Securities on ships: which channel?

Barry Allan, New Zealand Law Journal, April 2007

This article summarises the law in New Zealand as it relates to registration of security interests in vessels and considers how it was applied in a recent case.

The case¹, which was summarised in the Autumn 2007 issue of Financial Services Quarterly, concerned competing security interests in a vessel that was built and registered under the Ships Registration Act 1992 (the SRA) in New Zealand and then taken to the United States and registered there. When the vessel returned to New Zealand and was sold several times it became the subject of competing security interests under the SRA and the Personal Property Securities Act 1999 (the PPSA).

In his article, Mr Allan summarises New Zealand's laws relating to security interests in vessels as follows:

• Wherever there is a security interest over personal property, the PPSA registration system becomes available to creditors.
• The PPSA regime ranks each interest that meets the statutory definition of a security interest.
• Security interests of those who fail to perfect in accordance with the PPSA will be subordinated to those who perfect.
• Exceptions to this are established under section 23 of the PPSA, including certain exclusions where there is an alternative system for transactions that would otherwise be caught by the PPSA, the idea being that those alternate systems provide their own priority rules.
• If you meet the criteria set out in section 17, then the PPSA applies unless you fall within the exclusion set out in section 23. A mortgage over a chattel is a classic security interest, and a ship is a classic chattel. Accordingly, unless the ship is caught by section 23(e)(xi) of the PPSA, a mortgage over a ship falls within its ambit.
• Section 23(e)(xi) excludes a "transfer, assignment, mortgage or assignment of mortgage of a ship that exceeds 24 metres registered length.". Accordingly, a ship less than 24 metres in length is caught by section 17 of the PPSA, and a creditor would be required to register under the PPSA to perfect and to protect its priority.
• Section 8 of the SRA permits any New Zealand ship to be registered, unless it has foreign registration (optional registration) and section 6 requires ships exceeding 24 metres in length to be registered (mandatory registration). Section 39 allows ships to be given as security for a mortgage irrespective of length - if a ship is registered under the SRA, then a mortgage can be registered against it.
• There is no statutory requirement for ships mortgages to be registered, but priority is determined by time of registration with all registered mortgages taking priority over unregistered mortgages.

The result is that certain ships are expressly excluded from the PPSA, which makes it possible for two registration systems to be available.

Mr Allan noted in his article that the judge in the recent case placed considerable emphasis on:

• New Zealand complying with its international obligations; and
• the contention that it would be bizarre to construe the PPSA to require owners and mortgagees of foreign vessels less than 24 metres in length to protect their position by filing a New Zealand PPSA financing statement when they enter New Zealand waters.

However, Mr Allan's contention is that New Zealand has already recognised its international obligations because:

• Security interests in ships exceeding 24 metres in length (a common distinction for ships likely to enter international waters) are not subject to PPSA priority rules. Therefore, security can only be registered in home country registers and subject to that country's priority rules.
• Section 30 of the PPSA deals with the position of goods used in more than one jurisdiction - they remain governed by the law of the jurisdiction at the time of attachment.
• Section 27 of the PPSA covers situations where goods are moved to New Zealand subject to foreign security. The secured party has 60 days from arrival of the asset in New Zealand to perfect its security and enjoy its existing priority, or 15 days from when it had knowledge of arrival in New Zealand of the asset.

Mr Allan's opinion is that the government chose to have two registers open for ships, and both registers treat registrations on the other register as inferior.

His recommendation is to rank security interests registered in either register in accordance with the time of registration, without regard to which register the entry was made in.

¹ KeyBank National Association v The Ship "Blaze" HR Auckland, CIV 2006-404-2266

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