No rehabilitation for Hanjin?

 

 

On 13th December 2016, Samil PriceWaterhouseCoopers (Samil PWC) submitted to the Seoul Central District Court an inspection report putting Hanjin’s appraised going concern value at only 80 billion won and expressing the view that Hanjin has very little going concern value. It is likely that by the end of February the rehabilitation process will come to an end and Hanjin will be declared bankrupt.

OW Bunkers — picking up the pieces

The result of the OW Bunkers litigation in the UK Supreme Court, PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [2016] UKSC 23; [2016] A.C. 1034 (noted here in this blog) is that shipowners having taken bunkers from bankrupt suppliers OW may still potentially face the prospect of being made to pay twice — once to OW because they supplied them, and once to the original sellers to OW because at the relevant time they still owned them. The argument that the original sellers somehow gave up their rights by consenting to onsale by OW is attractive but not cast-iron. The important issue now, however, is how to avoid a similar debacle in the future. Steamship Mutual have advised a change in the terms of contracts. They say: “We recommend Owners review their existing contract wordings to make clear that should their direct counterpart become insolvent, in the bunker supply context or otherwise, that payment to the party down the chain (e.g. the physical supplier) shall be permitted and discharge the debt to the insolvent party.”

With respect, we have some doubts as to whether this will necessarily work. Such an arrangement might well fall foul of the anti-deprivation principle in English insolvency law, which says that where there is an accrued debt owed to an insolvent, any provision depriving the insolvent of the right to collect that debt in the event of subsequent insolvency is presumptively ineffective: see the summary by Lord Collins in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38, [2012] 1 A.C. 383 at [100].

A more effective strategy might be an acknowledgment in the contract of sale that in so far as the bunkers sold are not at the time of delivery owned by the seller, then any right of action is held on trust for the actual owner. Such a provision, not being triggered on insolvency, seems to us more likely to survive scrutiny. But only time will tell.

Korean rehabilitation proceedings. Tricky English law issues may be resolved in English proceedings.

Ronelp Marine Ltd vs. STX Offshore & Shipbuilding Co Ltd : [2016] EWHC 2228 (Ch)

In May 2016 rehabilitation proceedings were commenced against STX, a South Korean shipbuilding company, and in June 2016 the English court recognised these as the foreign main proceeding under the 2006 Cross Border Insolvency Regulations (the ‘CBIR’) which give the force of law to the UNCITRAL Model Law on Cross Border Insolvency.

At the time of the rehabilitation proceedings, there were already actions afoot against STX in the English Commercial Court under guarantees it had provided in respect of five shipbuilding contracts entered into by its Chinese subsidiary Dalian, which were subject to English law and jurisdiction. In 2014 the contracts had come to an end with Dalian’s entry into Chinese insolvency process under which the Chinese office holder had issued a notice stating that the ships would not be built. STX raised two defences which involved complex issues of English law. First, it was alleged that the contracts were vitiated by illegality in that there had been a sideletter which intended to mislead third parties as to the true price paid under the contracts. Second, the contracts did not entitle the Buyers to damages but confined them simply to the return of instalments plus interest and since Dalian has received no instalments, it was not in breach of any obligation, which raised difficult issues relating to the interaction of contractual remedies and common law remedies for repudiatory breach.

Under the UNCITRAL Model Law, article 20.1(a) provides for a stay of actions subject to courts power under art. 20.6 to modify the stay on such terms as it thinks fit, provided the court is satisfied that interest of creditors and other persons interested are adequately protected. Article 21 provides that the Court has power to grand discretionary relief including any relief under paragraph 43 Schedule B1 of the Insolvency Act 1986.

The buyers applied to the court to exercise its discretion to allow the proceedings already commenced in England to continue. Their sole object was to obtain an adjudication of the claim, with a view to presenting the outcome to the Korean Rehabilitation Court. It was accepted that any judgment obtained from the Commercial Court could not be enforced against STX and that the conversion of the claim into a judgment could not alter the priorities within the Korean insolvency. The Buyers would continue to have an unsecured claim, but one that would be verified and quantified by the Commercial Court, which it was up to the Korean Rehabilitation Court to adopt or reject.

Norris J found himself in a similar position to that of Briggs J in Cosco Bulk Carrier: Ltd v Armada Shipping SA [2011] EWHC 216 where he was concerned with competing claims to sub-freights of the shipowner pursuant to a lien on sub freights and the time charterer, a Swiss Company subject to Swiss liquidation. The resolution of that dispute involved a consideration of competing views, expressed at first instance (and once in the Court of Appeal) on the one hand and in the Privy Council on the other hand, about the juridical nature of a lien on sub-freights. Briggs J had there exercised his discretion to allow the English arbitration proceedings brought by the shipowners against the sub-charterers to continue.

Accordingly Norris J. exercised his discretion to lift the stay and to allow the English proceedings to continue, given that otherwise the Korean Rehabilitation Court would have to grapple with these difficult issues of English law in assessing the buyers’ claims against STX under the guarantee.

Arrest of ships and insolvency – Canadian courts apparently confirm orthodoxy

Last Friday Sigurdson J in the British Columbia Supreme Court recognised the Korean Hanjin bankruptcy proceedings under the UNCITRAL Model Law and banned further arrests of Hanjin vessels should they visit Vancouver or other BC ports. Importantly, however, he left existing arrests in place. We have not seen the text of his decision (though it is referred to here and here (£)): but it seems to reflect orthodoxy. Assuming an in rem claim against a vessel does not arise out of a maritime lien, under the orthodox rules of Admiralty in England and Canada it survives insolvency if brought before the inception of insolvency but not if brought afterwards (see Re Aro Co Ltd [1980] Ch 196 and The Oriental Baltic [2011] 1 SLR 487). Where the bankruptcy is foreign the relevant time is that of its recognition. Hence there seems nothing surprising about this determination.

Hanjin in the Far East

Creditors of bust Korean shipping line Hanjin are feverishly looking for jurisdictions where they may be able to arrest Hanjin ships; the company itself, and the insolvency authorities in Korea, one of the most arrest-unfriendly jurisdictions in the world, are trying to stop them.

An interesting suggestion here (£) comes from Ivan Ng of Stephenson Harwood in Hong Kong that that jurisdiction may be a safe haven. This is a bit surprising. Traditionally the view of the common law, which applies in Hong Kong to the exclusion of the UNCITRAL Model Law on Cross-border Insolvency, has been that while the common law may recognise and help foreign insolvency proceedings, it won’t take away the substantive secured status that arrest in Admiralty gives the claimant. But the suggestion is that all this has changed. This based on a Singapore decision of Aedit Abdullah JC in the Singapore High Court about four weeks ago, namely Re Taisoo Suk (as foreign representative of Hanjin Shipping Co Ltd) [2016] SGHC 195, in which, apparently also on the basis of the common law, he did prohibit arrests of Hanjin vessels.

No doubt Hanjin will take comfort at all this. But their joy may be short-lived. The Singapore decision is controversial, and is in any case an interim ex parte one, due to come to a full hearing in early November. Don’t bank on its being upheld. Also remember that at least one fairly recent Hong Kong decision, The Convenience Container [2007] 3 HKLRD 575, seems to uphold the strict common law view.

Watch this space: we live in interesting times.

Hanjin Rehabilitation. Claims by Owners and the UK Recognition Order

 

 

As well as having its own vessels, Hanjin is also believed to have time chartered a substantial number of vessels. It is a good bet that many of those charters will be subject to London arbitration and English law. The Hanjin collapse will see those shipowners making claims against Hanjin, such as for damages for the unexpired residue of the charters following their termination, (an issue on which the Court of Appeal’s decision in Spar Shipping is eagerly awaited).

Shipowners will also seek to claim against third parties connected with Hanjin, by exercising liens on sub-freights against parties who have sub-chartered from Hanjin, or by claiming freight due under shipowners’ bills incorporating the terms of those sub-charters. The mechanism for making such claims is by giving notice to the sub charterer or to the bill of lading shipper that payment is to be made to owners and not to Hanjin, and hoping that the freight hasn’t already been paid. However, the basis of the two types of claim is quite different. The nature of the lien on sub freights has not been definitively ascertained under English law, but the better view is that the lien operates as an equitable assignment giving  rise to a floating charge over the charterer’s asset, its contractual right to sub-freights. The claim to freight under the bill of lading on the other hand is a claim under a separate contract between the shipowner and the shipper.

Following the rehabilitation proceedings in South Korea (which are similar to US Chapter Eleven proceedings), recognition orders have been obtained in various jurisdictions including the UK. Under article 20(1) of the UNCITRAL Model Law, which is given the force of law by the Cross-Border Insolvency Regulations 2006, there will be then be an automatic stay of certain actions, such as commencement or continuation of actions or proceedings against the debtor or its assets, or execution against a debtor’s assets. The stay will effect any arbitration proceedings against Hanjin, or its sub-charterers against whom the lien on sub-freights has been exercised. However, article 20 (6) provides that the court has power to modify or terminate the automatic stay and to do so upon such terms and conditions as it thinks fit. Article 20(2) requires the court to apply the same test and principles as it would apply to the stay of a winding up order under section 130(2) of the Insolvency Act 1986 which gives the court a free hand to do what is right and fair according to the circumstances of each case. The stay will usually be lifted when disputed claims need to be resolved by proceedings and it is right and fair in all the circumstances to accept and implement this need.

Last year in proceedings arising out of another set of rehabilitation proceedings involving a South Korean charterer, Re Pan Ocean Co. Ltd Pan Ocean); subnom another  v. Pan Ocean Co Ltd and another [2015] EWHC 1500 Ch, the discretion was exercised in favour of allowing arbitration proceedings to continue, although the owners’ application to the Company Court was made however on the basis that they would not seek to enforce any arbitration award or subsequent judgement against the assets of Pan Ocean. This follows a similar result in Cosco v Armada [2011] EWHC 216 (Ch), a case involving a recognition order of Swiss bankruptcy proceedings against a time charter. Briggs J allowed the stay to be lifted in respect of owners’ arbitration proceedings against sub-charterers, pursuant to the lien on sub-freights. This was subject to a condition that after an award in owners’ favour had become final, charterers should have the opportunity to restore the matter to the court, in the event that any aspect of the interests of its creditors or office-holder have not been addressed by the arbitrators, or upon appeal.

However, a claim to freight under the bill of lading, as a contractual claim against the shipper, should not be affected by the recognition order unless the freight exceeded the amount of owners’ claim in which case the surplus would be held on account of the time charterer.

As a post-script it may well be that under South Korean insolvency law the rehabilitation proceedings will not affect the exercise of a lien on sub-freight. This was the position in The Bulk Chile [2012] EWHC 2107 (COMM). It was there argued at first instance that the lien on sub freight was subject to the Comprehensive Stay Order, designed to suspend creditors’ compulsory enforcement, which is defined in article 44 of the Debtor Rehabilitation and Bankruptcy Act as meaning, among other things, “the compulsory auction sale proceedings for the execution of security interests”. Andrew Smith J heard conflicting evidence from South Korean lawyers on this and concluded that the Stay Order did not affect the exercise of the lien. He stated [69]:

“Mr Kim’s suggestion of such a purposive construction of the statute is advanced in tentative terms. “Mr Choi firmly rejected it in a report in response dated 22 June 2012, and cited in support of his opinion the views of the Bankruptcy Division of the Seoul court published by them in “Practice in Rehabilitation Cases”. His opinion is in line with a decision of the Seoul court of 21 December 2011 in case no 2011 Hoehwak 382.” I cannot accept that Mr Kim’s suggestion represents the present state of Korean law, and I conclude that the orders of the Seoul court afford the defendants no answer to the lien claims. I uphold the lien claim against Metinvest.”

 

Arrest of ships and insolvency: the “affaire Hanjin”

The Hanjin debacle, like the previous Pan Ocean collapse, looks set fair to occupy marine lawyers for some time to come. Hanjin, one of the top ten container lines of the world, finally filed for bankruptcy protection in its home jurisdiction of Seoul 9 days ago, on 31 August. This has immediately led to a scramble to issue arrest proceedings against its ships (reportedly carrying over $14 bn worth of other people’s goods): in turn, the story is that a number of Hanjin vessels have been told to circle the seven seas, rather like the Flying Dutchman, rather than put into a port where they might be seized.

All this raises one of the currently sexy issues in ship arrest: how far can foreign bankruptcy proceedings stymie the right a creditor otherwise has to pay himself from the proceeds of the vessel arrested ahead of the owner’s other creditors? The point is particularly important in the Korean context, since Korean law is notoriously unwelcoming towards maritime claims in rem.

In many jurisdictions, including Australia, New Zealand, the US and the UK, this depends on the interpretation of the UNCITRAL Model Law on cross-border insolvency, and in particular how each jurisdiction has taken advantage of Art.20.2 of that provision. It has been decided in Australia (Yu v Pan Ocean (2013) 223 FCR 189, see too Kim v SW Shipping Co Ltd [2016] FCA 428) that maritime lien claimants continue to be able to thumb their noses at general creditors. In New Zealand the courts have gone further and said the same about in rem claimants generally (eg irate cargo claimants or bunker suppliers), provided they issue proceedings before the foreign bankruptcy is recognised (see Kim v STX Pan Ocean [2014] NZHC 845). One suspects the same would follow in England. But the US may well be different: Evridiki Navigation, Inc v Sanko SS Co, 880 F.Supp.2d 666 (2012).

An unanswered question in Australia and New Zealand is what happens to in rem claimants relying on claims — notably by repairers or bunker suppliers — which by local law do not create a maritime lien, but which give rise to such a lien under the law governing the original supply (see The Sam Hawk [2015] FCA 1005).

One place one suspects Hanjin masters may have been told to avoid like the plague is Hong Kong, which applies the old common law rules and which is not in the UNCITRAL system. There the authority seems to say that no account at all is taken of bankruptcy elsewhere as regards priorities: see The Convenience Container [2007] 3 HKLRD 575. Singapore, doubtless, which applies similar principles, will also be given a wide berth.

One is tempted to say that this is a ship’s dog’s dinner. Is it too much to hope that the IMO or some similar body could sponsor a convention to deal with the priorities arising from rights of arrest?

 

IX European Colloquium of Maritime Law Research 2016

This is a free conference taking place in Bilbao, Spain on 14-15 September, at the Bizkaia Aretoa. The theme is maritime liens, mortgages and forced sales. Details here. A large number of excellent speakers, including Profs Erik Røsæg and Paul Myburgh. Two IISTL stalwarts will be speaking, Prof Andrew Tettenborn and Prof Rhidian Thomas.  For information contact Olga Fotinopoulos, Olga.fotinopulos@ehu.eus, Tel + 00 34 945 01 3417.

More from the OWB bunker saga. Agency and conversion.

In The Cosco Felixstowe Shipowners ordered bunkers from D2, a bunker trader in Singapore who had contracted with OWBS to supply the bunkers. OWBS had in turn contracted with OWBC who had contracted with the plaintiff who physically supplied the bunkers to the vessel. Leave was granted pursuant to serve a writ out of the jurisdiction on D2 and OWBC under Order 11 rule 1(1)(f) of the Rules of the High Court that D2 had committed a tort (ie the tort of conversion) within the jurisdiction, and/or under rule 1(1)(d) on the basis that it was arguable that OWBC had entered the contract with P as agent for D2.

The Hong Kong Court of First Instance (Deputy High Court Judge Le Pichon) [2016] HKCFI 492 – 18 March 2016, has now denied D2’s application to set aside the grant of leave. It was arguable that there was a material difference between the terms of OWB’s contract in The Res Cogitans and P’s standard terms in the present case in that the latter provided no unambiguous authorisation to consume the bunkers for propulsion purposes prior to payment. The conversion would be constituted by OWBS’ contractual obligation to procure use of the bunkers before payment had been made. A clause in P’s contract that the buyer and the vessel owner would only use the bunkers for the operation of the vessel did not amount to consent by P to immediate consumption of the bunkers.

It was also arguable that there was an agency chain running from D2 to OWBC who contracted with the physical supplier, in which case there would be a contract with P made by an agent within the jurisdiction.

 

Insolvency and anticipatory breach. More from Singapore

In The STX Mumbai [2015] SGCA 3; [2016] 1 Lloyd’s Rep 157, the Singapore Court of Appeal has held that the doctrine of anticipatory breach does apply to executed contracts and in appropriate circumstances a party’s insolvency is capable of amounting to an anticipatory breach. Bunkers had been supplied to a vessel with payment to be made within 30 days. A company in the corporate group of which the shipowning company was a part had become insolvent and the bunker supplier took the view that payment was unlikely to be made. Accordingly, three days before the due date for payment, they demanded immediate payment by the close of business, and when that was not forthcoming, arrested the vessel the following day. At first instance the in rem proceedings were struck out as legally unsustainable as the insolvency of an associated company in the shipowner’s corporate group did not amount to an anticipatory breach by the shipowner. Futhermore, the Judge expressed the view that the doctrine of anticipatory breach applied only to executory contracts and not to an executed contract such as the present.

The Court of Appeal disagreed. The doctrine could apply to executed contracts. Although insolvency in itself would not constitute an anticipatory breach, it might well do so in the proper context. Much would depend on the precise facts, which could only be adduced if the action went to trial. The evidence showed some plausible connection between the insolvent company and the shipowner such that it was not completely unarguable that the former’s insolvency could well have made it impossible for the latter to make timely payment under the bunker supply contract in respect of the vessel. Accordingly, the bunker supplier’s case was not legally unsustainable and its claim would not be struck out.