The importance of flag choice to yacht financing– a Maltese law perspective

The Maltese flag is currently the largest in Europe and the seventh largest in the world. While the strength of the flag has historically been predominantly reflected in its sizeable merchant fleet, Malta has over the past seven years steadily been making a name for itself in the superyacht sector.

Indicative of this is the announcement made by Transport Malta at the beginning of the year that it had registered a growth of 18.1% in yacht registration over the previous year. Up to the end of 2013, nearly over 400 yachts (inclusive of both private and commercial yachts) over 24 metres were registered under the Malta flag.

While factors such as the reliability and reputation of the chosen flag and tax considerations undoubtedly rank very high up in the owner’s list of priorities, in situations involving financing a yacht, a maritime flag is only successful if the financier is confident that the law of the flag will protect their financial interest should things take a turn for the worse.

When a yacht is registered in Malta, the financier would register a mortgage in Malta against the vessel’s entry in the register. Under Maltese law, the mortgage is equivalent to an executive title. This means that the mortgage is the equivalent of a judgement and in the eventuality that the owner defaults on his mortgage payments, the banks can proceed directly to the enforcement of that mortgage.

In real terms what happens if an owner defaults is that the mortgagee notifies the owner that they are in default and that they are going to make use of the rights granted by law:

(a)  The financier is fully entitled to take possession of the yacht and to trade her himself.

(b)  The financier is entitled to enforce that mortgage as though it were a judgement and proceed immediately with a judicial sale by auction. This can be done in a matter of five weeks in Malta. The advantages of a judicial sale are that the vessel is sold free and unencumbered.

(c)  The financier also has the right to sell the vessel privately and in that way have full control over the sale price. However in such a case since it is a private sale, it is unlikely that any buyer would be interested in purchasing the vessel in a private sale because he would be concerned about the debts which the vessel may be burdened with.

(d)  In January 2009 the possibility of a court approved private sale was introduced under Maltese law. In this case the mortgagee or the owner for that matter finds a buyer. Once a private buyer is identified for the agreed price, the mortgagee then obtains two independent valuations and provided that the sale price is in the region indicated in the valuations then the court will approve the sale. The approval by the court turns the sale into a court approved sale and the vessel is sold free and unencumbered as though it were a judicial sale. The additional advantage here, is that the owner can participate in finding a buyer and can benefit from the price obtained if the price is in excess of the mortgage, whereas in a judicial sale by auction where the vessel is sold to the highest buyer, that highest price may very well be a fraction of the value of the yacht.

The recent uncertain economic times, which are still very fresh in the minds of all those involved in this industry have undoubtedly led to a greater sensitivity on the part of banks in extending finance.

It goes without saying that banks would deal with each and every client on a case by case basis and would look to alternative forms of collateral to the yacht itself in deciding whether to extend finance and indeed to what extent.

Nonetheless a legal system that offers accessible, reliable and swift procedures to the financier and the comfort of tried and tested mechanisms goes a long way in rendering a maritime flag attractive to owners and financiers alike and in cementing its success.

Advice given by Dr Alison Vassallo, senior associate within the Yachting Division and the Marine Litigation Department at Fenech and Fenech Advocates. For more information please visit www.fenechlaw.com.

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