A Year In Review: The Finance Charter Instrument

By virtue of Act I of 2025, significant amendments were introduced to Merchant Shipping Act (‘MSA’) Chapter 234 of the Laws of Malta (‘The Amendments’), reflecting Malta’s continued efforts to modernise its maritime legal framework and align itself with evolving international standards. As these amendments reach their first anniversary, this three-part series undertakes a review of the principal reforms introduced. The first part analyses the Finance Charter Instrument, the second part focuses on the Protection of Seafarers and the third part addresses the Merchant Shipping Act Amendments.

To begin our year in review of the Amendments, Part I of this series explores the newly introduced finance charter instrument and its implications for maritime financing.

Introduction

The most notable amendment by virtue of Act I of 2025 to the MSA [PB1.1]was the introduction of the Finance Charter Instruments (‘FCI’), a statutory security designed to protect finance lessors, making Malta the first and only European Flag state to offer such security instrument.

Legal Framework and Scope of the FCI

Prior to this amendment, finance charter transactions were governed by general Maltese civil and contract law. Parties relied on the ownership structure, whereby the lessor remained the registered owner, and on contractual enforcement mechanisms to protect their interests.[PB2.1] A lessor was only able to enforce termination and repossession of the ship contractually through the finance charter itself. However, without a dedicated registerable security interest, the lessors’ position against third parties in the event of insolvency of the lessee, was less integrated in the ships register priority system. Since the ship itself could not be charged for the charter, the lessor would look for additional collateral through additional security packages such as guarantees and pledges over shares in the owning SPV (special purpose vehicle).

The FCI, established under the newly enacted Article 49B of the MSA, allows a lessor under a finance charter of a Maltese-flagged ship to secure its rights by registering a charge over the ship. The article provides a broad definition of a ‘finance charter’, encompassing arrangements, such as bareboat or demise charters, where possession, operation, or control of the ship is transferred to the charterer or lessee, and where the principal purpose of the agreement is to finance the acquisition, operation, or management of the ship. Additionally, the term ‘lessor’ is defined as the owner of a ship which is the subject of or is otherwise addressed in a finance charter

The FCI is specifically intended to secure the position of a lessor who has acquired ownership of a ship as part of a financing arrangement ultimately aimed at the lessee’s acquisition of the ship. This structure enables the financier to retain legal ownership of the ship while distancing itself from operational responsibilities.

Registration and Secured Obligations

The FCI is executed by the finance charterer in favour of the lessor, who must formally acknowledge the instrument. Once registered in the ship’s register, the FCI constitutes official notice to third parties of the lessor’s rights over the ship.

The scope of the security is broad. An FCI secures all obligations of the finance charterer arising under the finance charter, irrespective of the governing law of the underlying agreement. This includes the payment of hire, principal sums, interest, obligations under an account current, and the performance of any other contractual commitments owed to the lessor.

Transferability

The Amendments permit the transfer of ownership of a ship over which an FCI is registered. In such cases, the lessor may elect either to discharge the FCI prior to the transfer or to allow the instrument to be transferred together with the ship to the new owner. The latter option offers considerable flexibility, as it preserves the priority ranking of the pre-existing FCI and avoids disruption to the underlying security structure.

Relationship With Mortgages

A key feature of the amendments is the express recognition that a ship may be simultaneously subject to both a registered mortgage and an FCI. Where an FCI is to be registered over a ship already encumbered by a mortgage, the prior written consent of the mortgagee is required.

Importantly, the MSA now makes clear that the registration, amendment, or discharge of an FCI does not prejudice the rights of a mortgagee, regardless of whether the mortgage registration is affected prior to or after the registration the FCI. The existence of an FCI does not interfere with the exercise of the rights of a mortgagee in any default scenario. Similarly, any changes to a mortgage remain unaffected by the presence of an FCI.

Priority Ranking and Privileged Status

As a registered charge over the ship, an FCI benefits from a preferential ranking over unsecured claims and other non-privileged claims. Nevertheless, the legislator has deliberately preserved the primacy of the mortgagee’s position. Article 49B(8) expressly provides that an FCI ranks after any registered mortgage and certain statutory privileged claims within article 50 of the MSA. These include, among others, crew wages, port dues, salvage claims, and claims for personal injury or loss of life. Such claims which are deemed to inherently benefit the ship and therefore follow it even after a voluntary sale.

Furthermore, the rights conferred by an FCI are limited strictly to the ship over which it is registered. The priority afforded to the finance lessor does not extend to debts and claims relating to the ship that arose prior to the registration of the FCI.

Enforcement And Right of Repossession

One of the most significant enforcement mechanisms introduced by the FCI is the finance lessor’s right to repossession of the ship in the event of a default. This right arises where the charterer breaches any term of the FCI or of any agreement referenced therein and closely mirrors the enforcement rights available to mortgagees under Maltese law.

Before exercising this remedy, the lessor must serve written notice of default on the charterer. Service is deemed effective if the judicial act is served to the ship’s master, the ship’s local agent in Malta, or court-appointed curators representing the charterer and the ship.
Banks position in the event of default

The introduction of the FCI does not diminish the position of banks holding registered ship mortgages, which remain the primary and senior form of security over a ship. Where both a mortgage and an FCI are registered, the enforcement of the FCI cannot prejudice the mortgagee’s entitlement to repayment from the ship or its sale proceeds. In the event of default under a finance charter, the FCI entitles the lessor to repossess the ship and enforce the charter obligations as a secured creditor; however, any subsequent sale or judicial enforcement remains subject to the mortgagee’s prior ranking claim. Banks therefore remain protected through traditional mortgage structures, while the FCI operates as a complementary, rather than competing, security mechanism within the existing maritime priority framework.

Insolvency Protection

To further safeguard finance lessors, the amendments introduced an additional layer of insolvency protection. Under Article 37C(1a) of the MSA, a registered FCI is not affected by the bankruptcy of the finance charterer occurring after the date of registration. This applies even where the charterer had possession or control of the ship at the commencement of bankruptcy proceedings.

In such circumstances, the finance charter interest enjoys priority over the claims of other creditors, trustees, or receivers acting on behalf of the bankrupt’s estate, subject only to those claims which, under the MSA, have precedence over an FCI.

Conclusion

The introduction of the FCI marks a major step in strengthening Malta’s ship finance framework. By providing finance lessors with statutory security, while preserving the established hierarchy of maritime claims, the amendments bring legal certainty to arrangements that had previously relied on fragmented contractual safeguards.

Since its introduction, the FCI has attracted interest from both ship owners and charterers, reflecting a positive initial response to the introduction of this new security instrument

Mamo TCV & Shipping

Mamo TCV is well-established in the maritime sector, offering integrated legal services across all aspects of shipping and yachting. The firm specialises in all aspects of Shipping law including ship finance, registration, sale and purchase, importation, corporate structuring and restructuring, port operations, taxation and VAT, as well as litigation and admiralty, and includes the registration of some of the world’s most prestigious yachts.

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