Defences and proprietary remedies under Maltese law

Home Defences and proprietary remedies under Maltese law

Defences and proprietary remedies under Maltese law available to hypothecary or privileged creditors and to third parties in possession who have paid value for acquiring an immovable.

 The connection between creditors and debtors is known to be one identified by their particular personal concerns, whereby the creditor ensures that a means of security is set to guarantee his credit. The importance of utilising some form of guarantee is to ensure that the creditor obtains protection against any possible scenario of non-remittance by the debtor. The general rule in relation to creditors is that unless there is a reason for preference, creditors rank pro-rata (i.e. par condiciocreditorum). However, the law also caters for the lawful use of preference between creditors. Indeed, privileges and hypothecs are law-created mechanisms geared towards ensuring priority in ranking between various hypothecary or privileged creditors. Therefore, this form of security usually takes the structure of a right of priority to obtain the payment over the secured debt, where the notion of ranking is placed on the guarantee and preference is given to a particular creditor. Indeed, privileges and hypothecs resolve into ranking of the various creditors and hence, strength of security, ease of enforceability and priority in payment upon insolvency are central elements. In fact, privileges and hypothecs are regarded as effective security forms under the Maltese jurisdiction. However, the element of fairness in this ambit may be scrutinized, as it may be said that the hypothecary or privileged creditor is safeguarded over and above. This is especially true when comparing the hypothecary or privileged creditor to the third party in possession, since it is evident that the security rights acquired are not on par.

Under Maltese law a hypothec or privilege bestows upon the creditor particular rights over the property of a debtor and may also extend to a third party, as a means of security to fulfill the obligation. Our law does not expressly define the term ‘third party in possession’ but local case-law and foreign doctrine reveal that such party is someone owning or enjoying a real right over an immovable, or a part thereof, subject to a special privilege or a special hypothec and thus, liable for the debt secured thereby.  As indicated in Article 2011(1) of the Civil Code a “[h]ypothec is a right created over the property of a debtor or of a third party, for the benefit of the creditor, as security for the fulfillment of an obligation”. Moreover, as stipulated in Article 2002(2), “special privileges over immovables and those movables which the Minister shall, from time to time, establish shall continue to attach to such immovables or movables whatever transfers to other persons take place”.

The main context is where a third party is in possession of an immoveable over which there is a special privilege or a special hypothec. Whenever there is a special hypothec or special privilege over an immoveable, there is a special right conferred upon the creditor, known as the droit de suit or diritto di seguito, meaning the right of following. This right conferred upon special hypothecary or privileged creditors means that their security interest remains valid and effective into whosoever hands the particular immoveable passes onto. Its significance is mainly that it is a claim on the res, and thus, the third party in possession is liable for the debt on the sole basis that he is the current possessor of the particular immovable over which the creditor has a special hypothec or privilege in his favour. Indeed, Article 2070 of the Civil Code stipulates that the third party is “liable as possessor for all the hypothecary debts”. Therefore, the third party in possession of the immoveable is not personally liable towards the creditor, but rather, is only liable because the particular specially hypothecated or privileged immoveable in respect of which there is a droit de suite is found in his possession. The droit de suite is granted to the hypothecary or privileged creditor so as to ensure that the security is not terminated on the transfer of the asset. Therefore,  in accordance with Article 2071, the third party in possession is obliged “to surrender, without any reservation, the immovable or movable charged with the hypothec, unless he elects to pay all the hypothecary debts, as each of them falls due, whatever their amount may be.” Evidently, this is a prime indication that protection is heavily granted to the hypothecary or privileged creditor, as the security is not extinguished once the asset in question is transferred to another, but continues to extend to the creditor even after the property passes onto the third party’s possession.

The strength of the droit de suite is that the creditor may force the judicial sale of the hypothecated immovable by virtue of such right, even if it is no longer in possession of the principal debtor but is found in the hands of a third party. Indeed, if the creditor has not been paid and no solid defence is raised by the third party in possession, the hypothecary or privileged creditor is entitled to demand judicially that the immovable be sold by court auction (subbasta), through an order by the court. Such a court action is referred to as the ActioHypothecaria. This action is thus, a remedy granted to creditors whereby the judicial sale of the particular immovable may be ordered so as to ensure that the creditors retrieve what is due to them in order of ranking. In an actiohypothecaria itself there is no sale by auction but rather there is the ordering of the judicial sale of the hypothecated asset so that the creditor exercising the action may be paid from the proceeds of the subbasta which follows this action. Hence, the element of respective ranking enters this sphere and the creditors will get what is owed to them in accordance with their ranking position on the immovable. The actiohypothecaria has to be preceded by a hypothecary protest filed by the creditor and served upon the debtor and the third party in possession jointly. The function of this hypothecary protest is to call upon the principal debtor to pay the debt due and to demand “the third party in possession either to discharge the debt or to surrender the immovable or movable”, as stipulated in Article 2072(1) of the Civil Code. The actual application for the institution of the actiohypothecaria cannot be filed before the expiration of thirty days from the service of this hypothecary protest upon the debtor and third party in possession.

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