The recent Australian Federal Court decision 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 has the effect of allowing the arrest of a ship in Australia, despite the operation of the Cross Border Insolvency Act 2008 (Cth) which incorporates the United Nations Model Law on cross border insolvency into Australian law.

Prior to this decision, it was unclear whether a ship could be arrested in Australia through in rem proceedings when the owner of the ship was the subject of insolvency, reorganisation or liquidation proceedings in the country where they have most of their assets because the Cross Border Insolvency Act 2008 (Cth) permits the Australian Courts to stay Australian proceedings in favour of the foreign insolvency proceedings. In addition, article 21 of the Model Law gives the Court a wide discretion to entrust the administration or realisation of all or part of a debtor’s assets located in Australia to the foreign liquidator, receiver or administrator.

In 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, the South Korean receiver of STX Pan Ocean Co Ltd sought an order that pursuant to Article 21 of the Model Law, the administration and realisation of all of the STX Pan Ocean’s assets located in Australia be entrusted to the South Korean receiver. If this order had been made, it would have meant that the arrest of a STX Pan Ocean Co Ltd ship could not be used as a means to obtain security for a maritime claim because the ship as would be returned to South Korea to be part of the South Korean insolvency proceedings. Accordingly, any right that a claimant would have to secure their maritime claim against the ship would be effectively abolished. The centuries old international maritime law security regime which is generally observed around the world, including Australia, would not be effective in Australia following the insolvency of the ship owner.

In this case, the Court refused to make the order in respect of in rem proceedings and an application for the arrest of STX Pan Ocean Co Ltd ships in Australia. The Court found that whether an arrest warrant could be issued depended on the circumstances, the reason why the arrest was sought, and the interest sought to be enforced by the action in rem. Significantly, the Court made it clear that it is unlikely that in rem proceedings and a subsequent arrest of the ship would be allowed for all maritime claims. Rather, such proceedings and subsequent arrest may only be allowed (depending on the circumstances of the case in question) where the proceedings and the arrest are issued to enforce an existing security right of a maritime lien (claims for damage done by a ship, for seamen’s wages, and for salvage). Such an action is permissible due to the following:

  • The Act and the Model Law expressly preserve the operation of local insolvency laws
  • Section 471 (c) of the Corporations Act Cth (2001) provides that when a company is being wound up in insolvency or by the court, or a liquidator is acting, nothing affects a secured creditor’s right to realise or otherwise deal with the security, and
  • An action in rem to enforce a maritime lien is an existing security claim falling within the provisions of section 471(c) of the Corporations Act Cth (2001).

In rem actions are permitted to enforce a maritime lien and fall outside of the cross border insolvency regime because maritime liens are an existing security right enforced by an action in rem and an arrest. However, other recognised maritime law in rem actions such as claims for bunkers, cargo damage, or a breach of charterparty are potentially still subject to the cross border insolvency regime; otherwise, these claims would have priority to claims by other secured creditors in insolvency proceedings. This would be contrary to one of the purposes of the Model Law, namely the fair and efficient administration of cross border insolvencies that protects the interests of all creditors. This is especially considering that under existing Australian insolvency laws, other maritime claimants would not be considered secured creditors.

The decision raises an interesting unresolved issue of whether the maritime lien, which falls outside the cross border insolvency regime, is a maritime lien recognised by the law of the forum, and/ or as recognised by the law of the country where the maritime lien arises, and/or a contractual maritime lien.

Considering that section 471 (c) of the Corporations Act Cth (2001) is the means by which the arrest action would be justified by the Court, it is likely that the reference to “secured creditor” in that section would be a reference to a secured creditor as understood in Australian Law. Accordingly, a right to a maritime lien for the supply of necessaries to a ship, as exists in the United States, is unlikely to fall within the scope of section 471(c).

Despite this, recent changes to Australian private international law may mean that a contractual right to a maritime law lien will be recognised, allowing claimants with liens not traditionally considered maritime liens to gain the benefit of the decision of this case and arrest the ship of an owner that is subject to foreign insolvency proceedings. However, it remains to be seen whether an Australian Court will be prepared to exercise its discretion in favour of a claimant seeking to enforce a contractual law lien.