MV “Sanko Mineral”

8 fathom . AUGUST 2015 Shipping Case Digest |by Andrew Chiew Ean Vooi and Jennifer James Ilango| MV “Sanko Mineral” With the current downturn in the shipping industry, shipowner insolvency is often a concern. In the MV “Sanko Mineral” (the Sanko Mineral),1 we find juxtaposition between in rem proceedings in the Admiralty court and cross-border insolvency proceedings. (i) Tokyo insolvency proceedings In July 2012, the owners of the Sanko Mineral, Sanko Holdings (“Sanko”) entered into reorganisation proceedings under the Corporate Reorganisation Act in Japan. As part of its reorganisation plan, the trustee of Sanko agreed to sell Sanko’s vessels and that the proceeds be paid in satisfaction of the finalised secured reorganisation claims. The reorganisation proceedings was recognised by Newey J in the Chancery Division of the High Court in England as the "foreign main proceeding" under the Cross-Border Insolvency Regulations 2006 in the UK. (ii) Glencore claim In the same year, Glencore Ltd brought an action in the US District Court for breach of contract of carriage against Sanko for delay in delivery of its cargo. Glencore maintained that as a matter of US law, it obtained maritime lien status over the Sanko Mineral. In September 2012, Glencore submitted a secured reorganisation claim and, in the alternative, an unsecured claim for the same amount in the reorganisation proceedings in Tokyo. The two claims were rejected by the trustee of Sanko and are pending appeal to the Tokyo District Court. There was an arbitration clause in the contract of carriage between Glencore and the Sanko Mineral providing for arbitration in London and requiring any claim to be initiated within 12 months of final discharge or be deemed to be waived and absolutely barred. No such arbitration was commenced by Glencore within the 12-month period. (iii) Mortgagee’s action in rem In April 2014, the mortgagee of the vessel initiated an action in rem and arrested the Sanko Mineral in the UK. The vessel was sold, and the proceeds of sale paid into court pending determination of priorities. Glencore contended that as a maritime lien holder under US law or as a statutory lien holder under Japanese law, its claim took priority over the bank's mortgage claim. On that basis, Glencore filed a request for a caution against release of the proceeds of sale at the Admiralty court in England pending determination of its claim against Sanko by the Tokyo court. The trustee of Sanko applied to strike out or have the caution withdrawn.2 It was held by the court that ordinarily, under English law, Glencore’s in rem claim would be time-barred because they had not commenced arbitration within 12 months of the delivery of cargo. The judge noted that, given that 1 Bank of Tokyo-Mitsubishi UFJ Ltd v Owners of the MV “Sanko Mineral” [2014] EWHC 3927 (Admlty) 2 Known as ‘Caveat Against Release and Payment’ under O 70 r 13 of the Rules of Court 2012 (Malaysia) fathom . AUGUST 2015 9 insolvency proceedings were ongoing in Tokyo, it was for the Tokyo court to determine the effect of the contractual time bar on a claim lodged in the insolvency proceedings. His Lordship held that if Glencore’s claim were not timebarred, its right of action in rem would not be lost simply because the in rem claim had been issued after the judicial sale of the vessel. It is an established principle that when a vessel is sold by the English Admiralty court, the rights in rem are transferred to the proceeds of sale. Thus, a claim could be enforced against the proceeds of sale, provided the person liable in personam on the claim (i.e. Sanko as the contractual carrier) was the beneficial owner of those proceeds. He therefore decided that if the proceeds of sale were to be paid out of court, it could only be done on the basis that the trustee of Sanko gave a strict undertaking that the proceeds of sale (after deducting a sufficient sum to protect the bank’s interest) would be kept in a separate account, pending a decision on the validity of Glencore’s claim in the Tokyo court. Impact of the decision Time bar under arbitration clause The arbitration clause in the contract of carriage between Glencore and the Sanko Mineral appears to be a typical Scott v Avery clause. 3 This clause disentitles a claimant from bringing an action if he fails to commence arbitration proceedings within the stipulated period in the contract. Under English law, there was no possibility for Glencore to resurrect its claim outside of the 12-month period. However, the court found that the question of whether Glencore could advance its claim in Tokyo, notwithstanding its failure to commence arbitration proceedings within time, was a matter for the Tokyo court to decide. The Scott v Avery clause has the same effect under Malaysian law and, unless the court extends time, the claimant is disentitled from bringing a legal action. One rationale for the principle was expressed as follows: “Having failed to take the necessary steps to abide by the agreed time frame… and having failed to avail itself of the statutory remedy provided for by s 28 of the Arbitration Act 1952 [Act 93],4 there is nothing left for the appellant to cling onto.”5 This juxtaposition between in rem proceedings and foreign insolvency proceedings does not appear to have arisen before the Malaysian courts and therefore, it remains to be seen whether the Malaysian courts will recognise the validity of a foreign insolvency proceedings commenced within the time period stipulated in a Scott v Avery clause as opposed to the commencement of arbitration proceedings. Malaysia does not have an equivalent legislation to the Cross-Border Insolvency6 legislation in the UK. For this reason, the Malaysian courts may not follow the same approach as the English court in deferring the decision on the effect of the Scott v Avery clause to the foreign insolvency proceedings. With the benefit of hindsight, it is best for litigants to commence arbitration within the stipulated time period in the arbitration clause in the contract to protect one’s claim against time bar. Statutory right of action in rem The court considered whether a claimant with a statutory right of action in rem, distinct from maritime lien, may 3 Scott v Avery & Ors [1843-1860] All ER Rep 1 4 The old section 28 of the 1952 Act has been re-enacted in s 45 of the Arbitration Act 2005 5 Damcom Telecommunication (M) Sdn Bhd v Uniasia General Insurance Bhd [2008] 6 MLJ 52; [2008] 5 CLJ 551 (CA), per Abdul Malik Ishak JCA at 88 6 UNCITRAL website (accessed 6 August 2015) 10 fathom . AUGUST 2015 enforce its claim against the proceeds of sale of the vessel by commencing an action in rem after the judicial sale of the vessel. A statutory lien refers to the right of a claimant to invoke admiralty jurisdiction by means of an action in rem in respect of a claim which does not give rise to a maritime lien. In order to commence an action in rem on this basis, the claimant must show that the person liable for the claim in personam is the beneficial owner, the demise charterer or the person in possession or in control of the ship sought to be arrested.7 The Sanko Mineral was sold by the Admiralty Marshall on 7 August 2014, but Glencore only obtained leave of court to commence an action in rem three weeks later, on 22 August. Glencore intervened in the bank’s mortgage action in rem and was seeking to recover from the proceeds of sale. Unlike a maritime lien that attaches to a vessel as soon as the cause of action comes into being, a statutory lien only crystallises when a writ in rem is issued.8 This meant that when Glencore’s action in rem was commenced, Sanko was no longer the beneficial owner of the vessel. Had it been a private sale, Glencore would have been in no better position if the writ was issued after the sale and an arrest of a vessel will not be possible. Although a private sale does not extinguish a maritime lien on the vessel, a judicial sale does. Therefore, in a judicial sale, where the vessel is sold free from all encumbrances, both the maritime lien holder and a claimant claiming under statutory lien will have no resort against the vessel. In the Sanko Mineral, the Admiralty court reaffirmed that one’s right of action in rem cannot be lost simply because the writ is issued after the judicial sale of the vessel. The judge took the view that an action in rem must be understood in the context of a long established principle that when a vessel is sold by way of judicial sale, rights in rem are transferred to the proceeds of sale. The privilege to assert one’s right of action in rem against the proceeds of sale once the vessel is sold should not be confined solely to those with maritime liens but should be equally applied to those having claims in rem. Effectively, in a case where the vessel has been sold by the Admiralty court, a claimant with a statutory lien may enforce his rights of action in rem against the proceeds of sale, so long as the person liable in personam is the beneficial owner of those proceeds. The beneficial owner in this context is to be regarded as the beneficial owner of the vessel.9 With this principle clarified, a claimant under a statutory lien will be able to bring an action in rem against a vessel that has been judicially sold by asserting his rights in rem against the proceeds of sale if he can show: (a) the claim arises in connection with a ship; (b) it is a valid claim in rem against the vessel;10 (c) the person liable in personam for the claim is the beneficial owner of the proceeds of sale; (d) an action in rem is brought within the time limit set in the order for sale of the vessel; and (e) service of the writ in rem is made on the Admiralty court (instead of the vessel) within such time. 7 Claims that can be enforced by way of statutory lien are set out in s 20(1)(c), 1(d); and s 20(2)(a) to (s) of the Supreme Courts Act 1981 (SCA). These provisions apply in Malaysia by virtue of s 24(b) of the Courts of Judicature Act 1964. 8 The Monica S (1968) P 741 9 The reference to ‘ship’ in s 21(4)(i) of the SCA will read as the proceeds of sale of the ship: see Toh Kian Sing, Admiralty Law and Practice (LexisNexis, 2nd Ed, 2007) at p 117. See also The Optima (1905) 74 LJP 94, 10 Asp MLC 147 at 149, 93 LT 638; The Acrux [1962] 1 LR 405 at 409; The Queen of the South [1968] P 449 at 461-462; [1968] 1 All ER 1163; [1968] 2 WLR 973 and The Union Gold [2013] EWHC 1696 (Admlty); [2014] 1 Lloyd's Rep 53 at para 2 10 Section 20(2)(a) to (s) of the SCA fathom . AUGUST 2015 11 Disposal of proceeds of sale Ordinarily, following a judicial sale, the proceeds of sale of the vessel will be distributed to claimants with a claim in rem pursuant to an application for determination of priorities. Under English law, a mortgagee would rank higher than a claim in contract for delay in delivery of cargo. Glencore maintained that if successful in its claim in contract in Tokyo, it will rank higher than the mortgagee bank. In the Sanko Mineral, the court took the position that the determination of priority in respect to the distribution of proceeds of sale of the vessel between the bank and Glencore remained before the Admiralty court in England pending the determination of the validity of Glencore’s claim by the Tokyo court. Following this, the judge agreed to release the proceeds of sale, after deducting a sufficient sum to protect the bank’s interest that will remain in Admiralty court, to the trustee of Sanko, with the Statutory Lien Judicial Sale Private Sale Writ in rem issued before sale Writ in rem issued before sale Writ in rem issued after sale Claimant loses right of action in rem Lien remains attached to vessel and survives change of ownership Writ in rem issued after sale Against proceeds of sale Against defaulting vessel 12 fathom . AUGUST 2015 condition that a satisfactory undertaking is given that the proceeds will be distributed in accordance with the order of the Tokyo court. The disposal of the sum retained to protect the bank’s interest will be presumably distributed according to the priorities of claim under English law that will be decided in due course. A guiding principle that may be derived from the Sanko Mineral will be that where there are foreign insolvency proceedings over the assets of the shipowner, the manner of disposal of the ship as well as the distribution of proceeds arising from its disposal depend very much on whether the governing procedure is the action in rem or the liquidation process. The proceeds of sale of the vessel pursuant to a judicial sale will not automatically fall under the company’s general pool of assets in the insolvency proceedings. However, where there is an excess in the proceeds of sale of a vessel over the total claims in rem, such excess will be distributed in accordance with the liquidation process. LH-AG About the authors Andrew Chiew Ean Vooi (ac@lh-ag.com) is a dispute resolution partner in the Shipping Practice Group. His recent experience includes bringing an action in detinue and conversion of a mobile oil processing unit located off the shores of Peninsular Malaysia. He also frequently acts for foreign and local corporations on commercial, financing and insolvency matters. Jennifer James Ilango (jji@lh-ag.com) is an associate with the Shipping Practice Group