta whilst the finance charterer registers the subject vessel in an overlying foreign bareboat charter registry of its choice.
Should the parties on the other hand decide to proceed with dual flag registration in Malta in accordance with Article 19A, then they may do so whilst simultaneously taking advantage of Article 49B.
Conclusion
The introduction of the finance charter instrument in the Merchant Shipping Act, represents a forward-thinking reform that enhances the flexibility and security of ship financing. The framework provided by Article 49B ensures that both lessors and charterers are protected while facilitating easier access to capital for vessel acquisition and operation. By recognising the importance of finance charters in the shipping industry and in addition to its judicial and fiscal strengths, Malta positions itself as an even more attractive destination for shipowners and investors.
Footnote
1. The term "lessor" is defined in Article 49B(13)(d) as "the term lessor shall refer to the owner of a ship which is the subject of or is otherwise addressed in a finance charter".
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.
