A recent judgment by the High Court in its admiralty jurisdiction extended the protection afforded to lien holders when the property subject to their lien is arrested. The court has held that an application for arrest by a possessory lien holder and the subsequent handover of possession of the vessel to the admiralty registrar did not destroy the possessory lien, so that the lien holder was entitled to priority payment from the proceeds of sale of the vessel ahead of other claimants.

Facts

The M/V Southern Pasifika, a three-hold container vessel, was owned by a German entity and registered in the Emden ship register. Two mortgages were registered over the vessel. In February 2011 the vessel arrived in New Zealand waters needing substantial repairs. The owners engaged Babcock Fitzroy Limited to carry out the repairs in its dry dock in Auckland. Babcock insisted that payment was needed in full before the vessel would be permitted to leave the dry dock. Work commenced and the crew remained onboard. The cost of the work was over NZ$1.5 million. The mortgagee of the vessel was unaware of the repairs until they were almost complete.

Despite the terms of the agreement, Babcock not only permitted the vessel to leave its dry dock, but also had the vessel moved to a repair berth that it leased from the New Zealand Navy. Once most of the work was complete, the vessel left the repair berth and was berthed at the Ports of Auckland for a six-day period in order to make room for a Navy vessel.

Payment for the repair work was not received after completion. Babcock asserted a possessory lien over the vessel. It also filed an in rem claim against the vessel in the High Court. Its claim was not defended and Babcock obtained judgment by default, along with orders for arrest, appraisement and sale of the vessel. The orders for arrest and sale were sought and made on the basis that they were without prejudice to Babcock's possessory lien. The orders were made without notice to the other interested parties.

Once the proceedings came to their attention, several other parties intervened and brought their own claims against the vessel. The master and crew brought a claim for unpaid wages and were paid out by the registrar as a cost of arrest. The charterer brought a claim for amounts due under the charterparty. The mortgagee also brought a claim for unpaid amounts under the mortgages.

The vessel was sold through the usual Admiralty Court process, but the funds obtained were insufficient to meet the claims of all parties. Accordingly, an application was made for the court to determine the order of priorities between the parties.

Parties' positions

Babcock claimed that its claim had priority over the claims of the other parties on the basis that it had had a possessory lien (which has priority over mortgages and other claims) and that the order for arrest and sale preserved its priority, even though it did not retain possession. The mortgagee claimed that:

• the priority afforded to possessory lien claims could not be maintained if possession was given up;
• by bringing an in rem claim and application for arrest, Babcock had given up possession and therefore destroyed its lien; and
• the orders obtained without notice could not create a notional lien so as to preserve priority – the correct time for the determination of matters of priority was at the priorities hearing at which all parties were represented.

Neither of the other interveners took part in the priorities application.

Authority

The issue to be decided in the application on priorities was novel in New Zealand law. In the English admiralty jurisdiction, the courts have traditionally allowed a possessory lien holder to assert priority over other claimants where a third party had arrested the vessel so that the lien holder was forced to give up possession (thereby losing its lien). The rationale for this approach is that the court should strike a balance between the rights of a lien holder under common law and the rights of claimants within the admiralty jurisdiction in order to prevent a situation which a lien holder would refuse to surrender possession to the admiralty registrar. The issue of whether this protection should be extended to a lien holder that brings the application for arrest itself has not been considered in the English admiralty jurisdiction. However, the issue has been considered in Singapore, where the courts have extended the protection afforded to possessory lien holders to maintain their priority, even when the possessory lien holders themselves applied for the arrest of the vessel over which they claimed a lien.

Decision

The High Court held that until the time of arrest, Babcock had - and maintained - a possessory lien over the vessel. It held that although Babcock had lost possession by having the vessel arrested and sold by the court, it was entitled to priority over the other claimants. The court saw its decision as a pragmatic extension of the English position, and one which was consistent with the position in Singapore. If possessory lien holders were to maintain priority when admiralty jurisdiction was invoked by another claimant, but were to lose priority when it invoked the jurisdiction itself, the result could be a stalemate, with neither party wishing to arrest the vessel for fear of losing priority.

The court did not consider that the statutory right available to possessory lien holders in New Zealand to seize and sell goods was relevant to the issue, as it did not see the statutory right as creating a viable alternative to judicial sale in the admiralty process.

Endnotes

(1) Babcock Fitzroy Limited v The Ship "The M/V Southern Pasifika" [2012] NZHC 1007.

(2) See The Dwima 1 [1996] SGHC 83; [1996] 2 SLR 670.

(3) Section 3 of the Wages Protection and Contractors' Liens Act Repeal Act 1987.