The Res, Arrest and Insolvency

National Admiralty Seminar 2009 - Federal Court of Australia

Presented by
Frazer Hunt^[1] and John Levingston^[2], Piper Alderman

Precis

This discussion deals with three issues. It highlights the difference in priorities between Admiralty and Insolvency, and two issues which the Admiralty Court can determine but which are beyond final determination in insolvency.

The Admiralty priorities are determined by the Admiralty Court following the judicial sale of the ship or other property (the res) to a buyer and creation of the sale fund in the Admiralty Court. Claims are made against the sale fund and the competing claims are determined by the Admiralty Court and payments made. The Admiralty Court provides an outcome which cannot be provided by the Insolvency Court:

Extinguishes all maritime claims against the res; and

Passes clear title in the res to the purchaser.

A sale of the res by a liquidator leaves the res liable to future arrest in a foreign port by claimants in Admiralty.

This presentation is in two parts:

The facts and questions and a claims matrix as an exercise.

Finally, an example of a Court Practice Direction is attached concerning Cross-Border Insolvency and Cooperation with Foreign Courts or Foreign Representatives

The facts and questions

Background

1 NSW Line Ltd is a South Australian incorporated ship owner employing office staff ashore in its Sydney office and a Master and crew on board its Ro-Ro ship the ‘Bondi Tram’ (estimated value US$15million). There are other ships currently under arrest in Canada and New Zealand as security for Admiralty claims.

2 NSW Line owns real estate worth about A$3million secured by a registered mortgage of $2million to a local bank.

3 The ‘Bondi Tram’ is registered mortgage security to the Bank of the South Pacific in Vanuatu for US$12 million.

4 Due to the significant worldwide downturn in container trade NSW Line has become insolvent and ceased paying employees and creditors in December 2008.

The ‘Bondi Tram’

5 On 1 August 2008 the ‘Bondi Tram’ was arrested by the Federal Court Marshal in Perth for the charterer and she was released upon cash security of US$5million being provided. The dispute is being determined by London arbitration and the funds were transferred to an escrow account in London by consent of the parties, pending the outcome of the arbitration. No award has been given.

6 On 1 April 2009 Ice Cold Containers Inc (ICCI) of New York arrested the ‘Bondi Tram’ at Sydney claiming unpaid rent for leased containers (US$1million) and on-board container handling forklifts (US$300,000). The Container Lease Agreement was signed in New York, with US governing law and a New York Courts exclusive jurisdiction clauses. It also contains a term by which NSW Line acknowledges that ICCI has a contractual maritime lien under US law. ICCI also claims return of 600 leased containers (value US$1million) on board on 'Bondi Tram' and at on-shore terminals.

7 The Master and crew of the ‘Bondi Tram’ have claims for their ‘wage’ entitlements, including leave and superannuation totaling A$0.5 million and Master’s disbursements (US$30,000).

8 The Sydney Office staff have unpaid wages, leave and superannuation entitlements of A$400,000.

The Liquidator

9 On 6 April 2009 Mr Max Smart was appointed by the Supreme Court of South Australia as the Liquidator of NSW Line and was unaware of the Admiralty proceedings until he started to examine the affairs of NSW Line. Mr Smart is familiar with the Corporations Act 2001 and recently attended a seminar on the Cross-Border Insolvency Act 2008. He regards the claims in Admiralty as an anachronism and contrary to his role in achieving the public policy objective of collecting all the assets for distribution to all creditors.

10 Mr Smart wrote to everyone who appeared to be in possession of the assets of NSW Line, including:

a. ICCI and other persons who arrested NSW Line ships in Canada and NZ demanding their release from arrest and delivery to him;

b. Inch by Inch solicitors in London demanding payment of the US$5million to his trust account in Adelaide;

and was surprised by the responses which included completely unacceptable offers to release the ships from arrest if he paid their claims in full, together with the Admiralty Marshal fees and expenses of the arrests and legal costs to date. Inch by Inch simply refused Mr Smart’s demand telling him he had no jurisdiction over the fund.

11 In the face of these refusals, on 15 April 2009 Mr Smart obtained orders in the South Australian Supreme Court requiring ICCI to ‘do all things and sign all documents’ so as to enable him to take possession of the ‘Bondi Tram’, and ditto with arresting parties for the other ships in Canada and NZ. He relied on his powers under the Corporations Act 2001 (Cth) and the Cross-Border Insolvency Act 2008 (Cth) which adopts the Uncitral Model Law on Cross-Border Insolvency.

12 Mr Smart has also written to all employees including the masters and crews of the ships, telling them their wage claims will be dealt with under the Corporations Act 2001 (Cth) and advising them that because NSW Line is in liquidation they cannot bring proceedings in any court for their unpaid wages.

13 The Sydney Office Manager of NSW Line has been employed by the Liquidator (for the moment), but he is anxious about the outstanding A$10,000 on the NSW Line corporate credit card issued in his name which he used to pay telephone and electricity accounts to keep the office open (A$2,000) during the difficult period prior to appointment of the Liquidator and for disbursements on account of The ‘Bondi Tram’ just before the arrest in Sydney (A$8,000).

The Issues

14 Consider these facts, and using the claims matrix below, indicate whether the claims will be resolved by the Admiralty Courts in various jurisdictions, or the Liquidator under the Corporations Act 2001 (Cth) or the Uncitral Model Law on Cross-Border Insolvency.

The Claim Matrix

	Item	Location	Asset	Claims
1	Real estate	Sydney	A$3million	Registered mortgage $2million
2	Office Staff 'wages'	Sydney		A$400,000
3	Sydney Manager credit card (office expenses)	Sydney		A$2,000
4	Sydney Manager credit card (for ship's disbursements)	Sydney		A$8,000
5	'Bondi Tram'	Arrested in Sydney	US$15million est)	Ship's Mortgage US$12million
6	London arbitration fund	London	US$5million	Not finalized
7	Master and crew wages	Sydney		A$500,000
8	Master's disbursements	Sydney		US$10,000
9	ICCI Container lease	Sydney		US$1.5million
10	Other ships under arrest	Canada and NZ	US$40million	Mortgages $30 million plus other claims
11	Marshals fees and expenses of arrest	All ports		$unknown
12	Legal costs of claimants	All ports		$unknown

Talking points

Cross border insolvency

1. The Model Law appears in the Cross-Border Insolvency Act 2008 (Cth), Sch 1, and has the force of law^[3] in Australia within the jurisdiction of the Federal Court for bankruptcy proceedings, and the Federal Court and State and Territory Supreme Courts for corporate insolvency.^[4] The Federal Court, State and Territory Supreme Courts also exercise Admiralty jurisdiction. The Model Law sets out its objectives, which, apart from protecting debtor interests and the rescue of a financially troubled business, do not seem to be in conflict with Admiralty. The Act sets out the functions of the trustee in bankruptcy and the registered liquidator in a corporate insolvency,^[5] provides access for foreign creditors^[6] to Australian insolvency proceedings,^[7] application for recognition of foreign proceedings^[8] which requires a full disclosure of all foreign proceedings in respect of the debtor known at the time of the application^[9] and which become subsequently known.^[10]

2. The Model Law provides a right of direct access to Australian courts (Art 9), but the sole fact of making an application does not make the applicant amenable to the jurisdiction for any purpose other than for the application (Art 10), though the foreign representative can apply to commence a proceeding (Art 11), participate in a proceeding (Art 12), and foreign creditors have the same rights as Australian creditors (Art 13). Notice of the foreign claim must be given to Australian and foreign creditors advising what information is to be filed (Art 14). The Model Law sets out provisions concerning the recognition of a foreign proceedings and relief, (Arts 15-24) including the certified copy of the decision commencing the foreign proceeding and appointing the foreign representative or other evidence and a statement identifying all foreign proceedings with presumptions to be made, and setting out the bases of a decision to recognise a foreign proceeding.

3. The Model Law requires co-operation between courts and with foreign representatives (Arts 25-27) to the maximum extent, including direct contact with foreign courts and representatives implemented by any appropriate means with some forms of co-operation listed. However, the court may refuse to grant relief where it would interfere with the administration of a foreign main proceeding under an insolvency law where the debtor has its centre of main interests (Art 19.4 and Art 2, "Definitions"). After recognition of a foreign main proceeding, concurrent proceedings are restricted to the debtor's assets in Australia (Art 28), and where there are concurrent proceedings, the Australian court is required to seek co-operation and co-ordination and is subject to a number of limitations (Arts 29-30).

4. Secured claims are preserved: Model law Art 42.

Without prejudice to secured claims or rights in rem, a creditor who has received part payment in respect of its claim in a proceeding pursuant to a law relating to insolvency in a foreign State may not receive a payment for the same claim in a proceeding under [identify laws of the enacting State relating to insolvency] regarding the same debtor, so long as the payment to the other creditors of the same class is proportionately less than the payment the creditor has already received.

5. Potential for conflict between Admiralty and insolvency courts^[11] is raised directly by the Model Law which provides the following relief (summarised) and effect (inter alia) of recognition of a foreign main proceeding (Arts 19-21):

(a)  staying execution against the debtor's assets;

(b)  entrusting administration or realisation of assets to the foreign representative or another person designated by the court, in order to protect and preserve the value of assets;

(c)  relief in Art 21 para 1(c) – suspending the right to transfer, encumber or otherwise dispose of debtor assets, (d) – examination of witnesses and taking evidence, and (g) – granting additional relief.

6. The potential for conflict prior to sale of the res appears to be ameliorated by (b) which is wide enough to include entrusting administration or realisation of assets to the Admiralty Marshal.

7. In a winding up, the order is in favour of all creditors and contributories as if the application was a joint application and employees (along with all other claimants) may not begin or proceed with a claim against the company for payment of entitlements except with leave of the court and subject to any terms the court imposes.^[12]

8. However, the Corporations Act 2001 (Cth)does not apply to claims in Admiralty, and the res is beyond the reach of the liquidator, as only the Admiralty Court can sell the res with a clear title which is recognised internationally.

The Admiralty Claims

The Sydney Manager’s credit card (ship’s disbursements amount) (Item 4)

9. The office manager’s disbursements were made as agent and on account of the ship and are a general maritime claim: s4(3)(r); but are not a maritime lien as they are not the master’s disbursements.

The ship’s mortgages (Item 5)

10. The Bank of the South Pacific has a proprietary maritime claim s4(2)(a)(iii) and is a secured creditor in Admiralty, but comes after the maritime liens, s15.

11. The mortgagee is also a secured creditor under the Corporations Act 2001.

The London arbitration fund (Item 6)

12. This fund was provided as security for a charter party claim. The fund would be provided either for the release of The ‘Bondi Tram’ from arrest or as consideration for not proceeding to arrest.

13. The question is the status of this fund :

a. while it is held by the Admiralty Court; and

b. after it is released by consent of the parties from the Admiralty Court to an escrow account.

Master and crew wages and master’s disbursements (Items 7 and 8)

14. The master and crew ‘wages’ claims are both a maritime lien in Australia : Admiralty Act 1988 (Cth) s15(2)(c); and a general maritime claim s4(3)(t), but this recognition might not exist in some jurisdictions.

15. The master’s disbursements are also both a maritime lien s15(2)(d) and a general maritime claim s4(3)(r). In Australia, they have the same priority as wages^[13] if they are disbursements made in the ordinary course of the ship’s use, but do not include wage advances made by the Master after the arrest.

16. The maritime lien exists independently of the personal liability of the ship owner, and is a claim in rem against the ship, even if there is no claim in personam against the ship owner. It is not wholly dependent on an express or implied contractual term. And, significantly, sale of the res does not defeat the lien which continues with the res until the claim is satisfied.^[14]

17. If the ship is to be released to the Liquidator, sufficient funds should be provided to secure the maritime lien wage claims.^[15]

18. The on-shore office staff do not enjoy the priority of the maritime lien and come after secured creditors against sale proceeds subject to a floating charge but after secured creditors with a fixed charge.^[16]

ICCI claim (Item 9)

19. The Container Lease asserts a maritime lien established by contract and whilst recognized in some jurisdictions, it is not recognized in Australia. This raises the tension between procedural and substantive law: see The Halcyon Isle [1981] AC 221, 232 Lord Diplock, (a slim majority), categories of maritime lien cannot be extended except by statute. In Australia such additional maritime liens are not recognized: See ALRC 33 [123]; Morlines Maritime Agency Ltd & Ors v the Proceeds of Sale of the Ship "Skulptor Vuchetich [1997] FCA 1627; [1997] FCA 432 (15 May 1997).

Claims against other ships under arrest (Item 10)

20. Each ship will probably be sold by the Admiralty Court and represented by a ship sale fund. The different classes of claims : maritime liens, proprietary maritime claims and general maritime claims will be made against one or other of the ship sale funds. Claimants cannot continue to maintain claims against all three ships and will have to elect against which fund they wish to claim. The maritime lien claims and mortgagees can expect to be paid in full and the general maritime claimants will probably only receive a pro rata payment.

21. The Admiralty Act 1988 (Cth) governs the arrest of the ‘Bondi Tram’.

22. Admiralty claimants will be interested in forum shopping and bringing their claim in the most favourable jurisdiction for recovery, eg ICCI whose contractual lien will be recognized in some but not all jurisdictions.

Admiralty Marshal’s fees and expenses of the arrest and sale (Item 11)

23. These are paid first, and are protected by the Admiralty Rules 1988 (Cth):

a. Rr 39(1), 41 and Form 12 (personal undertaking to the Court);

b. R53 which provides that the Marshal may refuse to release a ship (or other property) despite an Order being made, unless arrangements satisfactory to the Marshal have been made for the payment of his fees and expenses in connection with the custody of the ship (or property) whilst under arrest;

c. R74 which provides that the Marshal’s fees and expenses are part of the expenses of the sale of the ship or other property.

Legal fees of claimants (Item 12)

24. These take the same priority as the claim.

The Claim Matrix

	Item	Location	Asset	Claims	Resolution by? A–Admiralty L–Liquidator
1	Real estate	Sydney	A$3million	Registered mortgage $2million	Mortgagee
2	Office staff ‘wages’	Sydney		A$400,000	L
3	Sydney Manager credit card (office expenses)	Sydney		A$2,000	L
4	Sydney Manager credit card (for ship’s disbursements)	Sydney		A$8,000	General maritime claim s4(3)(r)
5	‘Bondi Tram’	Arrested in Sydney	US$15million (est)	Ship’s mortgage US$12million	Proprietary maritime claim s4(2)(a)(iii) but subject to higher priorities
6	London arbitration fund	London	US$5million	Not finalized	General maritime claim s4(3)(d) and once award made s4(3)(u) including interest
7	Master & crew wages	Sydney		A$500,000	Maritime lien s15(2)(c) General maritime claim s4(3)(t)
8	Master’s disbursements	Sydney		US$10,000	Maritime lien s15(2)(d) General maritime claim s4(3)(r)
9	ICCI Container lease	Sydney		US$1.5million	General maritime claim s4(3)(m). Maritime lien not recognized in Australia
10	Other ships under arrest	Canada and NZ	US$40 million (est)	Mortgages $30million plus other claims	Same as above
11	Marshal’s fees and expenses of arrest	All ports		$unknown	Admiralty Rules
12	Legal costs of claimants	All ports		$unknown	Admiralty Rules

SUPREME COURT OF TASMANIA

PRACTICE DIRECTION

No. 2 of 2009 27 February 2009

The following Practice Direction is published by direction of the Chief Justice, the Honourable Justice Crawford.

Cross-Border Insolvency – Cooperation with Foreign Courts or Foreign Representatives

The Cross-Border Insolvency Act 2008 (Cth) (the Act) provides in s 6 that, subject to the Act, the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL) (the Model Law), with the modifications set out in Pt 2 of the Act, has the force of law in Australia. The English text of the Model Law is set out in Schedule 1 to the Act.

Chapter IV of the Model Law, comprising Articles 25–27, provides for cooperation with foreign courts and foreign representatives in the cross-border insolvency matters that are referred to in Article 1 of the Model Law.

Articles 25 and 27 of the Model Law, as modified by s 11 of the Act, and as presently relevant, provide:

Article 25

Cooperation and direct communication between the Supreme Court of Tasmania and foreign courts or foreign representatives

1. In matters referred to in article 1, the court shall cooperate to the maximum extent possible with foreign courts or foreign representatives, either directly or through a registered liquidator (within the meaning of section 9 of the Corporations Act 2001).

2. The court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.

Article 27

Forms of cooperation

Cooperation referred to in article 25 may be implemented by any appropriate means, including:

(a) Appointment of a person or body to act at the direction of the court;
(b) Communication of information by any means considered appropriate by the court;
(c) Coordination of the administration and supervision of the debtor’s assets and affairs;
(d) Approval or implementation by courts of agreements concerning the coordination of proceedings;
(e) Coordination of concurrent proceedings regarding the same debtor.

The form or forms of cooperation appropriate to each particular case will depend on the circumstances of that case. As experience and jurisprudence in this area develop, it may be possible for later versions of this Practice Note to lay down certain parameters or guidelines.

Cooperation between the Court and a foreign court or foreign representative under Article 25 will generally occur within a framework or protocol that has previously been approved by the Court, and is known to the parties, in the particular proceeding. Ordinarily it will be the parties who will draft the framework or protocol. In doing so, the parties should have regard to: (sets out internet links to the Model Law).

^[1] Solicitor and Partner in Piper Alderman, Sydney.

^[2] Barrister at the Sydney Bar, Adjunct Professor of Law University of Canberra and Conjoint Professor of Law University of Newcastle.

^[3] Cross-Border Insolvency Act 2008 (Cth), s 6: "Model Law to have force of law in Australia", and as required by Art 3, ss 21, 22 provide that Model Law prevails in event of inconsistency with Bankruptcy Act 1966 (Cth), s 29; Corporations Act 2001 (Cth), Pt 5.6 Div 9 and Pt 5.7, and Model law is in addition to and not in derogation of Corporations Act 2001 (Cth), s 601CL.

^[4] Cross-Border Insolvency Act 2008 (Cth), s 10: courts competent to perform functions under Model Law.

^[5] Cross-Border Insolvency Act 2008 (Cth), s 11 refers to Bankruptcy Act 1966 (Cth) s 5(1); Corporations Act 2001 (Cth), s 9.

^[6] Cross-Border Insolvency Bill 2008 (Cth), s 12(1) provides that claims of foreign creditors (other than tax and social security) must not be ranked lower than unsecured creditors solely because claim is by a foreign creditor.

^[7] Cross-Border Insolvency Bill 2008 (Cth), s 12: "Access of foreign creditors to Australian insolvency proceedings".

^[8] Cross-Border Insolvency Bill 2008 (Cth), s 13: "Application for recognition of foreign proceeding": "foreign proceeding" defined in Art 2 as "a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation".

^[9] Cross-Border Insolvency Bill 2008 (Cth), s 13(a): Bankruptcy Act 1966 (Cth), (b) Corporations Act 2001 (Cth) s 416; (c) Corporations Act 2001 (Cth), Ch 5 or s 601CL.

^[10] Cross-Border Insolvency Bill 2008 (Cth), s 14: "Subsequent information", and Art 18.

^[11] See J Levingston Admiralty and insolvency courts in conflict (2008) 82 ALJ 849

^[12] Corporations Act 2001 (Cth) s471B.

^[13] Admiralty Act 1988 (Cth) s15(2)(d).

^[14] The Batavia (1822) 2 Dods 500; 165 ER 1559; The Nymph (1856) Swab 86; 166 ER 1033.

^[15] Turners and Growers Exporters Ltd v The ship "Cornelis Verolme" - [1997] 2 NZLR 110.

^[16] Corporations Act 2001 (Cth) ss596AA(1).

Top