Federal Court of Australia

Bank of New Zealand (Security Trustee) v The vessel MY “Island Escape” [2022] FCA 1230

ORDERS

THE COURT ORDERS THAT:

1.    Paragraphs 2 to 9 of these orders are subject to and will take effect from the plaintiff giving an undertaking to the Court to pay, on demand, to the Marshal an amount equal to the costs and expenses of the Marshal in complying with these orders.

2.    The Marshal is to sell the defendant ship MY “Island Escape” under the Admiralty Rules 1988 (Cth).

3.    The method of sale is to be determined by the Court.

4.    The Marshal would be justified in having the ship valued in writing for the purpose of selling the ship.

5.    The Marshal is to engage a shipbroker, experienced in the sale of vessels of a similar nature to the ship, to advise as to the method of sale and to value the ship in writing if the Marshal considers such a valuation is necessary or desirable for the purpose of selling the ship.

6.    As soon as practicable after receipt, the Marshal is to provide to the parties and the caveators:

(a)    the name of the shipbroker the Marshal proposes to engaged to sell the ship; and

(b)    the shipbroker’s recommendations as to the method of selling the ship.

7.    The Marshal is to retain a solicitor experienced in the judicial sale of ship to act on the sale of the ship.

8.    Until further order, the Marshal and the shipbroker are not to disclose any valuation referred to in para 4 to the parties, the caveators, or any other person apart from the Marshal’s delegates or agents.

9.    The costs and expenses incurred in the appraisement, and in the sale of the ship be paid out of the proceeds of the sale of the ship as part of the Marshal’s costs and expenses in this proceeding.

10.    The parties and the caveators are to have liberty to apply for further directions or orders as to the valuation and sale of the ship.

11.    The costs of this application are reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

FEUTRILL J:

Introduction

1    The plaintiff, the Bank of New Zealand as security trustee for and on behalf of the Bank of New Zealand (BNZ) and Export Finance Norway (EFN) as lenders, commenced these proceedings in rem against the ship MY ‘Island Escape’ by filing a writ on 18 August 2022. The ship was arrested at Roebuck Bay, Broome, on 19 August 2022. On 22 August 2022, OSM Offshore AS and on 24 August 2022, Sealanes (1985) Pty Ltd each filed a caveat against release of the ship from arrest. No appearance was entered for the defendant within the 21 day period prescribed in r 23 of the Admiralty Rules 1988 (Cth), or at all, and on 9 September 2022, the plaintiff applied for sale of the ship without a valuation under r 69 of the Admiralty Rules. Otherwise, the application is for the sale order to be made pedente lite.

2    For the reasons set out below, I am satisfied that it is appropriate for the ship to be sold pedente lite. However, it should not necessarily be sold without a valuation. Further, the method of sale should be determined at a later date after the Marshal has received advice from an appropriately experienced shipbroker. Accordingly, the usual orders will be made for the sale of the ship, provision will also be made for the Marshal to have the ship valued if considered necessary or desirable for the purpose of the sale, the method of sale will be determined at a later time and ancillary orders will be made to give effect to the sale and valuation process.

Materials

3    In support of the plaintiff’s application for the issue of a warrant for the arrest of the ship it filed an affidavit of Mr Maurice Lynch sworn 18 August 2022 (first Lynch affidavit).

4    On 1 September 2022, the Marshal, Ms Susan Kate Ladlow, filed an affidavit sworn the same day verifying service on the defendant of the writ, arrest warrant and first Lynch affidavit. Based on the contents of that affidavit, I am satisfied that the defendant was served with these documents in accordance with the Admiralty Rules.

5    On 9 September 2022, the plaintiff filed an affidavit of Mr Lynch sworn the same day in support of its application for sale of the ship (second Lynch affidavit). On 13 September 2022, the plaintiff filed written submissions in support of its application for sale of the ship.

6    On 20 September 2022, the Court made orders, amongst others, directing the plaintiff to file affidavit evidence addressing whether to the plaintiff’s knowledge, information or belief, notice of the arrest of the ship had been given, and if so by what means, to the directors of Seasons Shipping Limited, the registered owner of the ship, and the directors of Island Escape Cruises (NZ) Limited, the demise charterer of the ship, or otherwise what steps, if any, the plaintiff had taken to give those directors such notice.

7    On 26 September 2022, the plaintiff filed an interlocutory application for summary judgment. That application was supported by an affidavit of Mr Lynch sworn 26 September 2022 (third Lynch affidavit). By email to the Court dated 26 September 2022, the plaintiff indicated that the third Lynch affidavit complied with the Court’s direction of 20 September 2022. On 7 October 2022, the plaintiff filed a further affidavit of Mr Lynch sworn 7 October 2022 in support of that application (fourth Lynch affidavit).

8    For the purposes of the plaintiff’s application for sale of the ship, the first, second and third Lynch affidavits and the Marshal’s affidavit of service are taken to have been read. What follows is a summary of the background to the application which is derived primarily from the affidavits read on the application. The summary is not, of course, a statement of any final findings of fact in the proceedings, but such findings as are necessary or relevant on affidavit evidence on an interlocutory application for sale of the ship pedente lite.

Background

9    The ship is a newly constructed luxury cruise ship registered in the Republic of the Marshal Islands. She is 53.5 metres in length, 11.2 metres of beam with a draft of 4.2 metres. She has 17 passenger cabins for 32 luxury cruise passengers. Island Escape NZ holds permits to operate the ship in the Fiordland National Park, South Island New Zealand, the Great Barrier Reef Marine Park and the Kimberley Marine Parks, Western Australia. Mr Lynch describes the ship as ‘one of a kind’ in his second affidavit.

10    On 13 October 2021, EFN, as lender, entered into a loan facility agreement with the Seasons Shipping, as borrower, for a loan in the sum of NZD 11,250,000 (EFN Facility). The EFN Facility is written in the English language but is expressed to be governed by Norwegian law.

11    On 14 October 2021, BNZ, as lender, entered into a separate loan facility agreement with Seasons Shipping, as borrower, for a loan in the sum of NZD 7,500,000 (BNZ Facility). Island Escape NZ and Pacific Exploring Limited provided a guarantee for both loan facility agreements (guarantors). The instrument of guarantee is not in evidence. On 14 October 2021, Seasons Shipping, as borrower, Island Escape NZ and Pacific Exploring, as guarantors, BNZ, as security trustee and lender, and EFN, as lender, entered into a security trust deed (Security Trust Deed). In accordance with the terms of the Security Trust Deed, BNZ, as security trustee, held certain security property on trust for itself and EFN. The BNZ Facility and Security Trust Deed are expressed to be governed by New Zealand law. On 14 October 2021, Seasons Shipping, as lender, Island Escape NZ and Pacific Exploring, as guarantors, and BNZ, as security trustee, also entered into a deed described as a composite security deed (Composite Security Deed). The Composite Security Deed is not in evidence.

12    On 26 October 2021, Seasons Shipping made and gave a first preferred mortgage, as mortgagor, over the ship in favour of BNZ, as security trustee and mortgagee (Mortgage). In accordance with the terms of the Mortgage, Seasons Shipping promises to perform certain obligations and in default of such performance, BNZ is entitled to certain remedies described in the Mortgage. The Mortgage is expressed to be governed by the laws of the Republic of the Marshal Islands.

13    On 22 December 2021, Seasons Shipping and Island Escape NZ entered into a bareboat charter-party. By the charter, Island Escape NZ agreed to hire the ship for five years with an option to renew the charter for a further period of five years. The charter is expressed to be governed by New Zealand law.

14    The plaintiff’s case put forward in the affidavit evidence of Mr Lynch is that Seasons Shipping, as borrower, and Island Escape NZ and Pacific Exploring, as guarantors, have defaulted in performance of their obligations to make payments due under the BNZ Facility and EFN Facility. As a consequence of those defaults, Seasons Shipping (and Island Escape NZ and Pacific Exploring) are liable to make payment to the plaintiff (BNZ as security trustee for and on behalf of BNZ and EFN) in a sum exceeding NZD 18 million. The plaintiff claims that sum is payable to it under the terms of the Mortgage. The plaintiff also claims interest on the sum due and costs.

15    As mentioned above, the ship was arrested in Roebuck Bay, Broome on 19 August 2022 and, after the arrest, two caveats against release from arrest of the ship or other property were filed. OSM Offshore claims that it entered into a standard ship management agreement for the management of the ship with Island Escape NZ pursuant to which it is owed the sum of USD 1,207,658.28. Sealanes claims that it made agreements for the supply of provisions with Island Escape NZ pursuant to which it is owed the sum of AUD 231,976.43. Each of OSM Offshore and Sealanes has commenced separate proceedings in rem against the ship.

16    On 23 August 2022, BNZ appointed Mr Neale Jackson and Ms Natalie Burrett joint and several receivers of each of Seasons Shipping and Island Escape NZ (Receivers) under the provisions of a security instrument dated 14 October 2021. The evidence does not identify if BNZ appointed the Receivers as security trustee under the Security Trust Deed or Composite Trust Deed or in its own right under some other instrument or instruments. In any case, it is evident from the affidavits of Mr Lynch that the Receivers have notice of the arrest of the ship and the application for sale of the ship and do not wish to enter an appearance on behalf of Seasons Shipping or Island Escape NZ in the proceedings.

17    It is also evident from the affidavits of Mr Lynch that the directors of Seasons Shipping and Island Escape NZ have received notice of the arrest of the vessel and the application for sale of the ship. If and to the extent the directors may have any residual authority to conduct the affairs of the companies in receivership, the directors have had the opportunity to take steps, but not taken any steps, to intervene and enter an appearance in the proceedings on behalf of Seasons Shipping or Island Escape NZ.

18    The ship remains under arrest in Roebuck Bay. The ship is in a remote location and is in tropical waters. The cyclone season officially commenced on 1 October 2022. On 20 September 2022, the Court made orders directing the ship, subject to the satisfaction of certain conditions precedent, to sail, while under arrest and without deviation, from Broome to Fremantle as soon as reasonably practicable. Counsel for the Marshal, who appeared on 11 October 2022, informed the Court that the Harbour Master of the Port of Broome has directed the Master of the ship to leave the port on or before 31 October 2022 due to the commencement of the cyclone season. There are some remaining impediments to the ship sailing of which the Court was informed on 11 October 2022. Subject to removal of those impediments, the ship will sail to Fremantle before 31 October 2022.

19    Mr Lynch deposed to facts to the effect that Broome is the most expensive and remote port in Australia at which to maintain a vessel under arrest. The estimated cost of maintaining the arrest at that location is USD 6,091 per day, or USD 182,728 per month. Notwithstanding that the direction to sail the ship from Broome to Fremantle will result in re-locating the ship to a port at which the costs of maintaining the arrest are likely to be lower, the costs of maintaining the arrest will continue to mount. Those costs will diminish the plaintiff’s security, the fund available for distribution to other claimants and the residual, if any, available to the companies in receivership. Given there has been no appearance for the defendant ship, the likelihood of any person with an interest in the ship providing bail within a reasonable period of time is negligible.

20    As mentioned above, the ship is a luxury cruise ship. The affidavit evidence suggests that the market and potential purchasers for a vessel of the character of the ship is somewhat niche or specialised. Further, it may be necessary to look outside Australia to identify a shipbroker with the required experience and knowledge to maximise the selling price of the ship upon a judicial sale. As a consequence of these features, the plaintiff has submitted that upon a judicial sale the Marshal should consider engaging at least one of four candidates the plaintiff has nominated. The plaintiff has applied for a sale without valuation and submits that a valuation is not necessary because the ship was valued in June 2022 by one of its nominee shipbrokers.

21    The valuation upon which the plaintiff relies has, in terms, a number of limitations and qualifications that render it inherently unreliable for the purpose of a judicial sale of the ship. The valuer did not inspect the vessel. No inspection was made of records nor was there any other independent, inspection, investigation or examination. The valuation was made in the period during which COVID-19 measures continued to affect the travel industry and, by implication, the value of a luxury cruise ship. The valuation itself indicates that it is only ‘valid’ as of 6 June 2022. The valuation contains the qualification: ‘Any interested party should conduct an independent inspection and investigation of the facts concerning the vessel. No one should rely on this value as a substitute for their own due diligence.’ Further: ‘The evaluation is provided solely for the use of the persons to whom it is addressed. The value is to be used only for the specific purpose stated and any other use is invalid. No reliance may be made by any third party without our prior written consent’.

22    The affidavit evidence does not depose the person(s) for whom the valuation was made or the purpose(s) of the valuation. The identity of the valuer and his or her expertise is also not in evidence. These are all matters that affect the independence and reliability of the valuation for the purpose of a judicial sale.

Consideration

23    As McKerracher J said in Bhagwan Marine Pty Ltd v The Ship “Teras Bandicoot” (No 2) [2020] FCA 1481, the principles upon which the Court will order a valuation and sale of a ship pendente lite, as in the present case, are well settled. In The “Myrto” [1977] 2 Lloyd’s Rep 243, which has been cited with approval by numerous Australian authorities such as Marinis Ship Suppliers (Pty) Limited v The Ship “Ionian Mariner” (1995) 59 FCR 245 at 249, Brandon J said (at 260):

The question whether an order for the appraisement and sale of a ship under arrest in an action in rem should be made pendente lite arises normally only in a case where there is a default of appearance or defence. In such a case it has been a common practice for the Court to make such an order on the application of the plaintiffs on the ground that, unless such order is made, the security for their claim will be diminished by the continuing costs of maintaining the arrest, to the disadvantage of all those interested in the ship, including, if they have any residual interest, the defendants themselves.

Where defendants to an action in rem against a ship appear in the action with the intention of defending it, they almost invariably obtain the release of the ship from arrest by giving bail or providing other security for the claim satisfactory to the plaintiffs. For this reason there appears to be no reported case in which the Court has had to consider in what circumstances it would be right to make an order for appraisement and sale of a ship pendente lite in a defended case.

…

I accept that the Court should not make an order for the appraisement and sale of a ship pendente lite except for good reason, and this whether the action is defended or not, I accept further that, where the action is defended and the defendants oppose the making of such an order, the Court should examine more critically than it would normally do in a default action the question whether good reason for the making of an order exists or not. I do not accept, however, the contention put forward for the owners, that the circumstance that, unless a sale is ordered, heavy and continuing costs of maintaining the arrest will be incurred over a long period, with consequent substantial diminution in the value of the plaintiffs’ security for their claim, cannot, as a matter of law, constitute a good reason for ordering a sale. On the contrary, I am of opinion that it can and often will do so.

24    In accordance with r 23(1) of the Admiralty Rules, any relevant persons may enter an appearance within 21 days of service of the writ, which in this case was effected by the Marshal on 19 August 2022 by affixing the writ to the window of the ship. Therefore, any appearance ought to have been entered by 9 September 2022.

25    In drawing upon the principles tending toward judicial sale set out in Myrto, Ryan J in Ionian Mariner identified the factors in favour of judicial sale as including the following (at 250):

Of most significance in this context is the factor which weighed with Brandon J in The “Myrto” that, unless a sale is ordered, heavy and continuing port charges and costs of maintaining the crew will be incurred without being fully defrayed by the owners. That will bring about a consequent, substantial, diminution in the value of the security which the plaintiff and those caveators who rank behind the mortgagee, have for their respective claims.

There must be added to the matters which I have just mentioned the possible impact of further delay on the claim of the crew, admittedly with a high priority, for unpaid wages and the humanitarian considerations which impel the Court to a speedy satisfaction of those claims. In the light of all these considerations, and in the absence of any firm or workable proposal for a speedy resolution of the plaintiff's claim and the claims of the caveators, there is a significant balance in favour of an order for valuation and sale.

26    I am satisfied that orders should be made for judicial sale of the vessel for the following reasons:

(1)    No steps have been taken by the registered owner and demise charterer to repay the debt owed under the EFN and BNZ Facility agreements.

(2)    There is a lack of opposition to the sale. None of the Receivers and caveators has opposed the sale. Further, based on the affidavit evidence, I am satisfied that the directors of the registered owner and demise charterers are on notice of the judicial sale and they have not taken any steps available to them to cause the companies in receivership to enter an appearance or oppose the sale.

(3)    The costs of the arrest will diminish the plaintiff’s security and the proceeds available for distribution to claimants and any residual to the companies in receivership.

(4)    I also take into account that maintaining the arrest may have an adverse impact on the crew and those managing the ship.

(5)    There is no apparent prospect of any interested person providing bail.

27    As to the question of valuation, in Bank of Scotland PLC v Owners of the Union Gold [2014] 1 Lloyd’s Rep 53, the applicant sought to deviate from standard practice and invited the Court to sell the vessels at a certain price to a certain buyer based on valuations that had previously been conducted by the applicant. The Court ultimately refused the application and expressed the following concerns (at 56):

The court’s first concern with the proposed order is that it does not provide for the appraisement of the vessel by the Marshal. The appraisement is usually conducted by the Marshal with advice from his broker. In the present case the bank has obtained a number of valuations, placed them before the court and invited the court to confirm that the proposed sale is not below the market value of the vessel.

…

The concerns which I have expressed strongly suggest that it is wrong in principle for the court to depart from the usual order that the Marshal sell a vessel by appraisement, advertisement and inviting bids to purchase the vessel. It was submitted on behalf of the bank that the court should accede to an application that the Marshal sell to a named buyer at a named price where there was evidence that the price is at or about the market value of the vessel. However, the buyer has been found by the bank and the market has not been tested by advertisement and invitations to bid. The difficulty with acceding to the bank’s submission is that it may give the impression that the Marshal is acting for a particular claimant in rem rather than as an officer of the court who must have regard to the interests of all claimants in rem and of the defendant shipowner.

28    As Rares J said in Norddeutsche Landesbank Girozentrale v The Ship “Beluga Notification” (No 2) [2011] FCA 665 at [29] ‘[b]ecause it is the duty of the Marshal to conduct the sale and in so doing to realise the highest price (The “Silia” [1981] 2 Lloyd’s Rep 534 at 535 per Sheen J; see too: Den Norske Bank ASA v Owners of the ship “Margo L” [1998] 1 HKC 217 at 218-220 per Waung J), it is preferable to allow the Marshal to undertake that function in the manner best calculated to achieve it’. Accordingly, given the reservations expressed in Union Gold against departing from the usual order for valuation of a vessel upon judicial sale and the limitations, qualifications and absence of evidence of independence and reliability of the valuation of June 2022, I consider that the Marshal should be permitted to undertake a valuation and appraisement of the ship if the Marshal considers that such a valuation and appraisement is necessary or desirable to realise the highest price and fulfil the Marshal’s duty on the conduct of the sale of the ship. Therefore, while an order will not be made that compels the Marshal to perform a valuation, the Marshal will be permitted and justified to have the ship valued if the Marshal considers such a valuation is necessary or desirable for the purpose of the sale of the ship.

29    Further, as the plaintiff’s application was made for an order that the ship be sold without valuation, there is ambiguity as to whether the deemed undertaking in r 69(4) of the Admiralty Rules extends to an order that the ship ‘be valued and sold’ as opposed to an order that the ship ‘be sold without valuation’. In effect, the order will be that the ship be ‘sold without valuation’ as requested in the application, however, an additional order will be made permitting the Marshal to obtain a valuation to facilitate the sale process. For the purposes of avoiding any doubt about the extent to which the deemed undertaking in r 69(4) extends to any valuation of the ship, the orders addressing sale and valuation will operate subject to the plaintiff providing an express undertaking to the Court in the same terms as the deemed undertaking.

Associate:

Dated:    17 October 2022