Malta's international maritime services industry is principally governed by the Merchant Shipping Act of 1973, Chapter 234 of the Laws of Malta (the "Merchant Shipping Act"). This is a legislative cornerstone, regulating ship registration, security interests such as mortgages, safety standards, seafarers' rights, shipowner obligations and other matters. Over the years, the Merchant Shipping Act has evolved to keep pace with global maritime trends, with the latest major transformation taking place through Act No. I of 2025 on the 4th of April 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.
Briefly, a finance charter refers to an arrangement where a ship is leased to a party, the finance charterer, under specific terms designed to facilitate the financing of the ship's building, acquisition, operation and, or management. This is typically structured as a bareboat charter, where the finance charterer assumes responsibility for the operation and control of the ship, much like an owner, yet with ownership title still being vested in the finance lessor.
Owners are able to secure their investment by holding legal title to the ship while avoiding the responsibilities of day-to-day operation. On many occasions 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"
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 finance a ship.
The Act introduced 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
A finance charter instrument or security is executed by the finance charterer in favour of the lessor as registered shipowner. The registration of the security in the ship's public register serves as formal notice of the lessor's rights over the ship, 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 lease of the ship, payment of principal sums and interest, as well as the 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 grants the holder 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 ship, enforceable against all third parties. Therefore, a finance charter instrument "attaches" to a ship in the same manner as any other privileged claim listed in the Merchant Shipping Act, including a registered mortgage.
However, this charge does not rank prior to existing or future mortgages or certain traditional privileged claims or maritime liens. Specifically, the finance charter instrument ranks after the debts secured by a mortgage, 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 including 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 holding 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 security, the mortgagee's rights are preserved, shall rank higher 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
In the event of a default under the finance charter agreement, Article 49B allows for a statutory right of repossession by the lessor. 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 Malta's 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. 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 ship 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.
9. Relationship With Existing Provisions
Parties to a finance lease may use the dual registration option, in which flag registration is wholly and exclusively retained in Malta. This is distinct from bareboat charter registration in a foreign flag registry.
A lessor may register ownership title over the ship whilst simultaneously permitting its contracting party, as lessee, to also register and obtain the operational certificate of Malta registry and any other certificates issued by the Maltese flag authorities, in its name as lessee. The dual Malta flag registration is subject to the prior consent of any registered mortgagee which may be withdrawn in an instance of default.
Civil law provisions were recently amended to guarantee that the sale or lease of ships are regulated by the terms of the agreement reached between the parties over the more traditional debtor friendly rules in the law. This ensures that any ill-suited provisions which contextually do not apply to the realities of a modern shipping finance arrangement, are effectively blocked from regulating the parties' relationship and consequently being applied by the courts in a dispute. Additionally, Maltese law will recognise the choice of the governing contractual foreign law.
Importantly the new finance charter provisions apply regardless of whether the finance charterer opts for the charterer flag registration in Malta. This means that a lessor as a registered owner of the financed ship 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.
A registered owner qua lessor may register ownership title and security in Malta whilst the finance charterer registers the 19th Annual Korea Ship Finance Forum October 30, 2025 " Paradise Hotel, Busan subject ship in an overlying foreign bareboat charter registry of its choice.
CONCLUSION
The introduction of a finance charter security instrument represents a forward-thinking reform that enhances the flexibility and certainty of ship financing. Both lessors and charterers are protected while facilitating easier access to capital for ship 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"
Originally published by Marine Money International
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.
