Collapse of Hanjin, cross border insolvency and maritime claims

Monday, 26 September 2016 00:01 -     - {{hitsCtrl.values.hits}}

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The entire shipping industry witnessed the long-awaited turn in business environment with last week’s news that Hanjin Shipping, a South Korean shipping giant which is considered as the seventh largest container carrier in the world would finally announce its untitled-2move for liquidation after months of recovering attempts that sank into unsalvageable debacle. 

Although this scenario is quite annoying to many corners of the shipping industry where over 95% of world cargo are transported through container lines; the drastic and much deadly freight market loss expected a sudden fall of a carrier in this over-crowded ship volumes where scrap market has evenly dropped down leaving out any option of scrapping additional ships in the trade. 

The decision of Hanjin’s banks to cease financial support not only led the shipping giant’s Board to vote for a voluntary winding-up but also led several leading ports including the Korean Busan Port denying entry to Hanjin vessels fearing that the company may not be able to meet its docking and dry docking charges in the days to come in wake of the insolvency proceedings that start in its domestic courts in South Korea. 

Already, 10 Hanjin vessels have been seized in China with more expected of possible detention on grounds of non-settlement of outstanding claims, with one other ship been seized in Singapore. According to the South Korean Maritime Ministry, about 540,000 TEUs are already afloat Hanjin vessels in this time of turmoil. 

Dangers of detention

While the like successor to Hanjin, M/s Hyundai Merchant Marine Co., planning to deploy 13 of its vessels to ease cargo distribution between the ports of US/Europe and South Korea, massive supply distribution issues have arisen in almost all parts of the world where Korean exports have faced significantly greater degree of delivery and competition fiascos with their market competitors in the forthcoming seasonal time. This would further enlarge if those who have maritime claims against the bankrupt carrier seek injunctions in various corners of the world under Admiralty proceedings in law. 

Such law suits will not only create panic among cargo owners in disputed vessels but also bring about complexities in Cross-Border Insolvencies. Shipping being an international business on, which carriage of goods overwhelmingly depended on movement of sea-traffic; legal complexities would definitely put the trade on an uncertain hold. 

For example, Sri Lanka being a country that applies Rules of Admiralty as per the English Common Law of Admiralty, any claimant having an interest over a ship in any of the following situations that may relate to a possible action against a vessel of a company before an insolvent proceeding, may face an anticipatory arrest. 

These include; any claim for loss/damage to goods carried in a ship; any claim arising out of ay agreement relating to the carriage of goods in a ship or to the use, or hire of a ship; any claim in respect of goods or materials supplied; any claim in respect of services rendered, to a ship for her operation or maintenance; any claim in respect of repair or equipment of a ship or dock charges or dues; any claim by a Master or member of the crew of a ship for wages, or for any money of property which is recoverable as wages; and any claim by Master, Shipper, Charterer, or Agent in respect of disbursements made on account of a ship. These have been well spelt in Section 2(1) of the Admiralty Jurisdiction Act No. 40 of 1983 where claimants against a rightful maritime claim could well found its entitlement to lead for an arrest of a vessel alleged to have committed an act of the aforesaid by virtue of Section 7 of the said Law. In such circumstance, the only way of releasing the vessel from arrest would be either pay into court, the amount so claimed in the action or an amount equal to the appraised value of the vessel or property which has been arrested/detained; OR provide bail, guarantee, or other security to the satisfaction of the claimant for the payment of such amount.  

Cross-border complexities

However, much of the complexities arise in a like scenario than that of a general arrest circumstance. The reason behind it, is that the parent entity is facing an insolvency proceeding back home. With the company filing for bankruptcy protection last Wednesday, 31st August 2016, has refused permission to offload or take aboard containers due to lack of guarantees that tugboat pilots and stevedores would be paid. In this aftermath, several jurisdictions including China have reported seizing of Hanjin vessels for the benefit of its creditors in China. 

Such actions may lead into a massive outcry of multiple legal battles around the world in respect of the ships seized in such nature and the cross boarder insolvency proceedings already institute in the shipping company’s real seat. While accepting Hanjin’s bankruptcy protection procedure, a day after the filing of it by the shipping company, the Seoul Central District Court has said in a statement that “we decided quickly to begin court receivership for Hanjin Shipping given its presence in the local shipping industry and its impact on the economy as a whole”. 

The total debt being Won 6.1 trillion which is equivalent to $ 5.4 billion by the fall of June 2016, there may be some hope for its creditors when the Hanjin management is expected to place its revival plan on 25 November 2016 with Hyundai most probably acquiring the assets of Hanjin through fresh funds injected by state-run Korea Development Bank. 

Nevertheless, any imminent arrest of ships in other jurisdictions as aforesaid or of an anticipatory basis would definitely add pressure on the existing scenario as well as on future negotiations in a possible take-over. The existing lacuna in the legal domain in respect of cross-border insolvencies in shipping thus creates unnecessary complications. At a time where Comite Maritime International (CMI), which consist of international maritime lawyers representing various States look to adopt a more stringent uniformity in this area, the Hanjin case would certainly fuel the necessary legal thinking among maritime lawyers. 

As Derrington and Turner states in The Law & Practice of Admiralty Matters (2006), “insolvency law is tricky enough to navigate in the context of domestic insolvency proceedings brought against companies registered and operating in the forum, but where the foreign companies and/or windings-up are involved, they are murky and treacherous, and must be navigated with care”. At present, States have not been able to agree upon a uniform application of cross border insolvency rules through any international convention adopted for such purpose. 

However, the Model Law on Cross Border Insolvency adopted by the United Nations Conference on International Trade Law (UNCITRAL) in 1997 can serve as a mediator towards any dispute between the court proceedings in two or more countries on one main subject matter where unilateral acts of seizer and/or sale of assets would end up in non-profitable outcomes for the parties in dispute. 

As the Model Law is not yet in force in most countries, it would simply oust its application in like scenarios, leading such proceedings to be mandated by classical approaches involved in the conflict of laws theories and in recognition of foreign judgments’ rules in private international law. 

Resolving conflicts

In this legal jargon, it would be quite advantages for courts of the different States to use this Model Law to resolve the impacts of competing jurisdictions, if the law of the State so allows its application. Especially in an action in Admiralty under ‘in rem’ procedure, these complications could well be settled by attending to questions such as; (a) whether there’s foreign proceeding and/or a foreign main proceeding; (b) whether an application has been made to the court for recognition of the foreign proceedings in which the foreign representative has been appointed; (c) whether the application has been brought in a way that the proceeding will recognise the foreign liquidation; (d) whether the stay of commencement, continuation, and/or execution against the debtor fulfil the ends of justice. 

The cardinal rule shall be to protect the creditor from any undue process involved in insolvency procedure where such creditor’s claim fails legal recognition. By reinstating such confidence in insolvency procedure would enable the creditor from accepting a stay of proceedings.

Nevertheless, in the case of cargo, immediate and expeditious resolution of the dispute at hand is quite imminent rather than agreeing to a stay of proceedings. An interesting scenario occurred in the Canadian case of Holt Cargo Systems Inc v. ABC Containerline NV (Trustees of) in 2001 where the Bankruptcy Court in Canada framed an anti-suit injunction to prevent the parties proceeding in the Federal Court of Canada to dispose of a ship that has been arrested. It was found that the purpose of such act was to send the proceeds of the ship back to Belgium to satisfy the creditors in the Belgian liquidation. 

Considering the possible consequences, the Supreme Court of Canada made it clear that the maritime jurisdiction was not obliterated by the supervening bankruptcy, and went on to hold that the Bankruptcy Court ought not to have made such an order. In another English case, the court went on to state that “the question is not as to where a dispute as to liability or damages should be determined, but whether the appellants should be able to secure the benefit of their attachments, and thus promote themselves from unsecured to secured creditors”. This would thus promote maritime claimants to ‘secured creditor’ statuses.         

Concluding remarks

Carriage of goods by sea is becoming increasingly lucrative for both the cargo owner as well as the carrier in international trade. Based on such perceptions, container fleets tend to increase in numbers over the recent years while competing with like traders in the shipping business. Over the years, the shipping industry saw some gigantic moves of several players claiming themselves as ‘mega carriers’. This prompted not only for several carriers to collapse but also to consolidate through formation of alliances in order to survive in the industry. 

Continuous thrive to own ships and order for new-builds have been top priorities of almost all shipping companies in the world that has in-turn resulted in the sharp drop of freight rates due to less demands with over capacity. While collapses in shipowning industry could effect in the rise of freight rates, it would cause negative impact on shippers having to pay higher rates than those that have been existing during the past several months. Obviously, the situation is quite favourable for the shipowners when the rates rise-up but definitely not on the shippers’ and consumers’ perspective. 

In a very recent report, Bloomberg opined the like successor to Hanjin, Hyundai Merchant is itself in the midst of creditor-debt restructuring programme while extending 14% of its shares to Korea Development Bank after swapping debt for equity. In contrast, Hyundai Merchant is in a better position to acquire the stakes of Hanjin in accommodating Korean exports to safeguard its economy. This approach would leave out any doubt that the outstanding claims if any against Hanjin cannot be settled worldwide in light of possible cross border insolvency issues. 

(The writer is the Executive Director of Ceylon Shipping Corporation, and former Dean of the Faculty of Management and Social Sciences at CINEC Maritime Campus. He is an Attorney-at-Law by profession who holds a PhD in Maritime Law, and is the Sri Lanka’s representative to Comite Maritime International).

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