Ship Arrests, Maritime Liens and Cross-border Insolvency

Steven Rares *

3 November 2017 

RTF - 307 KB

1. When major multinational groups in the shipping industry collapse, international trade stalls, creditors quail, maritime lawyers gloat and maritime courts around the world go into overdrive. The recent collapses, in November 2014, of OW Bunker, the world’s largest bunker fuel supplier and, in September 2016, of Hanjin Shipping, the world’s seventh-largest container carrier, generated numerous legal disputes about the recognition or status of maritime liens, the nature of a sale of consumables like bunkers or fuel, and the circumstances in which different legal systems deal with the cross-border complexities of multinational insolvencies.

2. I wish to deal with aspects of issues that arise in three common and often interrelated situations involving international maritime commerce, namely, maritime liens, contracts for the sale of goods and cross-border insolvency.

Maritime liens

3. Maritime law and domestic insolvency or bankruptcy law each deal with the rights of creditors to payment of their claims. Over centuries, maritime law has developed a sophisticated and generally harmonious system of dealing with cross-border insolvencies. Indeed, in 1759 the great English commercial judge, Lord Mansfield CJ said^[1]: “… the maritime law is not the law of a particular country, but the general law of nations”.

4. This system enabled creditors and claimants to arrest or attach a ship when she was in the jurisdiction of a court of Admiralty. Obviously, this system worked among only sea and riverine trading nations but it did so efficiently, in both common law and civilian law jurisdictions. The shipowner then had three choices, first, he could decide to pay the claim, secondly, he could appear in the proceedings and put up security to obtain release of the ship so that, in general, the fund could answer the claim if the Admiralty court found in favour of the claimant, or, thirdly, he could ignore the process and allow the Admiralty court to sell the ship and distribute the proceeds amongst all persons who made and established maritime claims against the ship.

5. Further, ships have traded internationally for millennia. When they enter a port they usually need supplies of goods and services for their next voyage, such as food, fuel or bunkers, and sometimes repairs. Often the owner or master or a charterer obtains those supplies on credit and the ship sails. She may never return to that port or country. Nowadays the ship is often owned as the only asset of a company incorporated in, for example, Liberia or Mongolia, which is, sometimes a subsidiary of a multinational group.

6. The lex maritima, law maritime, developed, across both the civil and common law, a sophisticated array of processes and remedies to enable creditors to enforce debts and other liabilities incurred by ships as they travelled from port to port. Both systems of law required a connection between the ship’s owner, or his agent, her master, and the contract creating the debt.

7. Australian law, like English law, treats the filing of a claim in rem – i.e. against the ship – as creating a secured right, even though her owner becomes insolvent after the filing of the writ for arrest but before any arrest is made^[2]. In the United States, Canada and some other jurisdictions, local statute law created rebuttable presumptions that debts incurred in connection with the supply to a ship of necessaries – i.e. goods or services – gave the creditor a maritime lien over her.

8. A maritime lien is a privilege, or inchoate right, that the lex maritima provides over the ship. Such a right is enforceable in civil law proceedings against her owners, and in common law proceedings against the ship herself as well as her owners, if they choose to appear, generally, in priority to all other interests, including mortgages. And, a maritime lien is enforceable even against a change in ownership or security interest that occurs after the maritime lien arises. The maritime law developed and enforced maritime liens to protect specific interests, including those of salvors (who had saved the ship from peril), the ship’s crew, who may not have been paid by the owner before the sale of the ship, and a person who claimed to have suffered loss because of a collision with the ship. Again, a maritime lien is enforced by the arrest or attachment of the ship.

9. Very often in dealings with ships, the creditor or lien holder does not know the actual relationship between the person with whom the deal is done and the ship. So, maritime law in sea trading nations had to devise an effective, but just, set of rights and remedies that enable maritime creditors to recover their debts in jurisdictions where the ship was, without having to go to the, sometimes uncertain, place where the owner or charterer or other person owing the debt might be found. And if the creditors had to sue in say Liberia or Mongolia where the company that owned the ship was, the creditor would be likely to find the owner has no assets there while the ship could be anywhere. Such a typical scenario does not offer much prospect of money going into the creditor’s pocket. Hence, the commercial effectiveness of arresting or attaching a ship when she sails into the jurisdiction in the maritime forum.

The status of maritime liens

10. Critically, this maritime law remedy of arrest or attachment operated on the asset, being the ship, not the owner of the asset. The owner could be solvent or insolvent. The owner had a choice of joining himself to the proceedings and exposing himself to personal liability. But, if the owner decided not to appear, or become a party, the Admiralty court treated the ship as the party or defendant or the owner’s answer to the claims and sold her to realise a fund that was used to meet the claims proved against her.

11. However, the scope or extent of the power of an Admiralty court to arrest a ship varies among maritime States because of the lack of international consensus as to which maritime claims, maritime liens and ships mortgages should be recognised as universally enforceable. For example, the maritime law of North America accords the status of a maritime lien to many categories of obligation, such as the supply of goods or services, like bunkers and supplies^[3], to a ship that English or Australian law treats as maritime claims that rank lower in priority.

12. The International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-Going Ships done at Brussels on 10 May 1952 (the 1952 Convention) marked the culmination of attempts initiated by the Comité Maritime International (CMI) at its 1930 Conference in Antwerp to formulate an agreed instrument on the arrest of ships^[4]. The 1952 Convention and subsequent International Convention on Arrest of Ships done at Geneva on 12 March 1999 (the 1999 Convention), each defined “arrest” similarly^[5], but with some variation, to mean in effect any detention of a ship by a court to secure a maritime claim other than the seizure of a ship to enforce or satisfy a pre-existing judgment. The 1999 Convention broadened the list of maritime claims for which an arrest can be made and extended the class of persons, other than the owner of the ship, in respect of whose conduct or dealings a right to arrest could be exercised.

13. The list of 17 maritime claims in Art 1(1) of the 1952 Convention foreshadowed the adoption of a common core of legislative provisions in, at least, the United Kingdom, Canada, New Zealand and Australia that expressly created or confirmed the categories of maritime claims that were within the respective in rem jurisdictions of those countries’ maritime courts^[6]. These included claims within Art 1(1)(k), namely, a claim arising out of “goods or materials wherever supplied to a ship for her operation or maintenance”. In countries that follow the jurisdictional theory of the Commercial Instruments and Maritime Liens Act^[7] (the US Liens Act), a claim based on such a supply can be used to found the arrest of a ship based on a statutory maritime lien, even though the contract for the supply did not involve the ship’s owners or master as a party^[8].

14. Even then, the number of express categories varies from jurisdiction to jurisdiction. Australia’s Parliament recognised, in the Admiralty Act 1988 (Cth), four categories of proprietary maritime claims, including claims relating to a mortgage of a ship or shares in a ship^[9] and 23 categories of general maritime claim^[10] including categories that overlap with the separate statutory right to proceed in rem on a maritime lien for salvage^[11], damage done by a ship^[12], master’s or crew member’s wages^[13] and master’s disbursements^[14].

15. However, the Act did not define or identify all categories of maritime liens, including foreign maritime liens, that could be enforced in an action in rem in Australia under s 15(1). This is because the Australian Law Reform Commission in its 1986 report, Civil Admiralty Jurisdiction, on which the Act was based, considered that this was best left to the courts^[15]. The Commission chose not to define maritime liens in detail because of uncertainties in the then existing Australian and international law^[16]. Similarly, the 1952 and 1999 Conventions recognised^[17] the lack of international consensus on the recognition and enforcement of maritime liens by expressly leaving that topic well alone.

16. Last year, in The Ship “Sam Hawk” v Reiter Petroleum Inc^[18], a Full Court of five judges of the Federal Court of Australia, on which I sat, considered for the first time whether Australian law would recognise and enforce a foreign maritime lien that would not have existed had the relevant events occurred in the forum. While the vessel at the centre of this case was not one related to OW Bunker, the finding by the primary judge that the ship could be arrested in Australia based on a foreign maritime claim that did not exist under Australian law^[19] subsequently led to an “unprecedented” number of ship arrests in Australian waters relating to the OW Bunker collapse^[20]. Ultimately, the decision of the primary judge was reversed by the Full Court and the arrest was set aside.

17. The facts of the case are like many that arose independently following the collapse of OW Bunker and subsequent claims based on the existence of a US Liens Act type of maritime lien. Egyptian Bulk Carriers Inc had time chartered the Hong Kong flagged ship from her owners on terms that required, as is usual, the charterer, at its expense, to bunker the ship during the term of the charter. The charterparty did not authorise the charterer to contract for necessaries on behalf of the owners or to bind Sam Hawk with a maritime lien for necessaries.

18. In late 2013, the charterers arranged with a Canadian bunker supplier, Reiter Petroleum Inc, to bunker the ship when she called at Istanbul in Turkey. Before bunkering occurred, the ship’s master issued a “no liability” notice to the initial bunker supply subcontractor and the shipping agent at Istanbul that stated that the owners did not accept liability to pay for bunkers which was the responsibility of the named charterer. After this, Reiter issued a revised quote that the charterer accepted and, on 7 December 2013, Sam Hawk received the bunkers. The revised quote stated that it was subject to Reiter’s standard terms and conditions, that included one clause requiring any contract to be construed according to the law of Canada. However, that clause was itself subject to cl 7 that provided that Reiter was entitled to assert a lien wherever it found the ship and that the law of the United States would apply to determine the existence of any maritime lien regardless of the court in which proceedings were instituted^[21].

19. Needless to say, the charterer failed to pay for the bunkers. In May 2014, Reiter wrote to the owners informing them of this and seeking their assistance in persuading the charterers to honour their payment obligations. About 11 months after the bunker supply at Istanbul, Reiter filed a writ in rem in the Federal Court of Australia on which Sam Hawk was arrested. The writ made two claims, namely, that Reiter had, first, a maritime lien^[22] and, secondly, a general maritime claim for necessaries supplied to the ship^[23], on the basis that the owners were a relevant person who would be liable were the action commenced in personam^[24].

20. The Full Court summarily dismissed the latter claim as having no reasonable prospect of success, because there was no evidence that the owners in any way had held the charterer out as having authority to bind them in a contract^[25]. However, opinions differed on the hitherto unanswered question of whether Australian law should recognise and enforce a foreign maritime lien that had no counterpart in domestic law.

21. In substance, the majority of the Court held that Australian law would be likely to recognise only claims to maritime liens for collision, bottomry and salvage, and claims by the master for disbursements made by him or her and for wages of the master and crew. That is the same position as in English law following the decision of the majority of the Privy Council^[26] in Bankers Trust International Ltd v Todd Shipyards Corporation (The Halcyon Isle)^[27].

22. The majority indicated that the wider class of maritime liens for supply of necessaries to a ship that the laws of the United States of America, Canada and similar jurisdictions recognise, were not likely to be classified as maritime liens at all under Australian law. Allsop CJ and Edelman J decided this point as one of their rationes decidendi^[28], and Kenny and Besanko JJ said that, without deciding the issue, they favoured the same approach^[29]. By contrast, I favoured the view that^[30]:

“Australian choice of law principles for both contract and tort claims ordinarily require the lex loci or lex causae to be used to classify the substance of the particular claim. Accordingly, a claim on a maritime lien that is properly so characterised under the law of the place where it attached, ordinarily, will be maintainable under s 15(1) of the Admiralty Act even though no such maritime lien would attach if the same events had occurred in Australia.”

23. Clearly enough, the priority given by the law of the forum to the claimed right will follow from the forum’s characterisation or classification of it. That is why the Federal Court of Australia has developed the practice of allowing an Admiralty judge to determine whether to allow an arrest to occur as an exception to the general stay under Art 20(1) of the UNCITRAL Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law^[31], a topic that I will return to below.

The nature of a sale of consumable fuel where the vendor retains title

24. The collapse of OW Bunker also led to an interesting and controversial decision of the Supreme Court of the United Kingdom dealing with the frequently occurring situation in which the vendor supplies goods, like bunkers, under a contract that provides for it to retain title to those goods, and subcontracts for another party (the physical supplier) to stem the bunkers for the ship, where the subcontract gives the physical supplier a different right to retain title over the bunkers. Obviously, these conflicting contractual provisions will lead to contested claims for priority and rights to be paid where the vendor becomes insolvent, as OW Bunker did, before it has paid the physical supplier and the ship consumes the bunkers.

25. In PST Energy 7 Shipping LLC v OW Bunker Malta Ltd^[32], OW Bunker sold something to the shipowner for Res Cogitans and the question was whether the subject matter of the sale was goods – ie: the bunkers themselves – or a right to consume the bunkers, notwithstanding the conflicting retention of title provisions, during the period of 60 days allowed by OW Bunker terms before which payment was due to it. In contrast, the physical supplier’s terms provided for a standard retention of title until payment that was due after 30 days, without any right of OW Bunker, as its purchaser, to allow anyone to consume the fuel before payment of the physical supplier. Unlike many of the other OW Bunker cases brought in Australia and elsewhere, neither OW Bunker nor the physical supplier claimed an enforceable maritime lien against the shipowner in the English arbitration and subsequent litigation. Lord Mance JSC, giving the judgment of the Supreme Court, explained that^[33]:

The essential problem arises from the insolvency of the OW Bunker Group and the concerns of vessel owners that they may be exposed to paying twice over, once to their immediate bunker supply group now insolvent, and again to the ultimate source of the bunkers who may claim rights under a reservation of title or maritime lien.

26. In that case, the facts were as follow. On 4 November 2014, OWB Malta (OWBM) agreed with the owners to supply 1,000 mt fuel oil and 100 mt gasoil to Res Cogitans on OW Bunker group (OWB) standard terms. The terms provided for a credit period of 60 days, a retention of title clause under which property in the bunkers would not pass to the shipowners until payment in full, and that, from the moment of delivery, the vessel was entitled to use the bunkers for the purposes of propulsion.

27. Two days later, on 6 November 2014, OWBM’s ultimate parent OW Bunker & Trading A/S (OWBA/S) announced that it was applying to a Danish Court for restructuring. OWBM had obtained the bunkers under a contract with OWBA/S, which itself had purchased the bunkers from another supplier, Rosneft Marine UK Ltd, which had purchased them from a related company RN Bunker Ltd. The latter, RN Bunker, in fact delivered the bunkers to the ship, Res Cogitans.

28. Rosneft had a contract with OWBM’s Danish parent, OWBA/S, that incorporated Rosneft’s standard terms, including that payment be made 30 days after delivery and a retention of title clause that, unlike OWB’s standard terms, did not allow the vessel owners to consume the bunkers before payment that was due 30 days after delivery.

29. Once OWBA/S began its court proceedings for restructuring, it committed an act of default under its facilities with its bank, ING Bank NV. ING asserted a right to recover as assignee of the debt, if any, owed by the shipowners to OWBM in respect of the supply of bunkers.

30. About two weeks later, on 17 November 2014, Rosneft became aware that OWBA/S might not pay it. Rosneft then asserted that it remained the owner of the bunkers and indicated that it would seek payment from the shipowners. By this time the vessel had consumed part of the bunkers for propulsion during the 30 day period in which Rosneft’s terms of contract with the OW Bunker group provided that the unpaid for bunkers remained Rosneft’s property. Of course, under the contract between OWBM and the shipowners, that consumption was allowed during the 60 day credit period, and OWBM lost title to the consumed bunkers.

31. The owners did not pay either Rosneft, OWBM or ING – no doubt fearful that such a payment to one of those claimants might not discharge the debt or liability to the other. Instead, the owners began arbitration proceedings against OWMB (as supplier) and its assignee ING seeking a declaration that they (the owners) were not bound to pay for the bunkers supplied or alternatively damages for breach of contract because OWMB was not able to pass title to them.

32. The key question before the arbitrators, and then the courts, was whether the head bunker supply contract, which incorporated OWB’s standard terms, was a contract for the sale of goods within the meaning of the Sale of Goods Act 1979 (UK) (the SOGA). Under s 2(1) a contract for sale of goods was a contract by which the seller agreed to transfer the property or title in the goods to the buyer for a money consideration, called the price. And s 2(4) provided that where the property in the goods was transferred from the seller to the buyer under the contract, that contract was called a sale. An agreement to sell became a sale, under s 2(6), when the time elapsed or the conditions were fulfilled subject to which the property in the goods was to be transferred.

33. The Supreme Court concluded relevantly that, first, the contract with the owners was not one of sale under s 2 of the SOGA^[34] and secondly, there was no implied term in that contract that OWBM would perform its obligations to the supplier, Rosneft, by paying promptly for the bunkers^[35]. The Court focused on the fact that the essential nature of the contract was the liberty to the owners to consume all or any part of the bunkers supplied without acquiring property in them or having paid for them^[36]. The Court found that the contract was a “sui generis transaction” and not a contract of sale^[37]. The owners had not agreed to pay for the transfer of title in the bunkers, but in fact had only acquired the right to consume them over the period before which they paid for them and only if any bunkers were then unconsumed would property in that residual fuel pass. However, there had been an agreed, assumed fact that the bunkers had all been consumed before the 60 days passed^[38].

34. The unsatisfactory situation that the use of separate issues and agreed facts created is exposed by Lord Mance JSC’s finding that^[39]:

As regards bunkers in existence at the time of any payment, OWBM would of course have to have had or at least be able to pass title. Had they been unable to do so, then, maybe, the owners could have treated OWBM as in breach of condition and terminated the contract, though they would at the same time have had to refrain from further use of the bunkers. OWBM would then have been unable to maintain a claim for the whole price, and would have had to assert either a contractual or a restitutionary claim (it is unnecessary to consider which) to pro rata payment for the bunkers consumed. But none of this is relevant, and for that reason it was not explored in submissions. What happened was quite different. No payment was ever tendered by the owners. The owners simply continued to use the bunkers under the contractual liberty until they were all consumed. So far as material, no basis appears for treating the contractual liberty as ending with the 60-day period for payment, if payment was not then made; so long as the contract remained in force, the liberty would continue on its face until payment or complete consumption of all the bunkers supplied. The issues before the court do not involve any claim that OWBM had no right to permit such use, or that the owners are or may be exposed to any risk of double exposure, either by reason of RMUK's claim (never so far as appears formally pursued) or on any other basis. On the presently assumed facts, therefore the owners are simply liable for the price, albeit under a contract sui generis, which is not one of sale. (emphasis added)

35. Thus, the Supreme Court held, because of the constraints of the agreed facts and separate issues, that OWBM was entitled to payment for the bunkers, even though it had not paid for, and never had property in, them. That reasoning raised but left unanswered several questions.

36. If Rosneft retained property in the bunkers, then it is difficult to see how OWBM had any capacity to give the owners permission to destroy or consume them by allowing the ship to use them for its propulsion. As Lord Mance JSC noted, the owners had not asserted that OWBM had no right to permit such use^[40]. But the question arises as to why was OWBM’s contractual case not flawed. That is because OWBM had no authority to allow the owners to consume the bunkers or otherwise to deal with them by reason of Rosneft’s retention of title clause which gave OWBM no right to do anything with the bunkers unless and until OWBM paid for them, payment only being due after 30 days, i.e. nemo dat quod non habet.

37. Instead, the Supreme Court found that the owners had no defence to OWBM’s claim for the agreed price^[41]. This also left the owners potentially liable to pay for the bunkers twice – first, to ING as the assignee of the insolvent OWBM under the contract, and, secondly, to the physical supplier of the fuel, who may have had a claim based on conversion of its property, and possibly a maritime lien if the supply had occurred in circumstances where the US Liens Act applied.

38. Professor Andrew Tettenborn, a well-known contracts and maritime academic, pointed out that the Supreme Court’s finding that the contract was not a contract for the sale of goods was “problematical”. He wrote that it created significant conceptual problems for everyday sales of what, to a non-lawyer, are goods bought on credit^[42]. Many contracts contain unqualified retention of title clauses, like Rosneft’s, in situations where it is likely that the parties expect that the purchaser will consume some or all of the goods before paying for them to acquire title. Rosneft, as a commercial bunker supplier, must have expected that the ships to which it supplied would use the bunkers, or at least some of them, before the 30 day time for payment had arrived. Its own standard terms created an artifice.

39. Common sense suggests that both parties would have expected that the subject matter of the supply would be wholly or partially consumed before payment was due as is the case in many everyday transactions, such as the supply of wine to a retail customer or steel girders for use on a building site. Prof Tettenborn questioned what happens to the property in the steel that is different to that in the bunkers or wine? He argued that many contracts for sale of goods deal with a conditional promise to transfer property later: e.g. a contract where risk in the goods, but not property, passes before the price is payable^43]. He contended that the contract is still properly to be classified as one for the sale of goods even if they are destroyed before the time for payment arrives and the buyer remains liable for the price.

40. Further, experience of the consequences of the collapse of OW Bunker in other jurisdictions has revealed other issues, sometimes involving the interposition of a charterer as purchaser of the bunkers. In jurisdictions in which the US Liens Act or an analogue applies, cases have considered the question of whether OWB, or ING as its assignee, or the physical supplier had a maritime lien over the vessel for the liability to pay for bunkers.

41. In Canpotex Shipping Services Ltd v Marine Petrobulk Ltd^[44], Russell J, in the Federal Court of Canada considered, on an interpleader summons, whether a charterer was jointly liable to both OWB/ING and its subcontractor, Marine Petrobulk, the physical supplier of the bunkers to the vessels. The charterer paid the total claimed by OWB/ING into Court. Russell J held that, under different contracts to the ones considered in PST^[45], Petrobulk had both a contractual right for payment, as the physical supplier, against the charterer and a maritime lien over the ship under s 139 of the Marine Liability Act, S.C. 2001, c. 6^[46]. The charterer was directly liable to Petrobulk for the price it charged OWB and, on payment, the charterer was discharged pro tanto from the equivalent liability to OWB/ING^[47], however it remained liable to pay OWB or ING the amount of the mark-up that OWB would have earned from the original sale. By contrast, Russell J held that, as OWB had not paid Petrobulk for the bunkers, and Petrobulk had supplied them (and would be paid from moneys paid into Court), neither OWB nor ING could assert a contractual right against the owners or maritime lien against the vessel^[48].

42. However, the Canadian Federal Court of Appeal reversed Russell J, finding that the judge did not have jurisdiction, on the interpleader summons, to extinguish the shipowners’ contractual liability to Petrobulk or the ship’s liability in relation to any maritime lien under s 139 of the Marine Liability Act^[49]. Nadon JA, with whom Dawson and Webb JJA agreed, found that the charterer would be entitled to the extinguishment of its liability only in respect of the contractual claims and, upon that happening, Petrobulk would have no reason to pursue its claim to a maritime lien against the vessels, based on s 139^[50]. However, Nadon JA noted that if the charterer had been found to be contractually liable to OWB/ING and these entities received the interpleader funds, Petrobulk would still have a right to arrest the vessels owned by the owners and have the vessels sold if its maritime lien claim was not satisfied^[51].

43. In January 2017, Judge Valerie Caproni in the Southern District of New York decided three OW Bunker “test” cases^[52] in interpleader proceedings. She found, in line with the general trend of United States District Courts, that physical suppliers of bunkers did not obtain a maritime lien over vessels because they had not provided the necessaries “on the order of” the owner or a person authorised by the owner, as required under the US Liens Act: that is, the owner did not specifically direct OWB to hire that supplier^[53]. In comparison, she found that OWB/ING did hold in rem claims against the vessels because it had “provided” the bunkers to the vessels^[54]. The suppliers delivered the bunkers to the vessels at the direction of OWB and thus did not enter into a contract with the vessels or their agents^[55].

44. However, less than one month later, Judge Hinkle in the District Court for the Northern District of Florida held that the physical supplier had entered into a contract with the owners because the ship’s engineer had signed a certificate for the fuel after delivery that contained an acknowledgment of liability for “the debt incurred by this transaction”^[56]. He also held that the physical supplier had acquired a maritime lien because it had supplied, that is, “provided”, the necessaries (bunkers) to the vessel^[57]. All that ING could recover was the margin that OW Bunker had made on the sale, being the difference between its price to the charterer and the price that the physical supplier charged to OW Bunker.

Arresting ships and the UNCITRAL Model Law on Cross-Border Insolvency

45. As I said at the outset, the lex maritima, or law maritime, provides traditional remedies to persons with rights to proceed in rem on maritime claims and maritime liens. In times past, a person claiming to have a maritime claim or maritime claim could seek to arrest a ship in any country into whose waters she had sailed. Then the claim would be heard and determined in the court of that forum, regardless of the solvency or corporate group structure of her owners. The local maritime court had plenary jurisdiction to sell the ship by judicial sale and in doing so would clean her hull of all maritime liens and other claims. The proceeds of sale would be distributed to creditors or claimants in order of priority determined under the local law, irrespective of ship’s owners financial position, or if they were insolvent, the position in the owners’ country of incorporation or centre of main interests.

46. However, during the late 20^th century, the reach of multinational corporations and groups spread, with their impact particularly evident when recessions occurred. The international consequences of a multinational’s economic collapse manifested in the impracticality and capriciousness of using only local assets of the corporation to pay local creditors in a forum and then return any surplus to the place where the company was incorporated or where the group holding company was. That could lead to vastly different distributions to creditors of the insolvent multinational company depending on the particular country in which its assets, debts or creditors happened to be.

47. This led eventually to the development of the Model Law. The preamble to the Model Law states that its purpose is to provide effective mechanisms for dealing with cross-border insolvencies and to promote, among other objects, fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor and protection and maximization of the value of the debtor’s assets^[58]. The Model Law implements the concept of universalism, or “modified universalism”, by requiring enacting countries to stay any proceedings against a debtor upon recognition of the existence of insolvency proceedings in the debtor’s centre of main interests^[59].

48. This system has been complicated now by the Model Law which Australia has given the force of law by dint of s 6 of the Cross-Border Insolvency Act 2008 (Cth). Legislation based on the Model Law has been adopted in 43 States in a total of 45 jurisdictions^[60], including the United Kingdom, Canada and South Korea but not, at this stage, the People’s Republic of China.

49. Recently, some Korean shipping lines have availed themselves here of their local equivalent of what is colloquially called “Ch 11” in the United States. This has highlighted the fact that those who drafted the Model Law did not take into account the existing, functional and well developed international law maritime, especially the impact of any stay in respect of proceedings in rem on a maritime lien or a secured or proprietary claim in admiralty matters.

50. The issues in cross-border insolvencies of shipping companies are not as straightforward as in other cases, and the Model Law has the capacity to affect the enforcement of the remedies for maritime claims and maritime liens. That is because of the potentially wide operation of the general stay prohibiting the commencement or continuation of proceedings against the debtor or its assets under Art 20(1). Importantly, Art 20(2) makes the scope of the stay under Art 20(1) subject to the local law in such a situation. But, that begs a very big question.

51. In a liquidation, usually secured creditors can enforce their rights regardless of a liquidator’s and unsecured creditors’ rights. But in a debtor-in-possession reconstruction, like Ch 11 of the United States Bankruptcy Code, secured creditors’ rights can also be rearranged. So, a court that grants interim or final relief under Arts 19 or 21 respectively must work out what the local equivalent is of the foreign proceeding it is being asked to recognise: i.e. the court must decide, first, whether secured creditors keep their rights or those rights will be suspended in the forum and be determined in the foreign proceeding and, secondly, what is the closest local equivalent of the foreign insolvency process so that the stay under Art 20 will reflect, in the most analogous manner, the nature of the protection that the debtor actually has in the foreign jurisdiction and should have under the local insolvency law.

52. In cases involving shipping groups, the foreign representative usually will seek to obtain provisional relief in the forum in the nature of a general stay preventing the commencement or continuation of proceedings concerning the debtor’s assets, rights, obligations or liabilities (as contemplated in an order for recognition of a foreign main proceeding under Art 20(1) or a foreign proceeding under Art 21(1)(a)). However, Art 22 requires the Court, in granting or denying interim or final relief, to be satisfied that the interests of all interested persons, including the creditors and the debtor, are adequately protected.

53. Very often, foreign representatives of collapsed shipping groups bring recognition proceedings before commercial or insolvency judges with no experience of maritime law or its remedies. They have succeeded in some cases in obtaining court orders staying commencement or continuation of all proceedings, in the language of Art 20(1)(a), “concerning the debtor’s assets”. Such a stay will prevent even the making of an application to arrest a ship, because that is a proceeding that concerns the ship which is the debtor’s asset.

54. Actions in rem, like mortgages over land, give secured rights. But the action in rem against a ship can only be exercised in the transient moment during which she is in the jurisdiction of the court where the arrest or attachment is sought. Once she is released or, if she is protected, from arrest, she is gone. Unless modified under Art 22, a stay created by Art 20(1)(a) against commencing or continuing proceedings “concerning the debtor’s assets” – such as a ship – could forestall automatically any arrest or attachment.

55. The Federal Court of Australia is a national court with general jurisdiction over both maritime and insolvency matters. It has addressed this situation by requiring applications under the Model Law for recognition of foreign proceedings involving shipping companies to be made to specialist judges assigned to its Admiralty and Maritime National Practice Area who could assess whether it was appropriate to issue an arrest warrant or whether the plaintiff ought simply prove in the foreign main proceeding. The Court’s practice in such cases is to modify the stay order by requiring any application to arrest a ship owned or chartered by the debtor, that is brought by a person claiming to hold a security interest in her, to be made to a judge of the Court and, to draw to the judge’s attention to the reasons for those orders and to the earlier decision in Yu v STX Pan Ocean Co Ltd (South Korea)^[61].

56. Allsop CJ explained the purpose of this qualification to what otherwise would be a general stay preventing any arrest in Yakushiji v Daiichi Chuo Kisen Kaisha^[62] as follows:

the protection given by the orders to a shipping company should not be seen as necessarily defeating proper maritime claims that are lien claims, and the question of the status of any claims that are lien claims (as well as the status of any claims that are “quasi lien claims”, to which I have referred), would need to be resolved in any litigation unless the matter were agreed. It would be wrong to make orders now that would forestall any vindication by such claimants against the interests of the rehabilitation. Likewise, it would be wrong to prevent the rehabilitation being supported by the Act on the mere possibility of the existence of these claims.

57. In such situations, a court may have to strike balances between competing public policies reflected in statutes conferring rights to proceed in rem, on the one hand, and, on the other, providing for the orderly administration in another jurisdiction of a debtor’s affairs under the Model Law. There will be cases where, as I suggested in Hur v Samsun Logix Corporation^[63], the interests of justice require that an unpaid ship’s crew be entitled immediately to enforce their maritime lien over her because^[64]:

The fact that they are unpaid and are on a ship from which, if penniless, they cannot escape is a very good reason to ensure that however else the automatic stay in Art 20(2) of the Model Law operates, claims to such maritime liens are protected and immediately enforceable without any requirement for prior leave to be sought. If the stay in Art 20(2) were construed to preclude members of a ship’s unpaid crew from exercising their maritime lien by arresting or attaching the ship when she reached port, the consequence might be the de facto forced labour or enslavement of the crew until the ship finally reached the crew’s or ship’s home port.

58. On the other hand, as in cases involving arrests to seek security for an arbitration, it may be appropriate for the maritime court to obtain security before releasing a ship from arrest, but to require the plaintiff to prove, such as by filing a proof of debt, the claimed liability in the jurisdiction where the foreign main proceeding is located so that all creditors in the same class might be treated equally, if the circumstances warrant doing so.

59. In the end, whether a local court should decline to exercise its jurisdiction after arrest (or beforehand) in cases where a recognition order has been made under the Model Law, is a matter that probably needs to be approached, at least for common law lawyers, on a case by case basis, while principles are developed after careful thought and experience.

60. Clearly enough, the priority given by the law of the forum to the claimed right will follow from the forum’s characterisation or classification of it. That is why, as I have explained above, the Federal Court of Australia developed the practice of allowing an Admiralty judge determine whether to allow an arrest to occur as an exception to the general stay under Art 20(1) of the Model Law.

61. One additional issue that has come up in practice is that the foreign representatives do not appear to respect the obligation in Art 18 to inform the court of the forum promptly or at all if the foreign proceeding in his or her home jurisdiction comes to an end. The effect of this is that the stay has remained in place in Australia even though there no longer is a current foreign proceeding to which it relates as occurred recently in three cases, including that of the Hanjin collapse^[65].

62. In November 2016, Jagot J granted a stay over any action against the Hanjin Milano after recognising rehabilitation proceedings in South Korea as a foreign main proceeding pursuant to Art 17(2) of the Model Law^[66]. However, the foreign representative failed to comply with Art 18 by not notifying the Court of a substantial change in the status of the foreign proceeding, whereby the rehabilitation proceedings were terminated and Hanjin declared bankrupt, and his own loss of status as a foreign representative^[67]. In April 2017, Jagot J vacated the recognition orders and stays on the actions of creditors.

Conclusion

63. Collapses of multinational companies in the shipping industry present new and complex challenges for maritime lawyers and courts as they attempt to navigate the choppy waters of international maritime commerce and balance the traditional remedies of maritime law and the administration of multinational insolvent estates. Courts in several jurisdictions have produced important, and at times conflicting or controversial, decisions on disputes about the status of maritime liens, the nature of a sale of consumables, and the impact of the Model Law on a creditor’s ability to arrest or attach a ship. It is likely that courts will continue to face these, and new, issues into the future.

64. This “clash” between traditional maritime law remedies and the theory of (modified) universalism in the administration of multinational insolvent estates has inevitably led to complex legal disputes about first, the status of maritime liens, secondly, the nature of a sale of consumable fuel where the vendor retains title, and, thirdly, the circumstances in which Courts that must apply the Model Law will stay or preclude maritime creditors from arresting or attaching ships. As the substantial litigation caused by the OW Bunker and Hanjin Shipping collapses indicate, implementing predictable legal regimes to achieve judicial decisions, with as much international consistency as possible, remains a challenge for courts around the world.

65. All trade and commerce involves risks, including the risk that one party to a transaction will become insolvent or, as more frequently occurs, make its creditors wait for payment until the creditor takes court action. The risks become more complex if, as is usually the case in maritime commerce, one or more parties is or are located in different countries. The solutions for some of those risks that the lex maritima, or law maritime, developed over millennia need to be understood and accommodated into the new and important development of the Model Law. Those mechanisms will need to be developed together by the courts to harmonise and systemise a general methodology to regulate multinational insolvencies so as to produce fair and common treatment of all creditors in an insolvency, regardless of where they are located or where the insolvent incurred the debts. Hopefully, courts will adopt a pragmatic and principled approach to recognising maritime liens as a special secured right in cross border insolvencies of shipping companies and groups.