Priority of security interests in foreign registered vessels in New Zealand

A security interest over a vessel registered first in time on the Personal Property Securities Register (PPSR) failed to defeat a foreign registered security interest.

This case¹ concerned competing security interests in a vessel known as “Blaze”, which was built and registered under the Ships Registration Act 1992 (SRA) in New Zealand and then taken to the United States and registered there.  The Blaze subsequently returned to New Zealand, was sold several times and became the subject of competing interests:

• in relation to a mortgage given in favour of Keybank, which was validly registered in the United States and therefore perfected against third parties as far as United States law was concerned; and
  
  
• in relation to the purchase of the vessel by Mr Walters, who had registered a financing statement on the PPSR. 

Keybank did register its interest on the PPSR, but it did so after Mr Walters’ registration.

The judgment included discussion about the Betty Ott² case, a decision of the Court of Appeal that determined that a later New Zealand-registered debenture had priority over an earlier Australian-registered ships mortgage on the basis that the Australian-registered mortgage was to be treated under New Zealand law as an unregistered mortgage because it had not been entered in the New Zealand register.  The effect of this decision was to deprive holders of registered ships mortgages of security in all jurisdictions other than the one in which the mortgage was registered.  Parliament responded by passing section 70 of the SRA, which provides that where there is an issue as to priority of securities in respect of a ship registered under the law of a foreign country, securities registered in that foreign country have the same effect as if they were registered in New Zealand under the SRA.

The result was that, in this case, the United States registered mortgage was as good as a mortgage registered in New Zealand for the purposes of determining priority.  So, in the absence of the Personal Property Securities Act (PPSA), Keybank’s interest would take priority over Mr Walters’ interest.

The issue was whether the PPSA applied because, if it did, then the purchaser would have taken the vessel free of Keybank’s interest because that interest was not, at the time of sale, perfected by registration of a security interest.

The Blaze is less than 24 metres in length.  Section 23 of the PPSA excludes from its application vessels over 24 metres in length, but it does not state that the SRA does not apply in respect of vessels less than 24 metres long.  Under the SRA, it is optional to register vessels under 24 metres (unless they are going on an overseas voyage, in which case it is compulsory). 

The court decided that, if a vessel under 24 metres is registered under the SRA, then the PPSA does not apply.  The Blaze was registered in the United States, which was sufficient in terms of section 70 of the SRA, so Keybank’s security interest had priority over Mr Walters’ interest on the PPSR.

The court also noted that it would be chaotic if each of the owners and mortgagees of vessels under 24 metres would have to file their interest on the PPSR to protect their interests as soon as their vessels entered New Zealand waters.

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