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MMLA President Dr Ann Fenech on The Judicial Sales of Ships

August 9, 2022 Leave a Comment

On June 30 in New York, the 55th Session of the United Nations Commission for International Trade Law (UNCITRAL) approved the text of the convention on the international effects of judicial sales of ships and this after the Commission had at its 35th Session in New York in May 2018 agreed to take on the project. It was a cause for great celebration for the Comité Maritime International (CMI) and for international maritime trade.

The convention owes its beginnings to a draft prepared by the CMI. In 2008 Henry Li from China suggested that the CMI should undertake a study on the subject matter.

It was evident that while in the majority of states, vessels sold in judicial sales are sold free and clear of any pre-existing claims, with their laws also providing for old creditors of such vessels to present their claims against the proceeds of the sale, there are states which refuse to recognise and give effect to the free and unencumbered title which accompany such judicial sales acquired by the purchasers of such vessels.

These instances lead to hugely challenging situations presenting serious interruptions to the orderly conduct of international trade, bearing in mind that 90 per cent of world trade is carried by sea.

This failure not only leads to mala fede claimants exerting illegitimate pressure on buona fide purchasers who would have spent good money in purchasing vessels in judicial sales, the failure also gives rise to great uncertainty for the new financiers of such vessels who assume they are financing vessels leading to a clean title, only to find old creditors making a claim against the ship purchased clean.

There have also been cases where old mortgagees refuse to let go of their pre-existing mortgages, causing problems to registrars of ships leading to great delays in the deletion of mortgages, or even ships from the old registries which in turn lead to further challenges with the registration of new mortgages.

These problems also lead to the question, which purchaser is going to risk paying top dollar for a ship in a judicial sale which is supposed to give him a clean title if after the sale, an old creditor can come along and arrest that vessel? This, in turn, leads to loss of confidence in judicial sales, leading to lower prices for ships in judicial sales, which in turn leaves less money for the vessel’s old creditors.

So between 2008 and 2014 the CMI worked on a draft convention aimed at ensuring that when a vessel is purchased in a properly held judicial sale free and clear of all previous debts, such a title will be given full effect by other state parties. The draft convention was called the ‘Beijing Draft’. Following its finalisation, the CMI needed to find an international legislative body for its draft, which would work on the project and turn it into an international treaty.

In July 2017 the CMI approached UNCITRAL, and the Commission at UNCITRAL recommended that the CMI should first hold an international colloquium with the maritime industry in order that the industry may express its view on whether there was a real need for such a convention.

This international colloquium was organised in Malta by the CMI in conjunction with the Malta Maritime Law Association and the support of Transport Malta in February 2018, and it was attended by over 150 international maritime protagonists ranging from BIMCO to IACS, to ITF, ship owners, flag registries, financial institutions, ship owners, service providers and maritime judges. There was an overwhelming agreement on the need for certainty in international trade and on the need for such a convention.

Switzerland thus presented the conclusions of the Malta Colloquium and the ‘Beijing Draft’ to the 51st session of the Commission in June 2018 and, notwithstanding some very stiff competition, the proposal garnered support from a number of very important state delegations leading the Commission to decide that this was a topic that would be added to the work programme of the Commission. Subsequently, the project was given to Working Group V1 and from May 2019 it held five working sessions until the Working Group presented the finalised text to the Commission in June of this year.

The 55th session of the Commission deliberated the draft for four days and approved the text of the Convention on June 30. It agreed to submit the text to the General Assembly of the United Nations recommending to the same General Assembly the adoption of the convention at its 77th session, the authorisation of a signing ceremony to be held as soon as practicable in 2023 in Beijing, upon which the Convention would be open for signature, and recommending that the Convention be known as the Beijing Convention on the judicial sales of ships.

It is anticipated that the General Assembly of the United Nations will adopt the convention at its 77th session in September.

Our Merchant Shipping Act clearly provides that where a ship has been sold in a judicial sale, the interest of the mortgagees as well as of any other creditor in the ship pass on to the proceeds of the sale of the ship.

However notwithstanding this and that for decades the position in Malta has been that when a vessel is sold in a judicial sale, it is sold free and unencumbered so that a purchaser purchases the vessel without any of the vessel’s previous debts.

In June 2018, the vessel Bright Star was arrested in Malta for an old debt, six months after having been sold free and unencumbered in Jamaica, following the arrest of the ship in Jamaica by the same old creditor.

In May 2021, the court in Malta decided in favour of the new owners underlining the fact that once a vessel is sold in a judicial sale free and unencumbered, any previous creditor must make a claim against the proceeds of the sale declaring the subsequent arrest to be illegal. The case is now before the Court of Appeal.

This case clearly shows that even in jurisdictions like Malta where the law is crystal clear, unscrupulous mala fede claimants will try to put illegitimate pressure on buona fede purchasers who purchase vessels in judicial sales.

The convention on the international effects of judicial sales of ships seeks to resolve this. It has 23 Articles with its entire raison d’être contained in Article 6 which states: “A judicial sale for which a certificate of judicial sale referred to in Article 5 has been issued shall have the effect in every other State Party of conferring clean title to the ship on the purchaser.” It is expected that the convention will be adopted by the General Assembly of UN in September- Ann Fenech

There are a number of criteria which need to be satisfied for the convention to apply, and important among which are the notification criteria contained in Article 4 and the issuance of a certificate of judicial sale by the court where the judicial sale takes place provided for in Article 5.

Article 4 provides that while the judicial sale needs to take place in accordance with the law of the state of judicial sale, a notice of judicial sale must be given to the owners or bareboat charterers of the ship, the registry or bareboat charter registry of the vessel, to the mortgagees, holders of registered hypothecs or other registered charges and to holders of maritime liens which would have presented a claim before the same court.

Article 5 provides that upon completion of a judicial sale which confers clean title to the ship, which was conducted in accordance with the law of state of judicial sale and in accordance with the convention, the court or other public authority conducting the sale will then issue a certificate of judicial sale to the purchaser. This certificate will state that the vessel was sold free and unencumbered in accordance with the law of the state of judicial sale and the criteria provided in the convention.

The convention also provides that both the notice of judicial sale and the certificate of judicial sale are to be transmitted to the repository mentioned in Article 10. The repository is the IMO which will provide a module in its already existing GISIS platform to host the repository.

This enables any person to access the digital IMO GISIS platform to see whether any vessel is about to be sold in a judicial sale and/or whether such a ship has in fact been sold and a certificate issued. This is of great benefit to creditors of ships who have an interest in pursuing the proceeds of a sale and who may wish to partake in any ranking of creditors procedures which may take place following the sale of such ships.

Article 7 provides that at the request of a purchaser who produces a certificate of judicial sale, a registrar of ships is obliged to delete the vessel, or affect a transfer of ownership, and is obliged to delete any pre-existing mortgages, hypothecs or registered charges.

Article 8 provides that an application for an arrest of a ship for a claim pre-existing the sale free and unencumbered shall be refused on the production of the certificate of judicial sale by the new owner of the vessel, and that if the vessel is arrested in ex parte proceedings, that vessel is to be immediately released on the production of a certificate of judicial sale.

In order to have further certainty, the convention provides in Article 9 that it is the court of the state of judicial sale which has exclusive jurisdiction to hear a claim or application to avoid the judicial sale and no other court of any other state. The only exceptions to these are two.

The court of the state of registration may decide that giving effect to the convention is against its public policy, and similarly, the court of the state where the vessel is subsequently arrested may also decide that not arresting such a vessel or releasing from arrest such a vessel would be in breach of its public policy.

It is expected that the convention will be adopted by the General Assembly of the United Nations at its 77th Session in September. It will be a significant step forward in achieving certainty in international maritime trade, particularly in today’s challenging economic climate.

Ann Fenech is the President of MMLA, a partner at Fenech & Fenech Advocates and Vice President of CMI and CMI coordinator for the project at UNCITRAL.

The article was issued in a two–part series.

Source: The Times of Malta

Final Draft Convention on the International Effects of Judicial Sale of Ships agreed at UNCITRAL

February 28, 2022 Leave a Comment

Dr Ann Fenech, President of the MMLA, and CMI co-ordinator for the project at UNCITRAL, just returned from New York where she attended the 40^th session of UNCITRAL Working Group V1. The meeting was held in a hybrid fashion between 7 – 11 February. Dr Fenech is pleased to report that the Working Group has completed its work by agreeing a final Draft of the Convention on the International Effects of Judicial Sale of Ships.

Working Group V1 has been considering and deliberating this draft convention presented to UNICTRAL in the form of the Beijing Draft since May 2018, starting off with the Malta Colloquium organised jointly by the MMLA and CMI. The Draft will now be presented to the Commission for its deliberation and approval in June and if approved the Convention will be presented to the General Assembly of the UN which will be followed by a signing ceremony of the Convention which could be held in Beijing in the first quarter of 2023.

Court orders extension of effects of flag injunction to security deposited by debtor

February 12, 2021 Leave a Comment

Creditors’ ability under Maltese law to file an application before the courts for an injunction prohibiting the sale, transfer or deregistration of Maltese-flagged vessels has proven to be a useful and effective tool to protect maritime claims.

Section 37 injunction

In essence, the Section 37 injunction allows creditors, in certain circumstances which give rise to a maritime claim attracting the jurisdiction of the Maltese courts in rem, to obtain a court order which prohibits the vessel from being sold or entering any further mortgages until the merits of the case have been decided in the appropriate jurisdiction. When granted, the order is served on the registrar of Maltese ships and is recorded against the vessel’s entry in the registry. This obliges the registrar to refrain from:

recognising any transfer of ownership;
recognising any further mortgages; and
issuing any deletion certificate for the vessel.

Further, if a transcript of register is issued, the injunction will appear on the transcript.

The law provides that the demand for the order must be made by sworn application as though the party were commencing an action. As with all such applications, this must be served on the defendant, which has 20 days to file a defence. The matter is also given a hearing date. Submissions and ultimately a court decision follow. The court will decide whether to agree to the request to order that no further transfers can be effected until the matter on the merits is decided. As this will take time and because any forewarning in the issuing of the injunction may defeat the object of the exercise, the law allows creditors to file an ex parte application together with the statutory sworn application, containing the same demands and requesting that the court agree to the order immediately and on an interim basis until the statutory sworn application has been heard and decided definitively. This caters for the element of urgency which often accompanies the necessity of obtaining such injunctions to ensure timely protection of creditors’ interests.

Case law

In the recent case of Dr Ann Fenech as mandatory for and on behalf of Clearlake Shipping Pte Ltd v Global LNG Limited, the creditor followed the above procedure in seeking security for a claim arising from a dispute under a charterparty concluded between the parties in relation to the MV Portovyy. While the merits were, in terms of the arbitration clause contained in the charterparty, subject to arbitration in London, the charterers were keen to ensure that their rights would be secured in the eventuality of them obtaining a favourable award.

The Maltese courts granted the Section 37 order on a provisional basis on the same day as the filing of both the statutory sworn application and the ex parte application (as described above). The owners eventually filed a cash deposit in the amount claimed by the charterers in the court registry, together with a request for the court to order that the Section 37 order be revoked.

By means of a 26 November 2020 decree, the court held that rather than ordering the revocation of the Section 37 injunction, the effects of said order would cease to exist insofar as the vessel itself was concerned but would continue to apply exclusively to the cash deposit provided by way of security by the owners, pending the final determination of the merits or a settlement being reached by the parties.

Comment

This case illustrates the practical efficacy of these procedures, which are an efficient tool for obtaining security while allowing owners to continue to make full use of their vessels. Further, the law allows owners to shift the effect of such an injunction from the vessel itself onto adequate security that may be provided by them in terms of law.

By Alison Vassallo, Fenech & Fenech Advocates

Source: ILO

Maritime Labour Convention amendments incorporated into Maltese law

January 23, 2021 Leave a Comment

Amendments to the Maritime Labour Convention (MLC) 2006 recently came into force after having been adopted in 2018. Malta, as a signatory to the MLC, implemented the changes into domestic law on 18 December 2020, with said changes having effect as of 26 December 2020. As one of the largest ship registries in the world, these changes will have a significant impact on the world’s shipping workforce.

Maltese law

The MLC was transposed into Maltese national law and introduced as the Merchant Shipping (Maritime Labour Convention) Rules, Subsidiary Legislation 234.51.

Under Maltese law, all employment relationships are governed by the Employment and Industrial Relations Act (EIRA), Chapter 452 of the Laws of Malta, and its subsidiary legislation. Although the rights and obligations of all employees are defined in the EIRA, it is the EIRA itself which states that some provisions within it do not apply to seamen.(1) It is thus understood that when referring to seafarers and their rights or obligations, the Merchant Shipping Act (MSA), Chapter 234 of the Laws of Malta, and its subsidiary legislation should be applied first as the lex specialis, followed by the EIRA should the MSA be silent on specific matters.

MLC and its amendments

The new amendments transposed into Maltese law can be divided into two parts introduced in the form of standards:

the first refers directly to seafarers’ employment agreements; and
the second refers to wages.

That said, a third amendment introduced in the form of a guideline within the MLC, which refers to specific entitlements, was not incorporated into the Merchant Shipping (Maritime Labour Convention) Rules. As a common denominator, these amendments deal directly with the threat of piracy and armed robbery, which has been on the rise in recent years.

Prior to these amendments, there was no definition of ‘piracy’ or ‘armed robbery against ships’ within the rules or the MSA. The only definition of ‘piracy’ within Maltese law was found within the Criminal Code(2) and was introduced in 2009. This definition is almost identical to that given in the United Nations Convention of the Law of the Sea 1982.

These terms have now been introduced directly into the Merchant Shipping (Maritime Labour Convention) Rules under Article 2(1). Specifically, ‘armed robbery against ships’ has been defined as:

any illegal act of violence or detention or any act of depredation, or threat thereof, other than an act of piracy, committed for private ends and directed against a ship or against persons or property on board such a ship, within a State’s internal waters, archipelagic waters and territorial sea, or any act of inciting or of intentionally facilitating an act.

On the other hand, ‘piracy’ has been given “the meaning assigned to it by the United Nations Convention on the Law of the Sea, 1982”.

Seafarers’ employment agreements Under Maltese law, seafarer’s employment agreements are regulated by Part III of the Merchant Shipping (Maritime Labour Convention) Rules – specifically, Articles 20 to 28. The amendments to the MLC state:

that a seafarer’s employment agreement shall continue to have effect while a seafarer is held captive on or off the ship as a result of acts of piracy or armed robbery against ships, regardless of whether the date fixed for its expiry has passed or either party has given notice to suspend or terminate it.(3)

This has been incorporated verbatim into the rules as Article 28A.

There are no similar provisions to the abovementioned one in the EIRA or its subsidiary legislation.

Wages Part III of the Merchant Shipping (Maritime Labour Convention) Rules also regulates wages and when and how these should be paid to seafarers (Articles 49 to 67). Article 67A has been introduced and states as follows:

Where a seafarer is held captive on or off the ship as a result of acts of piracy or armed robbery against ships, wages and other entitlements under the seafarers’ employment agreement or relevant collective bargaining agreement, including the remittance of any allotments as provided in rule 64 (1), shall continue to be paid during the entire period of captivity and until the seafarer is released and duly repatriated or, where the seafarer dies while in captivity, until the date of death.(4)

The introduction of this obligation for employers codifies rights for seafarers which were not previously clear under Maltese law, thus strengthening the already privileged position of seafarers’ wages by extending the obligation to these situations out of their control.

Notably, under the EIRA, any illegal deductions to an employee’s wages constitutes an offence on the part of the employer. The introduction of this amendment therefore clarifies any doubt which may have been present in situations where a seafarer could not have performed their duty due to piracy or armed robbery. It also enforces the understanding that a situation such as this could never be considered as being a form of abandonment of work.

Entitlement Curiously, the third and final amendment, which found its way into the MLC in the form of a guideline, relates to entitlements and was not incorporated into the Merchant Shipping (Maritime Labour Convention) Rules. The guideline states as follows:

The entitlement to repatriation may lapse if the seafarers concerned do not claim it within a reasonable period of time to be defined by national laws or regulations or collective agreements, except where they are held captive on or off the ship as a result of acts of piracy or armed robbery against ships.(5)

Notably, while Part A of the MLC contains standards which are mandatory to all signatories of the MLC, Part B contains guidelines, such as the aforementioned one, which are non-mandatory. This begs the question as to whether the Maltese courts will take this guideline into consideration when contemplating prescriptive periods or the quantification of damages in situations regarding the repatriation of seafarers. However, this would be unlikely, and perhaps the only relevant time periods would be the general prescriptive periods under Maltese law. Where prescription is concerned, from a Maltese law perspective, the general rules would apply – namely:

a two-year prescriptive period for actions in tort; and
a five-year prescriptive period for any contractual claims.

Comment

It is refreshing to see that such protection will now be given to seafarers including those employed on Maltese-flagged vessels – especially those who regularly traverse areas which may be considered high-risk zones.

Over the coming months, it will be interesting to see how these new provisions will be interpreted by the Maltese courts and tribunals and also whether these could lead to the consideration of similar rules or laws to be implemented in instances of agreements with crew engaged on ships which do not fall within the scope of the Merchant Shipping (Maritime Labour Convention) Rules (eg, fishing vessels, small ships, yachts in non-commercial use and warships or naval auxiliaries), or more widely, in other employment agreements in other industries where similar risks could exist.

By Michael Paul Agius, Fenech & Fenech Advocates

Source: Lexology

Endnotes

(1) Article 39 of the EIRA states as follows:

The provisions of article 36 shall not apply in respect of seamen employed on ships under the provisions of the Merchant Shipping Act; and in the event of any conflict between any of the provisions of the said Act and any of the provisions of this Act, the former shall apply.

(2) Criminal Code, Chapter 9 of the Laws of Malta.

(3) Standard A2.1 – Text of the amendments adopted on 27 April 2018, third meeting of the Special Tripartite Committee established by the governing body in accordance with Article XIII of the Maritime Labour Convention 2006, as amended (MLC 2006).

(4) Standard A2.2 – Text of the amendments adopted on 27 April 2018, third meeting of the Special Tripartite Committee established by the governing body in accordance with Article XIII of the Maritime Labour Convention 2006, as amended (MLC 2006).

(5) Standard B2.5.1 – Text of the amendments adopted on 27 April 2018, third meeting of the Special Tripartite Committee established by the governing body in accordance with Article XIII of the Maritime Labour Convention 2006, as amended (MLC 2006).

A critical benefit of the Maltese Maritime Flag: Court-approved private sales

January 22, 2021 Leave a Comment

The continued success of the Maltese Maritime Flag can be greatly attributed to the protection given to financiers and creditors of vessels registered under the Maltese Flag.

A ‘judicial sale’, as defined by Lief Bleyen, is the “sale of a ship by a competent authority by way of public auction or private treaty…by which Clean Title to the Ship is acquired by the Purchaser and the proceeds of sale are made available to the creditors.” Act XIV of 2006 amended Article 358 of the Code of Organisation and Civil Procedure (‘COCP’), introducing a novel procedure of Court-approved private sales for aircraft and vessels in addition to the traditional judicial sale by auction. Therefore, under Maltese law, there are two types of judicial sales:

1. Traditional judicial sale by auction; and

2. Court-approved private sales.

In a judicial sale by auction, the vessel is sold to the highest bidder in Court, with no reserved price mechanism in the case of vessels exceeding 10 metres in length. This creates a certain ambiguity surrounding the creditors, as they would not be aware whether the sum agreed to by a buyer as the highest bidder in Court would cover, or even come close to what such creditor or creditors, are owed. This type of judicial sale of a vessel is a rather risky one, as it may eventually lead to a situation where a creditor/s remains unpaid once the vessel is sold.

Prior to the introduction of Court-approved private sales in 2006, creditors had the option of negotiating private sales. However, such sales were largely disregarded by buyers since the imperative “executive title” would not be guaranteed. This inevitably led to a situation where the buyer would not purchase an aircraft or vessel free and unencumbered from any liabilities connected to the vessel. This highlights the importance of the amendment to the COCP which brought about an overhaul of the already-existing private sale.

In Court-approved private sales, commonly referred to as ‘hybrid sales’, the mortgagee agrees on a price with the buyer, obtains valuations of the vessel through physical inspections, and if the sale price exceeds the highest valuation, the mortgagee will apply to the Court for the sale to be approved. In this type of sale, the creditors will then seek settlement from the sale price. Court-approved private sales amalgamate the advantageous characteristics of a private sale, i.e. the possibility of negotiating the price, as well as providing the prospective purchaser with an executive title; a modification which seeks to bridge the gap between both types of sales. This introduction is a powerful tool for creditors and financiers where, in the event of default, the vessel can be arrested and sold in a judicial sale without the need of commencing an action on the merits.

Despite being introduced around 15 years ago, the first time that this amendment was used was in the ‘Thor Spirit’ case in 2011. The entire procedure was concluded in around two weeks, proving to be expeditious and highly cost-efficient.

Since the ‘Thor Spirit’ case, the Maltese Courts have continued to approve private sales of vessels in numerous judgments. Examples of such cases include the 2013 Blankenese case and the 2014 MV Ladybug case. Further cases such as the HHL Rio de Janeiro case decided in 2019, also dealt with Court-approved private sales. In the latter case, the sale was finalised within 20 days, once again highlighting the transparent and efficient nature of Court-approved private sales.

The role of the Court in this type of sale is not one which is solely limited to rubber-stamping but pursues a somewhat proactive role, ensuring that the application of this procedure is carried out in a consistent manner, in line with the appropriate administration of justice, as well as the bona fide principle being respected by all affected parties.

THE CMI BEIJING DRAFT

Despite there not being international consensus regarding the judicial sale of vessels, it appears that the Comité Maritime International (‘CMI’) is definitely paving the way for results. The CMI is recognised as the oldest organisation worldwide which is exclusively concerned with the unification of Maritime law and related commercial practices. Back in 2008, the Executive Council of the CMI launched an International Working Group on the Judicial Sale of Ships, with the aim of studying the challenges associated with the failure of the recognition of such judicial sales. Eventually, in 2012 the CMI issued the Beijing draft, which was subsequently approved in 2014.

The Beijing Draft deals solely with the recognition of judicial sales, providing that notices must be given to persons indicated in the clause (including owners, mortgagees, holders of registered titles and lien holders) within 30 days prior to the judicial sale. The Draft reaffirmed that ships must be sold free and unencumbered, where the purchaser shall acquire clean title over the vessel. It also provides for the issuance of a Certificate by the authority ordering the sale, certifying that the vessel is free and unencumbered, and that all rights previously existing against the ship are extinguished.

In 2017, the CMI submitted its proposal to the United Nations Commission on International Trade Law (‘UNCITRAL’). Following this, a joint Colloquium was held in February 2018 in Malta between the CMI, the Malta Maritime Law Association and the Maltese Government. Various attendees, including ship owners, ship repairers, banks, and financiers encouraged the creation of an international instrument which would finally regulate this area to improve the organisation, stability and certainty of international trade.

The UNCITRAL Working Group V1 met in December 2020 to discuss the Beijing Draft. The final result remains an international Convention where the free and unencumbered title in a vessel purchased in a judicial sale is recognised by State parties, guaranteeing that such vessel fetches the maximum price in a judicial sale for the benefit of the creditors, guaranteeing at the same time, the peaceful possession and use of the newly purchased vessel by the bona fide purchaser.

By Katrina Abela, Aleandro Mifsud and Nina Fauser, GVZH Advocates

Source: Lexology

Member of the Comité Maritime International

MMLA President Dr Ann Fenech on The Judicial Sales of Ships

Final Draft Convention on the International Effects of Judicial Sale of Ships agreed at UNCITRAL

Court orders extension of effects of flag injunction to security deposited by debtor

Maritime Labour Convention amendments incorporated into Maltese law

A critical benefit of the Maltese Maritime Flag: Court-approved private sales

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