Royal Bank v. 1132959 Ontario Ltd.

In Constitutional Issues in Maritime Law on (Updated )

This was an application by the Appellant bank (the “Bank”) for possession of a yacht pursuant to rights allegedly acquired through a general security interest. The application was opposed by the Respondent, who was registered as the owner of the yacht under the Canada Shipping Act (“CSA”), on the grounds that the bank’s interest was not registered under the CSA. The background facts are important. The Bank entered into a general security agreement dated 9 March 2001 with a numbered company (“Numbered Co.”) and registered its interest under the Ontario Personal Property Security Act (“PPSA”). On 17 April 2004 the Numbered Co. acquired title to the yacht and, although it is not entirely clear from the judgment, it appears that the yacht was registered under the CSA at that time. On 13 February 2008 the sole shareholder of the Numbered Co. made an assignment in bankruptcy. On 12 March 2008 the Numbered Co. entered into a security agreement with the Respondent, the brother of the company’s sole shareholder. The security agreement was allegedly to secure a prior debt owed to the Respondent. This security agreement was never registered under the PPSA. On 20 March 2008 the Respondent was given a marine mortgage over the yacht as further security for the debt allegedly owed between the brothers. This marine mortgage was registered under the CSA but not the PPSA. On 10 April 2008 the marine mortgage was discharged and the yacht was transferred to the Respondent in full payment of the debt allegedly owed. On these facts the Court held that there was no doubt that on 17 April 2004 the Bank acquired a perfected security interest in the yacht pursuant to the after acquired property clause in the security agreement. The Court further held that the Bank’s interest had priority over any interest the Respondent had pursuant to the agreement of 12 March 2008 since that agreement was not registered. However, the Court recognized that the real issue was whether a registered interest under the CSA could take priority over a prior interest registered under the PPSA. The Respondent alleged that the CSA provided a complete code and registry of all interests in vessels. The Court disagreed and held that the CSA created two types of registers; mandatory and voluntary. Pleasure craft are not required to be registered and fall within the voluntary registry. Therefore, the Court held the Bank was not required to register its interest under the CSA registry. In result, the Court held the Bank’s interest had priority.

(Note: This has been a vexing issue for years and has the potential to cause serious difficulties for both lenders and borrowers. Although the equities of this case certainly favoured the bank, the Court’s analysis does not withstand any serious scrutiny. The distinction between mandatory and voluntary registration is no more than descriptive and does not provide a legal basis for the decision. Also, the mandatory,voluntary distinction is probably not accurate in respect of a mortgagee. The prevailing view is that if the vessel is registered (whether voluntarily or mandatorily) then any mortgage or security interest must be registered. It is submitted that the Court should have done a proper constitutional analysis taking into account the dual aspect doctrine, interjurisdictional immunity and paramountcy. Also, one cannot help but think that if, after the constitutional analysis, Canadian maritime law applied, then equitable considerations would have played an important part in any ranking.)