The Finance Charter Instrument (FCI) –

A New Security Interest for Finance Lessors

Introduction

Malta has long been recognised as a favourable maritime jurisdiction affording traditional ship financiers an array of self-help remedies following an event of default. A registered mortgagee is afforded the statutory right to take possession and the right to sell the mortgaged vessel privately to a third party. More significantly, a ship mortgage is deemed to be an executive title under Maltese law, meaning that it may be enforced swiftly without the need for substantive proceedings.

However, over the last decade or so, the ship finance landscape has evolved, transitioning from traditional financing secured by a mortgage to more sophisticated structures, most notably involving leasing arrangements and in particular sale and leaseback transactions.

Up until recently, such finance lease arrangements in Malta remained governed solely by the general principles of our civil and contract laws with limited security packages available to a finance lessor, particularly where the lessee was not a Maltese entity. Whilst the finance lessor would typically enjoy ownership rights over the vessel, Maltese legislators identified a gap in the protection afforded to such financiers, particularly in insolvency scenarios or cases where the charterer accrues significant debt on the vessel.

Following consultations with key stakeholders, Maltese legislators introduced significant amendments to the Maltese Merchant Shipping Act (the ‘MSA’) by virtue of Act I of 2025. In terms of traditional financing, the amendments streamlined several provisions and procedures pertaining to the ship mortgage including inter alia the introduction of a grace period to amend errors in mortgage deeds, and the registration of a mortgage over ships under construction.

However, undoubtedly, the most impactful legislative development related to the introduction of the Finance Charter Instrument (the “FCI”), a novel security measure designed to enhance the protection afforded to finance lessors under Maltese law. With the introduction of the FCI, Malta became the first and only European flag state to offer such a security instrument to finance lessors, effectively strengthening its status as the financier friendly jurisdiction.

This article seeks to provide a comprehensive overview of the key features, requirements and benefits of the FCI under Maltese law.

The FCI

In essence, the newly enacted Article 49B of the MSA affords the lessor of a Maltese flagged ship under a finance charter the ability to secure their rights over the chartered vessel by recording a charge over the leased vessel.

The law defines a ‘finance charter’ as a charter or lease of a ship under terms where the possession, operation or control of that ship is given to a bareboat charterer or to a lessee including through a demise or bareboat charter or a similar agreement, the principal purpose and intention of which is to finance the acquisition, operation, administration or management of that ship. Accordingly, the FCI is aimed at providing security rights to a lessor who has acquired ownership of a vessel as part of an arrangement primarily intended to finance the eventual acquisition of that ship by the lessee.

Registration Requirements

The FCI is drawn up on a statutory form, which is to be executed by the finance charterer in favour of the lessor, who in turn must also acknowledge the instrument by way of signature. In addition, the instrument is generally signed by parties’ local representatives, with both signatures required to be witnessed.

The instrument must be presented to the Registrar of Ships in Malta, who will register same in the ship’s register by noting the date and time of registration. Once registered, the FCI will provide a charge in favour of the lessor as ship owner and shall remain registered/ enforceable until discharged, rendering the FCI enforceable against all third parties.

It is also pertinent to note that whilst Maltese law permits a bareboat charterer in a finance lease arrangement to register its interests as a lessee with the ship registry and to subsequently obtain the issuance of all operational certificates in its own name in terms of Article 19A of the MSA, the FCI may be availed of even where the interest of the bareboat charterer is not registered.

Interest Secured

A FCI may be drawn up to secure the performance of any obligation of the finance charterer in favour of the lessor under and in terms of a finance charter (irrespective of the governing law of the underlying charterparty), including the payment of hire, a principal sum and interest, an account current, as well as the performance of any other obligation. Accordingly, there is no need to expressly stipulate any maximum secured sum, and the law covers most obligations typically undertaken in a finance lease arrangement.

The Possibility of dual registration: the Mortgage and the FCI

In contrast to other jurisdictions that only permit the registration of either a mortgage or a finance charter over a vessel, Maltese law uniquely allows for the registration of both a mortgage and a FCI concurrently over the same vessel. This offers finance lessors more flexibility, as it enables them to formally record their rights as lessors while also leveraging the vessel as collateral by granting a mortgage in favour of another lender, provided naturally that this is not prohibited in the underlying bareboat charter arrangement. Consequently, Maltese law provides an interestingly versatile advantage for structuring complex ship finance transactions and their security packages.

In the instances where a FCI is intended to be registered over a ship which already has a mortgage registered over it, the prior written consent of the mortgagee will be required for the FCI to be registered.

The Mortgagee’s Position

The Maltese legislator intentionally sought to safeguard the primary status and high ranking of a mortgage under our law. The amendments to the MSA explicitly provide that the registration of any FCI shall not affect any rights of any mortgagee, regardless of whether the respective ship mortgage was registered prior or after the recordation of a FCI. Accordingly, a mortgagee will still retain all the rights in its favour in terms of Maltese law and may still easily enforce them over the vessel in any default scenario. Likewise, any amendment or discharge of a mortgage will not be affected by the existence of a FCI. Additionally, it is to be noted that unlike a mortgage, the FCI does not grant the finance lessor an executive title in terms of Maltese law.

Enforcement Rights

The most salient statutory power afforded to a finance lessor in whose favour a FCI is registered is the self-help remedy to take immediate re-possession of the ship upon the occurrence of a default on the part of the charterer lessee of any term or condition of a FCI or of any document or agreement referred to therein (including typically the underlying bareboat charterparty). However, just as with a mortgage enforcement, the finance lessor would be first required to give notice of default in writing to the lessee prior to exercising its right of re-possession. Nevertheless, this statutory enforcement right serves to enhance a lessor’s position beyond its contractual remedies.

Moreover, for the purpose of any judicial proceedings instituted by the finance lessor in Malta in connection with a finance charter, the respondent charterer would be deemed served if the judicial act is duly served on the master of the ship, or if he is absent from Malta, on the local agent appointed for the ship, or in the absence of any local agent on curators appointed by the courts to represent the finance charterer and the ship.

Typically finance charter agreements are governed by foreign law and subject to a foreign jurisdiction clause, which would generally be upheld by Maltese courts. Nevertheless, it is also worth highlighting that Article 1526(3) of the Maltese Civil Code affords further comfort to finance lessors as it expressly provides that under Maltese law the terms and conditions agreed between the parties in a finance lease agreement prevail over the general provisions of domestic contract law regulating leases.

Ranking of Claims

As a charge over the vessel, a FCI attracts priority ranking in preference of all unsecured claims as well as most privileged claims. Article 49B(8) stipulates that a FCI will rank immediately after the rights of any mortgagee. The legislator’s decision to make the FCI subordinate to the position of a registered mortgage underlines the legislative efforts to maintain the primacy of the mortgagee’s position under Maltese law.

Nevertheless, there are a limited number of claims other than the mortgagee’s rights which would rank prior to the interest of a finance lessor. These are limited to handful of claims listed under Article 50 of the MSA and which attract a special privilege (the closest equivalent to maritime liens under our legal system). Such claims are deemed by the legislator to intrinsically benefit the vessel and as such would attach to the vessel, even after a voluntary sale of a ship (for a period of one year from said sale). The special privileges which would pre-rank the FCI would include, inter alia, tonnage dues, anchorage and berthing dues, wages and expenses for assistance, recovery of salvage, and for pilotage, crew wages and entitlements, as well as expenses incurred for the preservation of the ship and of her tackle including supplies and provisions to her crew incurred after her last entry into port.

The law however sets out two caveats. First, the rights of the finance lessor shall be limited to the ship over which the FCI is recorded. Second, the priority ranking afforded to the holder of an FCI shall not rank before any debts, obligations, actions and claims relating to the ship which arose prior to the registration of the FCI. These restrictions seek to curb any potential abuses aimed at circumventing pre-existing claims.

Insolvency of the Lessee Charterer

To offer additional statutory protection to the finance lessor, a new provision was incorporated into the MSA. Article 37(1a) provides that a FCI registered over a Maltese flagged vessel shall not be affected by the bankruptcy of the finance charterer occurring after the registration date of the finance charter, notwithstanding that the finance charterer at the commencement of the bankruptcy had the ship in his possession, order or disposition, and such finance charter interest shall have preference on the said vessel, overall other debts, claims or interests of any other creditor of the bankrupt or of any curator, trustee or receiver, acting on behalf of any other creditors, save for those claims which would rank in preference of a FCI in accordance with the provisions of the MSA.

Amendments to the FCI

It is also permissible to amend a FCI in one of two scenarios. First, an amendment can be filed to increase the amount of capital secured. For the avoidance of doubt, in this regard, the law also clarifies that any agreement to amend and vary the rates of interest payable, the modalities for the calculation of interest including any indices, margin, or market mechanism, the repayment schedule or the currency in which payment is to be made is not considered as an increase of capital. Second, it is also possible to amend the instrument to extend the existing FCI to secure any other obligation of the finance charterer in favour of the lessor under and in accordance with the terms of the underlying charter.

Transfer of the Vessel

It is also possible to transfer the ownership of a vessel over which a FCI is registered. In such cases, the lessor may either opt to discharge the FCI prior to any transfer of ownership of the vessel in favour of the new owner or alternatively, the Registrar will transfer the FCI to the transferee together with the ship. This latter option affords wider flexibility as it permits the lessee to transfer title over the vessel without disrupting the ranking of the pre-registered FCI.

Conclusions

The introduction of the FCI represents a significant milestone that seeks to set Malta apart from other European flags. By offering finance lessors this new security measure, Malta continues to earmark itself as a jurisdiction of choice for ship financiers. As sale and leasebacks transactions gain momentum, the additional layers of protection the Maltese FCI affords finance lessors positions it to become a standard feature in most finance lease arrangements involving Maltese-flagged vessels.