When The Ship Goes Down: Creditor Priorities in a Court-Ordered Ship Sale

Nov 17, 2022

Nobody wants to be part of a court-ordered ship sale; it usually means there are many losers to one degree or another. However, knowing the order of priorities can help a creditor avoid missing out on receiving satisfaction of debts they were entitled to or being burned by unnecessary legal fees.

The case of the “Phoenix Sun” (Ballantrae Holdings Inc. v. The Ship Phoenix Sun, 2016 FC 570) is a tragic tale of the end of an old ship, ambitions that were perhaps too great with many parties losing.

The ship was under arrest when she was purchased; the goal was to find cargo and sail her to Turkey where she could be sold as scrap for a profit. The ship was purchased using funds advanced by Ballantrae, who wisely secured a mortgage against the ship. However, the mortgage was registered as a charge under the Ontario Personal Property Security Act rather than in the ship registry.

Crew, chandlers, and repairers were hired and provided goods and services to the vessel. More funds were obtained from a Mr. Hamilton.

Alas, the funds for the venture soon ran out and the ship was again arrested, this time by Ballantrae. She was sold for $680,000, far short of the claims against her. The Court was then called on to adjudge and rank the claims against her. These claims included:

  • Marshall fees for bringing the ship to sale;
  • Ballantrae for its costs in bringing the ship to sale;
  • Master and crew for amounts due under their employment contracts;
  • The local municipality for cost of berthage and supplying electricity;
  • Various necessaries suppliers who claimed lien rights under section 139 of the Marine Liability Act;
  • Mr. Hamilton, who also claimed a lien under section 139;
  • Ballantrae for the amount due under the mortgage; and
  • A company named Skylane which claimed it had a mortgage registered in Panama.

First up were the Marshall’s fees. These are virtually always paid in full and were first to be satisfied in this matter. It is so clear that in this matter the Marshall’s fees were paid in full prior to even the Court decision. Ballantrae then received funds, but only the amount it cost to bring the ship for sale. The claim for the mortgage funds was separately ranked lower.

Afterwards, Master & crew claims for wages and benefits. Who qualifies as crew is an important distinction; a vendor claimed to be crew but was found to only be a supplier and ultimately receiving nothing. Those who were found to be crew were paid their outstanding wages.

The local municipality had been providing free berthage and electricity to the vessel. The Court found the municipality had no priority in ranking but exercised its equitable jurisdiction to vary the order of priorities. A court may do this when the interests of justice require it. On this basis, the municipality was awarded the costs of electricity. After this award, came the claims of various necessary suppliers.

Next was Ballantrae’ s mortgage. As it was not registered in the ship registry, it was a legal, unregistered mortgage which would have difficulty ranking ahead of subsequently registered mortgages. It could outrank equitable charges and in rem claims of creditors. However, right holders in British Columbia should beware; the BC PPSA does not apply to security agreements such as a mortgage under the Canada Shipping Act. To be safe, ship mortgages should be registered in the ship registry.

In this case, Ballantrae’s mortgage took up the balance of the remaining funds. Mr. Hamilton received nothing, as he was found to have been part of the venture to begin with and thus not a creditor. He took the risk when the ship was purchased. Skylane also did not receive any funds, as the mortgage was registered while the ship was under arrest and there was evidence that the mortgage was invalid under Panamanian law.

If you have an outstanding claim against a ship, the actions you take could determine whether you receive full, partial, or zero satisfaction of the amount owed to you. There are sometimes many creditors waiting to pick the ship clean, and it could leave you high and dry. Contact a marine lawyer to help you navigate this complicated situation.