Legal Infrastructure for Asset Finance in Civil Law Jurisdictions

Dr. Tonio Fenech LL.M. (Lond), LL.D.

Dr. Tonio Fenech LL.M. (Lond), LL.D.



As a Civil Law country, our general law of

obligations is codified in the Civil Code



Art.1994: “Whosoever has bound himself

personally, is obliged to fulfil his obligation with

all his property, present and future.”



Art.1995(1): “The property of a debtor is the

common guarantee of his creditors, all of whom

have an equal right over such property……”

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

Art. 1995 provides for 3 particular

qualifications to the general rule, being:



Lawful causes of preference;



Transfer of property by way of security; or



Transfer under a security trust in accordance with

the Code

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

Art. 1996: “The lawful causes of preference

are privileges, hypothecs and the benefit of

the separation of estates.”



Arts. 1994 – 2095 proceed with setting out

the legal infrastructure which provides for the

establishment of privileges and hypothecs, of

a general or special nature, and over all

property or specific property.

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

Art. 2095E deals with Security Trusts;



Arts. 2095F-2095I regulate security by title

transfer;

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

Anglo-Saxon asset finance models, and the

mortgage in particular, were seen as key to

attracting ships to our flag;



The same is true for the development of the

aviation register;



“transfer of title by way of security” is an

interesting mechanism introduced as part of

the aviation-driven reforms in 2009-10 that

may be the key to having a more integrated

system for asset finance going forward;

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

Complex aircraft finance often shares many

characteristics with maritime finance:



assets of great value which can themselves be a

significant aspect of the security to be provided;



the intrinsically international nature of the

industries;



The importance of anglo-saxon legal notions for

financiers;



Ships and aircraft, like land, but unlike most other

tangible moveable assets, require registration;

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

Lord Justice Roskill

 in 

The “Panglobal

Friendship”

[1978] 

1 

Lloyd’s Rep. 369 (CA):

For advancing

funds 

to one or more 

ship 

owning

companies

, a bank will typically take:



a mortgage on the ship

, and possibly also

mortgages on other sister ships,

by way of

 security

for the loan

;



an assignment of 

any

 time charter;



an assignment of insurance policies and P&I Club

cover;



P

ermutations, refinements and variations of

the 

mainstream

 theme

:



Off-balance sheet financing (

l

easing)

;



High yield bond issues

;



Flotations and other capital markets transactions



Others

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From Wikipedia:



The three most common schemes for financing

commercial aircraft are 

secured lending

, 

operating

leases

 and 

finance leases;



However, there are other ways to finance aircraft

acquisition:



Operating leases and sale/leasebacks



Export credit guaranteed loans



Tax leases



Manufacturer support



Equipment Trust Certificates (ETCs) and

     Enhanced Equipment  Trust Certificates (EETCs)

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

The usual security structure for a loan in the

shipping/

aviation field comprises a number of

elements:



A mortgage of the 

asset (ship or aircraft)

;



An assignment of earnings, rights and receivables;



An assignment of insurances;



Sometimes, a pledge on the shares of the

company, or of other receivables

;



Special privileges on the 

ship or 

aircraft as

applicable

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

The letting or hiring of ships to merchants for

the carriage of goods is historically described as

a charterparty. The system was developed for

operational objectives, not asset financing ones.

At the basic level, when hired:



for a period of time, it is a time charter;



For a point-to-point voyage, it is a voyage charter;



A Bareboat or demise charter is a time charter

where the charterer takes responsibility  for the

crewing and maintenance of the ship (he is

treated  as the “disponent owner”)

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

Wet Lease or ACMI - Aircraft, Crew,

Maintenance & Insurance



Lessor provides ACMI, but lessee provides fuel,

landing (etc) fees, crew HOTAC as well as local

taxes. Otherwise rental is on block hours (choc

off – choc on), sometimes with guaranteed

minimum block hours paid per month



Damp lease (no crew)



Crew normally must receive training from

Lessor

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

Normally adopted by leasing companies and

banks: lessee puts aircraft on its AOC and

provides aircraft registration, etc



Operating lease:

▪

aircraft does not appear on the lessee’s balance sheet



Finance lease:

▪

Normally viewed as a purchase for accounting purposes

▪

Purchase option at end of lease for agreed price

▪

Lease payments are substantial percentage of market

value of aircraft

▪

Lease term substantial percentage of aircraft’s usable life

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

Finance leasing represents a threshold that

goes from off-balance sheet financing to debt

financing, and vice versa



Once they get on to the balance sheet,

expensive assets remain important elements

to help secure finance

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

A 

C

redit economy implies the need for confidence

that payment obligations will be fulfilled



Most systems have long developed specific

methodologies and concepts, intended to give a

creditor some “security interest” in property



A method which provides for differentiation and

prioritization in ranking between competing rights



But the system of one country is not necessarily

recognized or enforceable in other countries and

legal systems

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

The problem is not so much the classic conflict

of law issues of applicable law, etc., but the

widely differing approaches of legal systems to

security and title reservation rights;



This traditionally created much uncertainty

among financiers as to the efficacy of their

rights;



The result was a general inhibition to extend

finance in large parts of the world, and a

general increase in borrowing costs

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

The 5 objectives according to Roy Goode:



the creation of an international interest which will be

recognized in all Contracting States



Providing the creditor with a range of basic default

remedies, and a means of speedy interim relief pending

determination of a claim on the merits;



an electronic international register of interests to give

notice, and preserve priority against unregistered

interests and the debtors’ insolvency administrator;



Ensuring that the needs of the industry sector are met;



Enhance credit rating of equipment receivables, thus

reducing borrowing costs

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

In ratifying the convention, Malta clearly sought to

maximize confidence of secured creditors in our system;



 as a result of ratification, the Maltese domestic system is

accompanied by the international system introduced by

the Convention;



Therefore to understand Maltese law in this area, one has

to look at the “domestic” situation as well as the situation

if the Convention mechanisms are harnessed;



The problem of language: “security interest” as defined in

the main text of the ARA, “international interest” as

defined in the 1

st

 Schedule, etc

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

This appears to be a possible way forward in

terms of general asset finance, where Anglo-

Saxon “self-help” mechanisms can possibly

encourage financiers to become more active

in such fields as motor vehicle finance,

farming equipment finance and the like

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Dr. Tonio Fenech LL.M. (Lond), LL.D.



An interest in or some right against property

of a debtor that is granted to a creditor to

secure payment, or the performance of

some obligation owed to that creditor; it

may be created:



By agreement, or



Operation of law

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

The provisions of law in this area 

are broadly identical in

both the 

Merchant Shipping Act

 as well as the Aircraft

Registration Act.



“[Ships and other vessels/aircraft]

.......

constitute a particular class of movables whereby they

form separate and distinct assets within the estate of their

owners for the security of actions and claims to which the

[vessel/

aircraft

]

is subject.  In case of bankruptcy

[of the

owner of the ship][

and, or insolvency of the owner of an

aircraft

]

,

all actions and claims, to which the 

[ship/

aircraft

]

may be

subject, shall have preference, on the said 

[ship/

aircraft

]

,

over all other debts of the estate

”

.

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

separation of estates



for the security of actions and claims



to which the 

ship/

aircraft may be subject



Therefore bankruptcy of the owner will not

affect claimants who have relied on the

security of the a

sset

, since these claims will

have priority.

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S. 37A(2) MSA:



a ship shall include together with the hull, all

equipment, machinery and other

appurtenances or accessories belonging to

the ship, which are on board or which have

been temporarily removed therefrom

;

S.37B(3) MSA:



separate items upon a vessel may themselves

be subject to special privileges in accordance

with the Civil Code



For the purposes of providing security an aircraft

comprises



All data, manuals and technical records, and



The airframe, all equipment, machinery and other

appurtenances as accessories belonging to the

aircraft, which are on board or which have been

temporarily removed therefrom, and



Any engines owned by the owner of the aircraft

whether attached to the aircraft or not, as well as

any replacement engines 

(designated for use on the

aircraft and owned by the owner of the aircraft) 

but

temporarily not attached to the aircraft

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

Any security given to a third party over an aircraft by

an airframe owner shall not extend to any engine

(owned by a third party) attached to the airframe,

notwithstanding that the engines may be specifically

referred to in the mortgage, the NAR or elsewhere



When an engine is attached to an aircraft owned by a

different owner, there is no accession in terms of the

Civil Code (Art. 573), and any security

0

n 

separate

items on or in an aircraft may themselves be subject

to special privileges in accordance with the Civil Code

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

A charge on 

ships and 

aircraft can be established



by means of a mortgage, or



by a special privilege;



For aircraft only, 

an 

“

international interest

” can also be created



Certain “privileged” rights are also given to the creditor in the context of security

interests



A general hypothec under the Civil Code 

remains available, but this 

attaches to all

the assets of a debtor, including any aircraft such debtor may own



Other mechanisms are specifically recognized which, while not constituting a

charge, they greatly facilitate a creditor’s life:



Security by title transfer



IDERA

(

aircraft only)

 – Irrevocable De-registration & Export Request Authorisation



Irrevocable powers of attorney in terms of Art 1887, Civil code



Swift judicial relief pending final determination

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

registered mortgages, special privileges, claims and actions 

to

which a [vessel/

aircraft

] may be subject 

are 

not

 affected 

by the

bankruptcy of the mortgagor or owner happening after the date 

of

the mortgage or special privilege, 

or when the 

action or claim arose



ARA: E

ven if the owner had the aircraft in his possession, order or

disposition, or was the reputed owner thereof, at the

commencement of the bankruptcy



The

 secured claims will have priority on the 

ship/

aircraft over all

other debts claims or interests of any other creditors



ARA: 

However, secured claimant must contribute to costs of

winding up (including liquidator costs) where he participates in the

liquidation proceedings, and is ordered to do so by the court,

determining the extent of his liability

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

Judicial sales and other enforcement actions instituted by a

registered mortgagee or privileged creditor cannot be interrupted

or hindered by any liquidator or curator or trustee of the owner for

any cause other than a cause which could be set up by the owner;

[to take note of slight differences in drafting, in the marine/aviation legislation. Is

this significant? Can the more refined drafting in the ARA guide judges when

interpreting the earlier MSA?]



ARA: 

The same applies to action taken by a secured creditor

against a conditional buyer or a lessee to terminate an agreement

or take possession or control of an aircraft



The provisions of the Companies Act relating to insolvency do

NOT

 apply insofar as inconsistent with the 

MSA/

ARA

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

Inter-creditor agreements specifically recognized



Art. 1996A, Civil Code:

▪

“it shall be lawful for a creditor to agree to subordinate, waive or

otherwise modify his rights of payment, enforcement, ranking and

other similar rights to the rights of other creditors and any such

agreement shall be binding on the parties to the contract, whether

before or after the insolvency of any party to the contract”



This applies generally, but 

ARA 

expressly 

applies

1996A to inter-creditor agreements entered into by

owners, lessors, lessees, creditors, mortgagees,

holders of security interests and “any other persons

having an interest in or in relation to an aircraft”

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

Art. 28(6) ARA:

▪

“Any hypothec or privilege whether general or over

particular movables to which an aircraft may be subject

under the provisions of the Civil Code shall not continue

to attach to it when the aircraft is transferred to third

parties”



No 

droit de suite

in such case

;

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Dr. Tonio Fenech LL.M. (Lond), LL.D.



Mortgages 

did not form part of our law prior to the

incorporation of the Merchant Shipping Act in 1973

;



Now 

part of Maltese law 

only

 for the purpose of putting

up a ship or an aircraft as security for a loan or debt.



Successive and significant amendments were made to the

MSA since 1988 

with the aim of 

generally 

strengthening

the mortgagee’s position

;



The Aircraft Registration Act represents a significant

milestone, not only in that aircraft mortgages are treated

separately, but also because it introduces a number of

innovations and changes in general approach;

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

The term mortgage has not been substantively defined in our law



One must 

thus 

refer to foreign sources, 

in addition

 to the 

MSA

 and ARA,

to understand the mortgage in terms of its effects, and the chain of

rights and duties it establishes



As in many things, to understand the nature of something, one must

start with how it developed. Hence the ship mortgage takes centre

stage:



Bowtle & McGuiness (The Law of Ship Mortgages):



a ship mortgage is merely one species of various forms of a consensual “real”

security



The modern UK ship mortgage is essentially statutory in nature, but it is a

creation built upon the foundation both of the common law of mortgages as

well as early statute law

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

Bowtle & McGuiness:



“

At the elementary level, it may be stated that in essence a mortgage is a

transaction under which a debtor confers upon a creditor a proprietary

interest in property of the debtor

....

it being intended that, by realisation or

appropriation of that property interest the creditors will obtain the discharge

of the debtor’s liability to the creditors

. 

The property interest so conferred is

redeemable or the obligation to create it is defeasible in the event that the

debtor discharges the liability in question

”



At

 common law, the mortgage was seen to be 

a transfer of property

made by a debtor to a creditor as security for performance

.

 The

mortgagor would normally remain in possession of the ship for his own

benefit, and subject to any contractual limitations (normally 

expressed 

in

a “deed of covenants”) the ship can be employed freely.



Where default occurs in terms of the mortgage, the mortgagee may

seize the ship and sell it.

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

Ever since the 17

th

 Century, a statutory registration system for

ships was introduced in the UK.



The English regime governing the creation of ship mortgages is

essentially built upon this registration regime.



The instrument creating a mortgage must be in the prescribed

form, as must a transfer or discharge of such a registered

mortgage.



not necessary for the mortgagee to acquire possession of the ship

for the mortgage to come into effect.



non-compliance with statutory requirements may prejudice

enforcement, 

eg 

with respect to third parties.

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

The mortgage was created by a transfer of title

to the mortgagee under a bill of sale, which was

registered with an annotation that the transfer

was not absolute but by way of mortgage.



The mortgage was also noted by endorsement

on the certificate of registry of ship.



A statutory form of mortgage was only

introduced in the Merchant Shipping Act of

1854.

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

This modified and departed from the common law conception of

mortgage as a security interest arising in the form of conditional

conveyance of title, 

without specifying its precise legal nature



The form of mortgage set out in the schedule however stated

clearly that the security which was conveyed created 

a right in

rem by way of security



There was no longer a notional transfer of legal title to the ship,

but the mortgage became a 

statutory from of charge



MSA 1894 did not change things, and the Malta MSA of 1973 was

clearly modeled on this, and followed it very closely

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Bowtle & McGuinness define the modern 

English ship 

mortgage as:



a form of security by or under a contract that confers an interest in

the property subject to it…..that is annulled upon the performance

of some agreed obligation – usually the payment of a debt with or

without interest.



The terms “mortgage” and “charge” are used almost

interchangeably.  This practice is most clearly evident in the case

of present-day ship mortgages, in which these two types of

security have been fused into a single type of security interest.



For all practical purposes, there is little difference between the

two classes of security, and while they are concept

u

ally different in

their origins, they have now become subsumed into a hybrid form

of security.

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

The position of a mortgagee and mortgagor under the modern

legislative framework was discussed

 in ex parte North Brisbane

Finance & Insurance Pty Ltd [1983] 2Qd.R.684 at p.688 (re

corresponding provisions of  Australian 

Shipping Registration Act

1981

):



“

Section 40 confers on the mortgagee of a ship the status of holder of

a statutory charge by way of security, not that of a legal owner of the

ship as in the case of a mortgagee under the general law.

”



“It is in that context that 

Section 41 confers on the ship’s mortgagee a

power absolutely to dispose of the ship and to give effectual receipts

in respect of the disposal.  Without that power, a mortgagee of a ship

would have to look elsewhere, and probably to the Court, for

assistance in selling a ship of which he was not the owner

”

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In “Maritime Law” 4th Ed. 1995:



A mortgage could be said to be ‘any charge by

way of lien on any property for securing money

or money’s worth.



It is the creation of a charge or encumbrance in

favour of the lender of money by the person

wishing to borrow.



It is the essence of a mortgage that it is

something more than a mere personal covenant.

Chorley & Giles, “Shipping Law” (8th ed. 1987):



A mortgage is a charge or encumbrance which the

borrower of money, the mortgagor, creates in favour

of the lender, the mortgagee.



The latter thereby obtains a hold on the property

mortgaged, which prevents the general creditors of

the owner from selling the ship in satisfaction of their

claims.



It also enables the mortgagee to recoup himself for

the mortgagor’s failure to repay the loan, or the

interest on it, by selling the ship or taking possession

of her



Iain Goldrein, “Ship Sale & Purchase” 1993:



A mortgage is:



a transfer of property, or



an interest in property,



as security for a debt, usually a loan.



A mortgage is a security transaction and is a form of “real”

security.  

It is a transfer of property or an interest in property as

security for a debt

.



The essential feature of a mortgage is that it is only a security

transaction; the property is redeemable by the mortgagor upon

satisfaction of the debt which it secures, but on the other hand the

property is realisable by the mortgagee if it is not.



The mortgagee acquires a right by a mortgage to the ownership of

property in a certain event, namely on default of payment of

principal and interest. From the standpoint of the mortgagor,

whereas every mortgage implies a right of redemption so too does

it imply a debt, and a personal obligation to repay it.

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The difference betweeen mortgage and



Outright sale:

mortgage takes place by way of security

only



Pledge:

pledgee’s security is dependant upon

possession and an ancillary power of sale, while the

mortgagee actually has title to the goods, subject to

mortgagor’s right to redemption



Charge:

property subject to a charge

 is

 appropriated to

meet a debt or obligation, but its efficacy does not lie in

possession, nor does property therein pass to the chargee.

Enforcement of the security is by way of judicial process.

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Dr. Tonio Fenech LL.M. (Lond), LL.D.



The ARA follows the MSA which itself followed

the British legislative model since 1854



No definition

,

but clear separation of estates



Must be in prescribed form



an

 interesting mixture of Continental and Anglo-

Saxon notions

, which in some sense anticipates

the approach introduced by Cape Town

 for

aircraft

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

Self-help and other remedies tend towards 

the view that

t

he mortgage 

i

s a fo

r

m of transfer of property by way of

security



But mortgagee is considered owner only to the extent

necessary for making security available for satisfaction of

amounts owing to him

, ie the remedies



mortgage

 can 

therefore also 

be seen as a charge on, not

transfer of, property, with exceptional remedies

 given to

mortgagee



Do the new provisions re security by title transfer 

in the

Civil Code 

impinge on this discussion in any way?

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

2095F(1):



“Security by title transfer is a contract whereby the

debtor, or a third party for the debtor, transfers or

assigns movable things.....so as to secure a present or

future obligation” to:

▪

 the creditor(s) present or future; or

▪

A security trustee in accordance with Art. 2095E



2095F(10):



“For all intents and purposes, the creditor to whom

the property has been transferred shall be considered

to be the absolute owner of the property......and such

property shall not form part of the patrimony of the

debtor”

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52



2095F(11): A transfer by way of security:



Shall not be subject to re-characterisation as any

other contract and shall take effect in accordance

with its terms; and



Shall be enforceable notwithstanding the

bankruptcy or insolvency of the debtor or

transferor

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53



A registered 

ship/

aircraft or a share therein may be made a

security for any debt or other obligation by means of:



an instrument creating a mortgage 

(in this Act called a “mortgage”)

executed by the mortgagor in favour of the mortgagee in the

presence of, and attested by, a witness or witnesses



a mortgage:



is indivisible “notwithstanding the divisibility of the underlying debt or

other obligation which it may secure”



Attaches to any proceeds from any indemnity arising from any

mishaps as well as any insurance proceeds

;



But in the case of Aircraft, the law specifically excludes applicability of

this provision to

 an indemnity payable under a liability policy

;

(International conventions impose particular liabilities on air carriers,

principally in the context of carriage of passengers)

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

Legislator seems to have ignored the opportunity of taking the

bull by the horns, possibly for continuity reasons

;



Language of MSA does not seem to be strong enough to

characterize mortgage as a transfer by way of securit

y, b

ut many

elements are similar

;



Many elements of security by title transfer should be applied to

mortgages where the law on mortgages is silent

;



A more comprehensive restatement of mortgage law will probably

help for academic purposes, but the problem does not appear to

be substantial

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55



Mortgages 

attach to the a

sset

 until discharged.



Exceptions to this rule:



where the a

sset

 is forfeited the interest of the mortgagee in the 

ship/

aircraft

will terminate where the mortgagee has authorized, consented to, or

conspired in the act or circumstances leading to forfeiture;



where 

the asset

 is sold pursuant to an order or with the approval of a

competent court within whose jurisdiction the 

asset

 was at the time of the

sale, the interest of the mortgagee as well as of any other creditor in the

a

sse

t shall pass on to the proceeds of the sale;



Where 

the

 a

sset

 is sold by mortgagee in possession on “free from

encumbrances” basis

, 

Mortgage rights are no longer exercisable in

relation to the 

asset

;



ARA adds further considerations for aircraft, in such a circumstance:



All rights ranking below the said mortgage  no longer attach;



All prior ranking rights are exercisable against proceeds of sale by

whosoever held, and no longer attach to the aircraft

tfenech@fff-legal.com                            www.fff-legal.com



The Mortgage instrument must be in the

prescribed 

form

.



T

he detailed terms and stipulations concerning

the mortgage 

are normally

 set out in a separate

collateral 

document, which in the maritime field

is 

habitually 

called a 

deed of covenants.



In order to avoid complications of due notice, it

is 

usually

 preferable to make express reference

to the collateral d

ocument

 in the actual

instrument of mortgage.



This

 is 

collateral to 

the mortgage instrument

, normally

containing:



the time for repayment of the principal sums;



the interest payable on the capital sum loaned;



the method of payment of such sum;



the insurance requirements and responsibility for the same;



any restrictions imposed by the mortgagee on the manner in

which the ship is operated;



events of default, and resultant action that can be taken by

the mortgagee.



MSA/ARA recognize role of 

security trustee

s

 as mortgagees, 

being

entitled to exercise all of the mortgagee’s rights.



Art. 2095E of the Civil Code applies to all situations involving

security trustees, where Maltese law applies



Until the Recognition of Trusts Act 1994, whenever there were

multiple financiers, practitioners often had to resort to naming

each and every one of them on the mortgage.



Nowadays, 

one of the financiers can act as Trustee for the others

for security purposes, which makes things much simpler in the

context of a “work-out” or enforcement of mortgage rights.

tfenech@fff-legal.com                            www.fff-legal.com



A mortgage may be 

created

 to secure the payment of principal

and interest, an account current, as well as the performance of any

other obligation.



The monetary value of the indebtedness need not be actually put

down in the mortgage.



The term 

“account current” here 

means “any indebtedness of a

mortgagor in favour of a mortgagee arising and determinable in

accordance with an underlying obligation”.



The normal meaning attributed to “account current” 

and the

provisions of law governing such contracts 

in the Commercial

Code do not apply to mortgages, except where specifically so

agreed

tfenech@fff-legal.com                            www.fff-legal.com



T

he mortgage can also cover “future

obligations”;



In such cases, however, a maximum sum by way

of principal for which the mortgage is granted

must be expressly stated in the mortgage and

such sum shall be recorded in the register

;



Such security can only be granted to credit

institutions in an approved jurisdiction, or as

indicated by Ministerial Notice;

tfenech@fff-legal.com                            www.fff-legal.com



A reading of Art. 

38 MSA and 

29

 ARA

c

ould lead to a

conclusion in the negative

 but, even if true, this is

misleading;



T

he special remedies made available by the

MSA/

ARA make reference to registered mortgages,

as do the provisions regarding ranking, etc



With Aircraft, a

 Maltese mortgage can be registered

in the international registry as an international

interest, without having it registered in the NAR

tfenech@fff-legal.com                            www.fff-legal.com



A

 transfer or mortgage of a registered ship

/aircraft

“shall have no effect” against any person other than

the transferor or mortgagor, unless the transfer or

mortgage has been registered in accordance with

the 

law;



The effect of registration is therefore that it gives

efficacy to the mortgage (or transfer of the 

asset

) as

against third parties

;



The priority rights of the mortgag

ee

 are established

and secured from the date and time of registration

;



Registration of any act or instrument (whether by record

or notation) in the NAR shall have the following effects:



Publicity

 - information will be deemed within the knowledge

of third parties;



Effectiveness

 -  of acts against third parties; Where expressly

conditional on registration, it shall create legal effects between

the parties to certain transactions;



Priority

 - according to the provisions of ARA and applicable

law, between different rights;



All other effects under applicable law



But t

he notation of ownership or lessee rights pursuant to

Art.4 shall not imply any priority over those of a registered

mortgage holder, 

except as stated in Art. 31 and the First

Schedule

tfenech@fff-legal.com                            www.fff-legal.com



Where it is stated in the mortgage instrument that the prior written

consent of the mortgagee is required before any further mortgages can

be registered

 (or transfer of ownership)

, the registrar shall make a note

of this

, and will not permit any further registrations

.



Any registration in such circumstance will be null and void

; 

The ARA

further specifies:



when a further mortgage is executed in favour of an existing creditor, no

consent is required from such creditor;



The registration of a special privilege is not hindered, 

where the Act requires

registration for its continuing validity and effect



Similar rule where the mortgage prohibits any transfer of the aircraft

without the consent of the mortgagee;



Exception here:



Transfers made pursuant to court order in a sale by auction or pursuant to

any other court order

tfenech@fff-legal.com                            www.fff-legal.com



Ranking in order of

 date & time of

 registration,

notwithstanding  any express, implied or

constructive notice



For aircraft, 

a mortgage 

registered in NAR on or

after F

ebruary 2011 will 

always rank after

 any

international interest, prospective international

interest and other right or interest which is

registered in the International Registry,

irrespective of the date and time of such latter

registration

tfenech@fff-legal.com                            www.fff-legal.com



In ships, t

he rights of the registered mortgagee remain

unaffected by the following subsequent events:



the creation of any separate privilege or charge on any part,

appurtenance or accessory of 

a ship

 which may attach in

virtue of any law; or



the reservation of ownership rights by a seller of any part,

appurtenance or accessory sold to the ship owner, provided

that provisions, fuel and other consumable goods are not

here considered to be appurtenances

;



Where any

 creditors 

register any 

reserv

ation of

 ownership

rights or special privilege or charge over parts,

appurtenances or accessories

,

 prior to the registration of a

mortgage, 

they will 

preserv

e

 their position as against any

subsequent mortgagees.

tfenech@fff-legal.com                            www.fff-legal.com



Similar provision as MSA, except:



It is subjected to Art. 32, which states that international

security interests shall rank prior to mortgages

registered on NAR after effective date



A lessee (even of any part, appurtenance or accessory)

can register his interest prior to the re

g

istration of the

mortgage;



Furthermore, subsequent 

privileges listed in Art. 42(1)

are not affected

;



the reservation of ownership rights by a seller 

can be:

▪

Also on an

 aircraft

 as a whole:

▪

Transfer can be

 a sale, hire purchase or similar contract; 

and

▪

Provi

so in MSA that

 provisions, fuel and other consumable

goods are not appurtenances

 is not repeated

tfenech@fff-legal.com                            www.fff-legal.com



a registered mortgage is an executive title for the purposes of Art.

253 

of the

COCP:



 where t

he obligation it secures is a debt certain liquidated and due; or



w

here a maximum sum is expressly stated in the instrument, and such figure is recorded in

the register for public notice



The

se also 

apply to all registered mortgages secur

ing

 debts resulting from an

account current or overdraft or credit facility, 

but 

mortgages 

for

 future debts

 are

only included in the ARA version;



For 

enforcement

, 

the mortgagee shall specify the sum due at the time of

enforcement by means of an affidavit served on the mortgagor

, in order to

determine the amount certain liquid and due, or the actual sum due when the

mortgage secures a future debt within an expressly stated maximum.



NB: the MSA applies these provisions for enforcement by judicial sale of a ship,

while ARA applies them for enforcement by any sale of aircraft;



ARA further specifies that 

Debtor and other interested persons cannot hinder the

mortgagees rights in any manner, but the debtor can pay such sum in settlement

of the amount due, and any interested party can otherwise contest such amount

according to law, even after payment



MSA merely states that any interested party can contest such amount;

tfenech@fff-legal.com                            www.fff-legal.com



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:



be entitled to take possession of the a

sse

t or 

relevant 

share therein

;



have power absolutely to sell the a

sse

t or 

relevant 

share

 therein

;



have power to apply for any extensions, pay fees, receive

certificates, and generally do all such things in the name of the

owner as may be required in order to maintain the status and validity

of the registration of the a

sse

t;



ARA adds the following rights of aircraft mortgagees:



Have power to lease the aircraft so as to generate income

therefrom; and



Have power to receive any income generated from the management

of the aircraft

tfenech@fff-legal.com                            www.fff-legal.com



S.2095F(11): the “fruits” of property transferred by way of

security are deemed part of the property and are subject

to the rights of the creditor as stated in the provisions re

security by title transfer



S.2095H(1):

creditor not permitted to make use of

property unless expressly permitted by the agreement,

and shall be liable for loss or deterioration of property

from his negligence



S.2095H(3):

fiduciary obligations owed (see

articulation of provision)



S.2095H(4):

absolute ownership, but with limitations.

Unauthorized use of property is a breach of fiduciary

obligations



S.33(1):

Notice requirement satisfied if by electronic

communication or in such other manner agreed between the

parties, or if served at registered address in Malta, or on a curator

appointed by the Court;



S.33(2):

Remedies may be exercised by the mortgagee

without the need of the leave of any court; To the extent that such

leave is indeed sought due to the hindrance of any person, the

court shall render full support to the mortgagee as expeditiously

as possible



S.33(8):

the debtor and person in possession of the aircraft

(except for the possessory lien holder) must cooperate fully with

the mortgagee enforcing his rights, including but not limited to

surrendering all data, manuals, technical records, parts,

accessories and appurtenances belonging to the aircraft

tfenech@fff-legal.com                            www.fff-legal.com



POSSESSION: 

except so far as may be necessary for

making a 

[secured asset]

.... available as a security for a

mortgage debt, the mortgagee shall not by reason of the

mortgage be deemed to be the owner of the 

[asset]

, nor

shall the mortgagor be deemed to have ceased to be the

owner thereof’



POWER TO SELL:

but where there are several

mortgagees, a subsequent mortgagee can only do so with

the concurrence of prior mortgagees, unless under the

order of a court of competent jurisdiction;



Are these limitations solely for the protection of the

mortgagor?



W

hen selling the a

sset

 to enforce 

a

 mortgage, 

and

proceeds of sale show a surplus, 

mortgagee is further

bound:



Under MSA, to deposit the same for the benefit of other

creditors and the mortgagor;



Under ARA:

▪

t

o hold under trust or deposit any surplus proceeds

;

▪

to act in a commercially reasonable manner

▪

by fiduciary duties to debtor and other creditors, and shall:

▪

Pay from proceeds received any prior ranking creditor “as he may determine

or as may be determined by the court in case of disagreement”; and

▪

Provide information to lower ranking creditors and to the debtor re

conditions of sale, expenses incurred, the prior rights settled and any other

deductions from the price received

tfenech@fff-legal.com                            www.fff-legal.com



Intervention of 

Merita Bank in Newcastle

P&I Association vs Dr Dingli noe 

(26.3.1999

per Arrigo J.)



refers with approval to a number of English cases



the Mortgagee owes a number of duties to the

mortgagor as well as to other creditors when

exercising its right of sale of the vessel

tfenech@fff-legal.com                            www.fff-legal.com



S.2095H(6)

, Civil Code

: creditor can sell

property:



In the manner agreed, or in the absence of

agreement, in the manner the creditor considers most

appropriate and commercially reasonable;

▪

For a price established in agreement (with transferor), or in

the absence thereof,

▪

at the market value, or if there is no such value

▪

At a price established by an independent competent person;

AND

▪

When 

through

 judicial sale by auction, at a price and in

accordance with applicable law

;

tfenech@fff-legal.com                                               www.fff-legal.com

76



S.2095F(11): the “fruits” of property transferred by way of

security are deemed part of the property and are subject

to the rights of the creditor as stated in the provisions re

security by title transfer



S.2095H(1):

creditor not permitted to make use of

property unless expressly permitted by the agreement,

and shall be liable for loss or deterioration of property

from his negligence



S.2095H(3):

fiduciary obligations owed (see

articulation of provision)



S.2095H(4):

absolute ownership, but with limitations.

Unauthorized use of property is a breach of fiduciary

obligations



A 

foreign mortgage shall be recognized as a mortgage

with the status and all rights and powers specified in

the 

MSA/

ARA notwithstanding the fact that it is not

entered over a registered 

[asset]

, if



the mortgage has been validly recorded in the foreign

registry of 

ships/aircrraft

 concerned;



such registry is a public registry;



the mortgage appears upon a search of the registry; and



under the foreign laws concerned, the mortgage is

granted a preferential and generally equivalent status as a

mortgage under the 

MSA/

ARA.

tfenech@fff-legal.com                            www.fff-legal.com

Dr. Tonio Fenech LL.M. (Lond), LL.D.



Art. 

1997(2) 

(

Civil Code

):

 the provisions of the

Title dealing with Privileges and Hypothecs

“shall not apply to ships or aircraft, or to debts

to which ships or aircraft may be subject

except so far as they are consistent with the

provisions of the Merchant Shipping Act or the

Aircraft Registration Act, as the case may be.”

tfenech@fff-legal.com                            www.fff-legal.com



Special privileges arise in virtue of law and no debt or other

obligation other than those specified at law shall be secured by a

special privilege.



Art. 1999 (Civil code): 

Privilege is a right of preference which the

nature of a debt confers upon a creditor over other creditors,

including hypothecary creditors.



Art. 

1997(2) 

(

Civil Code

):

 the provisions of the Title dealing with

Privileges and Hypothecs

“shall not apply to ships or to debts to

which ships may be subject except so far as they are consistent

with the provisions of the Merchant Shipping Act, 1973.”



ARA: 

Where a special privilege is subject to registration in the

international registry, such registration shall be an additional

requirement for the continuing existence of such special privilege

tfenech@fff-legal.com                            www.fff-legal.com



The debts which are held by s

.

50

, MSA

 to be secured

by a special privilege on the vessel concerned are the

following:



judicial costs incurred in respect of the sale of the ship and

the distribution of the proceeds thereof;



fees and other charges due to the registrar of Maltese

ships arising under the Act;



tonnage dues;



wages and expenses for assistance, recovery or salvage,

and for pilotage;



the wages of watchmen, and the expenses of watching the ship from

the time of her entry into port up to the time of sale;



rent of the warehouses in which the ship’s tackle and apparel are

stored;



the expenses incurred for the preservation of the ship and her tackle

including supplies and provisions to her crew incurred after her last

entry into port;



wages and other sums due to the master, officers, the crew including

repatriation costs and social insurance contributions payable on their

behalf;



damages and interest due to any seaman for death or personal injury

and expenses attendant on the illness, hurt or injury of any seaman;



moneys due to creditors for labour, work and repairs previously to the

departure of the ship on her last voyage



ship agency fees due for the ship after her last entry into port, in accordance

with port tariffs, and any disbursements incurred during such period not

enjoying a privilege in paragraphs (a) to (I) of this section, though in any case

for a sum in the aggregate not in excess of four thousand liri;



moneys lent to the master for the necessary expenses of the vessel during her

last voyage, and the reimbursement of the price of goods sold by him for the

same purpose;



moneys due to creditors for provisions, victuals, outfit and apparel, previously

to the departure of the ship on her last voyage;



damages and interest due to freighters for non-delivery of the goods shipped,

and for injuries sustained by such goods through the fault of the master or the

crew;



damages and interest due to another vessel or to her cargo in cases of

collisions of vessels;



the debt specified in paragraph (d) of section 2009 of the Civil Code for the

balance of the price from the sale of a ship.



The privilege granted to the seller for the price

of the thing sold under the provisions of article

2009 (

d) 

of the Civil Code is 

only

 effect

ive

regarding

 vessels, 

if the

 claim for such price 

is

registered in the register of the said ship, within

two days from the date of the sale.



Such privilege is registered by delivery to the

registrar on the prescribed form duly completed

and signed by the seller.



Where debts of a nature similar to the ones

mentioned 

are 

contracted in different ports,

or 

i

n several forced returns to the same port,

the priority established by art

.50

 shall be

established on each arrival or return.



Privileged 

debts 

established on

 subsequent

arrival

s

 or return

s

 have preference over those

contracted on the occasion of a former arrival

or return.



The following debts, as well as any proceeds from any indemnity

arising from any mishaps as well as any insurance proceeds (other

than  from a liability policy:



judicial costs incurred in respect of the sale of the aircraft and the

distribution of the proceeds thereof;



fees and other charges due to the DG arising under the Act;



Wages due to crew in respect of their employment on the aircraft;



Any debt due to a possessory lien holder for the repair, preservation

of the aircraft to the extent of the service performed and value

added to the aircraft;



The expenses incurred for the repair, preservation of the aircraft to

the extent of the service performed and value added to the aircraft;

and



Wages and expenses for salvage in respect of the aircraft

tfenech@fff-legal.com                            www.fff-legal.com



Some debts require registration in the IR to be

recognized as secured by a special privilege. They also

must be created by the owner of the aircraft or a

person authorized by him. These are:



Taxes, duties and, or levies due to the Government of

Malta in respect of the aircraft;



Wages and expenses for assistance or recovery in respect

of the aircraft



Art.42(5): This rule (and consequent ranking) prevails

over any other law, which is an interesting concession

by the Government not normally readily given

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

Art.42(3):

With reference to the privileges

requiring registration, it is stated that where the debt

is created by an operator (or a lessee):



“it shall not affect the aircraft or the owner thereof, and

shall only operate in relation to the said debtor and upon

the termination of his temporary title and reversion of the

aircraft to the owner, the said claim shall be dissolved with

regard to the aircraft which shall revert unencumbered to

the owner”



This seems to indicate that there could be charge on

the aircraft during the relevant temporary tenure, and

therefore wording here could be happier!

tfenech@fff-legal.com                            www.fff-legal.com



Art.42(4) can also be improved.



It seems to refer to the registration of the

privileges covered by Art. 42(2)

on the NAR

which would trigger notification to interested

parties.



These can presumably find themselves on the

NAR only through the facultative “noting”

possibility under Art. 4(2)(b)



Some clarification possibly needed here

tfenech@fff-legal.com                            www.fff-legal.com



The debts specified in article 50 shall rank in

the order therein set out and in preference to

other hypothecary and privileged claims,

notwithstanding that the ship is still in the

possession of the debtor, and the debts

specified in article 50(a) and (b) shall under all

circumstances rank in preference to any

claim.



Debts secured by possessory liens, rank after some of the

privileged debts, but not all.

Examples:



su

ch a lien holder ranks after the ship repairers who did

work on the direct order of the ship owner, but ranks prior

to ship agency fees as well as the rest of the privileged

debts listed thereafter, as well as any other hypothecary

and privileged claims.



Debts secured by a mortgage rank after the debts of

possessory lien holders, as well as ship agency fees;

however they rank prior to debts for necessary expenses,

etc...

1.

The debts specified in art

.

42(1)

 ARA shall rank in the 

order therein set

out

, but the possessory lien holder will be entitled not to release

possession of the asset until paid or otherwise secured to his

satisfaction

;

2.

A mortgage registered in the NAR or a charge in the international

registry or secured by a foreign mortgage recognized by ARA

 shall rank

after lien and debts covered by special privilege pursuant to Art. 42(1),

but prior to other hypothecary and privileged claims;

3.

The privileges requiring registration in the IR (taxes, assistance or

recovery costs and wages) shall rank after the debts specified in Art.

42(1) as well as debts secured by mortgages and charges in the IR which

will have already been registered

;

4.

The debts specified in art.42(2), 

as well as 

where covered by a special

privilege

tfenech@fff-legal.com                            www.fff-legal.com



Any 

ship/

aircraft repairer, 

shipbuilder/

aircraft manufacturer, or

other creditor into whose care and authority an 

[asset]

 has been

placed for the execution of works or other purposes shall have a

possessory lien over the 

[asset]

;



 the lien entitles the creditor to retain possession of the a

sse

t until

such he is paid for his work



The lien is extinguished by the voluntary release of the a

sset

 from

the lien holder’s

 custody

, but not if released pursuant to a court

order or judicial sale. In the latter case, the lien holder will enjoy

priority over the sale proceeds.



The lien holder is obliged to declare the amount of his claim if

called upon to do so by judicial letter

tfenech@fff-legal.com                            www.fff-legal.com

Dr. Tonio Fenech LL.M. (Lond), LL.D.



ARA:



“security interest” means an interest granted in terms of a security

agreement drawn up to secure the rights of:

a)

A person who is a conditional seller under a title reservation agreement; or

b)

The rights of a person who is a lessor under a lease; and which is

recognized and regulated in terms of Art.41



But neither a lease nor sale with title reservation are normally

considered a “security agreement”  in the traditional sense;



The definition therefore refers to a security agreement that

provides an interest to the lessor and conditional seller

;



Moreover, Art.41 confers certain “privileges” to these, but only

when registered in the International Registry, as opposed to any

registration in Malta

;



Furthermore the lease or conditional sale must apparently be

part of a “security agreement”

;

tfenech@fff-legal.com                            www.fff-legal.com



Both contracts are recognized in the 1

st

 Schedule as international

interests directly, separately from rights given under a security

agreement



1

st

 Schedule:



“security agreement” means an agreement by which a chargor grants

or agrees to grant to a chargee an interest (including an ownership

interest) in or over an aircraft object to secure the performance of any

existing or future obligation of the chargor or a third person



“Leasing agreement” means an agreement by which one person (the

lessor) grants a right to possession or control of an aircraft object

(with or without an option to purchase) to another person (the lessee)

in return for a rental or other payment”

tfenech@fff-legal.com                            www.fff-legal.com



An interest in airframes, aircraft engines or

helicopters:



Granted by the chargor under a security

agreement;



Vested in a person who is a conditional seller

under a title reservation agreement; or



Vested in  lessor under a leasing agreement

tfenech@fff-legal.com                            www.fff-legal.com



We have already seen how a security interest creditor

enforcing his rights is given privileged status by Art.

27(4), in that the relevant procedure cannot be

interrupted or hindered by any curator in bankruptcy,

liquidator, etc., for any cause other than a cause that

could be set up by the owner of the aircraft



However, it is not clear where else in the Act, apart from

the Convention dimension, security interests per se have

any significance, except where a security interest is also

an international interest



There is however the curious case of Art. 31

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

The law specifies other 

creditors who can have their

interest on an aircraft or part, accessory or

appurtenance, noted or registered in the register,

subject to Article 32, prior to the registration of a

mortgage. These include:



Any creditor having a separate privilege or charge

;



A seller reserving ownership rights, or enjoying the

benefit of any conditions affecting title thereto;



A lessee having rights to an aircraft or any part,

appurtenance or accessory of an aircraft;

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

The person in favour of whom such rights are

registered prior to the registration of a

mortgage, shall be protected from and rank

prior to any subsequent mortgage



Further provisions provide for the cancellation

from the register of lessee interests and

reservation of ownership rights, as and when the

relevant circumstance changes



But why does Art.31(4) refer to the lessee and

not the lessor?

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

Art. 4 ARA provides for the registration of a number of interests

and documents beyond what was traditionally understood as

natural. eg:



Details of any 

Irrevocable De-registration and Export Request

Authorization (

IDERA

)

 and other powers of attorney granted to an

owner or a less

or

 or to a mortgagee, or to any third party, granting

rights relating to the aircraft or to closure of registry;



Any act to be registered under the provisions of Art. 31 or of any

other law;



Lessor rights relating to the aircraft or an engine;



Lessee rights in relation to an aircraft or an engine and all matters

relating thereto in terms of Article 31;



Information on international interests registered in the international

registry and the debtor thereof

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

As long as their interest is registered in the

International Registry, in addition to the de-fault

remedies allowed by the 1

st

 Schedule, a security

interest holder has various self-help remedies under

Art. 41:



Upon simple notice to defaulting debtor, he has:

▪

Power to terminate the agreement and take possession or control of the

aircraft;

▪

Apply to the court to authorize or direct either of these acts

▪

Security interest is an executive title

▪

No court intervention is necessary, etc.



Registration in the IR in effect elevates a security

interest holder under Maltese law to quasi-mortgagee

status

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

The 1

st

 schedule does not seem to provide for registration

in the IR as essential for an interest to constitute an

“International Interest” as defined



However, Art.41(2) makes registration of an international

interest in the international registry a pre-condition for

recognition, enforceability and entitlement to all the

rights and powers specified in the 1

st

 Schedule



Art. 41(8) further recognizes foreign security interests,

provided that these shall be subject and subordinate to

the rights of any registered mortgagee or holder of an

international interest registered in the IR

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

Maltese law allows a creditor the possibility, if desired, to

have various security interests recorded in the IR, either in

replacement of registration in the NAR, or together with

such “domestic” registration



If such international registration is opted for, the relevant

international interest will be fully enforceable in Malta,

subject to rights having priority under Art.42



An international interest will not be subordinate to a

“domestically registered” mortgage, irrespective of time

of registration (other than registrations preceding

February 2011)

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Dr. Tonio Fenech LL.M. (Lond), LL.D.

Fenech Farrugia Fiott Legal

Malta

tfenech@fff-legal.com

www.fff-legal.com

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