Transcript Ships as security for debts, Mortgages, and Maritime

Dr. Tonio Fenech LL.M. (Lond), LL.D.
Dr. Tonio Fenech LL.M. (Lond), LL.D.

Aircraft finance: financing for the purchase
and/or operation of aircraft;

Complex aircraft finance often shares many
characteristics with maritime finance:
 assets of great value which can themselves be a
significant aspect of the security to be provided;
 the intrinsically international nature of the industries;
 The importance of anglo-saxon legal notions;
 Ships and aircraft, like land, but unlike most other
tangible moveable assets, require registration;
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
Lord Justice Roskill in The “Panglobal
Friendship” [1978] 1 Lloyd’s Rep. 369 (CA):
For advancing funds to one or more ship owning
companies, a bank will typically take:
 a mortgage on the ship, and possibly also
mortgages on other sister ships, by way of security
for the loan
 an assignment of any time charter
 an assignment of insurance policies and P&I Club
cover
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
Permutations, refinements and variations of
the mainstream theme:
 Off-balance sheet financing (leasing)
 High yield bond issues (junk bonds, etc)
 Flotations and other capital markets transactions
 Others
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From Wikipedia:
The three most common schemes for financing
commercial aircraft are secured lending, operating
leases and finance leases;
 However, there are other ways to finance aircraft
acquisition:

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Operating leases and sale/leasebacks
Export credit guaranteed loans
Tax leases
Manufacturer support
Equipment Trust Certificates (ETCs) and
Enhanced Equipment Trust Certificates (EETCs)
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
The usual security structure for a loan in the
shipping/aviation field comprises a number of
elements:

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A mortgage of the asset (ship or aircraft);
An assignment of earnings, rights and receivables;
An assignment of insurances;
Sometimes, a pledge on the shares of the
company, or of other receivables;
 Special privileges on the ship or aircraft as
applicable
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The letting or hiring of ships to merchants for
the carriage of goods is historically described as
a charterparty. The system was developed for
operational objectives, not asset financing ones.
At the basic level, when hired:




for a period of time, it is a time charter;
For a point-to-point voyage, it is a voyage charter;
A Bareboat or demise charter is a time chareter
where the charterer takes responsibility for the
crewing and maintenance of the ship (he is
treated as the “disponent owner”)
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
Wet Lease or ACMI - Aircraft, Crew,
Maintenance & Insurance


Lessor provides ACMI, but lessee provides fuel,
landing (etc) fees, crew HOTAC as well as local
taxes. Otherwise rental is on block hours (choc
off – choc on), sometimes with guaranteed
minimum block hours paid per month
Damp lease (no crew)

Crew normally must receive training from
Lessor
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
Normally adopted by leasing companies and
banks: lessee puts aircraft on its AOC and
provides aircraft registration, etc
 Operating lease:
▪ aircraft does not appear on the lessee’s balance sheet
 Finance lease:
▪ Normally viewed as a purchase for accounting purposes
▪ Purchase option at end of lease for agreed price
▪ Lease payments are substantial percentage of market
value of aircraft
▪ Lease term substantial percentage of aircraft’s usable life
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
Finance leasing represents a threshold that
goes from off-balance sheet financing to debt
financing, and vice versa

Once they get on to the balance sheet,
expensive assets remain important elements
to help secure finance
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charge
mortgage
Finance lease
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Security by
title transfer
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Operational
lease/charter
A Credit economy implies the need for confidence
that payment obligations will be fulfilled
 Most systems have long developed specific
methodologies and concepts, intended to give a
creditor some “security interest” in property
 A method which provides for differentiation and
prioritization in ranking between competing rights
 But the system of one country is not necessarily
recognized or enforceable in other countries and
legal systems

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The problem is not so much the classic conflict
of law issues of applicable law, etc., but the
widely differing approaches of legal systems to
security and title reservation rights;
 This traditionally created much uncertainty
among financiers as to the efficacy of their
rights;
 The result was a general inhibition to extend
finance in large parts of the world, and a
general increase in borrowing costs

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
The 5 objectives according to Roy Goode:

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the creation of an international interest which will be
recognized in all Contracting States
Providing the creditor with a range of basic default
remedies, and a means of speedy interim relief pending
determination of a claim on the merits;
an electronic international register of interests to give
notice, and preserve priority against unregistered
interests and the debtors’ insolvency administrator;
Ensuring that the needs of the industry sector are met;
Enhance credit rating of equipment receivables, thus
reducing borrowing costs
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
In ratifying the convention, Malta clearly sought to
maximize confidence of secured creditors in our system

as a result of ratification, the Maltese domestic system is
accompanied by the international system introduced by
the Convention

Therefore to understand Maltese law in this area, one has
to look at the “domestic” situation as well as the situation
if the Convention mechanisms are harnessed

The problem of language: “security interest” as defined in
the main text of the ARA, “international interest” as
defined in the 1st Schedule, etc
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Dr. Tonio Fenech LL.M. (Lond), LL.D.

An interest in or some right against property
of a debtor that is granted to a creditor to
secure payment, or the performance of
some obligation owed to that creditor; it
may be created:
 By agreement, or
 Operation of law
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
The provisions of law in this area are broadly identical in
both the Merchant Shipping Act as well as the Aircraft
Registration Act.
“[Ships and other vessels/aircraft]
.......constitute a particular class of movables whereby they
form separate and distinct assets within the estate of their
owners for the security of actions and claims to which the
[vessel/aircraft] is subject. In case of bankruptcy [of the
owner of the ship][and, or insolvency of the owner of an
aircraft],
all actions and claims, to which the [ship/aircraft] may be
subject, shall have preference, on the said [ship/aircraft],
over all other debts of the estate”.

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
separation of estates

for the security of actions and claims

to which the ship/aircraft may be subject

Therefore bankruptcy of the owner will not affect
claimants who have relied on the security of the
asset, since these claims will have priority.

Droit de suite?
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S. 37A(2) MSA:
 a ship shall include together with the hull, all
equipment,
machinery
and
other
appurtenances or accessories belonging to
the ship, which are on board or which have
been temporarily removed therefrom;
S.37B(3) MSA:
 separate items upon a vessel may themselves
be subject to special privileges in accordance
with the Civil Code
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21

For the purposes of providing security an aircraft
comprises

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All data, manuals and technical records, and
The airframe, all equipment, machinery and other
appurtenances as accessories belonging to the
aircraft, which are on board or which have been
temporarily removed therefrom, and
Any engines owned by the owner of the aircraft
whether attached to the aircraft or not, as well as
any replacement engines (designated for use on the
aircraft and owned by the owner of the aircraft) but
temporarily not attached to the aircraft
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
Any security given to a third party over an aircraft by
an airframe owner shall not extend to any engine
(owned by a third party) attached to the airframe,
notwithstanding that the engines may be specifically
referred to in the mortgage, the NAR or elsewhere

When an engine is attached to an aircraft owned by a
different owner, there is no accession in terms of the
Civil Code (Art. 573), and any security 0n separate
items on or in an aircraft may themselves be subject
to special privileges in accordance with the Civil Code
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
A charge on ships and aircraft can be established
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by means of a mortgage, or
by a special privilege;
For aircraft only, an “international interest” can also be created

Certain “privileged” rights are also given to the creditor in the context of security
interests

A general hypothec under the Civil Code remains available, but this attaches to all
the assets of a debtor, including any aircraft such debtor may own

Other mechanisms are specifically recognized which, while not constituting a
charge, they greatly facilitate a creditor’s life:

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Security by title transfer
IDERA (in the case of aircraft only)
Irrevocable powers of attorney
Swift judicial relief pending final determination
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
registered mortgages, special privileges, claims and actions to
which a [vessel/aircraft] may be subject are not affected by the
bankruptcy of the mortgagor or owner happening after the date of
the mortgage or special privilege, or when the action or claim arose

ARA: Even if the owner had the aircraft in his possession, order or
disposition, or was the reputed owner thereof, at the
commencement of the bankruptcy

The secured claims will have priority on the ship/aircraft over all
other debts claims or interests of any other creditors

ARA: However, secured claimant must contribute to costs of
winding up (including liquidator costs) where he participates in the
liquidation proceedings, and is ordered to do so by the court,
determining the extent of his liability
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
Judicial sales and other enforcement actions instituted by a
registered mortgagee or privileged creditor cannot be interrupted
or hindered by any liquidator or curator or trustee of the owner for
any cause other than a cause which could be set up by the owner;
[to take note of slight differences in drafting, in the marine/aviation legislation. Is
this significant? Can the more refined drafting in the ARA guide judges when
interpreting the earlier MSA?]

ARA: The same applies to action taken by a secured creditor
against a conditional buyer or a lessee to terminate an agreement
or take possession or control of an aircraft

The provisions of the Companies Act relating to insolvency do
NOT apply insofar as inconsistent with the MSA/ARA
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
Inter-creditor agreements specifically recognized

Art. 1996A, Civil Code:
▪ “it shall be lawful for a creditor to agree to subordinate, waive or
otherwise modify his rights of payment, enforcement, ranking and
other similar rights to the rights of other creditors and any such
agreement shall be binding on the parties to the contract, whether
before or after the insolvency of any party to the contract”

This applies generally, but ARA expressly applies
1996A to inter-creditor agreements entered into by
owners, lessors, lessees, creditors, mortgagees,
holders of security interests and “any other persons
having an interest in or in relation to an aircraft”
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
Art. 28(6) ARA:
▪

“Any hypothec or privilege whether general or over
particular movables to which an aircraft may be subject
under the provisions of the Civil Code shall not continue
to attach to it when the aircraft is transferred to third
parties”
No droit de suite in such case;
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Dr. Tonio Fenech LL.M. (Lond), LL.D.

Mortgages did not form part of our law prior to the
incorporation of the Merchant Shipping Act in 1973;

Now part of Maltese law only for the purpose of putting
up a ship or an aircraft as security for a loan or debt.

Successive and significant amendments were made to the
MSA since 1988 with the aim of generally strengthening
the mortgagee’s position;

The Aircraft Registration Act represents a significant
milestone, not only in that aircraft mortgages are treated
separately, but also because it introduces a number of
innovations and changes in general approach;
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
The term mortgage has not been substantively defined in our law

One must thus refer to foreign sources, in addition to the MSA and ARA,
to understand the mortgage in terms of its effects, and the chain of
rights and duties it establishes

As in many things, to understand the nature of something, one must
start with how it developed. Hence the ship mortgage takes centre
stage:

Bowtle & McGuiness (The Law of Ship Mortgages):
 a ship mortgage is merely one species of various forms of a consensual “real”
security
 The modern UK ship mortgage is essentially statutory in nature, but it is a
creation built upon the foundation both of the common law of mortgages as
well as early statute law
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
Bowtle & McGuiness:
 “At the elementary level, it may be stated that in essence a mortgage is a
transaction under which a debtor confers upon a creditor a proprietary
interest in property of the debtor....it being intended that, by realisation or
appropriation of that property interest the creditors will obtain the discharge
of the debtor’s liability to the creditors. The property interest so conferred is
redeemable or the obligation to create it is defeasible in the event that the
debtor discharges the liability in question”

At common law, the mortgage was seen to be a transfer of property
made by a debtor to a creditor as security for performance. The
mortgagor would normally remain in possession of the ship for his own
benefit, and subject to any contractual limitations (normally expressed in
a “deed of covenants”) the ship can be employed freely.

Where default occurs in terms of the mortgage, the mortgagee may
seize the ship and sell it.
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
Ever since the 17th Century, a statutory registration system for
ships was introduced in the UK.

The English regime governing the creation of ship mortgages is
essentially built upon this registration regime.

The instrument creating a mortgage must be in the prescribed
form, as must a transfer or discharge of such a registered
mortgage.

not necessary for the mortgagee to acquire possession of the ship
for the mortgage to come into effect.

non-compliance with statutory requirements may prejudice
enforcement, eg with respect to third parties.
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
The mortgage was created by a transfer of title
to the mortgagee under a bill of sale, which was
registered with an annotation that the transfer
was not absolute but by way of mortgage.

The mortgage was also noted by endorsement
on the certificate of registry of ship.

A statutory form of mortgage was only
introduced in the Merchant Shipping Act of
1854.
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
This modified and departed from the common law conception of
mortgage as a security interest arising in the form of conditional
conveyance of title, without specifying its precise legal nature

The form of mortgage set out in the schedule however stated
clearly that the security which was conveyed created a right in
rem by way of security

There was no longer a notional transfer of legal title to the ship,
but the mortgage became a statutory from of charge

MSA 1894 did not change things, and the Malta MSA of 1973 was
clearly modeled on this, and followed it very closely
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Bowtle & McGuinness define the modern English ship mortgage as:

a form of security by or under a contract that confers an interest in
the property subject to it…..that is annulled upon the performance
of some agreed obligation – usually the payment of a debt with or
without interest.

The terms “mortgage” and “charge” are used almost
interchangeably. This practice is most clearly evident in the case
of present-day ship mortgages, in which these two types of
security have been fused into a single type of security interest.

For all practical purposes, there is little difference between the
two classes of security, and while they are conceptually different in
their origins, they have now become subsumed into a hybrid form
of security.
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
The position of a mortgagee and mortgagor under the modern
legislative framework was discussed in ex parte North Brisbane
Finance & Insurance Pty Ltd [1983] 2Qd.R.684 at p.688 (re
corresponding provisions of Australian Shipping Registration Act
1981):
 “Section 40 confers on the mortgagee of a ship the status of holder of
a statutory charge by way of security, not that of a legal owner of the
ship as in the case of a mortgagee under the general law.”
 “It is in that context that Section 41 confers on the ship’s mortgagee a
power absolutely to dispose of the ship and to give effectual receipts
in respect of the disposal. Without that power, a mortgagee of a ship
would have to look elsewhere, and probably to the Court, for
assistance in selling a ship of which he was not the owner”
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In “Maritime Law” 4th Ed. 1995:
 A mortgage could be said to be ‘any charge by
way of lien on any property for securing money
or money’s worth.

It is the creation of a charge or encumbrance in
favour of the lender of money by the person
wishing to borrow.

It is the essence of a mortgage that it is
something more than a mere personal covenant.
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38
Chorley & Giles, “Shipping Law” (8th ed. 1987):
 A mortgage is a charge or encumbrance which the
borrower of money, the mortgagor, creates in favour
of the lender, the mortgagee.

The latter thereby obtains a hold on the property
mortgaged, which prevents the general creditors of
the owner from selling the ship in satisfaction of their
claims.

It also enables the mortgagee to recoup himself for
the mortgagor’s failure to repay the loan, or the
interest on it, by selling the ship or taking possession
of her
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39

Iain Goldrein, “Ship Sale & Purchase” 1993:

A mortgage is:
 a transfer of property, or
 an interest in property,
 as security for a debt, usually a loan.
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40

A mortgage is a security transaction and is a form of “real”
security. It is a transfer of property or an interest in property as
security for a debt.

The essential feature of a mortgage is that it is only a security
transaction; the property is redeemable by the mortgagor upon
satisfaction of the debt which it secures, but on the other hand the
property is realisable by the mortgagee if it is not.

The mortgagee acquires a right by a mortgage to the ownership of
property in a certain event, namely on default of payment of
principal and interest. From the standpoint of the mortgagor,
whereas every mortgage implies a right of redemption so too does
it imply a debt, and a personal obligation to repay it.
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The difference betweeen mortgage and

Outright sale: mortgage takes place by way of security
only

Pledge: pledgee’s security is dependant upon
possession and an ancillary power of sale, while the
mortgagee actually has title to the goods, subject to
mortgagor’s right to redemption

Charge: property subject to a charge is appropriated to
meet a debt or obligation, but its efficacy does not lie in
possession, nor does property therein pass to the chargee.
Enforcement of the security is by way of judicial process.
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Dr. Tonio Fenech LL.M. (Lond), LL.D.

The ARA follows the MSA which itself followed
the British legislative model since 1854

No definition, but clear separation of estates

Must be in prescribed form

an interesting mixture of Continental and AngloSaxon notions, which in some sense anticipates
the approach introduced by Cape Town for
aircraft
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
Self-help and other remedies tend towards the view that
the mortgage is a form of transfer of property by way of
security

But mortgagee is considered owner only to the extent
necessary for making security available for satisfaction of
amounts owing to him, ie the remedies

mortgage can therefore also be seen as a charge on, not
transfer of, property, with exceptional remedies given to
mortgagee

Do the new provisions re security by title transfer in the
Civil Code impinge on this discussion in any way?
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
2095F(1):
 “Security by title transfer is a contract whereby the
debtor, or a third party for the debtor, transfers or
assigns movable things.....so as to secure a present or
future obligation” to:
▪ the creditor(s) present or future; or
▪ A security trustee in accordance with Art. 2095E

2095F(10):
 “For all intents and purposes, the creditor to whom
the property has been transferred shall be considered
to be the absolute owner of the property......and such
property shall not form part of the patrimony of the
debtor”
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
2095F(11): A transfer by way of security:
 Shall not be subject to re-characterisation as any
other contract and shall take effect in accordance
with its terms; and
 Shall be enforceable notwithstanding the
bankruptcy or insolvency of the debtor or
transferor
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47

A registered ship/aircraft or a share therein may be made a
security for any debt or other obligation by means of:
 an instrument creating a mortgage (in this Act called a “mortgage”)
executed by the mortgagor in favour of the mortgagee in the
presence of, and attested by, a witness or witnesses

a mortgage:
 is indivisible “notwithstanding the divisibility of the underlying debt or
other obligation which it may secure”
 Attaches to any proceeds from any indemnity arising from any
mishaps as well as any insurance proceeds;
 But in the case of Aircraft, the law specifically excludes applicability of
this provision to an indemnity payable under a liability policy;
(International conventions impose particular liabilities on air carriers,
principally in the context of carriage of passengers)
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
Legislator seems to have ignored the opportunity of taking the
bull by the horns, possibly for continuity reasons;

Language of MSA does not seem to be strong enough to
characterize mortgage as a transfer by way of security, but many
elements are similar;

Many elements of security by title transfer should be applied to
mortgages where the law on mortgages is silent;

A more comprehensive restatement of mortgage law will probably
help for academic purposes, but the problem does not appear to
be substantial
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49

Mortgages attach to the asset until discharged.

Exceptions to this rule:

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where the asset is forfeited the interest of the mortgagee in the ship/aircraft
will terminate where the mortgagee has authorized, consented to, or
conspired in the act or circumstances leading to forfeiture;
where the asset is sold pursuant to an order or with the approval of a
competent court within whose jurisdiction the asset was at the time of the
sale, the interest of the mortgagee as well as of any other creditor in the
asset shall pass on to the proceeds of the sale;
Where the asset is sold by mortgagee in possession on “free from
encumbrances” basis, Mortgage rights are no longer exercisable in
relation to the asset;
ARA adds further considerations for aircraft, in such a circumstance:


All rights ranking below the said mortgage no longer attach;
All prior ranking rights are exercisable against proceeds of sale by
whosoever held, and no longer attach to the aircraft
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
The Mortgage instrument must be in the
prescribed form.

The detailed terms and stipulations concerning
the mortgage are normally set out in a separate
collateral document, which in the maritime field
is called a deed of covenants.

In order to avoid complications of due notice, it
is usually preferable to make express reference
to the collateral document in the actual
instrument of mortgage.
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51

This is collateral to the mortgage instrument, normally
containing:





the time for repayment of the principal sums;
the interest payable on the capital sum loaned;
the method of payment of such sum;
the insurance requirements and responsibility for the same;
any restrictions imposed by the mortgagee on the manner in
which the ship is operated;
 events of default, and resultant action that can be taken by
the mortgagee.
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52

MSA/ARA recognize role of security trustees as mortgagees, being
entitled to exercise all of the mortgagee’s rights.

Art. 2095E of the Civil Code applies to all situations involving
security trustees, where Maltese law applies

Until the Recognition of Trusts Act 1994, whenever there were
multiple financiers, practitioners often had to resort to naming
each and every one of them on the mortgage.

Nowadays, one of the financiers can act as Trustee for the others
for security purposes, which makes things much simpler in the
context of a “work-out” or enforcement of mortgage rights.
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
A mortgage may be created to secure the payment of principal
and interest, an account current, as well as the performance of any
other obligation.

The monetary value of the indebtedness need not be actually put
down in the mortgage.

The term “account current” here means “any indebtedness of a
mortgagor in favour of a mortgagee arising and determinable in
accordance with an underlying obligation”.

The normal meaning attributed to “account current” and the
provisions of law governing such contracts in the Commercial
Code do not apply to mortgages, except where specifically so
agreed
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
The mortgage
obligations”;
can
also
cover
“future

In such cases, however, a maximum sum by way
of principal for which the mortgage is granted
must be expressly stated in the mortgage and
such sum shall be recorded in the register;

Such security can only be granted to credit
institutions in an approved jurisdiction, or as
indicated by Ministerial Notice;
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
A reading of Art. 38 MSA and 29 ARA could lead to a
conclusion in the negative but, even if true, this is
misleading;

The special remedies made available by the
MSA/ARA make reference to registered mortgages,
as do the provisions regarding ranking, etc

With Aircraft, a Maltese mortgage can be registered
in the international registry as an international
interest, without having it registered in the NAR
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
A transfer or mortgage of a registered ship/aircraft
“shall have no effect” against any person other than
the transferor or mortgagor, unless the transfer or
mortgage has been registered in accordance with
the law;

The effect of registration is therefore that it gives
efficacy to the mortgage (or transfer of the asset) as
against third parties;

The priority rights of the mortgagee are established
and secured from the date and time of registration;
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
Registration of any act or instrument (whether by record
or notation) in the NAR shall have the following effects:
 Publicity - information will be deemed within the knowledge
of third parties;
 Effectiveness - of acts against third parties; Where expressly
conditional on registration, it shall create legal effects between
the parties to certain transactions;
 Priority - according to the provisions of ARA and applicable
law, between different rights;
 All other effects under applicable law

But the notation of ownership or lessee rights pursuant to
Art.4 shall not imply any priority over those of a registered
mortgage holder, except as stated in Art. 31 and the First
Schedule
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

Where it is stated in the mortgage instrument that the prior written
consent of the mortgagee is required before any further mortgages can
be registered (or transfer of ownership), the registrar shall make a note
of this, and will not permit any further registrations.
Any registration in such circumstance will be null and void; The ARA
further specifies:




when a further mortgage is executed in favour of an existing creditor, no
consent is required from such creditor;
The registration of a special privilege is not hindered, where the Act requires
registration for its continuing validity and effect
Similar rule where the mortgage prohibits any transfer of the aircraft
without the consent of the mortgagee;
Exception here:

Transfers made pursuant to court order in a sale by auction or pursuant to
any other court order
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
Ranking in order of date & time of registration,
notwithstanding
any express, implied or
constructive notice

For aircraft, a mortgage registered in NAR on or
after February 2011 will always rank after any
international interest, prospective international
interest and other right or interest which is
registered in the International Registry,
irrespective of the date and time of such latter
registration
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
In ships, the rights of the registered mortgagee remain
unaffected by the following subsequent events:



the creation of any separate privilege or charge on any part,
appurtenance or accessory of a ship which may attach in
virtue of any law; or
the reservation of ownership rights by a seller of any part,
appurtenance or accessory sold to the ship owner, provided
that provisions, fuel and other consumable goods are not
here considered to be appurtenances;
Where any creditors register any reservation of ownership
rights or special privilege or charge over parts,
appurtenances or accessories, prior to the registration of a
mortgage, they will preserve their position as against any
subsequent mortgagees.
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
Similar provision as MSA, except:

It is subjected to Art. 32, which states that international
security interests shall rank prior to mortgages
registered on NAR after effective date
A lessee (even of any part, appurtenance or accessory)
can register his interest prior to the regbistration of the
mortgage;
Furthermore, subsequent privileges listed in Art. 42(1)
are not affected;
the reservation of ownership rights by a seller can be:



▪
▪
▪
Also on an aircraft as a whole:
Transfer can be a sale, hire purchase or similar contract; and
Proviso in MSA that provisions, fuel and other consumable
goods are not appurtenances is not repeated
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
a registered mortgage is an executive title for the purposes of Art.253 of the
COCP:







where the obligation it secures is a debt certain liquidated and due; or
where a maximum sum is expressly stated in the instrument, and such figure is recorded in
the register for public notice
These also apply to all registered mortgages securing debts resulting from an
account current or overdraft or credit facility, but mortgages for future debts are
only included in the ARA version;
For enforcement, the mortgagee shall specify the sum due at the time of
enforcement by means of an affidavit served on the mortgagor, in order to
determine the amount certain liquid and due, or the actual sum due when the
mortgage secures a future debt within an expressly stated maximum.
NB: the MSA applies these provisions for enforcement by judicial sale of a ship,
while ARA applies them for enforcement by any sale of aircraft;
ARA further specifies that Debtor and other interested persons cannot hinder the
mortgagees rights in any manner, but the debtor can pay such sum in settlement
of the amount due, and any interested party can otherwise contest such amount
according to law, even after payment
MSA merely states that any interested party can contest such amount;
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
In the event of default of any term or condition of a registered
mortgage or of any document or agreement referred to therein,
the mortgagee shall, upon giving notice in writing to the
mortgagor:




be entitled to take possession of the asset or relevant share therein;
have power absolutely to sell the asset or relevant share therein;
have power to apply for any extensions, pay fees, receive
certificates, and generally do all such things in the name of the
owner as may be required in order to maintain the status and validity
of the registration of the asset;
ARA adds the following rights of aircraft mortgagees:


Have power to lease the aircraft so as to generate income
therefrom; and
Have power to receive any income generated from the management
of the aircraft
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S.2095F(11): the “fruits” of property transferred by way of
security are deemed part of the property and are subject
to the rights of the creditor as stated in the provisions re
security by title transfer
 S.2095H(1):
creditor not permitted to make use of
property unless expressly permitted by the agreement,
and shall be liable for loss or deterioration of property
from his negligence
 S.2095H(3):
fiduciary
obligations
owed
(see
articulation of provision)
 S.2095H(4):
absolute ownership, but with limitations.
Unauthorized use of property is a breach of fiduciary
obligations

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65

S.33(1):
Notice requirement satisfied if by electronic
communication or in such other manner agreed between the
parties, or if served at registered address in Malta, or on a curator
appointed by the Court;

S.33(2):
Remedies may be exercised by the mortgagee
without the need of the leave of any court; To the extent that such
leave is indeed sought due to the hindrance of any person, the
court shall render full support to the mortgagee as expeditiously
as possible

S.33(8):
the debtor and person in possession of the aircraft
(except for the possessory lien holder) must cooperate fully with
the mortgagee enforcing his rights, including but not limited to
surrendering all data, manuals, technical records, parts,
accessories and appurtenances belonging to the aircraft
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
POSSESSION: except so far as may be necessary for
making a [secured asset].... available as a security for a
mortgage debt, the mortgagee shall not by reason of the
mortgage be deemed to be the owner of the [asset], nor
shall the mortgagor be deemed to have ceased to be the
owner thereof’

POWER TO SELL: but where there are several
mortgagees, a subsequent mortgagee can only do so with
the concurrence of prior mortgagees, unless under the
order of a court of competent jurisdiction;

Are these limitations solely for the protection of the
mortgagor?
67

When selling the asset to enforce a mortgage, and
proceeds of sale show a surplus, mortgagee is further
bound:
 Under MSA, to deposit the same for the benefit of other
creditors and the mortgagor;
 Under ARA:
▪ to hold under trust or deposit any surplus proceeds;
▪ to act in a commercially reasonable manner
▪ by fiduciary duties to debtor and other creditors, and shall:
▪ Pay from proceeds received any prior ranking creditor “as he may determine
or as may be determined by the court in case of disagreement”; and
▪ Provide information to lower ranking creditors and to the debtor re
conditions of sale, expenses incurred, the prior rights settled and any other
deductions from the price received
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
Intervention of Merita Bank in Newcastle
P&I Association vs Dr Dingli noe (26.3.1999
per Arrigo J.)
 refers with approval to a number of English cases
 the Mortgagee owes a number of duties to the
mortgagor as well as to other creditors when
exercising its right of sale of the vessel
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
S.2095H(6), Civil Code: creditor can sell
property:
 In the manner agreed, or in the absence of
agreement, in the manner the creditor considers most
appropriate and commercially reasonable;
▪ For a price established in agreement (with transferor), or in
the absence thereof,
▪ at the market value, or if there is no such value
▪ At a price established by an independent competent person;
AND
▪ When through judicial sale by auction, at a price and in
accordance with applicable law;
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S.2095F(11): the “fruits” of property transferred by way of
security are deemed part of the property and are subject
to the rights of the creditor as stated in the provisions re
security by title transfer
 S.2095H(1):
creditor not permitted to make use of
property unless expressly permitted by the agreement,
and shall be liable for loss or deterioration of property
from his negligence
 S.2095H(3):
fiduciary
obligations
owed
(see
articulation of provision)
 S.2095H(4):
absolute ownership, but with limitations.
Unauthorized use of property is a breach of fiduciary
obligations

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71

A foreign mortgage shall be recognized as a mortgage
with the status and all rights and powers specified in
the MSA/ARA notwithstanding the fact that it is not
entered over a registered [asset], if
 the mortgage has been validly recorded in the foreign
registry of ships/aircrraft concerned;
 such registry is a public registry;
 the mortgage appears upon a search of the registry; and
 under the foreign laws concerned, the mortgage is
granted a preferential and generally equivalent status as a
mortgage under the MSA/ARA.
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Dr. Tonio Fenech LL.M. (Lond), LL.D.

Art. 1997(2) (Civil Code): the provisions of the
Title dealing with Privileges and Hypothecs
“shall not apply to ships or aircraft, or to debts
to which ships or aircraft may be subject
except so far as they are consistent with the
provisions of the Merchant Shipping Act or the
Aircraft Registration Act, as the case may be.”
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
Special privileges arise in virtue of law and no debt or other
obligation other than those specified at law shall be secured by a
special privilege.

Art. 1999 (Civil code): Privilege is a right of preference which the
nature of a debt confers upon a creditor over other creditors,
including hypothecary creditors.

Art. 1997(2) (Civil Code): the provisions of the Title dealing with
Privileges and Hypothecs “shall not apply to ships or to debts to
which ships may be subject except so far as they are consistent
with the provisions of the Merchant Shipping Act, 1973.”

ARA: Where a special privilege is subject to registration in the
international registry, such registration shall be an additional
requirement for the continuing existence of such special privilege
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
The debts which are held by s.50, MSA to be secured
by a special privilege on the vessel concerned are the
following:
 judicial costs incurred in respect of the sale of the ship and
the distribution of the proceeds thereof;
 fees and other charges due to the registrar of Maltese
ships arising under the Act;
 tonnage dues;
 wages and expenses for assistance, recovery or salvage,
and for pilotage;
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76
 the wages of watchmen, and the expenses of watching the ship from
the time of her entry into port up to the time of sale;
 rent of the warehouses in which the ship’s tackle and apparel are
stored;
 the expenses incurred for the preservation of the ship and her tackle
including supplies and provisions to her crew incurred after her last
entry into port;
 wages and other sums due to the master, officers, the crew including
repatriation costs and social insurance contributions payable on their
behalf;
 damages and interest due to any seaman for death or personal injury
and expenses attendant on the illness, hurt or injury of any seaman;
 moneys due to creditors for labour, work and repairs previously to the
departure of the ship on her last voyage
77
 ship agency fees due for the ship after her last entry into port, in accordance
with port tariffs, and any disbursements incurred during such period not
enjoying a privilege in paragraphs (a) to (I) of this section, though in any case
for a sum in the aggregate not in excess of four thousand liri;
 moneys lent to the master for the necessary expenses of the vessel during her
last voyage, and the reimbursement of the price of goods sold by him for the
same purpose;
 moneys due to creditors for provisions, victuals, outfit and apparel, previously
to the departure of the ship on her last voyage;
 damages and interest due to freighters for non-delivery of the goods shipped,
and for injuries sustained by such goods through the fault of the master or the
crew;
 damages and interest due to another vessel or to her cargo in cases of
collisions of vessels;

the debt specified in paragraph (d) of section 2009 of the Civil Code for the
balance of the price from the sale of a ship.
78

The privilege granted to the seller for the price
of the thing sold under the provisions of article
2009 (d) of the Civil Code is only effective
regarding vessels, if the claim for such price is
registered in the register of the said ship, within
two days from the date of the sale.

Such privilege is registered by delivery to the
registrar on the prescribed form duly completed
and signed by the seller.
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
Where debts of a nature similar to the ones
mentioned are contracted in different ports,
or in several forced returns to the same port,
the priority established by art.50 shall be
established on each arrival or return.

Privileged debts established on subsequent
arrivals or returns have preference over those
contracted on the occasion of a former arrival
or return.
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
The following debts, as well as any proceeds from any indemnity
arising from any mishaps as well as any insurance proceeds (other
than from a liability policy:






judicial costs incurred in respect of the sale of the aircraft and the
distribution of the proceeds thereof;
fees and other charges due to the DG arising under the Act;
Wages due to crew in respect of their employment on the aircraft;
Any debt due to a possessory lien holder for the repair, preservation
of the aircraft to the extent of the service performed and value
added to the aircraft;
The expenses incurred for the repair, preservation of the aircraft to
the extent of the service performed and value added to the aircraft;
and
Wages and expenses for salvage in respect of the aircraft
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
Some debts require registration in the IR to be
recognized as secured by a special privilege. They also
must be created by the owner of the aircraft or a
person authorized by him. These are:
 Taxes, duties and, or levies due to the Government of
Malta in respect of the aircraft;
 Wages and expenses for assistance or recovery in respect
of the aircraft

Art.42(5): This rule (and consequent ranking) prevails
over any other law, which is an interesting concession
by the Government not normally readily given
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
Art.42(3):
With reference to the privileges
requiring registration, it is stated that where the debt
is created by an operator (or a lessee):
 “it shall not affect the aircraft or the owner thereof, and
shall only operate in relation to the said debtor and upon
the termination of his temporary title and reversion of the
aircraft to the owner, the said claim shall be dissolved with
regard to the aircraft which shall revert unencumbered to
the owner”

This seems to indicate that there could be charge on
the aircraft during the relevant temporary tenure, and
therefore wording here could be happier!
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
Art.42(4) can also be improved.



It seems to refer to the registration of the
privileges covered by Art. 42(2) on the NAR
which would trigger notification to interested
parties.
These can presumably find themselves on the
NAR only through the facultative “noting”
possibility under Art. 4(2)(b)
Some clarification possibly needed here
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
The debts specified in article 50 shall rank in
the order therein set out and in preference to
other hypothecary and privileged claims,
notwithstanding that the ship is still in the
possession of the debtor, and the debts
specified in article 50(a) and (b) shall under all
circumstances rank in preference to any
claim.
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85

Debts secured by possessory liens, rank after some of the
privileged debts, but not all.
Examples:
 such a lien holder ranks after the ship repairers who did
work on the direct order of the ship owner, but ranks prior
to ship agency fees as well as the rest of the privileged
debts listed thereafter, as well as any other hypothecary
and privileged claims.

Debts secured by a mortgage rank after the debts of
possessory lien holders, as well as ship agency fees;
however they rank prior to debts for necessary expenses,
etc...
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1.
The debts specified in art.42(1) ARA shall rank in the order therein set
out, but the possessory lien holder will be entitled not to release
possession of the asset until paid or otherwise secured to his
satisfaction;
2.
A mortgage registered in the NAR or a charge in the international
registry or secured by a foreign mortgage recognized by ARA shall rank
after lien and debts covered by special privilege pursuant to Art. 42(1),
but prior to other hypothecary and privileged claims;
3.
The privileges requiring registration in the IR (taxes, assistance or
recovery costs and wages) shall rank after the debts specified in Art.
42(1) as well as debts secured by mortgages and charges in the IR which
will have already been registered;
4.
The debts specified in art.42(2), as well as where covered by a special
privilege
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
Any ship/aircraft repairer, shipbuilder/aircraft manufacturer, or
other creditor into whose care and authority an [asset] has been
placed for the execution of works or other purposes shall have a
possessory lien over the [asset];

the lien entitles the creditor to retain possession of the asset until
such he is paid for his work

The lien is extinguished by the voluntary release of the asset from
the lien holder’s custody, but not if released pursuant to a court
order or judicial sale. In the latter case, the lien holder will enjoy
priority over the sale proceeds.

The lien holder is obliged to declare the amount of his claim if
called upon to do so by judicial letter
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Dr. Tonio Fenech LL.M. (Lond), LL.D.

ARA:

“security interest” means an interest granted in terms of a security
agreement drawn up to secure the rights of:
a) A person who is a conditional seller under a title reservation agreement; or
b) The rights of a person who is a lessor under a lease; and which is
recognized and regulated in terms of Art.41




But neither a lease nor sale with title reservation are normally
considered a “security agreement” in the traditional sense;
The definition therefore refers to a security agreement that
provides an interest to the lessor and conditional seller;
Moreover, Art.41 confers certain “privileges” to these, but only
when registered in the International Registry, as opposed to any
registration in Malta;
Furthermore the lease or conditional sale must apparently be
part of a “security agreement”;
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
Both contracts are recognized in the 1st Schedule as international
interests directly, separately from rights given under a security
agreement

1st Schedule:
 “security agreement” means an agreement by which a chargor grants
or agrees to grant to a chargee an interest (including an ownership
interest) in or over an aircraft object to secure the performance of any
existing or future obligation of the chargor or a third person
 “Leasing agreement” means an agreement by which one person (the
lessor) grants a right to possession or control of an aircraft object
(with or without an option to purchase) to another person (the lessee)
in return for a rental or other payment”
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
An interest in airframes, aircraft engines or
helicopters:



Granted by the chargor under a security
agreement;
Vested in a person who is a conditional seller
under a title reservation agreement; or
Vested in lessor under a leasing agreement
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
We have already seen how a security interest creditor
enforcing his rights is given privileged status by Art.
27(4), in that the relevant procedure cannot be
interrupted or hindered by any curator in bankruptcy,
liquidator, etc., for any cause other than a cause that
could be set up by the owner of the aircraft

However, it is not clear where else in the Act, apart from
the Convention dimension, security interests per se have
any significance, except where a security interest is also
an international interest

There is however the curious case of Art. 31
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
The law specifies other creditors who can have their
interest on an aircraft or part, accessory or
appurtenance, noted or registered in the register,
subject to Article 32, prior to the registration of a
mortgage. These include:
 Any creditor having a separate privilege or charge;
 A seller reserving ownership rights, or enjoying the
benefit of any conditions affecting title thereto;
 A lessee having rights to an aircraft or any part,
appurtenance or accessory of an aircraft;
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
The person in favour of whom such rights are
registered prior to the registration of a
mortgage, shall be protected from and rank
prior to any subsequent mortgage

Further provisions provide for the cancellation
from the register of lessee interests and
reservation of ownership rights, as and when the
relevant circumstance changes

But why does Art.31(4) refer to the lessee and
not the lessor?
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
Art. 4 ARA provides for the registration of a number of interests
and documents beyond what was traditionally understood as
natural. eg:





Details of any Irrevocable De-registration and Export Request
Authorization (IDERA) and other powers of attorney granted to an
owner or a lessor or to a mortgagee, or to any third party, granting
rights relating to the aircraft or to closure of registry;
Any act to be registered under the provisions of Art. 31 or of any
other law;
Lessor rights relating to the aircraft or an engine;
Lessee rights in relation to an aircraft or an engine and all matters
relating thereto in terms of Article 31;
Information on international interests registered in the international
registry and the debtor thereof
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
As long as their interest is registered in the
International Registry, in addition to the de-fault
remedies allowed by the 1st Schedule, a security
interest holder has various self-help remedies under
Art. 41:
 Upon simple notice to defaulting debtor, he has:
▪ Power to terminate the agreement and take possession or control of the
aircraft;
▪ Apply to the court to authorize or direct either of these acts
▪
▪

Security interest is an executive title
No court intervention is necessary, etc.
Registration in the IR in effect elevates a security
interest holder under Maltese law to quasi-mortgagee
status
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
The 1st schedule does not seem to provide for registration
in the IR as essential for an interest to constitute an
“International Interest” as defined

However, Art.41(2) makes registration of an international
interest in the international registry a pre-condition for
recognition, enforceability and entitlement to all the
rights and powers specified in the 1st Schedule

Art. 41(8) further recognizes foreign security interests,
provided that these shall be subject and subordinate to
the rights of any registered mortgagee or holder of an
international interest registered in the IR
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
Maltese law allows a creditor the possibility, if desired, to
have various security interests recorded in the IR, either in
replacement of registration in the NAR, or together with
such “domestic” registration

If such international registration is opted for, the relevant
international interest will be fully enforceable in Malta,
subject to rights having priority under Art.42

An international interest will not be subordinate to a
“domestically registered” mortgage, irrespective of time
of registration (other than registrations preceding
February 2011)
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Dr. Tonio Fenech LL.M. (Lond), LL.D.
Fenech Farrugia Fiott Legal
Malta
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