Legislative developments reflecting recent trends in ship finance

1. Legislative developments reflecting recent trends in • ship finance • Dr. Caroline Risiott/Dr. Jan Rossi • 15 March 2017

2. The Act was enacted at the end of 2016. The Act primarily deals with amendments to the Aircraft Registration Act however it also amends the COCP, the Civil Code, the Financial Institutions Act and the Interest Rate (Exemption) Regulations An Act to amend the Aircraft Registration Act and ancillary laws thereto Act No. LII of 2016 (the “Act”)

3. The amendments to the Civil Code include amendments to the sections of the Civil Code dealing with lease to cater for finance lease arrangements in ship and aircraft finance transactions. • Civil Code was enacted in 1850s, has a strong focus on immovable property or land and is not flexible enough to cater for the market realities of today’s world. • Art. 1526 of the Civil Code • Amendments to the Civil Code

4. New sub-article to Art. 1526 which provides that the letting of ships and aircraft shall be regulated by the provisions of any agreement between the lessor and the lessee in accordance with its terms as well as by the international usages of trade applicable in the context.[freedom of contract between the parties] • In case of conflict between the terms agreed to between the parties and the Civil Code, it is the terms of the agreement which prevail. • Art. 1526 of the Civil Code • Amendments to the Civil Code

5. Art. 1526 of the Civil Code Amendments to the Civil Code • A new sub-article 4 to Art. 1526 has removed the requirement for notice by judicial act for the termination of a lease in case of default. • The parties may now agree on the methods of notice to each other which can be in writing in any manner or even by any electronic means. • Full freedom of contract to determine how notice will be served • Requirement of notice by judicial act was too formalistic and local.

6. Art. 1526 of the Civil Code Amendments to the Civil Code • In case of default by the lessee, the lessor (or mortgagee in case of a leveraged finance lease and unless such power is expressly revoked) may • immediatelydissolve or terminate the lease upon notice in writing notwithstanding the opposition of the lessee and without court authorisation or confirmation that an event of default has taken place. • after notice to the lessee take possession of the ship in accordance with the agreement between the parties and may ask Court for an order authorising or directing these acts. The Court shall render full support to the lessor or mortgagee as expeditiously as possible.

7. Art. 1526 of the Civil Code Amendments to the Civil Code • Maltese law tends to be biased in favour of the possessor/lessee therefore this is a reversal of the law in that court intervention is not required and if requested, it needs to be given as expeditiously as possible. • The mortgagee also has the same powers as the lessor – can also exercise repossession directly upon giving notice to the lessee. This is a strong right in favour of the mortgagee being the risk taking party. • Avoids the need for the mortgagee to go through the lessor and avoids possible duplication of remedies – particularly where the lessor and the mortgagee have aligned interests, the process can be very efficient.

8. Art. 1526 of the Civil Code Amendments to the Civil Code “Default” means The fulfilment of a condition under which the dissolution of the lease was expressly covenanted or a failure by a party to perform his obligations; A change in the financial condition of the lessee as stated in Art. 1079 (lessee has become insolvent; condition of lessee has so changed as to endanger the payment of the debt; by lessee’s own act he diminished the security given to the creditor or if lessee has failed to give agreed security); A default which substantially deprives the mortgagee of what it is entitled to expect under the agreement between the mortgagor and the mortgagee;

9. Art. 1526 of the Civil Code Amendments to the Civil Code • Arguing what constitutes default may take considerable time before a court – this new definition seeks to avoid this. • Should lessor terminate the lease agreement for reasons which are; • - not contemplated in the agreement or • generally not valid at law • the lessee may seek damages for breach of the agreement.

10. Art. 3A Amendments to the Financial Institutions Act • As a general rule – financial leasing is a licensable activity in terms of the Financial Institutions Act (one of the licensable activities listed in the First Schedule to the Act) • By virtue of the Act (insertion of new Article 3A), the activity of financial leasing of ships will not require a licence in terms of the Financial Institutions Act even if the entity is registered or operates in or from Malta and even if the ship flies the Maltese flag. • This is therefore the removal of a major obstacle to Malta being used as a centre for financial leasing.

11. Art. 3A Amendments to the Financial Institutions Act • Conditions for the exemption from the licensing requirement to apply: • Entity must be(1) owned and controlled OR (2) a subsidiary of OR (3) exclusively funded by persons or entities who are described in in Annex II to Directive 2014/65/EU (MIFID) or persons/entities who are recognized as eligible counterparties in accordance with Art. 30 of MIFID; • AND • - Any financial leasing transaction or the underlying asset (ship) is exclusively financed by persons or entities who are described in in Annex II to Directive 2014/65/EU (MIFID) or persons/entities who are recognized as eligible counterparties in accordance with Art. 30 of MIFID

12. Art. 3A Amendments to the Financial Institutions Act • MIFID: Market in Financial Instruments Directive – EU legislation that regulates firms who provide services to clients linked to “financial instruments” (bonds, shares etc) and the organised trading of financial instruments. • Art. 30 of MIFID (Market in Financial Instruments Directive)refers to “professional clients” or “clients who may be treated as professionals upon request” or “eligible counterparties”. • “Professional clients” include large undertakings, institutional investors, pension funds, credit institution, collective investment schemes (funds) and commodity dealers.

13. Art. 3A Amendments to the Financial Institutions Act • Additionally: • Art 3A (2): activity of the entity must be limited to the financing of ships and to activities that are ancillary thereto to the exclusion of other types of assets and activities falling within the purposes of the Financial Institutions Act.

14. Amendments to the Interest Rate (Exemptions) Regulations • The Regulations provide for a number of instances where the general public policy provisions on the maximum amount of interest chargeable and the compounding thereof found in the Civil Code, do not apply. • Regulation 3 (1)(b) has been substituted in its entirety: • Debts and other obligations which are (i) secured by a mortgage over, or (ii) due under a lease of a ship or aircraft, including an aircraft engine, whether registered in Malta or otherwise and whether governed by Maltese law or otherwise.

15. Amendments to the Interest Rate (Exemptions) Regulations • Art 3 (1) (b) exempted debts and other obligations secured by a Maltese mortgage or a foreign mortgage recognised in terms of Maltese law from the Civil Code restrictions. • By virtue of the amendments the lessor and lessee can agree on interest rates at current international market rates, even in excess of those permissible in terms of the Civil Code.

16. Amendments to the Merchant Shipping Act • L.N. 210 of 2016 introduced a number of amendments to the Merchant Shipping Act including an amendment to the Art. 19A and the addition of a new Art. 19B. • Art. 19 A: the charterer of a vessel could (subject to certain conditions) request the issuance of the certificate of registry (whether provisional or permanent) in the name of the said charterer. • Art. 19A as amended now specifically gives the lessee of a vessel a similar right. (In a finance lease, the lessor will typically have no interest in operating a vessel. The lessee is effectively the operator of the ship and is responsible for all matters relating to the ship’s operation.)

17. Amendments to the Merchant Shipping Act • The lessee must: • - pay an amount equal to the annual registration fee for that year in addition to that paid by the registered owner (lessor) of the vessel; • - submit to the Registry written consent from the registered owner (lessor) of the vessel and all registered mortgagees; and • submit to the Registry a copy of the lease agreement. • Even though the Maltese Register is a public register, the lease agreement will not be available for public inspection. (comfort to the parties due to the sensitive nature of such agreements and the commercial terms they contain).

18. Amendments to the Merchant Shipping Act • A certificate issued in the lessee’s name in terms of Art. 19 (A) will specifically indicate that it is issued in terms of Art. 19 (A) – it is only the name of the lessee that appears on the certificate. The name of the lessor (registered owner) will not be indicated. • Art. 19 (B) enables the lessor (registered owner) or the mortgagee to withdraw consent to the issuance of the certificate in the lessee’s name. • Once consent is withdrawn, the certificate will cease to have effect and the lessee must immediately surrender the certificate issued in its name.

19. Lease as a security interest The way forward… • It may be time to consider amending our laws to make lease a security interest which may be registered. Certain jurisdictions (Marshall Islands) have already introduced this into their laws, thus strengthening the position of a lessor in a finance lease arrangement. • Upon recording the lease would be treated in essentially the same way as a ship mortgage and the lessor (as ship owner) will be granted the status of a secured party. In other words the lessor (ship owner) will have the benefit of being treated in much the same way as a mortgagee is treated in relation to a ship mortgage. • Similar conceptually to the position of a lease under the Cape Town Convention (in aviation finance context).

20. Further amendments to the Merchant Shipping Act The way forward… • Further amendments to the MSA are in the pipeline: these will reflect amendments made to the Aircraft Registration Act by Act LII of 2016 and will focus amongst other things on the insolvency angle. • The aim of these amendments will be to ensure that insolvency proceedings begun in respect of a Maltese single vessel shipping organisation do not have the effect of stalling enforcement proceedings. • Article 14 of Act LII of 2016

21. Caroline Risiott Jan Rossi • crisiott@ganadoadvocates.comjrossi@ganadoadvocates.com