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Core Maltese Legal Concepts for Banks and other Money Lenders

April 2015 - Finance. Legal Developments by Chetcuti Cauchi Advocates.

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Over the years Malta has evolved from a traditional, debtor friendly civil law jurisdiction into an increasingly financier friendly jurisdiction that offer many of the flexibilities typically associated with common law jurisdictions. These developments have been spurred by (and have spurred) the growth of the aviation and maritime industries in Malta, as well as the country’s emergence as a reputable financial services centre. This article provides an overview of the core Maltese legal concepts which are of interest to banks and other financial institutions lending money in or from Malta.

Core Maltese Legal Concepts for Banks and other Money Lenders

Over the years Malta has evolved from a traditional, debtor friendly civil law jurisdiction into an increasingly financier friendly jurisdiction that offer many of the flexibilities typically associated with common law jurisdictions. These developments have been spurred by (and have spurred) the growth of the aviation and maritime industries in Malta, as well as the country’s emergence as a reputable financial services centre. This article provides an overview of the core Maltese legal concepts which are of interest to banks and other financial institutions lending money in or from Malta.

The Authorisation to Lend

In order to lend money in or from Malta the prospective lender must be:

-       A credit institution authorities under the Banking Act; or

-       A financial institution authorities under the Financial Institutions Ac (the Financial Institutions Act is a domestic law that regulates various quasi-banking activities such as the lending of money from own capital)t; or

-       Have duly exercised freedom of services or freedom of establishment (passport) rights

Persons lending money without the appropriate permissions may be guilty of an offence as well as subject to an administrative penalty. The Malta Financial Services Authority (MFSA) is the local regulator for credit institutions and financial institutions.

Security under Maltese Law

Maltese law of security is grounded in civil law, although as mentioned earlier we have seen a steady uptake of common law instruments such as the security trust. The Maltese law of security is sophisticated and permits the taking of security over diverse assets including land, securities, contractual rights, tangible assets such as aircraft and ships, intellectual property and stock.

Security over land is typically taken by way of special hypothec. The special hypothec attaches to the specified property, granting a diritto di seguito; meaning that the security continues to have effect even where a transfer of such immovable property takes place. A hypothec must be registered in the Public Registry (and the Land Registry if it is an immovable in a land registration area) otherwise it will be ineffectual and produce no right in favour of the creditor. The date of registration is necessary in view of the fact that it affects the ranking of the creditor.

Special hypothecs may be contrasted with general hypothecs, which do not attach to a specific property but rather are taken over a changing pool of assets, in a manner similar to floating charge. In view of this ‚Äėfloating‚Äô characteristic, general hypothecs are the preferred means of taking security over stock.

Special privileges are also common forms of security on land as they arise ex lege in certain circumstances, such as with respect to a debt due to the alienor of the land.

With respect to movables (including movables by operation of law such as shares), pledge is the normal method of granting security. Pledge is constituted by delivery to the creditor (or to an agreed third party) of the thing pledged or of the document conferring the exclusive right to the disposal of the thing pledged. Note however that a pledge of shares or other securities must be executed in writing, the pledge must therefore be created by way of public deed or private writing.  Notice of the pledge must be delivered by the pledgee to the Registrar of Companies within 14 days.

With respect to certain movables, namely ships and aircraft, security may also be taken by way of mortgage. This is in-line with the afore-mentioned efforts directed towards making Malta a financier friendly jurisdiction, particularly in the context of the shipping and aviation industries.

Note that through the Financial Collateral Arrangements Regulations 2004, Malta has adopted the provisions of Directive 2002/47/EC on financial collateral arrangements and Directive 2009/44/EC on settlement finality and financial collateral arrangements (Settlement Finality and Collateral Arrangements Directive). The regulations facilitate the taking and enforcement of pledges and other security qualifying as financial collateral. The Regulations also remove the formalities regarding judicial notification of the debtor and the observance of pre-emption rights. The rules also require Maltese courts to recognize financial collateral arrangements that would be alien to Maltese law and could otherwise risk re-characterization. The Regulations do not apply where either the collateral grantor or taker are physical persons; the Regulations provide a list of persons that can make use of the Regulations.

Malta also permits the taking of security over intellectual property. The correct mechanism for the taking of security over intellectual property is generally understood to be pledge, although there is ongoing debate regarding the Maltese regime for IP security.

In the context of ships and aircraft, as part of ongoing efforts to develop a financier friendly hub for the shipping and aviation industry, Malta also permits the creation of ship & aircraft mortgages.

Costs of taking security

No costs arise upon the taking of security over an asset per se. However, depending on the instrument of security notarial and registration fees may apply. In a contract of loan over immovable property, and the taking of security consequent thereon, the notarial fees are established by law and, depending on the value of the property, range between 1-1.5% of the total value of the immovable.

When pledges are made by way of public deed, notarial fees are of approximately 0.5% of the total value of the object pledged. In the case of a pledge of cash in a bank account this is done by means of a private writing with the bank, and hence only bank fees arise.

Registration fees, both with regards to hypothecs and privileges, as well as with regards to mortgages, are generally not very significant.

Focusing on release of security, hypothecs and privileges are released by cancelling the registration thereof. A pledge of movables is released by returning the movable to the debtor once the debt is fulfilled, though a pledge of shares or other securities requires due notification to the Registrar of Companies upon termination. A mortgage on vessels or aircraft is released by means of a discharge registered by the Registrar of Ships or the Director General of Aviation respectively.

Security Trusts

Maltese law recognizes the concept of trust in general, and as of 2010 the concept of a security trustee become regulated via article 2095E of the Civil Code. Security trustees are treated as the creditor and are entitled to register the security in their own name, but indicating their position as trustee. This mechanism can be used both with regard to arrangements whereby the legal rights of a creditor are protected such as guarantees, privileges, hypothecs and pledges, as well as the placing of property in possession or control of the trustee with rights of retention and or sale, as in a mortgage. Security trustees are empowered ex lege to file any legal proceedings for the enforcement thereof.

Beneficiaries may assign the debt to third parties in writing and in such case the assignees enjoy the rights of the beneficiaries under the security trust upon notice to the trustee without the need of a separate assignment of the beneficiary rights under the trust deed. This avoids the cumbersome procedures for the transfer of a security when the mechanism of a security trustee is not used.

Debt Transfer Under Maltese Law

The transfer of a debt typically takes place through assignment. An assignment of a debt is not valid unless it is made in writing. Moreover, the assignee may not exercise any of the rights assigned to him with respect third parties unless the assignee gives notice of assignment to the debtor by means of judicial act. This requirement can be set aside if the debtor acknowledges the assignment. It is common practice for debtors to appear on assignment agreements to clearly evidence such acknowledgement.

No Lending Taxes

No special taxes are associated with making loans to entities incorporate in Malta. No withholding tax is payable on interest payments under loan agreements.

Exchange control restrictions

Malta maintains no exchange control restrictions

Ranking of creditors

Ranking in the absence of contractual regulation is as follows:

i.        Judicial costs;

ii.        Fees due to the liquidator in insolvency proceedings, or due to the Registrar of Ships or the Director General of Aviation in the enforcement of mortgages on vessels and aircraft respectively;

iii.        Payments due to the Government under the Value Added Tax Act and the Social Security Act, if any;

iv.        Payments due to employees in respect of wages for a maximum of three months, leave and termination allowance, up to a maximum of a sum equivalent to six months‚Äô minimum statutory wage [currently ‚ā¨3976.32 in total as of the year 2014], if any;

v.        Mortgages ‚Äď in between themselves mortgages rank according to date of registration;

vi.        Pledges, over the object pledged;

vii.        Privileges ‚Äď in between themselves privileges rank according to nature, specifically depending on the manner in which they are listed in the Civil Code;

viii.        Hypothecs ‚Äď in between themselves hypothecs rank according to the date of registration.


In general, a lender can enforce its security upon non-payment of the debt when due and/or in the case of partial payment.  The lender can resort to procedures for enforcing payment and, if other lenders exist with respect to the same debt, their respective security will determine the extent of payment they can receive.  Guarantees can also be enforced on default depending on the nature of the guarantee.  If the guarantor is jointly and severally liable with the principal debtor, then upon default of the principal debtor, payment of the debt can be sought directly from the guarantor.  Conversely, if the guarantor is bound in subsidium, the debt can only be enforced through the guarantee if the default of the principal debtor is confirmed, as the guarantor has the benefit of discussion whereby he can force the lender to seek payment from the principal debtor before enforcing the guarantee.


A creditor may subordinate his existing or future rights of payment, ranking, and other similar or existing or future rights in favour of any other person, be it a determined person or someone yet to be determined. This may be made via an agreement with or by unilateral declaration to such other person who will benefit from the subordination.

Choice of Law and Cross-Border Enforceability Issues

The Rome I Regulation, Regulation No 593/2008/EC, on the law applicable to contractual obligations, entitles the parties to a contract to choose the law which is to govern their contract in whole or in part. The choice must be made either expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. However, one should be aware of the fact that where all the elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. This should apply irrespective of the existence of a choice of court agreement or otherwise. Moreover, there are certain laws of the Member State of the forum which cannot be derogated from, particularly the laws of procedure. This is relevant where the Member State which forum has been chosen to hear and determine the case is not the Member State chosen to have its laws as the governing law of the contract.

In conjunction, Brussels I Regulation, Regulation No 44/2001/EC, on jurisdiction and the recognition and enforcement of civil and commercial matters, entitles the parties to a contract to determine which court(s) of a Member State is to have jurisdiction to settle any arising disputes. A choice of court agreement shall be either in writing or evidenced in writing, or in a form which accords with practices which the parties have established between themselves or as per practice in international commerce.

Judgements given by the courts of an EU Member State will be recognized in Malta, pursuant to Regulation 44/2001 are equally enforceable in Malta as any judgement pronounced by Maltese courts. This is based on the fact that a judgement given by a court of a Member State is to be recognised in the other Member States without the imposition of any special procedure. It is only when the judgement to be recognised: (i) is manifestly contrary to the public policy of the Member State to recognise and enforce it; or (ii) is irreconcilable with a judgement given in a dispute between the same parties in the Member State in which recognition is sought or with an earlier judgement given in another Member State or in a third State involving the same cause of action and between the same parties; or (iii) the defendant was not duly served with the document(s) which instituted the proceedings, that the judgement is not to be recognised.

The enforcement of the judgement given in a Member State and enforceable in another shall be enforced when, on the application of any interested party, it has been declared enforceable there. In Malta the application would have to be submitted to the First Hall, Civil Court as the competent court. The party seeking recognition or applying for a declaration of enforceability shall produce a copy of the judgement as well as certificate by the court seized with jurisdiction with the following details, namely: (i) the Member State of origin; (ii) the court or competent authority issuing the certificate; (iii) the court delivering the judgement; (iv) the date, reference number, name of all parties, date of service of the document which instituted the proceedings where judgement was given in default of appearance; (v) the text of the judgement and (vi) the names of any parties who were granted legal aid.

Author: Dr Charles Cassar

Dr Charles Cassar leads the financial services regulatory team at Chetcuti Cauchi Advocates. Dr Cassar has advised clients from a variety of sectors of the financial industry including investment advisors, funds and their managers, insurance principals and intermediaries, banks and financial institutions. Dr. Charles Cassar is particularly interested in the intersection between technology and financial services, and has built a clientele which includes forex brokers, online payment institutions and virtual currency operators. Dr Cassar regularly delivers training sessions, career talks and seminars and has spoken at the University of Malta, Maastricht University and Society Education.