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Sailing, Flying and Rolling: the seriously complex network connecting mortgages over extremely movable property


 

The Australian Government is currently reviewing Australia’s Personal Property Securities (PPS) law with potential reforms likely. This review and reform may potentially impact the operation of PPS laws in Pacific jurisdictions, something of which you can read about here.

 

Despite expectations, the PPS law in Australia, and elsewhere across the Pacific, doesn’t touch every type of movable property. For example, many jurisdictions exclude marine vessels over a certain size from the application of PPS law, and aircraft are usually excluded. This article highlights the gaps across some PPS regimes across the Pacific, and how alternative security can be taken over these forms of property.

 

This mish mash of laws creates issues for the enforcement of security interests and drives up the cost of transactions relating to large chattels. These issues could be addressed through a uniform regionally focused amendment to the laws.

 

The inundation of laws affecting security interests over maritime vessels

 

Whether a PPS security interest can be granted and registered over a vessel differs between jurisdictions. In Vanuatu, Samoa, Tonga, Solomon Islands and the Cook Islands, ships that are required to be registered under maritime law cannot be subject to a security interest under PPS law.[1] In Fiji and PNG, a security interest over a vessel may be perfected under the PPS law, however it will have subordinate priority to a security granted over a vessel under maritime law.[2]

 

There are usually two places that a marine vessel can be registered, namely a domestic registry or international registry. Domestic registries will allow a ship to be used in the contiguous waters of a jurisdiction, while a vessel that has an international registration can be used to navigate between countries and in international waters.

 

Domestic registries generally allow for the registration of charges and other security interests over registered vessels. However, coverage is jurisdictional, meaning if a vessel is removed from a country, it becomes very difficult to enforce a security interest.

 

Countries such as Vanuatu and Marshall Islands operate international vessel registries that are favourable to vessel owners and operators on a regulatory and financial basis. When a vessel is registered on an international register, security can be taken against the vessel, such as a mortgage.

 

The Vanuatu International Registry for example, allows for the recording of a range of security interests attaching to registered vessels. Importantly – a sale, conveyance, hypothecation, mortgage or assignment may not be validly attached against a vessel until the instrument evidencing the transaction is recorded with the registry.[3] Recordation also gives notice to other parties regarding the legal rights and interests attached to registered vessels, thereby creating a priority regime.

 

The turbulent laws governing aircraft, helicopters and airframes

 

In Vanuatu, Samoa and Tonga aircrafts are included in the application of PPS law, therefore a security interest may be perfected over aircraft in the manner stipulated by the PPS law. Meanwhile in Solomon Islands and the Cook Islands, aircraft cannot be subject to a security interest under PPS law.[4] In Fiji and PNG, a security interest over aircraft may be perfected under the PPS law, however it will have subordinate priority to a security granted over that aircraft under aviation law.[5]

 

Additionally, civil aviation law operating in each jurisdiction allows for the registration of mortgages and other forms of security interests over aircraft. The overlap of laws means that in one jurisdiction an aircraft may have both a PPS security interest and a registered mortgage.

 

Similar to maritime vessel registration, aviation registry operates in the Pacific on a domestic basis, meaning that enquiries, regulatory oversight and enforcement is still conducted through domestic agencies and courts.

 

To complicate things further what is deemed to be an aircraft differs from jurisdiction to jurisdiction. The consensus is that security over aircraft can be taken with respect to the following categories of movable property (meaning care is needed to check what has or has not been secured):

 

  • aircraft engines;

  • airframes; and

  • helicopters.

 

Issues that may arise for security over extremely movable property

 

These are some of the issues that businesses operating in the Pacific should consider in this area:

 

  1. Locating and identifying collateral - the ways in which collateral is identified can differ from jurisdiction-to-jurisdiction, particularly with ships and planes.

  2. Conflict of laws - the law that applies to certain collateral differs from jurisdiction to jurisdiction and with reference to different international treaties. For example, in some jurisdictions a court will apply lex situs (the law where the collateral is located), while in others a court may apply the law of where the debtor is located.[6] The application of conflict of laws provisions may impact the priority of security interests, the method of enforcement and even the remedies available. 

  3. Increasing transaction costs - these arise because of complex, overlapping and unclear legislative frameworks.

  4. Inconsistent outcomes - for both financiers and the owners of highly movable property, significant risk arises from the inconsistency between domestic laws and the associated uncertainty.  

 

Pathway towards a uniform system? 

 

There have been attempts to simplify and reform the rules around financing transactions over highly movable property. These attempts vary in their scope and success. For example, the Geneva convention on the registration of inland navigation vessels (1965) attempted to make consistent international rules so that the law of where the debtor was located would be applied in transactions concerning regards to vessels only operating in inland waters. [7] 

 

In 1992 the International Institute for the Unification of Private Law (UNIDROIT) was considering an international convention that would govern secured transactions for all types of movable property.[8] UNIDROIT’s aspirations led to the eventual Convention on International Interests in Mobile Equipment (2001) (Cape Town Convention) (CTC), of which an Aircraft Protocol has been adopted by 83 states.[9] The CTC and Aircraft protocol establish a truly international registry, and associated priority and enforcement rules that apply to being aircraft engines of a particular power, airframes of a particular size and helicopters.[10] The CTC and Aircraft Protocol also offer a variety of new enforcement options that reduce creditor risk, by creating standardised rules for enforcement.

 

Despite the benefits of a uniform aircraft regime, the only Pacific Island state parties to the Aircraft Protocol are Fiji and Tonga.

 

Further reform is required and ongoing, and in a Pacific context financiers and businesses operating in the Pacific need to remain cognisant of the jurisdictional differences that remain relevant to transactions affecting ships, planes and other extremely movable property.  

 

The Pacific Legal Network has more than 21 locations between Singapore and American Samoa. We have a talented and engaging Banking and Finance Team in many locations. Please contact us for any enquiries or more information.



 

[1] Personal Property Security Act 2012 (Vanuatu) s 11(k); Personal Property Securities Act 2013 (Samoa) s 5(4)(e); Personal Property Securities Act 2010 (Tonga) s 5(3)(f); Secured Transactions Act 2008 (Solomon Islands) s 3(2)(d); Personal Property Securities Act 2017 (Cook Islands) schedule 2(2)(k).

[2] Personal Property Security Act 2017 (Fiji) s 68(a); Personal Property Securities Act 2011 (PNG) s 75(a).

[3] Maritime Act (Cap 131) (Vanuatu) s 50.

[4] Secured Transactions Act 2008 (Solomon Islands) s 3(2)(e); Personal Property Securities Act 2017 (Cook Islands) schedule 2(2)(k).

[5] Personal Property Security Act 2017 (Fiji) s 68(b); Personal Property Securities Act 2011 (PNG) s 75(b).

[6] Roy Goode, ‘The Priority Rules under the Cape Town Convention and Protocols’ (2012) 1 Cape Town Convention Journal 95, 95-96; Anton Didenko, ‘A Historical Overview of the Basic Concepts of the Cape Town Convention (Part I): International Interest and Internationality’ (2017) 6 Cape Town Convention 136, 138-139.

[7] Anton Didenko, ‘A Historical Overview of the Basic Concepts of the Cape Town Convention (Part I): International Interest and Internationality’ (2017) 6 Cape Town Convention 136, 139.

[8] Sōichirō Kozuka (ed)  Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions (Springer International Publishing, 2017), 2.

[9] ‘Protocol To The Convention On International Interests In Mobile Equipment Specific To Aircraft– Status’, UNIDROIT (Web Page) <https://www.unidroit.org/instruments/security-interests/aircraft-protocol/status/>.

[10] Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, opened for signature 16 November 2001, UNIDROIT (entered into force 1 March 2006), art. II.

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