The right tools for the job

ONE of the reasons behind the growth of the Maltese flag over the past few years is the support given to the flag by shipping financiers. This is undoubtedly due in part to the fact that mortgagees enjoy a number of privileges when an owner is in default.

Maltese law provides the mortgagee with at least two important procedural tools. Under Section 42 of the Merchant Shipping Act, in the event of default of any term or condition of a registered mortgage, the mortgagee shall, upon giving notice to the mortgagor, be entitled to take possession of the ship and in addition has absolute power to sell the ship. In practice, the Registrar of Maltese Ships will recognise such a sale effected by the mortgagee provided that evidence is given to the Registrar that the mortgagor is truly in default and that the notice of default has been served and received by the owner.

The advantages to this procedure include the speed with which the matter can be concluded, the price that can be obtained for the vessel and the fact that the ball is entirely in the court of the mortgagee. However, one disadvantage the mortgagee must take into account is the fact that the sale is considered to be a private sale and consequently the vessel may not necessarily be free from encumbrances or claims. Because of this, a bank may be reluctant to sign a bill of sale stating that the vessel is free from encumbrance in case the bank would be exposing itself to future actions.

A buyer may also be equally reluctant to purchase a vessel which may not be free from third party claims. For this reason, this option is usually only resorted to when the bank is fully aware of the vessel's history and prepared to take the risk.

In addition to the above, and according to Section 42 (2) of the Merchant Shipping Act, a registered mortgage is deemed to be an "executive title" where the obligation it secures is a debt which is certain, liquidated and due. In practice this means that a registered mortgage has the same value as a court judgement and may be enforced in exactly the same way. The mortgagee, therefore, does not have to commence an action on the merits and obtain a judgement before enforcing that judgement. By virtue of this section of the law, the mortgagee can proceed directly with the enforcement of its rights.

By far the most popular method of enforcement is the judicial sale by auction. The advantage of this procedure is that in a judicial sale the vessel is sold by the court, not by the mortgagee, and is sold to the buyer free from encumbrances - the buyer, in effect, purchases the vessel with a clean title. For this reason, it is usually the option preferred by mortgagees.

This procedure, however, is not free from all disadvantages. Since it is a procedure involving the courts, there are a number of procedural steps which need to be taken prior to a mortgagee being able to request the court to fix a date for the sale of the vessel. Having said that, the procedural steps which need to be taken are fairly straightforward and involve producing evidence to the effect that the owner is truly in default and that the defendant has been served with a judicial request for payment. Service of documents on the vessel's agent is deemed to be service of the documents on the vessel.

There have been quite a few judicial sales of vessels held on the demand of mortgagees in this past year, for example the very recent application filed by the Royal Bank of Canada requesting the judicial sale of the vessel Ocean Alert.