Malta: Insolvency Proceedings And Third Party Rights In Rem: A Maltese Perspective

In a recent judgment, the Maltese Court rejected a foreign liquidator's application to have a precautionary warrant of arrest lifted on the basis of the EC Regulation 1346/2000 on Insolvency Proceedings.

The facts of the case were as follows:

In 2006, a German ship-owning company entered into a shipbuilding contract with a Chinese yard for the construction of a vessel (later named the MV Beluga Sydney). The following year, the said company assigned all the rights and obligations to another German legal entity and consequently the latter was scheduled to accept delivery of the vessel as its new registered owner. The said delivery took place in 2010.

It transpired however that despite several agreements between the owners and the yard, a large sum due for the construction of the vessel allegedly remained unpaid. In June of 2011, the Chinese builders filed a request before the Maltese Civil Courts to obtain a precautionary warrant of arrest against the MV Beluga Sydney to secure their claim in rem amounting to US $5,162,206.57, which represented the outstanding balance for the construction of the vessel. The Maltese Courts acceded to this request and the vessel which was already within Maltese territorial waters was immediately arrested.

A month later, the local Courts of Bremen in Germany ordered the commencement of insolvency proceedings against the ship owner of the vessel and the courts appointed a provisional administrator to look after the affairs of the company. The latter was subsequently also appointed as the liquidator of the said company when the Courts of Bremen ordered the liquidation of the same company in November 2011.

That same month, the appointed liquidator filed an application before the Maltese courts demanding that the precautionary warrant of arrest should be lifted or alternatively that the arresting creditor should have to put up a counter-security. Amongst the various arguments raised to support this request to have the arrest lifted, the liquidator sustained that the precautionary arrest was invalid in accordance with the provisions of EC Regulation 1346/2000 on Insolvency Proceedings

The liquidator argued that in terms of the Article 4 of the Regulation, German law should be the applicable law determining the validity or otherwise of any judicial proceedings affecting the ranking of creditors in the courts of any Member State, including precautionary warrants of arrest. Accordingly, he argued that under Article 88 of the German Insolvency Code, the arrest of a vessel which took place one month before the insolvency proceedings were commenced is invalid.

The liquidator tried to link the above argument with one of the grounds in the Maltese Code of Organization and Civil Procedure under which a precautionary warrant can be lifted; that is in those cases where it would be unreasonable to maintain the precautionary act in force or that the said precautionary act is no longer necessary or justifiable.

The Judgment

The Court decided that none of the arguments put forward in the liquidator's application merited the lifting of the precautionary warrant. Likewise, the Court held that there was no justifiable reason as to why the arresting creditor should be forced to put up a counter-warrant.

With respect to the argument raised in terms of Regulation 1346/2000, the Court accepted that this Regulation had direct effect in Malta and that it was therefore directly applicable in proceedings before the Maltese Courts. That said, the Court also highlighted that one should bear in mind that this aforementioned European legislation differentiates between different classes of claims brought against insolvent parties.

The Court made reference to paragraph 25 of the Preamble of the said Regulation. This paragraph explicitly states that there exists a special need for different rules to be followed in the case of rights in rem. The basis, validity and extent of every right in rem should normally be determined according to the lex situs (the law of the place in which the property in question is situated) and should therefore not be affected by the opening of any insolvency proceedings in another Member State. The Court also referred to Regulation 5(1) which expressly states that the opening of insolvency proceedings shall not affect the rights in rem of creditors over both movable and immovable assets belonging to the debtor which are situated within the territory of another Member State at the time of the opening of said insolvency proceedings.

In light of the above provisions, the Court decided that that mere fact that insolvency proceedings were opened in Germany should not mean that legal proceedings already instituted by creditors in Malta to secure their rights in rem against the vessel should be stopped.

Comments

This Judgment is to date the only judgment delivered by the Maltese Courts wherein the effects of Regulation EC 1346/2000 on legal proceedings instituted in Malta to secure maritime claims in rem were discussed. It should be noted that the Court's conclusions vis-à-vis the effects of insolvency proceedings on claims in rem also compliment the relevant provisions in the Maltese Merchant Shipping Act.

The Act, and more specifically Article 37A (1), acknowledges that when dealing with actions and claims in rem, ships and other vessels constitute a particular class of moveables that should be treated as separate and distinct assets from the rest of the estate of their owners. Moreover, the same Article expressly provides that where a ship owner goes bankrupt, any action or claim in rem against the ship enjoys preference on the said ship, over any other creditors of the ship owner's estate.

Similarly, Article 37C (1) of the same Act provides that any registered mortgage, special privilege, action or claim in rem against a vessel shall not be affected by the bankruptcy of the shipowner which takes place after the date when the claim arose, even if the said shipowner was the owner or in possession of the vessel at the commencement of the bankruptcy. In this article, our law states once again that rights in rem enjoy a preference in relation to the ship in question, over all other debts of any other creditor of the bankrupt ship owner.

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.