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Admiralty proceedings against a vessel are necessarily territorial in nature. A debtor’s vessel may sail into a certain jurisdiction and be arrested and sold for the benefit of creditors who both have Admiralty in rem claims against the vessel and actively take the required steps in the Court proceeding concerned. Creditors not having rights of claim of that nature would miss out or only have a very low priority in respect of the proceeds of sale. In contrast, the Insolvency (Cross-Border) Act 2006 (“Act”) is designed to facilitate the realisation of the debtor’s assets in a single jurisdiction in accordance with the pari passu principle (that is, equably, without preferring one creditor – no matter where they are located – over another).
The recent decision Kim and Yu v STX Pan Ocean Co. Limited [2014] NZHC 845 is the leading (and only) New Zealand case on the interrelationship between Admiralty proceedings and the Act.
The key players were the claimants, namely various Inchcape Shipping group entities (including the New Zealand member of the group, ISS-McKay Limited) and Horizon Shipbrokers Limited, STX Pan Ocean Co. Limited (“STX”), a Korean shipping company, and You Sik Kim and Chun Il Yu, appointed as STX’s administrators.
Hesketh Henry acted for the Inchcape Shipping group entities.
By way of background, all the claimants had provided shore services to STX. Horizon Shipbrokers Limited brokered charter parties in respect of a certain vessel, New Giant, and other vessels between STX and New Zealand based charterers. The Inchcape Shipping group entities were port agents for STX and provided services to ships that STX chartered.
The timing of events across New Zealand and Korea was critical:
- 7 June 2013: STX, in financial difficulty, applied to the Fifth Bankruptcy Division of the Seoul Central District Court (“Korean Court”) for an order commencing rehabilitation proceedings. Korean rehabilitation proceedings are the equivalent of New Zealand administration proceedings.
- 7 June 2013: the Korean Court made two interim orders. The first prevented STX from paying or securing any of its existing liabilities or dealing with its assets. The second prevented creditors from exercising various recovery rights.
- Between 12 and 14 June 2013: the claimants filed statutory in rem Admiralty proceedings against the vessel New Giant. At all material times, STX was the charterer by demise of New Giant. The vessel was arrested on ISS-McKay Limited’s application on 14 June 2013.
- 17 June 2013: the Korean Court made an order placing STX in rehabilitation and appointed Kim and Yu as administrators.
On 25 June 2013, the administrators applied for recognition in New Zealand of the Korean rehabilitation proceeding as a foreign main proceeding under the Act. The effect of recognition is to trigger an automatic stay of all proceedings, including those in Admiralty, in New Zealand, pursuant to art 20(1) of Sch 1 to the Act. The proceeding was recognised on 1 July 2013.
The present case concerned the claimants’ subsequent application for leave to continue their statutory claims in rem under the Admiralty Act 1973 against the New Giant. The claimants relied on the Court’s discretion in art 20(2) of Sch 1 to the Act; notwithstanding the automatic stay of all proceedings, the Court may order that the stay does not apply in respect of any particular action or proceeding.
In determining whether to exercise its discretion, the Court considered the same general matters that it would consider were it exercising its comparable discretion under section 248(1)(c) of the Companies Act 1993 to allow a person to continue legal proceedings against a company that has been placed in liquidation. These are whether:
- the commencement of proceedings will enable a creditor to gain an advantage over other creditors;
- the proposed proceeding is the most convenient way of establishing the claimed right; and
- the claim is at least arguable, so that the assets of the company are not dissipated in wasteful litigation.
The Court’s focus was on whether the claimants would obtain an advantage if permitted to continue their Admiralty proceedings. This necessitated a review of the nature of the claimants’ rights and when they arose. The claimants did not have maritime liens, which are special rights attaching to the vessel and creating a security interest or charge over it immediately at the time the relevant events occurred (maritime liens arise only for certain claims, namely damage done by a ship, salvage, seafarers’ wages, Master’s wages and disbursements, and bottomry and respondentia).
Instead, the claimants had statutory in rem rights arising under the Admiralty Act. A statutory in rem claim creates a security interest or charge over the vessel when Admiralty proceedings are issued. This was at least 3 days prior to the commencement of rehabilitation proceedings in Korea on 17 June 2013. As a consequence, when the rehabilitation commenced, STX’s rights to New Giant were subject to the claimants’ secured claims. That is, the claimants would not be obtaining an advantage over other creditors in being allowed to continue, because their secured rights had already crystallised.
The administrators, however, argued that 7 June 2013, the date the interim orders were given, was the crucial date. After that date, on the administrators’ view, the claimants had effectively promoted themselves from unsecured to secured creditor status by issuing Admiralty proceedings and arresting the vessel; this had given them an advantage over other creditors.
The Korean Court’s 7 June 2013 order was in the following terms:
The administrators argued this order extended to cover the claimants’ actions. The New Zealand Court disagreed, finding the order did not purport to prevent creditors from issuing Admiralty proceedings and pursuing their in rem claims (as noted above, it being the initial step of commencing Admiralty proceedings which brings the right to security).
Further, the New Zealand Court considered that to protect itself, STX should have immediately applied for interim relief overseas for the protection of its assets. The management of STX and, following their appointment, the administrators, would have known the location of STX’s shipping fleet, and each vessel’s vulnerability to arrest by maritime lien holders and other suppliers with rights in rem in Admiralty. They took no steps to prevent any such creditors from exercising these rights.
Concluding, the Court gave the claimants leave to continue their claims against New Giant. At the time the rehabilitation proceedings were commenced on 17 June 2013, STX’s rights to New Giant were already subject to the claimants’ rights, and STX only had a residual interest in the vessel. The administrators can only administer such assets as STX had on 17 June 2013, namely the residual asset. The grant of leave to continue, enabling the residual asset to be dealt with by the administrators for the benefit of all STX’s creditors on a pari passu basis, meets the purposes of the Act.
If any of these issues have the potential to impact you or your business, please do not hesitate to contact us for any legal advice.
