Commercial Maritime Law

Melis Özdel, Melis Özdel

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509901050
• Edition: 1
• Topic: Law
• Subtopic: International Trade Law
• Index: Law

The title 'Commercial Maritime Law' is a misnomer. There is a patchwork of different commercial maritime laws around the world. However, the title is a true reflection of what many legal scholars and practitioners in the field have long desired: a common framework of commercial maritime law. This book unravels the complexities of bridging the gap between common law and civil law and will discuss whether the title will remain a misnomer despite the countless attempts at harmonisation. Internationally renowned legal scholars and practitioners discuss herein the areas in which the common law and civil law are divided; the impact of these differences on the drafting and ratification of international conventions; the search for a common framework; and the procedural aspects of the common law and civil law divide embedded within commercial maritime law.

1

Cross-border Insolvency and Admiralty: A Middle Path of Reciprocal Comity

PROFESSOR MARTIN DAVIES*

I.Introduction

The global financial crisis of 2008 produced a quick¹ and disastrous decline in the global shipping business,² leading to the insolvency of several major shipping lines, mostly in the form of Chapter-11-like ‘rehabilitation’ or reorganisation proceedings, in which the shipping line sought to trade out of its financial difficulties.³

The post-2008 wave of shipowner insolvencies brought to light some pressing questions for the law relating to cross-border insolvency. By its very nature, much of the shipping business is global in scale, with the result that a shipowner may have mobile assets (its ships) dispersed all around the world when it opens insolvency proceedings in its base of operations.⁴ An insolvency with globally spread assets is not that unusual but, for good or ill, ships are different from other assets,⁵ in that there is an ancient and well-established body of law giving rights to creditors in ways quite different from those that apply in relation to their land-based counterparts.⁶ When a shipowner becomes insolvent, or when it appears that it soon may be so, creditors often move to arrest its ships or attach its other assets wherever in the world they can be found, using admiralty procedures designed to protect the interests of local claimants. When that occurs, a head-on collision arises between insolvency law and admiralty law, raising interesting conceptual questions for both. This remains a very topical question, as there are still very few signs of recovery in the global shipping market.⁷

Admiralty law would allow the creditor to proceed against the shipowner’s assets wherever they were seized, notwithstanding the existence of insolvency proceedings in the debtor’s home country. Indeed, one of the principal purposes of the traditional admiralty procedures of arrest and attachment is to allow local creditors to get satisfaction of their claims, notwithstanding the insolvency of a distant foreign shipowner. In contrast, in insolvency law, the ‘golden thread’ of universalism calls for courts in other countries to cooperate with the courts in the country of the debtor’s insolvency to ensure that all of its assets are distributed to its creditors under a single, orderly, system of distribution.⁸ If the debtor’s assets have been seized by admiralty judicial process in another country, the principle of universalism calls for them to be released, and for the admiralty creditors to participate in the debtor’s insolvency proceedings.

At first sight, the underlying imperatives of these two bodies of law appear to be irreconcilable. It seems that one or other must prevail at the expense of the other. If admiralty prevails, the admiralty proceedings in the country of arrest or attachment will proceed as usual, notwithstanding the existence of insolvency proceedings in the debtor’s home country.⁹ If insolvency prevails, the admiralty proceedings must be discontinued so as to ensure that all creditors participate equally in the insolvency proceedings.¹⁰ Predictably, maritime lawyers prefer the first alternative. This is, after all, why admiralty procedures have existed for hundreds of years. Equally predictably, insolvency lawyers prefer the second alternative. To them, the right to proceed against the debtor’s assets in admiralty amounts to little more than an illegitimate form of preference for a particular class of creditors. This would seem to be a zero-sum game. Whichever body of law wins, someone will regard the outcome as illegitimate or inappropriate.

The goal of this chapter is to suggest a third way, a middle path that achieves the main goal of universalism, recognising the primacy of the insolvency proceedings, while also preserving the right of admiralty claimants to secure their claims by proceeding against the debtor’s assets wherever in the world they may be found. This middle path depends upon the notion of reciprocal comity, by which each country – that of the admiralty arrest or attachment and that of the insolvency proceedings – respects the legitimacy of the other’s proceedings and laws.¹¹ Respect should be mutual. If respect is not reciprocated, it is no more than enforced acquiescence or self-abnegation.

The UNCITRAL Model Law on Cross-Border Insolvency¹² implements the concept of universalism by requiring enacting countries to stay any proceedings against a debtor upon recognition of the existence of insolvency proceedings in the debtor’s centre of main interests (COMI).¹³ The EU’s Insolvency Regulation¹⁴ (which has been replaced and superseded by the Recast EU Insolvency Regulation)¹⁵ implements a modified form of universalism, giving primacy to insolvency proceedings in the debtor’s COMI and the law of the country where they are opened (the lex concursus), but preserving pre-existing rights in rem granted by the laws of other EU Member States.¹⁶

Comity demands that a country where the debtor’s assets have been arrested or attached using admiralty procedures must recognise the primacy of insolvency proceedings in the debtor’s COMI. Reciprocal comity demands that the country of the insolvency proceedings should recognise and respect the legitimacy of the security granted by the admiralty procedures in the country of arrest or attachment. Both the Model Law and the Insolvency Regulation (and Recast Regulation) can accommodate a reciprocal comity approach of the kind recommended here. This chapter explains how, focusing mainly on the Model Law, which, although not yet widely adopted, has been enacted in several important maritime jurisdictions, including Australia, Canada, Greece, Japan, Korea, South Africa, the UK and the US.¹⁷

The appropriate relationship between the law of the country of arrest or attachment and the law of the opening of insolvency proceedings depends in part upon the order in which proceedings are commenced. The next section of this chapter explores the different possible permutations.

II.Three Permutations

One of the most troublesome aspects of the relationship between insolvency proceedings and admiralty proceedings in different countries is the fact that the nature of that relationship changes according to the order in which the various proceedings are brought. That is true not only as a matter of priority and precedence, but also, as a practical matter, in relation to the assets of the debtor themselves. In particular, as will shortly be shown, the extent of the debtor’s insurance cover for pre-existing liabilities will depend upon the order in which proceedings are brought.

There are three significant moments in the kind of case under consideration here: the commencement of admiralty arrest or attachment proceedings (A); the opening of insolvency proceedings in the debtor’s COMI (I); and recognition of the insolvency proceedings as a foreign main proceeding (FMP) in a country that has enacted the Model Law (R). These three events can occur in three possible sequences: A-I-R, I-R-A and I-A-R.¹⁸ The three permutations raise different implications about the relationship of reciprocal comity between the country of arrest/attachment and the country of the FMP. As a practical consequence, it follows that there cannot be a single, ‘one size fits all’ solution to the legal issues raised in these cases. The appropriate international solution must depend upon the sequence of events.

A.A-I-R: Admiralty Proceedings before Insolvency Proceedings

This permutation is the one that most pointedly raises the supposed competition between insolvency and admiralty. Admiralty claimants may have proceeded against the debtor’s vessel(s) before its insolvency either because they have learned of the possibility of an impending insolvency or in the ordinary course of things, unaware of the possibility that the operator of the vessel(s) against which they are proceeding is in sufficiently dire straits that it may soon be forced into insolvency in its COMI. The admiralty claimant’s knowledge, intention or motive is irrelevant, however. All that matters for present purposes is that the admiralty claimant has proceeded to enforce what admiralty law has always regarded as a secured claim before insolvency proceedings were opened. Should the subsequent opening of insolvency proceedings bring an end to the pre-existing admiralty proceedings, thereby quite possibly extinguishing the security that those admiralty proceedings give to the claimants? Or should the admiralty claimants’ ‘first strike’ against one of the main assets of the debtor be allowed to stand, possibly giving them what amounts to a preference over other creditors?

The UNCITRAL Model Law deliberately left that question up to enacting states, thereby eschewing the possibility of an internationally uniform answer. Article 20(2) of the Model Law modifies the effect of the mandatory stay called for by Article 20(1) by providing:

The scope, and the modification or termination, of the stay and suspension referred to in paragraph 1 of the present article are subject to [refer to any provisions of law of the enacting State relating to insolvency that apply to exceptions, limitations, modifications or termination in respect of the stay and suspension referred to in paragraph 1 of the present article].

UNCITRAL’s ‘Guide to Enactment and Interpretation’ states that the purpose of Article 20(2) is to limit the effect of the mandatory Article 20(1) stay by reference to any exceptions or limitations that may exist under the law of the enacting country, such as local laws allowing the continuation of pre-existing claims by secured creditors.¹⁹ The ‘Guide to Enactment’ says that an insolvent debtor enjoying the benefit of Article 20 must accept the imposition of restrictions by the enacting country, even if they are different, and possibly more stringent, than they would be under the law of the FMP.²⁰ That is consistent with a reciprocal comity approach because it requires both the enacting country (the country of arrest/attachment) and the country of the FMP to acknowledge and respect the laws of the other. The country of arrest/attachment must respect the existence of the FMP in another country by staying the existing admiralty proceedings in its courts, but the country of the FMP (and the debtor invoking insolvency protection) must respect the fact that the country of arrest/attachment may choose to preserve the priority of claims secured before the insolvency proceedings were opened.

The EU achieves a similar result by leaving the effect that subsequently opened insolvency proceedings might have on pending proceedings as a question to be determined by the law of the country of the pending proceedings.²¹

Thus, Article 20(2) of the Model Law means that a country enacting the Model Law could provide that the mandatory Article 20(1) stay does not apply to a pre-existing action by any secured claimant,²² including one who has proceeded in admiralty to seize a ship by arrest or attachment. Predictably, different countries that have enacted the Model Law have ‘filled in the blank’ in Article 20(2) in different ways.

Although some enacting countries have provisions allowing secured claimants ...