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The EU Cross-Border Insolvency Recast Regulation: Arrest of Ships in Malta

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Back in May, the mortgagee of the vessel MT Dominia filed for the arrest of the ship whilst it lay in Maltese waters, as security for outstanding sums due to the said creditor. It transpires the arrest was triggered by insolvency proceedings filed by the registered owners of the vessel before the Italian courts.

The creditor mortgagee then proceeded to enforce its mortgage in Malta, as an executive title enforceable pursuant to Articles 49 of the Merchant Shipping Act, Chapter 234 of the Laws of Malta. Following the lapse of two days from the service of the judicial letter on the defendant, the mortgagee rendered its mortgage enforceable. Shortly thereafter, the owners first filed an application against the mortgagees to challenge the effects of the judicial letter. However, the Court dismissed this request and highlighted that a distinction must be made between an executive act like a warrant or arrest, and the judicial letter which only serves to render the existing executive title enforceable.  The Judge concluded that a challenge application is not compatible with the latter.

However, in a second bid to stop any eventual judicial sale of the Dominia, the owners filed a challenge application to contest the validity of the arrest pursuant to the provisions of Article 281 of our Code of Organisation and Civil Procedure. By virtue of this article, a debtor may only attack any executive act or warrant on grounds limited to the judicial act or document itself. A debtor is precluded from entering into or touching upon the merits of the underlying enforceable title.

It transpired that the owners’ main point of contention related to the ongoing insolvency proceedings which they had commenced before the Italian Court, and which provided for a stay order against creditors for a period of some ninety days. They argued that this should mean that the mortgagee should be prohibited or forbidden from enforcing the mortgage or arrest the ship as a creditor of the owners.

On their part, the financiers rebutted and argued that Article 8 of the EU Cross-Border Insolvency Regulation (Recast) [EU 2015/848] clearly carves out third party rights in rem as an exception to the general rules and processes under the said regulation. Article 8(1) of Regulation 2015/848 in fact provides that “[t]he 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 collections 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.”

The Court of First Instance pronounced that since the financiers’ claims are secured by a registered mortgage, this would indeed constitute a third party right in rem and thus the mortgagee would enjoy the protection under Article 8 of the Regulation. Of particular interest, the Court drew a parallel also to Article 25(5) of the PreInsolvency Act enacted last December to partially transpose EU Directive 2019/1023, which explicitly excludes actions in rem against vessels, warrants of arrest and proceedings commenced by the holder of a registered mortgage over a ship for the effects of any stay order issued in the context of any preventive restricting procedures commenced in Malta by a ship owner.

The Court threw out the owners’ challenge application and thus upheld the arrest. Subsequently, the owners filed an appeal. The owners asserted amongst other things that the First Court had erred in its interpretation of Article 8 of the EU Cross-Border Insolvency Regulation (Recast) and submitted that the judge’s wrongful application of the said provisions ran contrary to the entire spirit of the Regulation. The Court did not concur with this view and underlined that even Article 23 which details how assets should be returned to the insolvency practitioner is subject to the exceptions under Article 8.

The Owners also argued that the mortgagee should have resisted any judicial action in Malta and should have chosen to oppose any protective measures before the Italian bankruptcy court, the judicial body which had issued the said measures. The owners claimed that the MT Dominia was arrested in Malta just one day after the mortgagee was informed in writing about the Italian court order.  They alleged it showed that the creditor mortgagee was forum shopping. However, the Court did not agree as it believed that this matter was somewhat irrelevant since the creditor proceeded in line with his remedies at law.

The Court of Appeal ultimately confirmed the findings of the court of first instance and upheld the mortgagee’s arrest. The vessel was eventually sold by judicial auction held in Malta on the 18 September 2023.

These judgments reaffirm the position followed by the Maltese Courts in the MV Beluga Sydney case and other decision on this matter. In the MV Beluga Sydney, the presiding Judge had concluded that the previous Cross-Border Insolvency Regulation EU 1346/2000 allowed third party in rem rights to still be enforced against a vessel arrested in Malta despite insolvency proceedings being instituted in another EU Member State.

Moreover, whilst the maritime exceptions under Article 25(5) of the Maltese Pre-Insolvency Act are yet to be tested before our courts, the First Court’s comparative analysis between the Recast Regulations and the Pre-Insolvency Act are encouraging as they bolster confidence that the legislators’ intentions to protect ship financiers and mortgagees from bankruptcy and insolvency proceedings, are being recognized and applied by the Maltese Courts.

How can we help?

Should you require any further information or assistance on the matter, please do not hesitate to reach out to us personally on adrian.attard@fenechlaw.com

©Fenech & Fenech Advocates 2023

Disclaimer │ The information provided in this article does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This article may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.