Thought leadership from our experts

Has the Hanjin insolvency trumped ship arrest in Australia?

It is an unfortunate reality that insolvency law now plays a large part in the risk management decisions of the worldwide shipping industry. Consequently, we all now have at least one eye on the development of local and world wide cross border insolvency law.

2016 saw the fall of Hanjin Shipping. Despite pleas to its creditors for debt restructure, Hanjin filed for protection on 31 August 2016. On 1 September 2016 the 6th Bench of the Bankruptcy Division of the Seoul Central District Court ordered that a rehabilitation procedure for Hanjin be commenced pursuant to Pt 2, Ch I of the Debtor Rehabilitation and Bankruptcy Act 2005 (Republic of Korea).

Hanjin recently informed the Australian Federal Court that: "the goal of the rehabilitation proceedings is to rehabilitate insolvent debtors by restructuring their debt". Only time will tell if Hanjin are to survive and if so, how the mountain of debt will be restructured, and to what end for the very long line of unfortunate creditors.

The fallout during September 2016 was like nothing seen before in Australia. Freight in respect of iron ore shipments was intercepted by unpaid ship owners. Hanjin's container ships were to be found hovering outside port in fear of arrest. Terminals took it upon themselves to detain containers and request that receivers (rather than Hanjin) paid the terminal charges and related port costs. The burden on cargo interests increased further with demands from Hanjin for security in respect of the return of the empty boxes. To add to the misery, when the cargo interests attempted to return the empty box, no one at Hanjin Australia was answering the question of where they should put it causing a container storage capacity problem.

The Hanjin California, was arrested and ordered by the Admiralty Marshal to berth at Glebe right in the heart of Sydney so bringing this high profile shipping insolvency directly into the public consciousness.

The fall of Hanjin also triggered a sea change in the approach adopted by the Australian Federal Court to applications for cross border insolvency protection by an (insolvent) shipping company.

Summary of the Cross Border Insolvency position in Australia

In Australia, foreign insolvency administrators may apply, pursuant to the Cross Border Insolvency Act 2008 (Cth) (CBIA), for recognition in Australia of insolvency proceedings commenced overseas.

The CBIA commenced operation on 1 July 2008. It provides that the English text of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) has the force of law in Australia, subject to the modifications made by the CBIA itself. The Model Law is set out in Schedule 1 to the CBIA.

Article 20 of the Model Law provides that:

1) Upon recognition of a foreign proceeding that is a foreign main proceeding:

a) Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed;

b) Execution against the debtor's assets is stayed;

c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.

2) The scope, and the modification or termination, of the stay and suspension referred to in paragraph 1 of the present article are subject to [refer to any provisions of law of the enacting State relating to insolvency that apply to exceptions, limitations, modifications or termination in respect of the stay and suspension referred to in paragraph 1 of the present article]..

Article 20(2) is subject to s16 of the CBIA which states that:

For the purposes of paragraph 2 of Article 20 of the Model Law (as it has the force of law in Australia), the scope and the modification or termination of the stay or suspension referred to in paragraph 1 of that Article, are the same as would apply if the stay or suspension arose under:

a) the Bankruptcy Act 1966; or

b) Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act 2001;

as the case requires.

Pre Hanjin

The judicial commentary on the question of whether the CBIA trumped the right to arrest a vessel in rem pursuant to the Admiralty Act 1988(Cth) has been developing steadily without conclusion for the last three years, as can be seen from the following leading cases.

Yu v STX Pan Ocean Co Ltd [2013] FCA 680

Back in 2013, in the matter of Yu v STX Pan Ocean Co Ltd the Federal Court refused to grant an order entrusting the administration and realisation of all of the defendant's assets located in Australia to the foreign representative. The defendant had no personal assets in Australia and therefore the focus of the order was the protection of its ships which occasionally called at Australian ports.

Buchanan J highlighted the fact that the terms of the Model Law failed to recognise and take appropriate account of International Maritime Law and the operation in Australia of the Admiralty Act 1988 (Cth) that provides the Court with in rem jurisdiction. Of particular concern were the rights of those creditors with maritime liens (e.g. for damage done by a ship, for seaman's wages, for salvage etc). These common law rights provide claimants with a security interest over a vessel even if it is sold prior to arrest. The Court recognised the significant question of public interest connected with the ability to enforce a maritime lien (as well as other claims) in rem.

The Court acknowledged that the terms of Article 20 of the Model Law will take effect automatically but saw no reason why the arrest of a ship owned or operated by the defendant could not be sought in appropriate circumstances.

Whether or not an arrest warrant would be issued would depend on the circumstances of the particular case, the reason why the arrest was sought and the interest sought to be vindicated by the action in rem.

Given that each case would turn on its own particular circumstances, the Court made an order that any application for arrest of the defendant's vessels should be put before a Judge (rather than a Registrar as is usual) and full disclosure should be made to the Court of the fact of the foreign proceedings recognised under the CBIA and the contents of the STX Judgment.

In making this order, the Court chose to adopt a pragmatic approach. It did not need to decide the issue because there was no potential arresting party before it. If a party wished to arrest then the Court would consider the merits of the arrest application in light of the protection afforded by the Model Law.

Yakushiji v Daiichi Chu Kisen Kaisha [2015] FCA 1170

In the more recent 2015 decision of Yakushiji v Daiichi Chu Kisen Kaisha the Federal Court again considered whether protection from arrest should be granted.

The Court appreciated that there was a difficulty with the intersection between international insolvency law and the enforcement of maritime claims. The Court concluded that orders made pursuant to the Model Law should not be seen as necessarily defeating proper maritime claims. The question of the status of any such claims would need to be resolved in litigation unless agreed. In this regard the Court noted that it would be wrong for the Court to 'forestall any vindication by such claimants against the interests of the rehabilitation'.

HUR v Samsun Logix Corporation [2015] FCA 1154

In the matter of HUR v Samsun Logix Corporation the Federal Court again grappled with the obvious tension between cross-border insolvency law and the enforcement of maritime liens in rem.

The Court noted that in respect of a maritime lien in rem, the creditor's position is unique compared with other remedies provided in domestic law. Creditors may only be able to enforce their secured maritime liens whilst those ships are in the temporary jurisdiction of the Admiralty Court. The Court noted that in future proceedings the Court might frame 'an order to clarify that a secured creditor, to the extent necessary, should have leave to, and may, exercise all the rights to bring proceedings against or in respect to any property of the debtor, including the commencement and prosecution of proceedings in rem under the Admiralty Act, to which the security interests of the creditor extends'. This would put creditors in the same position as if section 471C and section 444F of the Corporations Act (which provide exceptions to stays for secured creditors) applied.

However the Court did not make this order and it is not clear why the Court was not prepared to make that step. Instead the Court simply made the same orders as in STX and so put off the argument to another day.

Kim v SW Shipping Co. Limited [2016] FCA 428

The recent decision of the Federal Court in Kim v SW Shipping Co. Limited extended the judicial discussion still further.

Rares J relevantly stated:

"It may be that in future proceedings of this kind, consideration might be given to framing an order to clarify that a secured creditor, to the extent necessary, should have leave to, and may, exercise all the rights to bring proceedings against or in respect of any property of the debtor, including the commencement and prosecution of proceedings in rem under the Admiralty Act, to which the security interest of that creditor extends. An order so framed would make clear that, in cases where the proceedings in rem are on a maritime lien under s 15 of the Admiralty Act, they can be brought because they are of a kind that ss 471C and 444F ordinarily recognise are appropriately excluded from an automatic stay of remedies that would otherwise be open to unsecured creditors in order properly to protect a secured creditor's rights."

In summary, Rares J pointed to the fact that the rights of secured creditors are carved out of the mandatory stays provided for by section 5.4B of the Corporations Act which addresses the liquidation of a company in Australia and concluded that the rights of holders of maritime liens could similarly be carved out of the cross border insolvency protection afforded to shipowners.

However, Rares J did not have to conclude on the issue because he followed the pattern developed in the above cases and left the door open for the arrest of a vessel and determination of the issue against the facts of the particular arrest.

The impact of Hanjin

In the matter of Tai-Soo Suk v Hanjin Shipping Co Ltd [2016] FCA 1404 the Federal Court has been willing to expressly protect Hanjin owned and operated vessels from arrest to further the objective of the foreign rehabilitation.

On 23 September 2016, with the container vessel Hanjin Milano unable to enter port to discharge for fear of arrest, Jagot J made the following interim orders on an urgent ex parte basis:

2. Pursuant to article 19 of Schedule 1 of the Cross Border Insolvency Act 2008 (Cth) that until 30 September 2016 or until further order of the Court:

a) No person may enforce a charge or lien over the ship "Hanjin Milano" its cargo, containers and bunker fuel and oil;

b) The owner or lessor of property (other than cargo) that is used or occupied by, or in the ship "Hanjin Milano" cannot take possession of the property or otherwise recover it.

These orders protected not only Hanjin property but third party property such as cargo, containers and fuel from arrest or detention. The Hanjin Milano proceeded to berth and discharge without being arrested.

On 30 September 2016, Her Honour made similar interim orders in respect of all Hanjin owned and operated vessels save for the Hanjin California which was already under arrest before Rares J in the Federal Court. The Hanjin California was released on 4 October 2016 for reasons unconnected with cross border insolvency protection.

On 23 November 2016, Jagot J recognised the Korean rehabilitation proceedings as a foreign proceedings within the meaning of the Model Law and made the following relevant orders:

Pursuant to article 21 of the Model Law, except with the written consent of the Plaintiff, or until further order of the Court:

* * *

b) No person may enforce a charge or lien over any vessel in the possession or control of the defendant, its cargo, containers and bunker fuel and oil;

c) The owner or lessor of property (other than cargo) that is used or occupied by, or in any vessel in the possession or control of the defendant cannot take possession of the property or otherwise recover it.

* * *

g) No enforcement process in relation to property of the defendant can be begun or proceeded with, or application for issue of a warrant for the arrest in Australia of any vessel owned or chartered by the defendant can be made, without the written consent of the plaintiff or leave of the Court.

Jagot J concluded that the Korean rehabilitation proceedings share similarities with a scheme of arrangement and most closely resemble a voluntary administration under part 5.3A of the Corporations Act as opposed to the winding up of a company which is addressed by part 5.4B of the Corporations Act. In doing so, Jagot J distinguished the issues from those addressed by Rares J in SW Shipping above.

Her Honour concluded that:

"I am satisfied that the relief sought is necessary to protect the major revenue-generating assets of Hanjin in Australia, enable an orderly and equitable administration of rehabilitation proceedings, and to appropriately empower the plaintiff to deal with Hanjin's assets in Australia as and when necessary."

Her Honour did not determine the issue of whether common law rights in rem fell outside the cross border insolvency protection. Her Honour was content that in making the orders that those having maritime liens were not prejudiced. An unpaid crew for example, could prosecute an in rem claim against a Hanjin vessel with leave of the Court. An application for arrest and an application for leave to proceed could be advanced simultaneously. As such, a party having a maritime lien against a Hanjin vessel is practically in no worse position than if the stay had not been granted.

While technically this analysis is correct, the time and costs to prepare both arrest application and application for leave may form a practical barrier to arrest for a relatively small crew wages claim or a claim in relation to a container vessel spending less than 24 hours in port. On balance, we are of the view that the approach adopted by the previous judges may have struck a more reasonable balance between the interest of the holders of maritime liens and the furtherance of the rehabilitation.

The conclusion from these recent decisions is that the Australian Courts are willing to tailor the cross border insolvency protection to the particular nature of the foreign proceedings to further that process despite the competing claims of those holding statutory or common law rights in rem. If the foreign proceedings are akin to a winding up, then protection from in rem arrest is less likely to be granted than for administration or rehabilitation proceedings.

This difficult issue, arising out of the unique nature of international maritime law, remains live for the time being in Australia. Whilst many lawyers would like to see it determined, the overriding desire is to see our industry return to more healthy times.

Article written by Joe Hurley (Partner and National Group Head) and Chris Sacré (Special Counsel) HWL Ebsworth Lawyers, Australia. HWL Ebsworth is a leading Australian commercial law firm with a national presence, headed by Joe Hurley; former chair of the IBA Maritime Law Committee.