The granting of credit and collateral go hand in hand. Underlying most credit facilities supplied by lenders is some form of collateral or what we lawyers often term “security”. Maltese law on security is based on the Napoleonic civilian law tradition and this area of law is largely set out in Malta’s Civil Code which provides that the property of a debtor is the common guarantee of his creditors, all of whom have an equal right over such property, unless there exist between them lawful causes of preference. In layman’s terms, unless a creditor obtains security, he will wait in the queue after all secured creditors.

Maltese law traditionally posed some significant restrictions when it came to taking security over so-called movable things (basically, non-real estate assets), more specifically tangible movable things (e.g. plant, machinery, equipment). Prior to the recent legal amendments referred to below, the only two consensual institutes which allowed the creation of security over movable things were the general hypothec and pledge. General hypothecs are often encountered in Malta and they attach to all the assets of a debtor, present and future. The problem with general hypothecs is that other types of security (such as pledges) may rank higher and once an asset is sold by the debtor, the security no longer attaches to such an asset. So, in substance, the security is good so long as it remains in the debtor’s estate. Insofar as movable assets are concerned, the established form of taking security was a pledge. Pledge is a great form of security as it is the highest ranking security.

The difficulty with our current laws on pledges of tangible assets is that it is a necessary condition for the creation of a pledge for the borrower to deliver the pledged asset to the lender or to a third party or otherwise to place it in the joint custody of the lender and borrower. This makes it impractical in today’s world as in many instances it does not make sense for the borrower to deliver such goods. For example, take the case of a bank which wants to grant an overdraft or a term loan facility to a company which owns machinery, computer hardware, cranes, other types of equipment and the like, then a bank is faced with the above issue. The general hypothec will capture such assets, but nothing stops the debtor from selling these assets, thus placing such assets outside of the lender’s grasp. Pledge is also not suitable, because the borrower cannot operate if he delivers such assets to the lender.

This problem is by no means restricted to Malta. Most continental countries had similar issues, but different inroads were taking place in various jurisdictions. The introduction of trusts law in Malta was one step in the right direction in this regard in that the trust concept could be used to get the borrower to declare a trust over assets for the benefit of the lender, until the underlying indebtedness gets paid. In addition, in line with specialised EU directives, certain specific laws were also enacted to allow better ways of taking security when it comes to financial instruments (shares, bonds etc.) and cash. Parliament had in 2007 also introduced in our Civil Code the concept of special hypothecs for movables. However, to date this remains a dead letter since the surrounding infrastructure to enable such security was never created.

At long last, hidden away in the Fifth Schedule to the Aircraft Registration Act (in force since October 1, 2010), Parliament created a new title under our Civil Code by the name Of Security By Title Transfer. By way of background, these changes were published in the Aircraft Registration Act because they are inextricably linked to the ratification of the so-called Cape Town Convention on International Interests in Mobile Equipment and the Aircraft Protocol, which Convention is part and parcel of the new aviation project being embarked upon by the country. However, Parliament wisely introduced concepts in Malta’s Civil Code which apply across the board and chose not to restrict them solely to the aviation sector.

This is the first of two articles. Next week’s article will deal with the main elements of the institute of security by title transfer and their practical use under Maltese law.

The author is a partner at Ganado & Associates – Advocates and a visiting lecturer at the Faculty of Laws, University of Malta.