Flag injunctions: Practical Alternative to Ship Arrests

Flag injunctions: Practical Alternative to Ship Arrests

Introduction

Located in the heart of the Mediterranean and on the rhumb line between Gibraltar and the Suez Canal, Malta has long been regarded as a hot spot for ship arrests. Maltese law is straightforward in terms of who has a right to arrest and which claims may be secured by means of an arrest. Consequently, creditors can pre-assess and pre-determine whether they can proceed with a ship arrest in Malta. Further, local arrest procedures are quick, efficient and inexpensive meaning that a creditor monitoring or tracking a debtor’s vessel would normally be more than pleased to discover that said ship is scheduled to call at a Maltese port.

However, while ship arrests are a powerful legal remedy for creditors, they have one major limitation: they are possible only where the targeted vessel actually enters Maltese waters. Thus, a vessel can be arrested only when it is physically present within Malta.

Section 37 injunction

Apart from arrests, Maltese law offers creditors another practical and useful mechanism to ensure that they can adequately secure maritime-related claims, which may arise in connection to vessels. Section 37 of the Merchant Shipping Act affords a creditor the right to request the courts to issue an injunction over any vessel flying the Maltese flag, to ensure that it cannot be sold, transferred or deregistered from the Maltese ship registry. An injunction may be requested at any time, irrespective of where the ship is located or trading. The relevant court order is colloquially referred to as a ‘Section 37 injunction’.

From a procedural perspective, a creditor must file a sworn application requesting that the courts prohibit the sale or transfer of its debtor’s vessel. This must then be served on the debtor, which has 20 days to file a reply. Subsequently, the court will schedule a hearing to determine whether to issue the final injunction. However, given that speed is of the essence when dealing with injunctions of this nature, the creditor will also simultaneously with its application, file an ex parte application (ie, the debtor is not served with a copy of the same) requesting that the same court immediately issue a provisional injunction prohibiting any transfer or sale of the vessel pending the outcome of the final order. This ensures that the element of surprise is maintained and that a provisional injunction is issued expeditiously. Indeed, a provisional injunction is normally issued within the same day that the request is filed. When the court issues an injunction order, be it provisional or final, it is immediately served on the national ship registry administration and is then duly recorded in the ship’s register. Once the injunction is duly registered, the Maltese registry will not recognise or record any sale or transfer of that particular vessel, unless the ship is sold by judicial sale. Likewise, the owner will be prohibited from deregistering the vessel from the Maltese register while the injunction remains in force.

The Section 37 injunction is regarded by many as a practical and useful tool for creditors for a number of reasons. Malta is currently the sixth largest flag in the world and the largest in the European Union, boasting a gross tonnage of more than 82 million. The fact that a Section 37 injunction is issued on the basis of the flag rather than the location of a ship means that this remedy is available for roughly 6% of the world fleet. In addition, more than 780 superyachts are registered under the Maltese flag. This particular remedy offers creditors a more discreet way of securing their claims than having to arrest. Further, this procedure is available irrespective of whether the ship owner is a Maltese entity. The Maltese courts have jurisdiction to issue Section 37 injunctions against any owner of a Maltese-flagged ship, even if they are foreign domiciled.

Further, unlike a ship arrest, a Section 37 injunction does not impede a vessel from trading and operating commercially. As such, this remedy is advantageous to creditors faced with a debtor that is facing liquidity or cash-flow issues despite having assets (ie, ships). By allowing a vessel to continue to trade, a ship can continue to generate profits and liquidity for its owner. The cash earned could eventually translate to the creditor’s debt being paid off. In addition, throughout the whole process, the creditor can be confident that the ship cannot be transferred and thus that it has security for its claims. Because the ship is not impeded from its commercial operations, there are also restrictive circumstances where a debtor may request the court to order a creditor to provide for counter security. This is naturally an advantage for creditors. Further, provided that the grounds to issue the flag injunction subsist, there are limited defences or challenges which can be brought to frustrate a Section 37 injunction.

If creditors maintain their flag injunction over a vessel, it will remain registered in the ship’s registry. This means that if the debtor ship owner wishes to sell its ship in future, it would be prohibited from doing so until it either settles the debt or challenges the injunction. Thus, in some cases, the mere fact that the ship cannot be transferred creates enough pressure for a debtor to settle its dues.

Comment

For all of the above reasons, the Section 37 injunction provides creditors with an interesting, cost-efficient remedy where a ship arrest is not possible.

Adrian Attard 

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