Insights

As the maritime sector continues to evolve, innovative financial instruments are emerging to facilitate investment and secure maritime transactions. Among these, the finance charter instrument introduced by Act No. I of 2025 (the “Act”) stands out for its potential to reshape ship financing.

In Part II of this legal series, we explored the foundational aspects of this instrument. In this instalment, we will delve deeper into the legal, practical and procedural dimensions of this new instrument, with particular attention to its enforcement, judicial procedures and priority in bank proceedings.

Legal, practical and procedural aspects

1. Transfer of Ownership

If the ship is transferred, the finance charter instrument must either be discharged or transferred alongside the ship to the new owner. This transfer of ownership is a functional matter that can arise irrespective of any default by the finance charterer.

2. Judicial Proceedings

The process for initiating any judicial proceedings in Malta for a finance charter instrument is identical to that for a mortgage. Therefore, in the event of a dispute, the lessor must serve notice to the master of the ship, or if the master is absent from Malta to the local agent, or if absent, to curators appointed by the court to represent the finance charterer. This procedural efficiency is vital for lessors who need to enforce their rights quickly in case of default.

3. Priority in Bankruptcy Proceedings

The holder of a finance charter instrument is not affected by the bankruptcy of the finance charterer and enjoys preferential rights on the secured vessel over all other debts, claims or interests except for those ranking higher than a finance charter interest. Therefore, a lessor with a registered finance charter instrument receives similar protection to that of a mortgagee, other privileged creditors and maritime claimants.

4. Judicial Perspective

Malta is exceptionally well positioned, from a judicial perspective, to handle new security mechanisms in the maritime sector. The Maltese courts have consistently proven themselves as experts in enforcing security interests in maritime matters, making Malta an ideal jurisdiction for these innovative instruments. While many lessors now consist of Chinese state-owned funds with over a decade of experience, having a robust judicial system remains crucial.

Malta’s well-established legal framework and experienced judiciary ensure that new security mechanisms, such as the finance charter instrument, can be effectively enforced and protected. Although an adjustment period is expected with new legislation, it will be exciting to see how matters will develop.

5. Miscellaneous Provisions

Article 49B aligns with existing sections of the Merchant Shipping Act, Chapter 234 of the Laws of Malta, ensuring the protection of the lessor’s rights, enforcement of obligations, and resolution of disputes. Notably, Article 49B(11) applies mutatis mutandis to a finance charter instrument, incorporating provisions such as, inter alia, the registration of a mortgage in favour of a security trustee (Art.38(4)), the definition of “account current” (Art.38(7)), the transfer of mortgage (Art.44), the assignment of part of a debt or other obligation (Art.44A), the transmission of interest of mortgagee by death (Art.45), the discharge of mortgage (Art.46), the obligation or registration with the Registry (Art.47), and the loss of original mortgage deed (Art.48).

These provisions ensure that the finance charter instrument operates seamlessly within the broader legal framework.

Article 49B applies regardless of whether the finance charterer opts for the charterer flag registration under Article 19A of the Merchant Shipping Act. Therefore, this means that a registered owner qua lessor can register title and security in Malta whilst the finance charterer registers the vessel in an overlying foreign bareboat charter registry of its choice. Alternatively, parties can opt for “dual flag registration” in Malta under Article 19A, while benefitting from Article 49B.

Conclusion

Article 49B offers robust protection for lessors and charterers, ensuring the effective enforcement of rights and a strong legal foundation for ship financing in Malta. Its judicial backing provides confidence to investors, positioning Malta as a prime jurisdiction for maritime financing. The practical impact of these provisions will likely facilitate easier access to capital for shipowners while strengthening the security of financing arrangements.

This article is the third in a series of articles that will be published by Ganado Advocates in the coming weeks.