ILO – Contributed by Fenech & Fenech Advocates August 29 2012

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In a recent judgment the Maltese courts rejected a foreign liquidator’s application to have a precautionary warrant of arrest lifted on the basis of the EU Insolvency Regulation (1346/2000).

Facts

In 2006 a German shipowner entered into a shipbuilding contract with a Chinese yard for the construction of a vessel (later named the MV Beluga Sydney). The following year, the shipowner assigned all rights and obligations to another German legal entity. The latter was consequently scheduled to accept delivery of the vessel as its new registered owner. The delivery took place in 2010.

However, it transpired that despite several agreements between the owners and the yard, a large sum due for the construction of the vessel had allegedly remained unpaid. In June 2011 the Chinese builders filed a request before the Maltese civil courts to obtain a precautionary warrant of arrest against the MV Beluga Sydney to secure their claim in rem, for an amount of $5,162,206.57. This represented the outstanding balance for construction of the vessel. The Maltese courts acceded to this request and the vessel, which was already within Maltese territorial waters, was immediately arrested.

One month later, the local courts of Bremen in Germany ordered the commencement of insolvency proceedings against the shipowner. The courts appointed a provisional administrator to look after the company’s affairs. The administrator was subsequently also appointed as liquidator of the company when the Bremen courts ordered its liquidation in November 2011.

Later that month, the appointed liquidator filed an application before the Maltese courts demanding that the precautionary warrant of arrest be lifted, or alternatively that the arresting creditor put up a counter-security. Among the various arguments raised to support the request to have the arrest lifted, the liquidator sustained that the precautionary arrest was invalid in accordance with the EU Insolvency Regulation.

The liquidator argued that, in terms of Article 4 of the regulation, German law should be the applicable law determining the validity or otherwise of any judicial proceedings affecting the ranking of creditors in the courts of any member state, including precautionary warrants of arrest. Accordingly, the liquidator argued that under Article 88 of the German Insolvency Code, the arrest of the vessel (which took place one month before insolvency proceedings were commenced) was invalid.

The liquidator attempted to link the above argument with one of the grounds in the Maltese Code of Organisation and Civil Procedure under which a precautionary warrant can be lifted – in cases where it would be unreasonable to maintain the precautionary act in force or where the precautionary act is no longer necessary or justifiable.

Decision

The court decided that none of the arguments put forward in the liquidator’s application merited lifting of the precautionary warrant. Likewise, the court held that there was no justifiable reason as to why the arresting creditor should be forced to put up a counter-warrant.

With respect to the argument raised in terms of the regulation, the court accepted that the regulation had direct effect in Malta and that it was therefore directly applicable in proceedings before the Maltese courts. However, the court also highlighted that the aforementioned European regulation differentiates between different classes of claim brought against insolvent parties.

The court referred to Paragraph 25 of the regulation’s preamble, which explicitly states that different rules should be followed in the case of rights in rem. The basis, validity and extent of every right in rem should normally be determined according to the lex situs (ie, the law of the place in which the property in question is situated) and should therefore be unaffected by the opening of insolvency proceedings in another member state. The court also referred to Regulation 5(1), which expressly states that the opening of insolvency proceedings shall not affect the in rem rights of creditors over both movable and immovable assets belonging to the debtor which are situated in the territory of another member state at the time of the opening of insolvency proceedings.

The court therefore decided that the mere fact that insolvency proceedings had been opened in Germany should not mean that legal proceedings already instituted by creditors in Malta to secure their rights in rem against the vessel should be stopped.

Comment

This judgment is to date the only judgment delivered by the Maltese courts in which the effects of the EU Insolvency Regulation on legal proceedings instituted in Malta to secure maritime claims in rem have been discussed. The court’s conclusions with respect to the effects of insolvency proceedings on claims in rem also complement the relevant provisions in the Merchant Shipping Act.

The act, and more specifically Article 37A(1), acknowledge that when dealing with actions and claims in rem, ships and other vessels constitute a particular class of moveable that should be treated as separate and distinct assets from the rest of the estate. Moreover, the same article expressly provides that where a shipowner goes bankrupt, any action or claim in rem against the ship enjoys preference in relation to the ship, over any other creditors of the shipowner’s estate.

Similarly, Article 37C(1) of the act provides that any registered mortgage, special privilege, action or claim in rem against a vessel will not be affected by bankruptcy of the shipowner that takes place after the date on which the claim arose, even if the shipowner was the owner or in possession of the vessel at the commencement of the bankruptcy. Article 37C(1) also reiterates that rights in rem enjoy a preference in relation to the ship in question, over all other debts of any other creditor of the bankrupt shipowner.

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For further information on this topic please contact Adrian Attard at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email adrian.attard@fenlex.com.

‘Times of Malta’, Monday, June 18, 2012. By Karl Grech Orr

The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Geoffrey Valenzia and Mr Justice Giannino Caruana Demajo on May 25, 2012, in the case “Norddeustsche Landesbank Girozentrale as represented by Dr Louis Cassar Pullicino vs Chemstar Shipping Ltd” held, among other things, that the rights of a mortgagee bank under Article 42 (1) of the Merchant Shipping Act to take possession of a vessel, were not subject to any limitations under Article 42 (2), which stated when a mortgage constituted an executive title. The rights of a mortgagee under Article 42 (1) were additional to and not subordinate to Article 42(2) of the Merchant Shipping Act.

The facts in this case were as follows.

The bank was entitled to exercise its rights under the security documents subject to judicial review. This meant that the bank had the right to take possession of the vessel Chemstar Shipping Ltd appealed from the decision of the First Hall of the Civil Court dated November 24, 2011.

The first court had upheld the request of Norddeutsche Landesbank Girozentrale, as mortgagee bank, to take possession of the vessel MV Star 1 which was mortgaged in its favour, in security of Chemstar’s loan obligations.

Chemstar was a principal debtor and guarantor and its debt was secured by a ship mortgage over the vessel, the property of Chemstar. The bank claimed that Chemstar was in default.

The loan facility had been terminated and payment in full was demanded. The bank gave sailing instructions to the master to bring the vessel to Malta.

However, its instructions were ignored. It said that as mortgagee bank, it had a right to take possession of the vessel. Faced with this situation, it proceeded to file legal proceedings in Malta, requesting the court:

• to declare that the bank had the right to take possession of the vessel;
• to order Chemstar within a short period to deliver the vessel and, if it failed, to authorise the bank to take possession of the vessel; appoint agents and crew;
• to prohibit Chemstar from doing anything which disturbed or impeded it from taking possession of the vessel;
• to give such orders and reminders to permit the bank from taking possession of the vessel.

Chemstar pleaded in defence that:

• the Maltese courts lacked jurisdiction;
• no court authorisation was necessary for the bank to take possession of the vessel;
• it was not to blame for the alleged “default”, the basis of this action. It in fact took action in Turkey on this matter;
• the bank did not follow the procedure in the law to acquire an executive title;
• the bank should have rendered the mortgage “executive” by filing a judicial letter in terms of Article 253 and 256 (2) of Chapter 12 and Article 42 (2) of Chapter 234 of the Laws of Malta.

On September 22, 2011 Chemstar petitioned the court to stay these proceedings until its case in Turkey was decided.

On September 29, 2011, the first court rejected its application. It noted the bank’s rights under the security documents.

Clause 8 of the Deed of Covenants states that: “The mortgage shall in so far as the owner’s obligations under the loan agreement are concerned be considered due and enforceable upon any event of default having occurred according to the sole discretion and option of the mortgagee.

“The mortgagee shall in such a case serve a written notice to this effect to the owner and any sum or amount outstanding under the loan agreement shall be considered immediately due and payable”. Under Clause 9: “Upon the security created by this deed becoming due and immediately enforceable pursuant to Clause 7 hereof, the mortgagee may put into force and exercise all the powers possessed by them as mortgagee of the vessel and in particular: (a) To take real or constructive possession of the vessel”.

The first court said that it was to no party’s benefit for these proceedings to be stayed and that this case in Malta could be decided before a decision was given in Turkey.

The court maintained that Chemstar would not suffer irremediable damage by this lawsuit. The first court accepted the bank’s request.

It decided further that the bank was entitled to take possession of the vessel under the loan agreement and deed of covenants.

It authorised the bank to take possession of the vessel, with the power to nominate agents and crew. It also ordered Chemstar not to impede directly or indirectly the bank from taking possession of the vessel.

Aggrieved by this decision, Chemstar appealed. Chemstar submitted that the bank failed to follow the necessary procedure in Chapter 12, to render its mortgage “executive”. It was not notified with a sworn statement indicating the amount due. It said that the bank did not file a judicial act under Chapter 12, necessary to render its mortgage “executive”, and before this was done, the bank could not take effective possession of the vessel.

Notice: The first court said that the bank was obliged to give written notice before enforcing its mortgage. Written notice was in fact given and no payment was made.

The bank also gave a notice of default and a notice of acceleration and demand. It informed Chemstar that the loan was terminated and gave sailing instructions to the master.

It also gave a notice of possession on July 29, 2011. The court said that the bank gave written notice as to the amounts due, in terms of the agreements and in this respect Chemstar’s pleas were without basis.

As regards the plea whether bank rendered its mortgage, “executive” and enforceable in terms of Article 42 of Chapter 234 the court considered Article 42 which provides:

1. 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: (a) be entitled to take possession of the ship or share therein in respect of which he is registered; but except so far as may be necessary for making a mortgaged ship or share available as a security for the mortgage debt, the mortgagee shall not by reason of the mortgage be deemed to be the owner of the ship or share, nor shall the mortgagor be deemed to have ceased to be the owner thereof.

2. A registered mortgage shall be deemed to be an executive title for the purposes of Article 253 of the Code of Organisation and Civil Procedure: (a) where the obligation it secures is a debt certain liquidated and due and not consisting in the performance of an act; or (b) where a maximum sum secured thereby is expressly stated in the instrument creating the security and such figure is recorded in the register for public notice.

3. The provisions of this article shall apply to all registered mortgages which secure debts resulting from any account current or overdraft or other credit facility.

4. In connection with the enforcement of any mortgage, not being a mortgage contemplated in sub-Article 2, for the purpose of determining the amount certain liquidated and due or the actual sum due when the mortgage secures a future debt within an expressly stated maximum, in connection with any judicial sale of a ship, the mortgagee shall specify the sum due at the time of enforcement by means of an affidavit served on the mortgagor: Provided that this shall be without prejudice to the right of any interested party to contest such amount according to law.

5. For the purpose of the proceedings referred to in this article, the debtor shall be deemed to be duly served if the application or other act is served on the master of the vessel, or if he is absent from these islands, on the local agent appointed for the vessel by the owners or their agent, or in the absence of such local agent on a curator appointed by the court to represent the debtor and the ship”.

The mortgagee under Article 42 had authority to exercise its powers after giving written notice to take possession of the vessel.

While Article 42 (2) restricted the cases when a mortgage was deemed to be “executive”, it did not impose any other condition to render a mortgage to be enforceable.

Article 42 (2) did not say that a mortgagee had to follow the procedures under Chapter 12. In this respect it did not have to apply Article 253 and Article 256 of Chapter 12.

The first court therefore did not accept Chemstar’s pleas. This court said that the bank was entitled to take possession of the vessel, under the mortgage and deed of covenants.

The bank complied with the formalities under the deed of covenants as regards notices. It resulted that Chemstar was in default, as it failed to pay the loan installments.

Nor did Chemstar contest that there was an event of default. The court said that the bank would suffer a greater hardship if these proceedings were delayed or stayed in particular since the vessel was the only asset of the debtor.

The court felt that there existed no extraordinary circumstances to justify this case be stayed until the Turkish case was decided. Enforcement of mortgage: The Court of Appeal had to consider whether the first court was correct to say that no other formality was necessary to enforce a mortgage, other than notice in writing. A mortgage had to be “executive” to be enforceable.

A mortgage, however, could be deemed to be included in Article 253 Chapter 12 in terms of Article 42 (2) Chapter 234. Article 256 (1) of Chapter 12 was applicable, maintained the court.

A mortgage could only enforce after two days from a request for payment by judicial act. This was also in accordance with Article 42 (5) of Chapter 234.

The court, however, pointed out that the rights of a mortgagee under Article 42 (1) were not subject to any limitations under Article 42 (2). The rights of a mortgagee under Article 42 (2) were additional to Article 42 (1). In this respect, the court dismissed Chemstar’s grievance that the formalities under Chapter 12 had to observed before the bank could present this action.

Chemstar claimed that it was not to blame for the breach. Chemstar maintained that the first court should have looked into its alleged “default”, in particular, when the bank requested the court to declare that it had a right to take possession of the vessel on the basis of its default. The court said it should review whether there was a breach as required by law.

The bank, on the other hand, disputed not observing the terms of the agreement. It put forward the argument that the fact that Chemstar chose to sue in Turkey only indicated that its pleas before the Turkish court would make no effect to rebut its claims in Malta.

This court said it could not now consider the bank was in a way responsible, once this issue had not been decided by the first court, otherwise it would deny a party the benefit of doppio esame.

If one of the conditions for the bank to take possession of the vessel was nonperformance by the mortgagor, a plea by the mortgagor defendant contesting such non-performance should not be lightly discarded. The bank was entitled to exercise its rights under the security documents subject to judicial review.

This meant that the bank had the right to take possession of the vessel. Chemstar’s pleas should not delay a decision by this court of the bank’s requests.

Besides as Chemstar raised this very issue before the Turkish court, this court was precluded from considering this issue: in view of the lis alibi pendens principle (a person could only sue once in relation to the same merits); nor should the outcome of the case in Turkey delay the delivery of a decision by this court.

For these reasons, on May 25, 2012, the Court of Appeal gave judgement by dismissing Chemstar’s appeal and by confirming the decision of the Court of First Instance dated November 24, 2011.

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Dr Grech Orr is a partner at Ganado & Associates