The shipping industry was arguably one of the hardest hit by the downturn that spread around the world late last year. The severe shipping slump, evidenced by a 93.5 per cent fall in the Baltic Dry Index between the summer of 2008 and December 2008, inevitably led to insolvencies of shipping companies across the globe1. This article briefly considers the unique challenges that insolvency practitioners face when balancing insolvency procedures against the application of maritime law.

The problem for administrators and liquidators is a mixture of the legal and the practical. Understanding the complex web of contracts between the many counterparties (charters, sub-charters, bills of lading, mortgages and insurance, to name but a few) many of which are likely to involve different jurisdictional issues as well as rights and liabilities, is a huge undertaking.  

Options available to the creditor

Maritime law tends to be creditor friendly with many jurisdictions having established procedures to allow potential claimants to secure their maritime claim with relative ease at the very outset of any claim. The two most common ways of doing so are by way of ship arrest or, in the US, by way of “Rule B” attachments.

A ship arrest allows the claimant to force the shipowner to provide security (usually some form of guarantee), or, where the shipowner is unable to provide the security, the claimant can rely on the vessel itself, or the proceeds of sale of the vessel to secure the claim. This right is an “in rem” right i.e. a right against an identifiable asset (the ship itself) rather than against the owning company itself.

While in most jurisdictions ship arrest is only an option if the potential defendant is the ship owner (South Africa being a notable exception), Rule B attachments in the US are open to all parties so long as the claim itself is maritime in nature and the defendant is not “found” in the jurisdiction (i.e. in some way registered within the jurisdiction of that state).

Alternatively, charterparties often incorporate contractual protections such as the right of the shipowner to exercise a lien over all cargoes and sub-freight or sub-hire (if, as is often the case, the vessel is sub chartered) for any amounts due under the charter2.

Maritime law v Bankruptcy law

However, conflicts arise when these well established maritime rights are exercised when the potential defendant has entered into administration. While a lien is asserted, a ship arrested or a Rule B attachment obtained in an insolvency context, in practice this can frequently work against the bankruptcy regime principles of protecting the debtor and treating all the classes of creditors evenly. By securing one of these maritime law remedies a claimant might be seen to be getting an unfair advantage as compared with the secured and unsecured creditors of the company in an insolvency process.

In theory the global view of bankruptcy law, particularly in light of the UNCITRAL model law on cross border insolvency in those states which have enacted it, empowers insolvency practitioners to protect assets in other jurisdictions. However, this is reliant on a foreign court granting assistance to the local court on the grounds of comity or recognising that insolvency process and proceeding to grant appropriate relief. In many jurisdictions this will involve an application to that court but of course with vessels dotted around the globe it may not be possible to anticipate where an arrest will take place and therefore where an application should be made to protect the asset.

Conclusion

Before, and even in the early stages of, the crisis ship owners were in many cases backed by solid cash reserves. However, with rates barely recovering and little sign of a significant upturn, those reserves are now looking thin. Recent indications from banks suggest they are less and less willing to stand by struggling owners. If banks, in particular, do start to take more aggressive enforcement action, further insolvencies are inevitable. If so, the number of maritime claims brought around the globe in an attempt to circumvent the usual bankruptcy priorities will also inevitably rise.