Clawback Provisions - Maltese Flag Vessel

Malta is a globally recognised jurisdiction for ship registration, offering robust protections to financiers through its ship mortgage framework. One of the key advantages for lenders under Maltese law is the recognition of ship mortgages as real rights that bind third parties. However, those protections are not absolute.

In the context of insolvency, transactions, including mortgages, may be challenged and potentially unwound under clawback provisions found in the Companies Act (Chapter 386 of the laws of Malta) and Civil Code (Chapter 16 of the laws of Malta).

The primary legislation governing ship mortgages in Malta is the Merchant Shipping Act (Chapter 234 of the Laws of Malta). Under this Act, a mortgage registered over a Maltese-flagged vessel enjoys the status of a real right in rem, meaning it is enforceable against the vessel itself and against third parties, including in insolvency proceedings.

Article 37C of the Merchant Shipping Act provides significant protection to mortgagees, stating:

“All registered mortgages, any special privileges and all actions and claims to which a vessel may be subject shall not be affected by the bankruptcy of the mortgagor or shipowner… and such mortgage… shall have preference… over all other debts, claims, or interests of any other creditor of the bankrupt.”

This effectively insulates properly registered mortgages from the general pool of unsecured creditors during bankruptcy.

Despite these statutory protections, Maltese insolvency law allows for certain transactions entered into before insolvency to be set aside. These clawback provisions, found primarily in Article 303 of the Companies Act and corresponding articles in the Civil Code, aim to prevent creditors from being unfairly preferred or defrauded.

A court, liquidator, or official receiver may unwind transactions that fall into the following categories:

• Fraud of creditors: Transactions entered with the intention to defraud or defeat creditor claims;
• Undue preference: Transactions that favour one creditor over others without justification;
• Lack of consideration: Transactions made without valuable or real consideration, particularly where no underlying debt exists.

A registered mortgage may fall within this scope and risk being clawed back if it is found to meet any of these criteria.

Even though a registered mortgage is a real right, it may still be challenged in insolvency under certain circumstances, particularly if:

• It is granted during the suspect period: Under Article 303, transactions made within six months before the date of dissolution or filing for winding-up are closely scrutinised and may be set aside if found to be preferential;
• It constitutes an undue preference: For example, if the mortgage secures a previously unsecured loan or favours one creditor without proper justification;
• It is unsupported by consideration: A mortgage granted without a genuine underlying obligation — such as a sham loan or gratuitous security — may be challenged;
• It involves related parties: If the mortgagee is a connected person or insider, courts may apply heightened scrutiny.

In such cases, the protection normally afforded to registered mortgagees under the Merchant Shipping Act may be limited by the overriding public interest in equitable treatment of creditors during insolvency.

Fortunately, Maltese law provides strong defences for mortgagees who act in good faith and in the ordinary course of business. Courts are generally reluctant to interfere with mortgages that meet the following criteria:

• The mortgage is granted for value, i.e., it secures a real loan or credit facility;
• The mortgage is registered promptly following the loan agreement;
• The transaction is conducted at arm’s length and without intent to defraud creditors;
• The mortgagee is a bona fide third party, not connected to the debtor or involved in its financial mismanagement.

In such cases, even if the mortgage falls within the six-month period before insolvency, it may still survive clawback challenges if the surrounding facts demonstrate commercial legitimacy and good faith.

To minimise exposure to clawback risks, financiers and mortgagees dealing with Maltese-flagged vessels should observe the following best practices:

• Ensure the underlying financial transaction is clearly documented, evidencing the value provided;
• Register the mortgage promptly upon execution of the loan agreement;
• Avoid late-stage mortgages that may appear to favour the creditor at the expense of others;
• Maintain independence and avoid insider relationships with the shipowner;
• Carry out due diligence on the debtor’s financial condition before agreeing to security.

When these safeguards are in place, the mortgagee can rely on the strong statutory framework Malta offers to protect ship mortgages — even in challenging insolvency scenarios.

Malta’s legal framework provides strong protection for mortgagees of Maltese-flagged vessels through its recognition of registered mortgages as real rights in rem. These rights are prioritised over most other claims and are generally enforceable even in insolvency. However, clawback provisions under Maltese insolvency law remain an important caveat. A mortgage granted without value, during a suspect period, or favouring one creditor over others may still be challenged.

Ultimately, the law balances creditor protection with the principles of fairness in insolvency. Provided that a mortgage is granted in good faith, for real value, and properly registered, the risk of clawback is significantly reduced, making ship mortgages under Maltese law a secure and reliable form of maritime security.

For any further information or assistance, please contact us at info@gtg.com.mt

Author: Dr Sarah M. Vella