The Advocate
Informing Marine Engineers about legal matters
Authored by: Darren Williams, Williams & Company
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Wage Claimants Proceed Against Asset Outside of Bankruptcy, Trumping Previously Registered Mortgage
The interplay between bankruptcy and maritime law continues to
surprise bankruptcy
lawyers to the pleasure of their counterparts in admiralty. In
Nanaimo Harbour Link
Corporation v. Abakhan & Associates (Trustees) Inc. (2007 B.C.S.C.
109) the B.C
Supreme Court was asked to determine whether a maritime lien claim
for seamens'
wages could be brought against a bankrupt's vessel despite the
statutory stay of
proceedings under s.69.3 of the BIA.
The insolvent Nanaimo Harbour Link Corporation owned as its only
significant asset a
catamaran fast-ferry that provided passenger service between Nanaimo
and Vancouver.
When the insolvent filed a notice of intention to file a proposal to
creditors in February of 2006 the first-position mortgagee took
possession of the vessel as a secured creditor
outside of the insolvency proceeding and attempted to sell the
ferry.
The insolvent's trustee, Abakhan, recognized the mortgage as valid
security far in excess of the value of the vessel and waived their
claim to the vessel. Meanwhile, 23 crew members and a ship repairer
brought in rem claims against the vessel and arrested the vessel
while in the possession of the mortgagee. The crew and repairer
declined to release the vessel so that the mortgagee could sell the
vessel under its self-help remedy, and the mortgagee
declined to recognize the crew and repairer's alleged maritime lien
claim in priority to the
previously registered mortgage.
The crew and the unpaid repairer each brought an application in the
insolvency
proceeding for a declaration under s.69.4 of the BIA that their
actions were not stayed by
s.69.3. The crew members, who claimed for unpaid wages and damages
for wrongful dismissal
due to insolvency (under the rule in Chene v. CIBC (2002 F.C. 873))
asserted their claim
was a maritime lien which by law ranked ahead of the prior
registered mortgage, and was
also a "secured claim for the purposes of s.69.3 of the BIA (and
therefore was not stayed
by the bankruptcy proceeding). The mortgagee asserted, inter alia,
that the BIA was a complete code, that maritime law had no application in determining
priorities in
bankruptcy proceedings, and the seamen were "wage" earners within
the meaning of
s.l36(1)(d) of the BZA and were therefore not secured.
In deciding Nanaimo Harbour Link, Justice Nicole Garson framed the
issue as being
whether "liens, when proven as maritime liens, are secured claims
having priority to the
ship's mortgage or if the claims are to be determined under the BIA
as unsecured claims
to debt, thereby ranking behind the ship's mortgage".
In deciding the issue the court looked at the unique nature of a
maritime lien. The court
quoted Justice William Binnie in Holt Cargo Systems Inc. v. ABC
Containerline (2001 3
SCR 907) as saying: "broadly speaking, a maritime lien arises
without registration or other
formality when debts of a specific nature are incurred by or on
behalf of a ship. The lien creates a charge which "goes with the
ship everywhere, even in the hands of a purchaser for value without
notice, and has a certain ranking with other maritime liens, all of
which take precedence over mortgages" (The Tolten, [I9461 P. 135
(C.A.), per Scott L.J., at p. 150). It may be described, in that
sense, as a "secret lien".
The reason for this privileged status for maritime lien holders is
entirely practical. The ship may sail under a flag of convenience.
Its owners may be difficult to ascertain in a web of corporate
relationships (as indeed was the case here, where initially Holt
named the wrong corporation as ship owner). Merchant seamen will not
work the vessel unless their wages constitute a high priority
against the ship".
Justice Garson addressed the interaction of bankruptcy and maritime
law as it was
discussed in Holt Cargo. In addressing the mortgagee's argument that
seamen were wage
earners and s.l36(1)(d) of the BL4 provided a subordinate position
in the distribution of
proceeds for wage earners, the court quoted Justice Binnie in Holt
in noting "a 'maritime
lien is a secured claim' with the meaning of s.136 of the BIA ...[a
nd] ... Binnie J . noted
that "'the policy of the [BZA] in the case of bankruptcy is not to
interfere with secured
creditors except in so far as may be necessary to protect the estate
as to any surplus on the assets covered by the security"'.
The court concluded that the seamen were secured creditors within
the meaning of s.136(1), and they were therefore entitled to an
order under s.69.4 that the statutory stay under 69.3 was not
applicable. In effect, this allowed the lien claimants to proceed to
prove their claims in admiralty court and, the vessel being
arrested, apply to sell the vessel and distribute the proceeds of
sale to themselves in priority to the prior registered mortgagee.
While the decision in Nanaimo Harbour Link was made in December of
2006, an appeal was abandoned in May of 2007.
Darren Williams is a Barrister and Solicitor (Lawyer) specializing in Admiralty Law, which has jurisdiction over maritime matters. Darren has worked extensively on the water as well as in the courtroom. He is a Barrister & Solicitor based out of Victoria, British Columbia, Canada, practicing at the Law Firm of "Williams & Company".
On this webpage, he brings us timely and relevant articles on the legal aspects of being a Marine Engineer in today's world. Although the articles have a predominately Canadian flavour, we are sure you will find his legal point of view enlightening where ever you ship sails. Darren has also published other legal articles on general admiralty law, view them all at the Williams & Company website. You can reach Darren for question or comment by phone at 250-478-9928 or by email.