OW Bunkers (again). Interpleader and maritime liens in Canada.

 

The collapse of the OW Bunker group in late 2014 has led to a series of interpleader claims in different jurisdictions in which competing claims to the deposited funds have been made by the physical bunker suppliers and ING Bank, the assignee of OW. An interpleader claim has recently been heard by the Federal Court of Appeal in Canada in ING Bank NV and Others v Canpotex Shipping Services Ltd and Others 2017  FCA 47. It concerns the effect of funds deposited by the time charterer and the  potential liability of the vessel under a maritime lien.

In 2014 OW UK supplied bunkers in Vancouver to two vessels on charter to Canpotex. Following the collapse of the OW group, competing claims for payment for the bunkers supplied were made by the physical supplier, Petrobulk, and ING Bank as the assignee of OW UK’s receivables. Canpotex interpleaded and obtained an order that the of OW UK’s invoice be paid into the US trust account of its solicitors, which payment would be treated as a payment into court. The interpleader covered only Canpotex’s liability.

Canpotex subsequently added the shipowners as plaintiffs to its statement of claim and sought a judgment as to whether Petrobulk or ING was entitled to all or part of the trust fund and a declaration  that following payment out any and all liability of both Canpotex and the shipowners was extinguished. In July 2015 Russell J heard the claims against the trust funds, (2015 FC 1108). There was a dispute about which terms governed OW UK’s supply of the bunkers to the vessel: the OW Group standard terms; or Schedule 3 of the OW Fixed Price Agreement. Both terms provided for the variation of the contract where the physical supply of the fuel was undertaken by a third party, but were worded differently.

Russell J found that there had been an oral agreement to apply the latter terms and the consequence was that Canpotex became jointly and severally liable under the contracts made between OW UK and Petrobulk.  Upon payment of that purchase price to Petrobulk, Canpotex would come be under no obligation, contractual or otherwise, to pay any amount representing the purchase price for the marine bunkers to OW UK or the Receivers. He then ordered Petrobulk be paid out of the trust fund and that ING be paid the mark up due to OW UK and that Canpotex’s and the shipowners’ liability in regard to the bunker delivery should be extinguished, as well as any and all liens.

The Federal Court of Appeal has overruled the decision. Interpleader proceedings had to be conflicting claims over the same subject matter which were mutually exclusive. The contractual claims against Canpotex advanced by OW UK and by Petrobulk were such claims, but Petrobulk’s assertion of a maritime lien was not a conflicting claim, and was a claim against the shipowners, and not against Canpotex.  If OW UK was contractually entitled to payment of the trust funds, that would extinguish Canpotex’s contractual liability, but Petrobulk’s maritime lien claim would remain alive. The Judge had been wrong to extinguish the shipowner’s liability for that claim and had also wrongly admitted oral evidence as to the terms of the spot bunker purchases. The terms applicable were those found in the OW Group standard terms and the case was returned to the judge for reconsideration.

If the judge finds that OW UK is contractually entitled to payment of the trust funds, this raises the prospect of ING recovering in full under the OW UK invoices from the trust fund established by Canpotex, and of Petrobulk doing likewise through its maritime lien against the vessel, if the vessel can be arrested in Canada.

 

 

Recast European Insolvency Regulation kicks in next Monday.

Regulation (EU) 2015/848 of the European Parliament and of the Council of
20 May 2015 on insolvency proceedings (recast) [2015] OJ L141/19 entered into force on 26 June 2015,  and will apply to insolvency proceedings from 26 June
2017.

The main changes from the European Insolvency Regulation (Regulation (EC)
No 1346/2000) are as follows:
– Codification of how the centre of main interests (the “COMI”) is determined. There
will be a rebuttable presumption that the COMI is at the registered office, but this will not apply if there has been a move of the registered office during the three months prior to the opening of proceedings.
– Coverage of hybrid and pre-insolvency proceedings. UK schemes of arrangement are
excluded from the Regulation.
– A framework for group insolvency proceedings, where two or more companies in a
group of companies are insolvent, will be introduced.
– Secondary proceedings are no longer limited to liquidation proceedings where a
company has an establishment. “Establishment” is now defined as “any place of operations where the debtor carries out a non-transitory economic activity with human means and assets”. The relevant time for assessing an establishment will be either the time of the opening of the secondary proceedings or, alternatively, the three month period prior to that. The insolvency practitioner in the main proceedings may now provide undertake to treat local creditors as they would be treated under secondary proceedings.
– New linked registers of insolvency proceedings will be established in each member state by 26 June 2018, to be linked via a central European e-justice portal by 26 June 2019.

Trustees, beneficiaries and purchasers — good news all round

Good news from the Supreme Court last week for commerce: in particular, those purchasing assets from trustees. In Akers v Samba Financial Group [2017] UKSC 6 ASa Saudi businessman, held shares on trust for a company, SICLA: he disposed of the shares to Samba in satisfaction of a debt. Assuming Samba were in good faith, you might have thought there was no problem: they would take free of the trust. But SICLA was insolvent: and the liquidator sought an end-run round the rule of equity’s darling by invoking s.127 of the Insolvency Act 1986. This prohibits disposition of the assets of an insolvent company (including beneficial interests in trust property), and allows their claw-back, with only a judicial discretion to protect the alienee and no general good-faith purchaser protection. The Supremes refused to allow this attempted circumvention. Dispositions within s.127 implied dispositions by the company, not dispositions of the company’s (equitable) property by a trustee purporting to vest it in a third party. Result: purchasers, provided they are in good faith and without notice, can happily thumb their noses at alleged trust beneficiaries, even insolvent ones. Quite right too.

But there was also good news for beneficiaries. In the present case the trust was a Cayman trust; however, the shares, being shares in Saudi companies registered in Saudi Arabia, were situated in Saudi Arabia. Now, Saudi law doesn’t accept the existence of trusts. Nevertheless their Lordships made it clear that under the Hague Convention embodied in the Recognition of Trusts Act 1987, the English courts would recognise the trust (although under Art.11(d) of the Convention the question whether a purchaser of the shares took free of it would fall to be decided by the lex situs, Saudi law). We all thought that was probably the case anyway; but it’s nice to have confirmation of one’s prejudices, especially if (as here) they are sensible ones.

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?