Vessel Financing and Security

Transcription

1 PPSA 2015 UPDATE PAPER 3.1 Vessel Financing and Security These materials were prepared by Catherine Hofmann of Bernard LLP, Vancouver, BC, for the Continuing Legal Education Society of British Columbia, February Catherine Hofmann

2 3.1.1 VESSEL FINANCING AND SECURITY I. Federal Jurisdiction Over Navigation and Shipping... 1 II. The Statutory Regime... 2 III. Registered Vessels... 2 IV. Recorded Vessels... 4 V. The Small Vessel Register and Pleasure Craft... 5 A. Vessel Searches General Searches Registry of Vessels Bank of Canada Fisheries and Oceans Canada, Licence Section Federal Court and British Columbia Supreme Court Personal Property Registry... 8 Traditionally, financing the purchase or construction of a vessel involves a combination of secured borrowing and owner equity. Although the methods by which vessel financings may be accomplished have become significantly more complicated over the years, regardless of whether the financing scheme involves a simple ship s or builder s mortgage or utilizes more innovative and complicated structures such as vessel leasing, or high yield bonds, the basic principles regarding the taking of security over vessels located in BC remain critically important. Before beginning any such discussion, however, it is important to understand and acknowledge the jurisdictional regime governing vessels and what law is applicable in a given context. I. Federal Jurisdiction Over Navigation and Shipping Although jurisdiction over navigation and shipping was granted to the federal government under the Constitution Act, 1867, there is the potential for the application of provincial law to maritime matters. While this topic is well beyond the scope of this paper, it is important to note that since the decision of the Supreme Court of Canada in Ordon v. Grail in 1998 there has been a steady expansion of the likely application of provincial statutes to matters which otherwise are considered to be the subject of Canadian maritime law. A recent and somewhat curious example of this was seen in Quebec Inc. v. Canada, where the Federal Court held that the applicable law governing the sale of a vessel was the Civil Code of Quebec on the grounds that it would not impair federal jurisdiction over navigation and shipping. Although this decision may be correct in light of the jurisprudence set out by the Supreme Court of Canada in Marine Services International Ltd. v. Ryan Estate, it is problematic to the extent that it may give rise to the inference that such a sale is solely governed by provincial law as the Canada Shipping Act, 2001(the CSA 2001 ) clearly applies to the sale of registered vessels.

3 3.1.2 The relevance of the jurisdictional confusion is significant in the context of vessel financing due to the fact that there is potential overlap between the application of the provincial Personal Property Security Act (the PPSA ) and the CSA as it relates to the taking of security. Caution should therefore always be taken to ensure that security is registered under the correct statutory regime. Which statutory regime is appropriate will in large part be determined by the nature of the vessel which forms the subject matter of the collateral in each case. II. The Statutory Regime Security to be taken over vessels in BC is governed by the CSA 2001 or the PPSA, or both, depending on the type of vessel and the type of security instrument to be taken. The CSA 2001 came into force on July 1, 2007, and contains a number of provisions relevant to vessel security filings. The CSA 2001 establishes the Canadian Register of Vessels which includes a main register (the Register ) and a separate register for small commercial vessels (the Small Vessel Register ). Perhaps one of the first questions to be answered is what constitutes a vessel? Under the CSA and subject to a few limited exceptions, a vessel is defined as a boat, ship or craft designed, used or capable of being used solely or partly for navigation in, on, through or immediately above water, without regard to method or lack of propulsion, and includes such a vessel that is under construction. This definition is extremely broad and includes such things as barges, jack up rigs and most forms of pleasure craft. Under the CSA 2001, there are four main types of vessels: registered vessels, small registered commercial vessels, recorded vessels, and pleasure craft. A fifth type of vessel contemplated by the CSA 2001 is called a listed vessel. This refers to a bareboat chartered vessel temporarily registered in Canada while its foreign registration is temporarily suspended. This type of vessel is very rare in Canada, and inquiries concerning security over listed vessels should be referred to an experienced maritime practitioner. III. Registered Vessels The CSA2001provides for the registration, listing, or recording of commercial vessels on the Register at the Registry of Vessels office in Ottawa. Canada s vessel registration system is based on the provisions of the British Merchant Shipping Act 1894 which were incorporated into the Canada Shipping Act in 1934, and are now contained in the revised CSA According to material published on the Transport Canada website: Registration is a title system for ownership of vessels. It is similar in nature to title systems used for land registry. Registration allows for name approval, mortgage registration and proof of ownership except in the case of a vessel registered in the Small Vessel Register. This statement, however, overreaches. By way of example, under s. 23(2) the Land Title Act (BC), subject to certain exceptions, a certificate of indefeasible title issued by the registrar is conclusive evidence at law and in equity, as against the Crown and all other persons, that the person named in the title as registered owner is indefeasibly entitled to an estate in fee simple to the land described in the indefeasible title. There is no similar provision in the CSA2001 and ship registration is not conclusive evidence of legal ownership of the vessel.

4 3.1.3 Every vessel that exceeds 15 gross tons, is wholly owned by qualified persons, is not a pleasure craft, and is not registered in a foreign country must be registered on the Register under the CSA. A qualified person means a Canadian citizen or permanent resident within the meaning of s. 2(1) of the Immigration and Refugee Protection Act or a corporation incorporated under the laws of Canada or a province. Commercial vessels under 15 gross registered tons may be and often are registered voluntarily on the Register. Pleasure craft, no matter how large, no longer need to be registered under the CSA, but, like smaller commercial vessels, they may voluntarily register on the Register. They are otherwise to be licensed under Part 10 of the CSA 2001 and the Small Vessel Regulations, SOR/ Licences are issued by Transport Canada. The application form for licensing a pleasure craft can be found at It should be noted that the licensing system established for pleasure craft should not be considered in any way to be a register of legal or beneficial ownership of the vessel for any purpose, including vessel financing. Commercial vessels under 15 gross tons must be registered on the Small Vessel Register. The Small Vessel Register has all the characteristics of the Register except that small vessels need not have names, and, more importantly, ship s mortgages cannot be registered against vessels on the Small Vessel Register. This latter distinguishing feature makes it less desirable should any financing be required in relation to the acquisition of the vessel. The CSA 2001 also provides in s. 47(b) that a vessel owned by a foreign corporation may be registered under the CSA 2001 so long as one of a Canadian subsidiary of the foreign corporation, an employee or director at a branch office in Canada of the foreign corporation, or a Canadian ship management company is acting with respect to all matters relating to the vessel. Each registered vessel on either register is divided into 64 shares, and a person can own any number of shares from one to 64. Shares can be jointly owned by up to five individuals, but ownership of fractional shares is not allowed. A vessel on the Register, or any share of it, may be security for a loan by way of a ship s mortgage. Where the vessel is neither recorded or registered the property in such vessel may be charged by any methods recognized by at law for the taking of security in chattel or personal property. The CSA 2001 augments the security of a mortgage to the extent that it provides a statutory scheme of registration whereby the mortgagee can give notice that they have an interest in and over a particular vessel. However, even a statutory mortgage does not give a mortgagee comprehensive security for repayment to the extent that the vessel may move to jurisdictions or ports where the mortgage will not be enforced. In addition, other unregistered maritime or statutory liens may take priority over the registered mortgage depending upon the circumstances of the particular case. Registry of Vessels forms, including mortgages, are in a form approved by the Chief Registrar. As a result, the forms may and do change from time to time and are available from the Vessel Registration Office in Ottawa or online at The rights and remedies available to a mortgagee granted in the CSA 2001 are usually supplemented by a collateral marine agreement that is not filed at the Registry of Vessels but is incorporated by reference into the form of mortgage. The one page form of mortgage published by Transport Canada, identified as Form 7, is found at the Transport Canada website. Only two statutory mortgage forms are acceptable for registration: to secure a principal sum and interest and to secure an account current.

5 3.1.4 The CSA 2001 also provides in s. 47(c) and s. 53(3) for registration of a financing agreement concerning fishing vessels pursuant to the operation of s. 428(5) of the Bank Act (Canada) at the Registry of Vessels, but it is at present difficult to determine how such agreements are to be registered, and they have accordingly been rarely, if ever, used in BC. A mortgage of a vessel or a share of a vessel does not constitute a transfer of title to the ship to the mortgagee. Section 68 of the CSA 2001 states that the mortgage of a vessel does not have the effect of the mortgagee becoming, or the mortgagor ceasing to be the owner of the vessel, except to the extent necessary to make the vessel or share available as security under the mortgage. Mortgagees are entitled in priority as between themselves according to the time and date on which each mortgage is accepted for entering in the register and not according to the date of the mortgages. Any variation of the priority so established can be agreed between the mortgagees, provided all of the mortgagees file their written consent with the Chief Registrar. The CSA 2001 is, however, silent as to all other security interests to and over the vessel, including unregistered non-mortgage interests or other interests that may be granted under provincial legislation. Issues of priority in these circumstances remain unclear. The PPSA continues to apply to a security interest in recorded and registered vessels, but not to a mortgage under the CSA 2001 pursuant to s. 4 of the provincial act. The statutory mortgage charges not only the vessel itself but also its appurtenances. The case law suggests that appurtenances include all of the vessel s machinery and equipment needed for navigation. An item of equipment placed on a vessel that does not come within the definition of appurtenance under the case law will remain personal property and can be charged by the grant of a security interest in all personal property on or used in connection with a vessel that is not otherwise covered by the charge created by the mortgage. Most collateral marine agreements now contain a charging clause that grants a security interest in any personal property associated with the vessel that might not be covered by the mortgage. When the description of collateral contains such a clause, or where a separate security agreement is taken, it will be necessary to register the mortgage at the Registry of Vessels and a financing statement at the Personal Property Registry. Refer to s. 10 of the Personal Property Security Regulation (the Regulation ) for correct use of serial, licence, and official registration numbers. It should also be noted that the Regulation (s. 10) contemplates the filing of financing statements over vessels registered on the Register (not the Small Vessel Register) under the CSA 2001, but the efficacy of such filings is questionable (see Ordon Estate v. Grail, [1998] 3 S.C.R. 437). The proper venue for registration of security over registered vessels is clearly the Registry of Vessels. IV. Recorded Vessels Under the CSA 2001 a vessel proposed to be built or one under construction may be recorded in the Register (s. 49), although the actual recording of such a vessel is not mandatory. A recorded vessel may be security for the repayment of a debt or the discharge of other obligations by way of a builder s mortgage in the form approved by the Chief Registrar. The form published by Transport Canada, identified as Form 16, is found at the Transport Canada website. This type of mortgage charges the vessel throughout the building phase. A builder s mortgage continues to operate as if it were a mortgage made after the vessel becomes a registered vessel. However, practitioners often replace this type of mortgage with a Form 7 mortgage once the vessel has become registered. Either or both of a vessel construction contract or collateral marine agreement is usually obtained and would contain additional security terms and conditions collateral to the

6 3.1.5 builder s mortgage. If a vessel under construction is, on completion, to be delivered and registered outside the jurisdiction of Canada, particular caution should be exercised by counsel for the lender. The record for the Canadian vessel should be cleared and the mortgage discharged before the vessel is registered in a foreign jurisdiction; this requirement is not always met, and a priority dispute could result. In such a situation, an experienced maritime practitioner should be consulted. It is worthwhile noting that personal property and serial numbered goods not yet installed in a vessel under construction may be and often is subject to registered security interests under the PPSA. V. The Small Vessel Register and Pleasure Craft Commercial vessels under 15 tons must be registered on the Small Vessel Register. Under the CSA 2001 and the Small Vessel Regulations, SOR/ , pleasure craft equipped with a motor or motors that have an aggregate power greater than 7.5 kw (approximately 10 horsepower) are required to be licensed. There is no requirement to license or register vessels that are not governed by the CSA 2001 or its regulations, and vessels (such as canoes and small skiffs) that are neither registered nor licensed are treated like any other serial numbered goods under the PPSA. Refer to s. 10 of the Personal Property Security Regulation regarding the appropriate means of registering by serial number as that term is defined in s. 10 and s. 12(5) when a repairer wishes to file a lien and the vessel has not been registered, recorded, or licensed. Licensed vessels (including vessels required to be on the Small Vessels Register) were previously identified by a number with a one- or two-digit and one-letter prefix. For example, in Vancouver all licensed vessels began with the number 13K. Toronto used the prefix 50E. Each province has a different letter designation. Licensed vessels were distinguished by the licence numbers, such as 13K 1234, displayed on them and recorded at Canada Customs. In 1999, Transport Canada initiated a new system of small vessel commercial licensing. Under this system, small commercial vessels in BC began to be issued licences beginning with the letter C, followed by six digits and the letters BC. This identification system is continued on the Small Vessel Register. It should also be noted that numerous small commercial vessels have still not converted to the new licensing system and are, therefore, still identified by their old licence numbers, although under the CSA 2001 they are now required to be registered. Pleasure vessels in BC under the new licensing system are now identified with a licence number starting with the letters BC followed by a six-digit number. Pleasure vessels licensed under the old system retain their 13K numbers. It is prudent to conduct a PPR search using the registry or licence number, if the vessel has one, and for any pleasure craft or small vessel to which the Small Vessel Regulations apply (see s. 2 of the Regulations), but a serial number search should also be conducted for the serial number referred to in s. 10(1)(f) of the Personal Property Security Regulation, which is the serial number that is permanently marked on, or attached to, the boat by the manufacturer. This number, which is the serial number referred to in ss. 900 to 904 of the Small Vessel Regulations, is located on the upper starboard quarter of the outside surface of the transom, or, if the vessel has no transom, on the uppermost starboard side at the aft end of the hull. Although there remains some question as to whether provincial personal property regimes can legitimately intrude into federal jurisdiction over vessels (see Ordon Estate v. Grail, [1998] 3 S.C.R. 437), there are no provisions for taking a CSA 2001 mortgage over a licensed pleasure vessel or

7 3.1.6 vessels on the Small Vessel Register. Licensed vessels and vessels on the Small Vessel Register are accordingly treated as personal property within the meaning of the PPSA, and security interests in them are dealt with in the same way as any other kind of security interest in personal property, except that it is important to note that boats are serial numbered goods as defined in the Personal Property Security Regulation. It should be noted again that lenders often insist that small commercial vessels or pleasure vessels be registered on the Register, in order that a proper ship s mortgage can be registered under the CSA A. Vessel Searches 1. General Searches When a person takes a security interest or mortgage over a vessel, the starting point of searches will be the same as with any other type of financing. If the borrower is a corporation, for example, the same types of searches would be done as if security were taken by a general security agreement. In addition, some specific searches are necessary. See also chapter 38 of the Due Diligence Deskbook. 2. Registry of Vessels The Registry of Vessels is the office where any mortgages against a recorded vessel or a vessel on the Register will be found. The register of a vessel will contain details of the vessel, including date of construction, date of registration, overall length, tonnage, and method of propulsion. The transcript of registry for a vessel on the Register (which can be obtained from the Registry of Vessels for a fee) should be examined for: (a) (b) (c) particulars of the vessel, such as its official number and dimensions (required for the ship s mortgage); particulars of any registered mortgages; and registered priority agreements and financing agreements. It is important to note that a vessel transcript will not reveal maritime or other liens that may exist in respect of the vessel being searched. Indeed, unknown possessory, statutory and maritime liens may cloud title to the vessel and counsel should be extremely wary of purporting to give any opinion in that regard. Vessels on the Small Vessel Register are no longer covered by the Privacy Act, and particulars of their registration can now be obtained, but this is of limited utility since the Small Vessel Registry does not disclose mortgages or encumbrances. For pleasure vessels, a copy of the current licence, and, for both pleasure vessels and vessels on the Small Vessel Register, the prior bill of sale can be requested from the borrower, and the owner name and licence number should be searched at the Personal Property Registry. 3. Bank of Canada If a vessel is a fishing vessel or is inventory of the borrower, security may be taken under s. 427 of the Bank Act, and such a vessel should accordingly be searched at the Bank of Canada in addition to the other searches. If the security is over a fishing vessel that is a recorded or registered vessel, a copy of the document giving the security must be recorded in the Registry of Vessels in order to preserve priority over other mortgages (see the Bank Act, s. 428(5) and (6)). The copy of the

8 3.1.7 security agreement once registered under the CSA 2001 is deemed to be the same as if it was a mortgage registered under that Act. Failure to record the s. 427 interest will result in loss of priority as against subsequently registered ship s mortgages at the Registry of Vessels. If the Bank Act assignment predates the subsequent registration of the vessel, that assignment (although unregistered) may have priority over a subsequently registered mortgage at the Registry of Vessels (Royal Bank v. Queen Charlotte Fisheries (1981), 13 B.C.L.R. 306 (S.C.), aff d (1983), 50 B.C.L.R. 128 (C.A.)). 4. Fisheries and Oceans Canada, Licence Section If the vessel is a fishing vessel, its usefulness as such is dependent upon the licences that it must have to participate in various fisheries. This search is done to establish the existence and good standing of such licences. A search for fishing licences associated with a fishing vessel can be done online at the Fisheries and Oceans Canada website and the current status of the licences should be checked by a telephone call to the DFO commercial licence unit. Under the federal Fisheries Act, fishing licences are privileges issued by the Minister of Fisheries and Oceans Canada (the DFO ). The DFO has for many years insisted that there is no property in fishing licences, as stated in regulations to the current Fisheries Act. It has, however, nevertheless been fairly common practice for lenders or others with an interest in fishing licences to file financing statements in respect to fishing licenses at the Personal Property Registry, if for no other reason than to give notice of their claim against the licences. In Saulnier v. Royal Bank of Canada, 2008 SCC 58, the court held that a fishing licence is personal property within the meaning of that term in the Nova Scotia PPSA, and also within the meaning of property in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. The British Columbia PPSA wording was more restrictive than the Nova Scotia PPSA; however, Bill 5, the British Columbia Personal Property Security Amendment Act, 2011, enacted in November 2011, expands the definition of licence in the PPSA to encompass a broader range of licences, including fishing licences. The Personal Property Security Amendment Act, 2011 came into force on September 1, As a result, it is advisable to perform an owner search at the Personal Property Registry and to treat fishing licences as personal property for security filings. As a result of the decision in Saulnier, and in response to concerns expressed by the fishing and financial service industries relating to the need for access to capital, the DFO established a Notice and Acknowledgement for Recognized Financial Institutions process in the various regional fisheries to notify the DFO of any agreement between a fish harvester and a recognized financial institution. For vessel based licences in the Pacific Region, a licence holder is often a vessel; therefore, financial arrangements are made with the vessel owner(s). Following the filing of a notice, for any subsequent request for a transfer of the licence or the transfer of quota for more than one fishing season, the notice will be considered by the DFO in determining whether to grant the transfer. A completed acknowledgment must be filed when a transfer is requested. 5. Federal Court and British Columbia Supreme Court Actions against vessels in rem (that is, the vessel is a separate defendant) may be conducted in the Federal Court and BC Supreme Court. Such claims can take priority over mortgagees and survive a transfer of title. Both Federal Court and Supreme Court searches should be conducted in respect of both the current and prior vessel names. It is also good practice to search the name of the vessel owner. There are now online search systems in place for both the Federal and BC Supreme Courts. Postings of filed court actions are not always up-to-date in the BC Supreme Court system. There

9 3.1.8 are also occasional data entry problems in both systems, but there is no economical alternative to the online searches, particularly in the case of the BC Supreme Court, where there are numerous registries in which actions can be filed. Clients should accordingly be warned that there is a residual risk of in rem claims and unregistered maritime liens that might affect the vessel. Maritime liens are claims against a vessel that are unaffected by a change of ownership. Traditionally, maritime liens at common law include claims for damage done by a vessel, salvage, and crewpersons wages. 6. Personal Property Registry This type of search is necessary for pleasure vessels, vessels on the Small Vessel Registry, recorded vessels (with an official record number), vessels that are under construction and are not recorded, and for any equipment on any vessel that may not be an appurtenance. In fact, if there are no mortgages registered at the Registry of Vessels against a registered vessel, a security interest in such a vessel filed at the Personal Property Registry is authorized under the PPSA, since the PPSA provides only that it does not apply to mortgages under the CSA There are complex jurisdictional questions surrounding such charges, but a Personal Property Registry search is nevertheless recommended for all vessels. For registrations, the Personal Property Security Regulation includes boats as serial numbered goods. A boat is defined as a vessel that is designed for transporting persons or things on water and that is propelled primarily by any power other than muscle power. As such, the collateral description of a boat must be in accordance with the Regulation (s. 10). If the boat is described by a serial number and can be registered, recorded, or licensed under the CSA 2001 or its Regulations, the serial number used in the description must be the number assigned under the CSA 2001 or its Regulations. If the boat cannot be registered, recorded, or licensed under the CSA 2001 or its Regulations, the serial number to be used in the description is the serial number that the manufacturer permanently marks on or attaches to the boat. For an outboard motor, the number to be used is the serial number marked on or attached to the motor by the manufacturer. (See also Regulation, s. 10(1)(e), (f), and (g) and 12(5).) It is also advisable to search the names of each owner. In some cases it is difficult to tell from the collateral description in the registrations against a debtor whether the vessel has been charged. Consider, for example, whether the vessel might be part of the debtor s inventory. If any doubt arises, the conservative approach is to obtain confirmation and releases or subordinations from the secured party. Under s. 3 of the Repairers Lien Act, a party bestowing money, skills, or materials on a boat has a possessory lien that, by following the provisions of that Act, can be turned into a non-possessory lien. The lien is filed by filing a financing statement under the PPSA. There are some interesting priority issues and constitutional issues surrounding the priority of such a lien as against a ship s mortgage subsequently granted. For example, in Finning Ltd. v. Federal Business Development Bank (1989), 34 B.C.L.R (2d) 237 (S.C.), the court held that since the plaintiff s lien was not a valid possessory lien under federal law, it ranked after the defendant s mortgage registered under the Canada Shipping Act. A solicitor planning a new ship s mortgage would wish to be assured of priority before proceeding in the face of such a prior PPSA filing. Notice of charters of vessels registered and unregistered may be filed under the PPSA. It is usually worth checking for other security granted by the vessel owner that may encumber equipment for example, security on a crane, which may not be charged by a CSA 2001 mortgage. For other searches that may be advisable, including the possibility of maritime liens that would not be disclosed by searches, refer to chapter 38 of CLEBC s Due Diligence Deskbook.