Insights

One of the special characteristics of Maltese maritime law is that vessels are granted a special status within the estate of the shipowner. This principle is enshrined in art. 37A (1) of the Merchant Shipping Act ( chapter 234 of the Laws of Malta) (“MSA”) which provides:

Ships and other vessels constitute a particular class of moveables whereby they form separate and distinct assets within the estate of their owners for the security of actions and claims to which the vessel is subject. In case of bankruptcy of the owner of a ship, all actions and claims, to which the ship may be subject, shall have preference, on the said ship, over all other debts of the estate.

The juridical consequence of this rule is that a curator in bankruptcy or liquidator has no right to stay any arrest and enforcement against vessel by creditors having maritime claims simply because the shipowner is bankrupt or insolvent.  The point is made even more emphatically in art. 37 (2) of the MSA:

Any judicial sale proceedings instituted by any registered mortgagee or privileged creditor shall not be interrupted or in any way hindered by any curator in bankruptcy, whether voluntary or compulsory, or any liquidator or receiver of the shipowner for any cause other than a cause that could be set up by the Owner.

Legal issues concerning the bankruptcy of the shipowner simply do not have any impact when ships are arrested within the Maltese jurisdiction and any creditor wishing to arrest a vessel in Malta waters will be in a position to proceed with his claim and even enforce his claim with a forced sale of the vessel once he obtains a favourable judgment or other enforceable title.

This principle is manifest in other provisions of Maltese law as well as some  recent decisions of the Maltese Courts.

Thus in art. 37C (1) of the MSA, we have a repetition of the rule that actions and claims against a vessel shall not be affected by the bankruptcy of the shipowner and that all claims qualifying as special privileges shall continue to enjoy priority  over all other debts. This provision states:

All registered mortgages, any special privileges and all actions and claim to which a vessel may be subject shall not be affected by the bankruptcy of the mortgagor or shipowner happening after the date on which the mortgage was created or the special privilege, action or claim arose, notwithstanding that the owner at the commencement of the bankruptcy had the ship in his possession, order or disposition, or was the reputed owner thereof, and such mortgage, privilege, action or claim shall have preference on the said vessel, over all other debts, claims or interests of any other creditor of the bankrupt or of any curator, trustee or receiver.

In practice many vessels have been arrested and auctioned by Court order in Malta in a situation where the shipowner was bankrupt and formal bankruptcy proceedings initiated in the jurisdiction where the shipowner is  domiciled. In such cases  the trustee or curator in bankruptcy or the appointed liquidator has no role to play other than protect the interests of the owner in respect of the defence of any claims directed towards  the vessel but other than this, there is no legal basis on which a trustee or liquidator can oppose the enforcement of maritime claims in order to take control and custody of the ship with a view to disposing of it during the normal course of the winding up process. When the enforcement of claims leads to the forced sale of the vessel, the proceeds of sale are deposited with the Court and the Court continues to administer the fund in the interest of the parties having an interest to put forward claims against that fund. The sale proceeds thus continue to be segregated from the estate of the shipowner and in the absence of any agreement between the interested creditors, competition proceedings would normally follow during which the Court proceeds to rank the various claims of creditors in accordance with the order of priority laid down in art. 50 of the MSA, which contains a list of privileged debts  in the order of ranking provided in the same provision.

In line with the above principles, the Maltese legislator has also introduced compatible rules in the law regulating the winding up of companies owning ships registered in Malta. Thus under the relevant law [ Merchant Shipping ( Shipping Organisations – Private Companies) Regulations, 2004], a Court has the power to order the winding up of a company owning a Maltese registered vessel when the  company is insolvent. However the law expressly provides that where the sole asset of the company is a ship subject to a registered mortgage or other maritime claims and the outstanding sums due under the mortgage or such maritime claims exceed the value of the ship, the Court shall not order the winding up of the shipowning company until it is satisfied that there are excess funds deriving to the company in Malta in relation to which the winding up order may be ordered. Thus even if the Court comes to the conclusion that there are sufficient grounds to order the winding up of the shipowning company due to its insolvency, the Court must await the outcome of any enforcement proceedings by the mortgagee or creditors having a maritime claim against the ship, whether in Malta or overseas, after which it shall determine the issue. If the sale proceeds available after any enforcement of claims against a ship are absorbed by such claims and no excess funds remain, the Court shall in the absence of any business of the company declare the company dissolved and wound up. If on the other hand there are any excess funds available from any such enforcement, such surplus funds  would in the normal course of events be administered by the trustee or liquidator handing the liquidation of the company and thereafter a winding up procedure can proceed. In any such scenario, all maritime claims would have already been satisfied at the stage involving ranking of creditor proceedings over the proceeds of sale.

The approach of the Maltese Courts has always been consistent and in full respect of the principle that a ship constitutes a special moveable asset within the estate of the shipowner. The principle has recently been tested in two cases before the Courts.

The  case “Emanuel Azzopardi v. Sea Malta Company Limited ( decided by the Court of Appeal on the 6th April 2006) involved a claim of  a number of crew members engaged to work on the two cargo vessels owned by the national shipping carrier,  Sea Malta. When Sea Malta became insolvent, the Maltese Government as the majority shareholder in the said company resolved to put the company in liquidation. The Liquidators of Sea Malta intended to proceed with the private sale of the two vessels owned by Sea Malta but the claimants sought an injunction against the Liquidators arguing that any private sale made by the Liquidators would be prejudicial to the rights and claims of the crew members who enjoyed privileged maritime claims over the two vessels in question. The Liquidators were in this case motivated by a desire to negotiate the best possible sale price for the vessels rather than risk having the vessels sold in a judicial auction. The Liquidators also argued that their prime motivation was to maximise the potential recovery from the sale of the vessels and that  if the vessels were sold privately, they would give an undertaking to the Court to segregate the proceeds of sale of each vessel from any proceeds recovered from the sale of other assets belonging to Sea Malta, in order to  ensure that the sale proceeds of each and every vessel benefits those creditors having claims in respect of each distinct vessel and that more importantly those creditors enjoying privileged  claims rank with priority in accordance with the list of preferred  claims contemplated in art. 50 of the Merchant Shipping Act.    The Court ultimately dismissed the arguments and undertakings granted by the Liquidators and issued an injunction thereby restraining them from proceeding with the private sale of the vessels. Ultimately the vessels were auctioned by order of the Court and the various claimants put forward their claims over the sale proceeds deposited in Court. The Liquidators were thus excluded from the process involving the administration and disposal of the ships in the ordinary course of the winding up, albeit in the qualified manner proposed by them,  due to the fundamental principle that ships represent a special class of assets which are to be kept separate and distinct from other assets within the estate of the owner.

More recently our Courts have also  had the opportunity to examine the impact of bankruptcy and ship arrest  in the context of the Council Regulation on Insolvency Proceedings ( EC No. 1346/2000). The case “ The Foreign Economic & Technical Co Operaton Company of China et vs m.v. Beluga Sydney, ( decided by the Civil Court on the 30th December 2011) involved an order for the arrest of a vessel by way of  security for a claim in respect of the construction of a ship. The vessel was the property of a German company which was declared to be in a state of insolvency and an insolvency administrator appointed by the German Court. The insolvency administrator filed an application before the Maltese Courts requesting the revocation of the arrest order. Amongst the arguments raised, the Administrator submitted  inter alia:

• That the owner of the vessel is a company which is incorporated in Germany and in accordance with art. 4 of the Council Regulation on Insolvency Proceedings, the law  applicable to the insolvency proceedings was the law of the  Member State where the insolvency proceedngs commenced;

• Moreover the said Council Regulation provides that « unless otherwise stated, the law of the Member State of the opening of the proceedings should be applicable ( Lex Concursus). This rule on conflict of laws should be valid both for the main proceedings and for the local proccedings ; the lex concursus determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned. »

• That according to art. 5 sub article 4 of the Council Regulation on Insolvency Proceedings, an action for an order that  cetain acts are null and void as they prejudice the creditors are not excluded in the context of rights in rem and which actions would have to be dertermined in accordance with the laws of the Member State where the bankruptcy proceedings would be dealt with.  Art. 11 of the Regulation provides that «  the effects of insolvency proceedings on the rights of the debtor in immovable property, a ship or an aircraft subject to registration in a public register shall be determined by the law of the Member State under the authority of which the regsiter is kept. »

• That according to the  definition of « the member State in which assets are situated » ( Art 2 (g) of EC No. 1346/2000 in the case of property and rights in property which have to be registered in a public registry as in the case of a vessel,  the law of the Member State where the register is kept is to apply;

• That with the commencement of bankruptcy proceedings in Germany, the law which determines the validity or otherwise of judicial acts which are intended to secure claims of creditors including therefore arrest proceedings against the vessel is the law of Germany also keeping in mind that the vessel in caption is registered in Germany.

The Court rejected the arguments of the Administrator and upheld the arrest of the vessel which was eventually sold by judicial auction. In its decision the Court held that:

• That there can be no doubt that the Council Regulation is a legislative instrument of the European Community which has direct legal effect in Malta. However, in matters involving bankruptcy or insolvency proceedings involving  a physical or legal person, there are differences which need to be considered  depending on the nature and type of claims advanced against the particular person involved.

• That  particular reference should be made to preamble 25 of the said Regulation which provides that:

There is a particular need for a specific reference  diverging from the law of the opening State in the case of rights in rem, since these are of considerable importance for the granting of credit. The basic validity and extent of such rights in rem should therefore normally be determined according to the lex situs and not be affected by the opening of insolvency proceedings. The proprietor of the right in rem should therefore be able to continue to assert his right to segregation or separate settlement of the collateral security. Where assets are subject to rights in rem under the lex situs in one Member State but the main proceedings are being carried out in another Member State, the Liquidator in the main proceedings should be able to request the opening of secondary proceedings in the jurisdiction where the rights in rem arise if the debtor has an establishment there. If a secondary proceeding is not opened, the surplus on sale of the asset covered by rights in rem must be paid to the Liquidator in the main proceeding.

• That apart from this, there is also art. 5 (1) of the said Regulation which provides that:

The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets – both specific assets and collection of indefinite assets as a whole which change from time to time – belonging to the debtor which are situated within the territory of another Member State at the time of the opening of proceedings.

• For the Court, this meant that the sole fact that proceedings have commenced for the insolvency and winding up of the Owning Company of the vessel in Germany , where the Company has its official seat and commercial place of business  does not mean that the procedures in rem in Malta by the arresting party against the vessel should be stopped and stayed. Art. 4 (1) of the Regulation  provides that:

Save as otherwise provided in this Regulation, the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened.

In conclusion, Maltese law is very clear in that bankruptcy proceedings involving a shipowner will have no impact on the arrest of a ship and those creditors who have a claim against such vessel can be assured that their claims can be pursued against the vessel without any interference from the curartor in bankruptcy or appointed liquidator.