Speaking Notes for the International Bar Association Conference in Sydney

Justice Rares 9 October 2017

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1. Ships have traded internationally for millennia. When they enter a port they usually need supplies of goods and services for their next voyage, such as food, fuel or bunkers, and sometimes repairs. Often the owner or master or a charterer obtains those supplies on credit and the ship sails. She may never return to that port or country. Nowadays the ship is often owned as the only asset of a company incorporated in Liberia, or Mongolia which is, sometimes a subsidiary of a multinational group.

2. The lex maritima, law maritime, developed, across both the civil and common law, a sophisticated array of processes and remedies to enable creditors to enforce debts and other liabilities incurred by ships as they travelled from port to port. Both systems of law required a connection between the ship’s owner, or his agent, her master, and the contract creating the debt.

3. Australian law, like English law, treats the filing of a claim in rem – i.e. against the ship – as creating a secured right, even though her owner becomes insolvent after the filing of the writ for arrest but before any arrest is made[1]. In the United States, Canada and some other jurisdictions, local statute law created rebuttable presumptions that debts incurred in connection with the supply to a ship of necessaries – i.e. goods or services –gave the creditor a maritime lien over her.

4. A maritime lien is a privilege, or inchoate right, that the lex maritima, provides over the ship. Such a right is enforceable in civil law proceedings against her owners, and in common law proceedings against the ship herself as well as her owners, if they choose to appear, generally, in priority to all other interests, including mortgages. And, a maritime lien is enforceable even against a change in ownership or security interest that occurs after the maritime lien arises. The maritime law developed and enforced maritime liens to protect specific interests, including those of salvors (who had saved the ship from peril), the ship’s crew, who may not have been paid by the owner before the sale of the ship, and a person who claimed to have suffered loss because of a collision with the ship. Again, a maritime lien is enforced by the arrest or attachment of the ship.

5. Very often in dealings with ships, the creditor or lien holder does not know the actual relationship between the person with whom the deal is done and the ship. So, maritime law in sea trading nations had to devise an effective, but just, set of rights and remedies that enable maritime creditors to recover their debts in jurisdictions where the ship was, without having to go to the, sometimes uncertain, place where the owner or charterer or other person owing the debt might be found. And if the creditors had to sue in say Liberia or Mongolia where the company that owned the ship was, the creditor would be likely to find that the owner that has no assets there while the ship could be anywhere. Such a typical scenario does not offer much prospect of money going into the creditor’s pocket. Hence, the commercial effectiveness of arresting or attaching a ship when she sails into the jurisdiction in the maritime forum.

6. The UNCITRAL Model Law on Cross Border Insolvency has the capacity to affect the enforcement of the remedies for maritime claims (i.e. goods and services) and maritime liens. That is because of the potentially wide operation of the general stay prohibiting the commencement or continuation of proceedings against the debtor or its assets under Art 20(1). Importantly, Art 20(2) makes the scope of the stay under Art 20(1) subject to the local law in such a situation. But, that begs a very big question.

7. In a liquidation, usually secured creditors can enforce their rights regardless of a liquidator’s and unsecured creditors’ rights. But in a debtor-in-possession reconstruction, like Ch 11 of the United States Bankruptcy Code, secured creditors’ rights can also be rearranged. So, a court that grants interim or final relief under Art 19 or 21 respectively must work out what the local equivalent is of the foreign proceeding it is being asked to recognise: i.e. the court must decide, first, whether secured creditors keep their rights or those rights will be suspended in the forum and be determined in the foreign proceeding and, secondly, what is the closest local equivalent of the foreign insolvency process so that the stay under Art 20 will reflect, in the most analogous manner, the nature of the protection that the debtor actually has in the foreign jurisdiction and should have under the local insolvency law.

8. In cases involving shipping groups, the foreign representative usually will seek to obtain provisional relief in the forum in the nature of a general stay preventing the commencement or continuation of proceedings concerning the debtor’s assets, rights, obligations or liabilities (as contemplated in an order for recognition of a foreign main proceeding under Art 20(1)(1) or a foreign proceeding under Art 21(1)(a)). However, Art 22 requires the Court, in granting or denying interim or final relief, to be satisfied that the interests of all interested persons, including the creditors and the debtor, are adequately protected.

9. Very often, foreign representatives of collapsed shipping groups bring recognition proceedings before commercial or insolvency judges with no experience of maritime law or its remedies. They have succeeded in some cases in obtaining court orders staying commencement or continuation of all proceedings, in the language of Art 20(1)(a), “concerning the debtor’s assets”. Such a stay will prevent even the making of an application to arrest a ship, because that is a proceeding that concerns the ship which is the debtor’s asset.

10. Actions in rem, like mortgages over land, give secured rights. But the action in rem against a ship can only be exercised in the transient moment during which she is in the jurisdiction of the court where the arrest or attachment is sought. Once she is released or, if she is protected, from arrest, she is gone. Unless modified under Art 22, a stay created by Art 20(1)(a) against commencing or continuing proceedings “concerning the debtor’s assets” – such as a ship – could forestall automatically any arrest or attachment.

11. The Federal Court of Australia is a national court with general jurisdiction over both maritime and insolvency matters. It has addressed this situation by requiring applications under the Model Law for recognition of foreign proceedings involving shipping companies to be made to specialist judges assigned to its Admiralty and Maritime National Practice Area. The Court’s practice in such cases is to modify the stay order by requiring any application to arrest a ship owned or chartered by the debtor, that is brought by a person claiming to hold a security interest in her, to be made to a judge of the Court and, to draw to the judge’s attention to the reasons for those orders and to the earlier decision in Yu v STX Pan Ocean Co Ltd (South Korea)[2].

12. Allsop CJ explained the purpose of this qualification to what otherwise would be a general stay preventing any arrest, in Yakushiji v Daiichi Chuo Kisen Kaisha[3] as follows:

“the protection given by the orders to a shipping company should not be seen as necessarily defeating proper maritime claims that are lien claims, and the question of the status of any claims that are lien claims (as well as the status of any claims that are “quasi lien claims”, to which I have referred), would need to be resolved in any litigation unless the matter were agreed. It would be wrong to make orders now that would forestall any vindication by such claimants against the interests of the rehabilitation. Likewise, it would be wrong to prevent the rehabilitation being supported by the Act on the mere possibility of the existence of these claims.”

13. In such situations, a court may have to strike balances between competing public policies reflected in statutes conferring rights to proceed in rem, on the one hand, and, on the other, providing for the orderly administration in another jurisdiction of a debtor’s affairs under the Model Law. There will be cases where, as I suggested in Hur v Samsun Logix Corporation[4], the interests of justice require that an unpaid ship’s crew be entitled immediately to enforce their maritime lien over her because[5]:

“The fact that they are unpaid and are on a ship from which, if penniless, they cannot escape is a very good reason to ensure that however else the automatic stay in Art 20(2) of the Model Law operates, claims to such maritime liens are protected and immediately enforceable without any requirement for prior leave to be sought. If the stay in Art 20(2) were construed to preclude members of a ship’s unpaid crew from exercising their maritime lien by arresting or attaching the ship when she reached port, the consequence might be the de facto forced labour or enslavement of the crew until the ship finally reached the crew’s or ship’s home port.”

14. In addition, a plaintiff may seek to arrest a ship so as to obtain security for an arbitration or other proceedings. In such cases, it may be appropriate for the maritime court to order that the debtor provide security before releasing a ship from arrest, if the circumstances warrant doing so instead of requiring the plaintiff to prove, such as by filing a proof of debt, the claimed liability in the jurisdiction where the foreign main proceeding is located, so that all creditors in the same class might be treated equally.

The law applicable to maritime liens

15. Despite the efforts of the Comité Maritime International, it has not been possible for States to agree on the ratification of a convention for the recognition and enforcement of foreign maritime liens. That is because different jurisdictions use maritime liens inconsistently to protect disparate classes of creditors. Thus, each jurisdiction has its own law relating to what claims or classes of claims create, or are to be recognised as, maritime liens.

16. Last year a Full (ie:appeal) Court of five judges of the Federal Court of Australia considered for the first time under the Admiralty Act 1988 (Cth) what maritime liens should be recognised by Australian law, in The Ship “Sam Hawk” v Reiter Petroleum Inc[6]. In substance, the majority of the Court held that Australian law would be likely to recognise only claims to maritime liens for collision, bottomry and salvage, and claims by the master for disbursements made by him or her and for wages of the master and crew. That is the same position as in English law following the decision of the majority of the Privy Council in The Halycon Isle[7].

17. In particular, the majority of the Full Court indicated that the wider class of maritime liens for supply of necessaries to a ship that the laws of the United States of America, Canada and similar jurisdictions recognise, were not likely to be classified as maritime liens at all under Australian law. Two of the five judges held that this was the law here while two others said that, although it was not necessary for them to decide the question in the appeal, they thought this would be likely to be the position. I said that I thought it likely ( obviously wrongly, as is now known) that Australian law would classify the foreign right as having the substantive effect it had in under the law the place where it arose.

18. Clearly enough, the priority given by the law of the forum to the claimed right will follow from the forum’s characterisation or classification of it. That is why the Federal Court of Australia developed the practice of allowing an Admiralty judge determine whether to allow an arrest to occur as an exception to the general stay under Art 20(1) of the Model Law.

19. One additional issue that has come up in practice is that the foreign representatives do not appear to respect the obligation in Art 18 to inform the court of the forum promptly or at all if the foreign proceeding in his or he home jurisdiction comes to an end. The effect of this is that the stay has remained in place in Australia even though there no longer is a current foreign proceeding to which it relates as occurred recently in 3 cases, including that of the Hanjin colapse[8].

[1]In re Aro Ltd [1980] Ch 196; Programmed Total Marine Services Pty Ltd v Ship “Hako Endeavour” (2014) 229 FCR 563 at 569[22] per Allsop CJ, 571[37] per Rares J

[2] [2013] FCA 680; (2013) 223 FCR 189 Buchanan J

[3] [2015] FCA 1170; (2015) 333 ALR 513 at 517 [21]

[4] [2015] FCA 1154; (2015) 238 FCR 4833 at 489 [31]-[33]

[5] 238 FCR at 489 [33]

[6] (2016) 246 FCR 337

[7] [1981] AC 221

[8] Suk v Hanjin Shipping Co Ltd [2017] FCA 404.

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