Times of Malta, Thursday, January 5, 2012 , by Ann Fenech
Section 42 of the Merchant Shipping Act lays down the rights of the mortgagee in the eventuality that the owner is in default of his obligations. One of the rights listed is the right of the mortgagee to take possession of the vessel.
In part one, I discussed a procedure which was inserted in our Code of Organisation and Civil Procedure in 2006 which gives the mortgagees of vessels further enhanced rights – a procedure whereby a mortgagee can enforce his rights through a court approved private sale which remedy attempts to bridge the distance between what was previously a choice between two remedies which were not in themselves 100 per cent satisfactory.
The judge made some very interesting remarks and observations, a number of which may very well open up a Pandora’s Box.
Through the court approved private sale the law seeks to support the mortgagee and other creditors of a defaulting owner by ensuring the best price for the vessel (something associated with a private sale as opposed to a judicial sale by auction), whilst ensuring that the vessel is indeed sold free and unencumbered (something which only a judicial sale by auction can guarantee and which a private sale cannot.)
We saw this remedy put to the test successfully on December 1, 2011 in the case Dr Ann Fenech for and on behalf of Danske Bank v. the M. V. Thor Spirit per Mr Justice Mark Chetcuti. The substantial and useful rights of the mortgagee granted by our law were however again confirmed by the same Mr Justice Mark Chetcuti on November 24, 2011, in the case Dr Louis Cassar Pullicino for and on behalf of Norddeutsche Landesbank Girozentrale v. Chemstar Shipping Ltd.
Section 42 of the Merchant Shipping Act lays down the rights of the mortgagee in the eventuality that the owner is in default of his obligations. One of the rights listed is the right of the mortgagee to take possession of the vessel. Whilst this may be all very well and good on paper, from a practical perspective this can present a number of challenges.
One would typically have a situation where the owner of the vessel is in default of a term in his mortgage; the mortgagee gives notice to the mortgagor to no avail because the owner remains in default, and the vessel is in some far flung jurisdiction. The mortgagee would like to take possession.
This would in real terms mean that the mortgagee would inform the owner that it intends to take possession; it may mean that the mortgagee would instruct the owner to take the vessel and to deliver the vessel into the possession of the mortgagee in a more efficient or reliable jurisdiction where the mortgagee can then take the necessary steps to enforce his mortgage through any remedy which Maltese law provides.
From experience, owners would generally comply with such requests. However there will be occasion when the owner, irrespective of the fact that the mortgagee would be fully within his rights to take possession of the vessel and order the owner to deliver the vessel to, say, Malta, the owner very consciously refuses. What can the mortgagee do about this situation?
This was the position which Norddeutsche Landesbank Girozentrale found itself in when following the default of Chemstar Shipping Ltd on its payments under a mortgage on the MV STAR 1, a vessel registered under the Malta flag, the bank sent the mortgagor a Notice of Default which was not actioned by the owner who remained in default of his obligations.
The mortgagee issued the owner with a Sailing Advice ordering the owners not to order the vessel to proceed to Turkey but to proceed to Malta instead. The owners ignored this advice and proceeded to Turkey. The bank then issued the owner with a further Sailing Advice as it was entitled to do in terms of its Loan Agreement to proceed immediately to Malta. The owners refused to do so. The bank representatives then attempted to board the vessel in Turkey to serve the Master with a notice of possession but were barred from boarding leading to the service of the notice of possession on the registered owners. The owners refused to hand over possession to the bank.
Given this, the bank was therefore forced to file an application before the Maltese courts requesting the court to confirm that the bank had the right to take possession of the vessel given the owner’s default, to fix a period of time within which the owner had to deliver the vessel to the bank failing which to authorise the bank to take possession of the vessel even by appointing new crew, order the owner to refrain from doing anything which would hinder either directly or indirectly the bank from taking possession of the vessel and finally to make all those orders necessary to enable the bank to take possession of the vessel.
The owners attempted to defend the application by stating that: The Maltese court had no jurisdiction over the matter because the vessel was not in Maltese territorial waters; that the law did not contemplate the mortgagee having a right to file such an application; that it was not the fault of the owners which led to them being in default; that the mortgagee had not taken any of the steps associated with obtaining an executive title; that the mortgagee had to first file an official letter which it did not.
Mr Justice Chetcuti threw out the defence of lack of jurisdiction on three counts – the basis that the defendant was a Maltese registered company and therefore the jurisdiction of the Maltese court was beyond question, on the basis of a jurisdiction clause in the deed of covenants indicating the Maltese courts as one of the courts to which disputes could be referred and on the basis of EU Regulation 2(1) of Regulation 44/2001.
Mr Justice Chetcuti also threw out the other defences by highlighting the fact that the right of the mortgagee to take possession was conditioned only by the need for the mortgagee to give notice to the owner in writing as stipulated in article 42 of the Merchant Shipping Act and the need to ensure that all the criteria established by the loan agreement and deed of covenants had been satisfied.
He therefore accepted all of the Bank’s requests and declared that the Bank had a right to take possession of the vessel and ordered the defendant to deliver the vessel to the bank within one week failing which was authorising the Bank to take possession of the Motor Vessel Star 1 ordering the owners to refrain from doing anything to obstruct the Bank from doing so.
In his decision dealing with every one of the defences separately, the judge made some very interesting remarks and observations a number of which may very well open up a Pandora’s Box, possibly each deserving a detailed analysis and article in themselves.
However, the general message which has been sent out loud and clear by this judgement is that in this particularly sensitive commercial area where the strength of the flag lies in the comfort it can give the financiers, international financiers of vessels registered under the Malta flag can rest assured that provided that their rights under the contracts they enter into are in line with the provisions of our Merchant Shipping Act they will be fully upheld and safeguarded.
Dr Fenech is head of the marine litigation department and managing partner at Fenech and Fenech Advocates.