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Malta Maritime Law Association

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Mortgage amendments – when are they required?

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A mortgage over a Malta-flagged vessel may be drawn up to secure the payment of a principal sum and interest, an account current (ie, an indebtedness arising and determinable in accordance with an underlying obligation) or the performance of any other obligation – including a future obligation – due to a creditor by the debtor.

Shipowners may register a mortgage to secure not only their obligations, but also those of a third party. Notably, the shipowners’ obligation to register a mortgage must always arise from an underlying obligation reflected in an underlying security document. The mortgage narrative must refer to the underlying security document and specifically refer to the obligation which is secured by the mortgage.

The parties to an underlying security document may enter into negotiations resulting in changes to the terms set out in the security document. The question that therefore arises is whether a mortgage amendment should be registered to reflect the new terms.

When should mortgage amendments be registered?

The Merchant Shipping Act (Cap 234 of the Laws of Malta), as amended, gives clear guidance as to when a mortgage amendment must be registered. The act sets out that while a mortgage amendment may be effected for any purpose, the registration of such amendment is mandatory if it aims to:

• increase the amount secured by the mortgage; or
• extend the mortgage to secure, whether as principal or surety, another obligation of the mortgagor to any other person, in favour of the mortgagee.
Where an amendment increases the amount secured by the mortgage, the law clarifies that certain agreements are not considered “an increase in the amount secured by the mortgage” – in particular, agreements to amend or vary:
• the rates of interest payable;
• the modalities for calculating interest, including any indices, margins or market mechanisms;
• the repayment schedule; or
• the currency in which payment is to be made.

In other words, loan restructurings do not warrant the execution and registration of a mortgage amendment.

Alternatively, in cases where the amendment aims to extend the mortgage to secure another obligation of the mortgagor, the law provides that where a new obligation qualifies as a ‘future obligation’ of the mortgagor secured by the mortgage, such amendment need not be executed and registered if the new obligation falls within the maximum sum by way of principal as stated in the mortgage deed.

While registration of a mortgage amendment in the cases above is specifically required by law, an amendment for any other reason remains optional and at the discretion of the parties. However, an amendment may not be registered after the obligation secured by the registered mortgage has been satisfied.

A mortgage deed can be amended by the mortgagor as long as the mortgagee’s written consent is included in the amendment deed; this consent must be attested by a witness. Further, if other mortgages are already registered over the vessel, the amendment may be registered if all of the registered mortgagees whose interests may be prejudiced by the said amendment provide their written consent to the registrar of ships.

Once an amendment has been registered, this forms an integral part of the original mortgage and the priority of the original mortgage is not affected.

by Lara Saguna Axiaq, member of the MMLA and maritime lawyer within the Ship Registration & Finance Department of  Fenech & Fenech Advocates

Source: ILO

Lost mortgage instruments

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The registration of a mortgage over a Malta-flagged vessel in favour of an individual, corporate lender or security trustee (the mortgagee) requires the filing of a statutory mortgage instrument (the deed) at the Maltese Ship Registry. Once the mortgage has been registered and the time and date of registration has been recorded in the vessel’s register and annotated on the deed, the registered deed is released in its original form to the mortgagee and certified true copies thereof are released to the registered shipowner (the mortgagor).

Maltese law also permits the transfer or assignment of registered mortgages pursuant to Sections 44 and 44A of the Merchant Shipping Act (Cap 234 of the Laws of Malta), which require the completion of an instrument of transfer or assignment. Once the same has been filed with the Registry of Ships, the mortgage may be transferred in favour of a new mortgagee.

Once the underlying obligation has been extinguished, the mortgage securing such obligation must also be discharged. The discharge of the security will require the filing of the original deed with the Ship Registry and a duly completed instrument of transfer or assignment. Thereafter, following the mortgagee’s instructions, the mortgage will be discharged with the time and date of discharge being recorded in the vessel’s register and on the deed.

However, what happens if the original mortgage instrument is misplaced?

Maltese law affords two remedies in instances where the original deed has been lost. The chosen remedy will depend on the remaining duration of the registered security.

Available remedies for lost deeds

Reconstitution of lost mortgage instrument
Section 48 of the Merchant Shipping Act provides that a lost mortgage instrument can be reconstituted on the mortgagee’s request alone or together with the mortgagor.

A sworn declaration (affidavit) referencing the loss of the original deed, together with a copy of the lost deed, must be filed at the Ship Registry.

The registrar will then make a note in the vessel’s register that a reconstituted mortgage instrument has been issued and annotate the copy of the lost deed.

The annotated copy of the lost deed will be deemed to be the reconstituted mortgage instrument and, should the security registered over the vessel eventually be transferred or discharged, the reconstituted mortgage instrument must be completed overleaf and filed at the Ship Registry. The transfer or discharge will be registered pursuant to the reconstituted mortgage deed.

Sworn declaration
If a deed is lost shortly before the security is scheduled to be transferred or discharged, the mortgagee may issue a sworn declaration (affidavit) indicating that it is the holder of the mortgage and that the original instrument has been lost.

On filing the sworn declaration, the registrar will treat such sworn declaration as the mortgage instrument.

Any mortgage transfers or discharges will be registered by virtue of the sworn declaration; a note to that effect will be entered in the vessel’s register and the sworn declaration will be annotated accordingly.

Comment

The above mechanisms afford mortgagees added protection should their original deed be lost. They not only confirm the continued validity of the mortgage despite the loss of the original deed, but also provide mortgagees with peace of mind and remedies should their mortgage need to be transferred or discharged.

by Lara Saguna Axiaq and Charlotte Spiteri, members of the MMLA and maritime lawyers within the Ship Registration & Finance Department of Fenech & Fenech Advocates

Source: ILO

Smart shipping – Blockchain technology offers the opportunity to revolutionise the shipping sector

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Malta is fast becoming a centre for Distributed Ledger Technology (DLT) businesses. Its efforts to become a global hub in this sector culminated in the enactment of three new laws earlier this year. This new legislative framework seeks to create a regulated environment within which this sector can function and thrive in. However, despite the buzz generated by blockchain, many people are still not sure what this technology really means and more importantly, how it can transform and revolutionise so many different industries, including shipping.

At its core, blockchain is a decentralised and distributed digital database. This means that different parties can share and update the same information online in real time, naturally depending on authorisation rights. There is no need for a central administrator. To simplify matters, imagine a spreadsheet. Rather than having one person regularly update it, here the spreadsheet is duplicated across a network of users (also known as ‘nodes’), who are regularly updating the spreadsheet.

Thus, whereas most centralised databases keep information upto-date at a particular moment, data held on a blockchain exists as a shared database which is constantly being updated and reconciled in real time as new sets of ‘blocks’ are added to it. Each block contains a timestamp and is linked to the previous block, forming a chain of information.

Naturally, while the information can be accessed by all, not all users can add a new entry to an existing chain. To do so, they must have a special cryptographic key. Decentralised data arguably also provides more security as it becomes harder to manipulate the information in the ledger. By way of example, imagine your bank maintains a central database of all its customer details and transactions. When you withdraw money or transfer funds, your bank updates its records in its database. If a hacker manages to access to this centralised database – they can change balances and change transaction details at will.

However, with blockchain, this would not be possible as there is no centralised database. All the users have real-time access to the data. Any manipulation would require the same change being made on all copies of the distributed ledger at the same time, which is highly unlikely. Most people associate blockchain technology with banking and cryptocurrencies. Perhaps this is a result of the fact that these two industries were the first to identify the enormous potential of this technology and have invested so heavily in it.

However, blockchain as a secured, decentralised and encrypted ledger is being explored by other sectors and the shipping industry is no exception. Shipping remains to date a paper-intensive industry, with most transactions dependent on the use of paper documents such as sale contracts, charterparties and bills of lading. Some of these documents may also need to exchange hands several times.

For instance, traditionally a bill of lading is issued at the port of loading in favour of the shipper. It may subsequently need to pass on to several banks before ultimately reaching the receiver. The process can be so time consuming that sometimes the cargo arrives at the port of discharge before the bills of lading do.

Blockchain technology offers the opportunity to turn shipping paperless, by means of which all the key stakeholders – including shippers, receivers, carriers, charterers, banks, terminals and customs officials – may contract, exchange or store information in encrypted format, give and accept instructions and securely effect payment exchanges. Every party involved in a transaction may access any of the relevant trade documentation in real-time, with the peace of mind that these have not been tampered with. By doing so, the use of blockchain technology promises to simplify current shipping processes, reduce costs, provide more time-efficient solutions and also offers a securer way of trading.

Blockchain technology may also revolutionise the shipping industry through the use of smart contracts. These electronic contracts are essentially drawn up by a computer programme which is intended to facilitate negotiations and execute agreements between parties. Additionally, they also aim to self-enforce or perform the obligations when certain pre-defined conditions are met. For instance, automated payments could become self-executing under a smart contract once the performance of the obligations therein is carried out.

It will be interesting to see whether the industry will embrace the use of smart contracts. In shipping, most transactions are carried out using standardform contracts and thus, much could depend on how well these contracts can be coded or transposed into smart contracts. The potential that blockchain has to transform shipping operations into more efficient and profitable enterprises is already being recognised by a number of big stakeholders in shipping.

Indeed, over the last couple of months, we have seen a number of ambitious projects go live. Container shipping giants A.P. Moller–Maersk have teamed up with IBM and recently launched their blockchain trade platform TradeLens. This platform aims to connect all parties involved in the shipping trade and enables them to interact efficiently and access real-time shipping data. It will enable participants to also digitalise and exchange trade documentation using a module, called ClearWay, which will also allow for the use of smart contracts and automated processes, such as import and export clearance. In layman’s terms, this technology will allow multiple trading partners as well as authorities to establish a single shared view of each transaction. Shippers, carriers, freight forwarders, terminal operators and customs authorities can interact more efficiently through real-time access to shipping data and shipping documents.

Blockchain-based start-up CargoX recently also successfully carried out its pilot shipment for the first ever smart bill of lading. The test trail saw shipments of garments arrive in the port of Koper from Shanghai, China on August 19, 2018. CargoX claims that its services can reduce the costs associated with issuing and processing bills of lading by up to 85 per cent, as well as save time and provide a more secure way of shipping cargo. The likelihood is that widespread acceptance of blockchain technology in shipping will not happen overnight.

There are still a number of challenges which will need to be overcome, primarily the need to ensure that the law supports the technology and also protects the legitimate interests of so many parties’ involvement in the maritime chain. Another important factor will certainly be the willingness of public authorities to embrace and use this technology. We must therefore patiently wait to see as to what extent the shipping industry can take advantage of blockchain technology.

by Adrian Attard, Member of the MMLA and maritime lawyer at the marine litigation department of Fenech & Fenech Advocates

Source: Times of Malta, Maritime&Logistics Supplement

 

The judicial sale by auction of the Indian Empress

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The June 2018 sale of the Indian Empress has attracted the attention of the superyacht community worldwide and international brokers, the international yachting media, potential owners and creditors of the yacht are watching this space very closely.

Overview of legislation

The sale of the Indian Empress must be considered in the context of the Code of Organisation and Civil Procedure and the Merchant Shipping Act, which have assisted in making Malta an important maritime jurisdiction.

The 2006 amendments to Article 742 of the Code of Organisation and Civil Procedure outlined:

  • an extensive list of claims for which the Maltese courts have jurisdiction in rem over vessels; and
  • additional powers given to vessel mortgagees under the Merchant Shipping Act through the newly introduced court-approved private sales.

These changes significantly contributed to the increase in maritime cases heard by the Maltese courts.

Further, the absence of a specialised admiralty court has not stopped the development of a robust body of maritime case law, principally due to the fact that maritime cases are referred to the same judges who have established procedures and provided important precedents in this regard – particularly in the realm of court-approved private sales and scenarios such as the one presented in the case of the Indian Empress.

Facts

The Indian Empress is a 95-metre superyacht built by Oceanco. The owners had approximately €27 million worth of debt with diverse creditors ranging from unpaid crew, to unpaid suppliers, service providers and financiers. The vessel was arrested in Malta by multiple creditors. These creditors are now obtaining favourable judgments and enforcing these against the vessel’s owners.

One such creditor, Melita Power Diesel Limited, filed an application requesting the judicial sale of the vessel. The sale was set for 28 June 2018 and attracted significant interest. The day before the sale, the owner of the Indian Empress filed an application in court asking to postpone the sale because they had previously entered into a memorandum of agreement (MOA) with Crediyacht Ltd to sell the yacht for $42 million. According to the owners of the vessel, Crediyacht needed more time to make the payment. It is unclear why the owners of the Indian Empress believed that the judge would grant their extension, particularly because owners of a vessel under arrest by several creditors cannot enter into a private MOA with a third party for the sale of the yacht unless all of the creditors will be paid and the arrest lifted. The court correctly refused the application, presumably seeing this as nothing more than a delay tactic. The court ordered the auction to proceed.

Under Maltese law, every bidder must offer evidence to the court-appointed auctioneer that they can cover their maximum bid. However, on the date of the sale, of the many international bidders that made offers, Crediyacht Ltd (the same company which had supposedly previously entered into an MOA for the private purchase of the yacht) had the winning bid of €43.5 million. Maltese law does not require a deposit to be made on the day of the auction; instead, it merely requires the successful bidder to pay the purchase price into the court within seven days.

However, concern arose when it became apparent that the successful bidder was the same entity which had previously been unable to produce the purchase price after supposedly entering into a MOA weeks earlier.

As expected, seven days after the auction, Crediyacht Ltd filed an application in court requesting an extension to make the payment. Naturally, all of the creditors opposed this request.

The judge refused the application.

In the meantime, the mortgagee – Barclays Bank – filed an application requesting the court to appoint a new date for the sale of the vessel and:

  • require any interested party to produce evidence to the court-appointed auctioneer that they had “guarantees or equivalent evidence or security for a value of not less than 35 million euros in place”; and
  • prohibit Crediyacht Ltd from participating in any future auction.

The main difficulties with the request to provide a guarantee of no less than €35 million was that:

  • Maltese law does not allow a minimum price in the case of the judicial sale of a vessel; and
  • accepting such a request would be tantamount to the court agreeing that a bidder could not make a bid of less than €35 million.

Decision

In his novel judgment, Justice Mark Chetcuti took a leaf out of the UK equity courts’ books and did not allow himself to be restrained by the failure of Maltese law to provide for the situation while maintaining the spirit of the law. Instead, Chetcuti:

  • set a new auction date for 19 September 2018;
  • required all bidders to deposit €1 million within 48 hours of the sale date;
  • prohibited Crediyacht from participating in the next auction; and
  • held Crediyacht responsible for paying the difference in the sale price if, at the 19 September auction, the Indian Empress was sold for less than the €43.5 million which Crediyacht had bid for the yacht on 28 June 2018.

Comment

This is the first time that a Maltese court has ordered bidders in a judicial sale by auction of vessels to make a cash deposit in court prior to the sale taking place and the first time that a bidder has been held liable for the payment of the difference.

by Ann Fenech, President of the Malta Maritime Law Association and Managing Partner of Fenech & Fenech Advocates

Source: ILO

Malta introduces measures aimed at attracting Ship & Yacht Management Companies to Malta

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The Maltese Government has recently confirmed its commitment towards the Shipping and Maritime cluster through the recently introduced Legal Notice 140 of 2018 aimed at attracting Ship and Yacht Management activities to Malta.

Ship management activities represent the operational side of the shipping industry. Maltese authorities, conscious of the scarce presence of third party managers on our shores, together with industry stakeholders, analysed the deficiencies in our current legal framework and have, for this reason, decided to take action in a consistent manner concurrently with the recently revamping of its tonnage tax rules.

The intention of Maltese Authorities is clearly that of attracting players on Maltese shores in order to strengthen the already robust ship registration and financing offering. These rules, together with the recently revamped tonnage tax regime, the sound corporate tax measures and the attractive social security policies are set to make Malta as the perfect home port for ship management activities.

Legal Notice 140/2018 in a nutshell

The Qualifying Employment in Maritime Activities and the Servicing of Offshore Oil and Gas Industry Activities (Personal Tax) Rules, 2018 introduced a favourable Tax Rate of 15% chargeable on employment income derived by individuals with respect to work or duties carried out in Malta (or in respect of any period spent outside Malta in connection with such work or duties).

The employers need to be:

1. Undertakings holding either a Document of Compliance (DOC) issued in terms of the International Safety Management Code or a Seafarer Recruitment and Placements Services Licence issued in the terms of the Maritime Labour Convention; or

2. Any undertaking involved in works on board of ships, with the exclusion of ships involved in regular ferry services on board of ro-ro and fast ferry ships; or

3. Any undertaking providing services to offshore oil and gas and ancillary services industry.

The beneficiaries from such exemption could be:

1. Chief Executive Officer;

2. Chief Operations Officer;

3. Managing Director;

4. Chief Financial Officer;

5. General Manager;

6. Crewing Manager;

7. Technical Manager;

8. Technical Ship Superintendent;

9. Designated Person Ashore;

10. Master;

11. Chief Mate;

12. Second Officer;

13. Chief Engineer;

14. Second Engineer;

15. Chef;

Servicing of the Offshore Oil and Gas and Ancillary Services Industry Activities

1. Chief Executive Officer;

2. Chief Operating Officer; and

3. Head of Training Academy (which Academy must be certified by an international accreditation institution).

In order to benefit from this favourable tax treatment, the employee must:

1. be employed to fill one of the above mentioned senior categories and be in possession of professional qualifications or acceptable professional experience;

2. be entitled to remuneration of at least €65,000 (exclusive of the annual value of any fringe benefits);

3. be in receipt of stable and regular resources which are sufficient to maintain him/herself and his/her family members without recourse to the Maltese social assistance system;

4. reside in accommodation regarded as normal for a comparable family in Malta;

5. not be domiciled in Malta;

6. be in possession of a valid travel document;

7. be in possession of adequate sickness insurance in respect of all risks normally covered for Maltese Nationals for himself/herself and the members of his/her family;

8. be protected as an employee under applicable Maltese laws.

In order for an eligible person to benefit from the reduced 15% rate he/she would be required to apply to the Authority for Transport in Malta (“TM”) for a formal determination confirming eligibility to the favorable tax rate. The eligible person would then need to submit a prescribed form endorsed by Transport Malta to the local tax authorities together with his/her tax return.

The eligible person must be a citizen of the EEA or a Third Country Nation and can avail of this tax benefit for a period of 5 years (4 in the case of third country nationals) with the possibility to extend such period for a similar period of time 5 years up to a maximum period of 10 years (9 in case of third country nationals) of assessment.

Ship Manager’s treatment under Tonnage Tax Rules

In addition to the above and as an alternative to the ordinary corporate tax on income, Ship Managers may be eligible to benefit from the tonnage tax exemptions with respect to the income derived from the management of vessels.

The conditions to be fulfilled in order to benefit from the tonnage tax exemption are the following:

1. Provision of technical and/or crew management services. Commercial management is excluded from the exemption.

2. Ship management companies must be set-up as Shipping Organisations in accordance with the provisions of the Merchant Shipping Act (Cap. 234 Laws of Malta) and duly approved as such by the Authority for Transport in Malta;

3. Must be established in the European Union (EU) or in the European Economic Area (EEA);

4. Maintaining of separate accounts clearly distinguishing the payments and receipts by the ship manager with respect to ship management activities from those not connected to such activity; and

5. At least two-thirds of the tonnage of the ships to which the ship manager provides ship management activities is managed from the territory of the European Union or EEA;

6. The tonnage in respect of which the ship manager provides ship management activities satisfies the flag-link requirement.

by Stephan Piazza member of the MMLA Executive Committee and Manager Transport & Leisure – Shipping, Aviation & Infrastructure at KPMG in Malta

Source: Lexologie

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International Events

The Comité Maritime International (CMI) held its Assembly meeting and other events on 8./9. November 2018 in London. Find out more…

The 24th Annual Conference of the European Law Organisation (EMLO) was held in London on 25/26 October 2018. Find out more…

The Malta Colloquium on Judicial Sales was held on 27 February 2018 in Valletta. Find out more…