The Federal Court of Australia case of Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (receivers appointed in South Korea) [2013] FCA 680 addressed the issue of whether a ship can be arrested in Australia where the owner is subject to insolvency proceedings in another country.

Facts

STX Pan Ocean Co Ltd (STX) was a global bulk shipping company based in South Korea. After STX became insolvent in June 2013, Mr Yu was appointed as receiver of the company. A receiver in South Korea is equivalent to a liquidator in Australia.

Mr Yu subsequently applied to the Federal Court of Australia for recognition as a foreign representative of STX. He also applied for recognition of the proceedings commenced in Korea as a foreign proceeding under the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (the Model Law), which is incorporated domestically in Australia through the Cross-Border Insolvency Act 2008 (Cth).

A foreign proceeding under the Model Law describes an insolvency proceeding where a debtor’s assets and affairs are subject to the jurisdiction and control of a foreign Court. As a recognised foreign representative, Mr Yu would be authorised in a foreign proceeding to oversee the liquidation or reorganisation of STX’s assets in Australia.

Mr Yu also sought additional relief under Article 21 the Model Law to prevent creditors of STX located in Australia taking steps to arrest or seize STX’s ships under the Admiralty Act 1988 (Cth). Article 21 allows the Court to grant additional relief where necessary to protect the assets of the debtor if it is in the interests of the creditors.

If this relief was granted, it would restrain secured creditors from enforcing a charge against STX’s property without first obtaining either the leave of the Court or Mr Yu’s consent. Mr Yu submitted that the arrest and delay of the ships could lead to damage being incurred by STX in the liquidation such as, for example, termination of contracts with the company’s major customers. As a result, this would diminish the company’s ability to achieve a successful reorganisation.

Decision

The Court recognised Mr Yu as a foreign representative and the proceedings were deemed to be foreign proceedings under the Model Law. However, the Court declined to grant any orders for the additional relief sought under Article 21 of the Model Law as the relief was not in the best interests of the company’s creditors.

The Court stated that Article 20(2) of the Model Law preserved the operation of local insolvency laws including sections 471B and 471C of the Corporations Act 2001 (Cth) (Act). These provisions act to stop proceedings against the company’s assets, preserve the rights of secured creditors and recognise the Court’s power to grant leave to creditors to commence proceedings where appropriate.

Further, the Court held that it would not divert from its current procedure pursuant to s 471B of the Act that requires leave of the Court in order to obtain an arrest warrant for a ship. The Court also held that an action to enforce a maritime lien fell within the operation of s 471C of the Act. This section provides that nothing in s 471B affects a secured creditor’s right to realise or otherwise deal with its security.

The Court held that the arrest of a ship owned by STX that was in Australian waters could be sought in appropriate circumstances without having to overcome an order. Whether a warrant would be issued would depend on the surrounding circumstances of the case.

An application for an arrest warrant should be made to a Judge of the Court as opposed to a Registrar with full disclosure that foreign proceedings have been recognised under the Cross-Border Insolvency Act 2008 (Cth). The Court held that any application relating to a warrant of arrest in Australia “of any vessel owned or chartered by STX [must] be dealt with by a Judge” of the Federal Court.

Implications

This case highlights the limitations of the Model Law and indicates the reluctance of Australian Courts to grant additional relief to foreign representatives in circumstances where it may diminish creditors’ rights.

Creditors will benefit from this decision as it confirms that they are able to arrest a ship of an owner that is the subject of insolvency proceedings in another country without having to obtain leave of the Court or a foreign representative’s consent