On the 4^th February 2025, the President of Malta by and with the advice and consent of the House of Representatives, enacted Act No. I of 2025, effectively introducing novel amendments to the Merchant Shipping Act (Chapter 234 Laws of Malta) pursuant to which Malta’s maritime product has been further diversified and strengthened.

The legislative amendments to the Merchant Shipping Act are the result of industry-wide developments which spurred a holistic legal review aimed at updating and consolidating Malta’s maritime legal framework. The amendments also introduce additional security options for financiers on the strength of the registration of a finance charter instrument, which is executed by the finance charterer in favour of a lessor in relation to Malta flagged vessels. This new security option follows a noticeable year on year increase in sale and lease back financing transactions – particularly from leasing houses in Asia – and further broadens the security package available to creditors under Maltese law.

The importance of maintaining a creditor-oriented jurisdiction has long been enshrined in Maltese law and the amendments effectively address potential limitations in the security package options available in lease finance transactions, where the registration of a mortgage over the vessel is not typically available as a security option. These statutory reforms seek to build on the more well-established security of registered Maltese law mortgages, which are uniquely designated as executive titles for the purposes of Maltese law.

By virtue of the legislative amendments to the Merchant Shipping Act, a lessor may now register its security interests over the leased vessel in a similar manner to a registered mortgage irrespective of whether the vessel is bareboat registered under the Malta flag or not. While the recordation of the finance charter instrument is not entirely analogous in strength to the security provided by a Maltese law mortgage, the new law provides an additional layer of protection which was hitherto not available, and which now directly attaches to the vessel. As a result, the promulgation of the finance charter instrument, coupled with the other traditional modes of security (in the form of share pledges, assignments and/or guarantees), collectively strengthen the position of the financier and may further encourage increased lending opportunities for Malta flagged vessels.

Finding inspiration in the provisions governing registered mortgages, the finance charter instrument shall not be affected by the bankruptcy of the finance charterer occurring after the registration date of the finance charter interest. Such provisions shall subsist notwithstanding that at the time of commencement of bankruptcy the charterer may have the ship in his possession, order or disposition.

This seeks to offer further comfort to the finance lessor by expressly carving out their registered security interest over a vessel from the realm of any potential bankruptcy proceedings or court winding up involving the charterers. The legislator included this provision to underline that under Maltese law the lessor’s security interest is separate and distinct for the patrimony of the charterer to mitigate the risk of the finance lessor becoming or being considered an unsecured creditor. Naturally, an unsecured lessor would have a reduced likelihood of recovering its debt in a bankruptcy scenario.

As a result, the registration of a finance charter interest over the relevant vessel shall have preference over all other debts, claims or interests of any other unsecured creditor, save for any privileged claims which would rank in preference of a finance charter interest in accordance with the provisions of article 50 of the Merchant Shipping Act.

In addition, should any claim be made by an unsecured creditor for the sale of the chartered vessel, the interests of a secured lessor under a finance charter instrument will continue to attach to the chartered vessel in priority over unsecured creditors. Therefore, where a ship has been sold pursuant to an order or with the approval of a competent court within whose jurisdiction the vessel was at the time of the sale, the interest of the lessor (as well as of any other creditor in the ship) shall pass on to the proceeds of the sale of the ship and will rank according to the date and time of registration, save for any privileged claims.

For purposes of the new legislation, the term “finance charter” refers to the chartering or lease of a vessel under terms where possession, operation and control of the vessel is given to a bareboat charterer or to a lessee including through a demise or bareboat charter or a similar agreement, and where the principal purpose of which is to finance the acquisition, operation, administration or management of the vessel. In such instances a finance charter instrument may be drawn up to secure the performance of any obligation of the finance charterer in favour of the lessor, including the payment of hire, a principal sum and interest, an account current, as well as the performance of any other obligation.

Once recorded with the Malta ship registry, a finance charter shall be considered to be a charge over a ship and shall be enforceable erga omnes, provided that the debt secured by a finance charter instrument shall only rank after a debt secured by a registered mortgage. The finance charter instrument shall however still rank ahead of certain privileged claims.

In addition, it is to be noted that the registration of a finance charter instrument shall not affect any mortgage registered over the leased vessel or share therein and this irrespective of whether the mortgage is registered before or after the registration of the finance charter instrument. Accordingly, any rights of the mortgagee shall in no way be prejudiced by the registration of the finance charter instrument, which will continue to rank ahead of a recorded finance charter. This being said, in view of the fact that a finance charter instrument is generally available to an owner acting as lessor in a lease finance scenario, it is unlikely that both a mortgage and a finance charter instrument will be simultaneously registered over the vessel, other than in the instances where a mortgage is registered by the owner itself in favour of third parties.

The new legislation addresses any potential security gap in a finance charter scenario and provides for filing requirements that are consistent with those mandated by more traditional Maltese law security options. This includes the requirement that the finance charter instrument be executed by the finance charterer in favour of the lessor who shall acknowledge same in writing, in the presence of, and attested by a witness or witnesses.

Through the adoption of amendments to the Merchant Shipping Act, the ability to record a finance charter instrument further consolidates the security package available to financiers while also potentially increasing opportunities for ship owners seeking alternative ship finance opportunities.

The Parliamentary Act enacting the amendments to the Merchant Shipping Act will officially enter into force following a statutory period of two months from the date of publication in the Government Gazette, effectively ushering in enhanced security options to financiers of Malta flagged vessels.