In a nutshell: On 4 April 2025, a new amendment to the Maltese Merchant Shipping Act came into effect, offering a new type of security to financiers in sale and leaseback transactions, similar to the legal framework provided by the Marshall Islands and Liberia.

What is a Finance Charter?

Finance charters are a key feature of sale and leaseback transactions. In these transactions, a ship owning company sells and transfers ownership of a vessel to a financier (typically a leasing company, private equity firm, or a financial institution, such as a bank) in exchange for a lump sum payment (i.e. the purchase price). Under the terms of the finance charter (usually called a bareboat charter) the financier as owner and lessor leases the vessel back to the former ship owning company as lessee. The lessee operates the vessel during the term of the lease in exchange for lease payments to the lessor.

Amendment to the Merchant Shipping Act

On 24 February 2025, the Maltese Parliament implemented a series of amendments to the Merchant Shipping Act. One of the key changes introduced was the recognition of finance charters within the Maltese legal framework, along with the establishment of a mechanism for registering finance charter instruments in the Maltese ship registry to the effect that a security interest is created for the benefit of the lessor. The amendments came into force on 4 April 2025. It has important implications for cross-border transactions involving Maltese-flagged ships.

By way of background, the characterisation of finance charters and who is actually determined to be the legal owner of a vessel under a finance charter can differ from jurisdiction to jurisdiction. For instance, in the event of a lessee's bankruptcy some jurisdictions may determine that legal ownership of the vessel rests with the lessor. In others and by virtue of the finance charter, the lessor may be recharacterised as a mere financing party and the lessee is determined to be the vessel's actual owner. In the latter case, the vessel might be considered part of the lessee’s bankruptcy estate, and the lessor – deprived of ownership title - would be left with nothing but an unsecured claim against the lessee's insolvency estate.

Under Maltese law the registration of a finance charter in the Maltese ship register seeks to give comfort to the lessor by granting a registered security interest. The lessor's security interest pursuant to Maltese law is separate and distinct from the lessee's insolvency estate and shall have preference over all other claims or interests of any other unsecured creditor of the lessee.

Why is this important for European Shipowners?

This legislative update represents a significant development for ship leasing structures in Europe making Malta an attractive option for structuring sale and leaseback arrangements. It provides a more robust legal framework for leasing transactions within an EU jurisdiction. In this way, lessors gain comfort that their interest in the vessel is registered and that they are a secured creditor in case of a bankruptcy proceeding against the lessee, notwithstanding any possible recharacterization by the bankruptcy court.

Conclusion

The amendment is undoubtedly a positive update for European ship owning companies seeking alternative financing solutions and could pave the way for increased leasing activity in Europe, offering both shipowners and lessors greater legal certainty and flexibility in their financial structuring.

For the sake of completeness, it should be mentioned that similar regulations exist in the Marshall Islands as well as in Liberia, granting a lessor as registered owner security interests comparable to a ship mortgage.

If you have any further questions hereto or seek to establish a contact in Malta, please do not hesitate to reach out to your contact person at EHLERMANN RINDFLEISCH GADOW or Adam Parmenter or Marta Ron. Should you be interested to learn more about registering a financing charter in the Marshall Islands or in Liberia, please do not hesitate to contact either Dr. Klaus Dimigen or Dr. Stefan Rindfleisch, both registered lawyers admitted to practice in the Marshall Islands.