Balancing cross-border insolvency applications and ship arrests in Australia

A recent decision of the Federal Court of Australia has found that the arrest of vessels pursuant to existing security rights, such as maritime liens under Australian admiralty legislation, have priority over cross-border insolvency applications under the UNCITRAL Model Law on Cross-Border Insolvency.

Introduction

The interplay between cross-border insolvency proceedings and the arrest of vessels under Australian admiralty jurisdiction was the subject of a recent decision of the Federal Court of Australia¹. The decision highlights that Australian courts are reluctant to grant additional relief to a foreign legal representative under the Cross Border Insolvency Act 2008 (Cth) (the Act) where the additional relief sought would adversely affect the rights of creditors under the Corporations Act 2001 (Cth) (the Corporations Act). Consequently, it was determined that a ship could be arrested in Australia if there was an “existing security right” attaching to the vessel in the form of a maritime lien. It remains to be seen whether other recognised maritime law actions such as contractual liens, claims for bunkers or cargo damage are still subject to the cross-border insolvency regime.

Facts

A receiver was appointed by the Seoul Central District Court over a South Korean bulk shipping company (the Shipping Company) in June of 2013. In the period between the application for the order being made and the order being granted, one of the Shipping Company’s vessels was arrested in Australia pursuant to an arrest warrant issued by the Supreme Court of Queensland.

The receiver applied to the Federal Court for recognition of the South Korean rehabilitation proceedings as “foreign main proceedings” under the UNCITRAL Model Law on Cross Border Insolvency (the Model Law). Where foreign proceedings are recognised as “foreign main proceedings”, Article 20 of the Model Law is automatically engaged and has the prima facie effect of staying or suspending actions, or proceedings, or execution and disposition against assets of the relevant debtor.

In an attempt to mitigate against the risk that ships within the fleet would be arrested or seized in Australia, the Shipping Company sought an additional order pursuant to Article 21 of the Model Law that the administration and realisation of all of the Shipping Company’s assets located in Australia be handed over to the South Korean receiver. Article 21 of the Model Law allows the Court to grant additional relief where it is necessary in order to protect the assets of the debtor, or it is in the interests of the creditor to do so. It was submitted that if ships were arrested in Australia, it would cause a chain reaction of delays to business operations, and severely damage the possibility of a successful reorganisation or restructure of the Shipping Company.

The Decision

The Court observed that Section 20 of the Cross Border Insolvency Act 2008 (Cth), and Article 20 of the Model Law, preserve the operation of, and should be read subject to, local insolvency laws, most notably Section 471C of the Corporations Act. Section 471C provides that when a company is being wound up in insolvency, or is the subject of insolvency proceedings, a secured creditor’s right to realise, or otherwise deal with their security, is unaffected. It was held that maritime liens were an existing form of security that fall outside the scope of the Model Law. Instead, an action to enforce a maritime lien is properly characterised as an action under Section 471C, and leave of the court is not required in order to enforce a maritime lien against a company in external administration in Australia.

The Court noted the significant public interest in upholding the ability to enforce the security of a maritime lien, though stopped short of settling the law in respect of the Model Law and general maritime claims which may also give rise to arrest proceedings under Australian admiralty legislation. The Court noted that whether an arrest warrant is appropriate will depend on the circumstances, the reason the arrest warrant is sought, and the interest sought to be protected.

The Court held that, in the circumstances, it was not in the interests of creditors to refuse the arrest application, and allow the vessel to be returned to South Korea as part of the South Korean insolvency proceedings.

Comment

In considering an application for the arrest of a ship owned by a company in external administration, the Court distinguished between proceedings employed to enforce an existing security right, and an action to enable a judgement to be satisfied out of the proceeds of sale of the vessel, preferring only the former as “an action by a secured creditor to realise or otherwise deal with the security” (as required under Section 471C of the Corporations Act). In so doing, the Court distinguished between arrest applications to enforce existing security rights (such as claims for damage done by a ship, for seamen’s wages, and for salvage) and other maritime claims such as contractual liens, claims for bunkers, and cargo damage.

As a leading producer of natural resources for export on predominantly foreign owned tonnage, this decision will give comfort to insurers, financiers, shipowners, operators, and charterers that Australia is in harmony with the centuries’ old international maritime law securities regime that is generally observed around the world.