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