Maritime Cross-Border Insolvency

Under the European Insolvency Regulation and the UNCITRAL Model Law

Lia Athanassiou

• Publisher: Informa Law from Routledge
• Year: 2017
• ISBN:
  9781351724623
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto fallimentare

Maritime Cross-Border Insolvency is a comprehensive comparative examination of both insolvency regimes (UNCITRAL and EU) in shipping with reference to the main jurisdictions having adopted the UNCITRAL regime, i.e. USA, UK, Greece.

Part I
Systemic Conflict between the Rules of Maritime and Insolvency Law

Chapter 1
Insolvency Mechanisms and the Operation of Shipping Companies

Financial Aspects

The importance of insolvency mechanisms (and the risks associated with them) for the operation of shipping companies can be better understood when the methods of the industry’s access to the money market are taken into account. As is well known, shipping depends, much more than other industries, on bank financing, and particularly on bank loans, while recourse to other sources of funding is still limited.

1 Shipping Dependence on Bank Loans

1.1 Evolving Bank Lending Practices

1.1.1 Features

1.1.1.1 Macro Features of the Industry Seeking for Finance

The dependence of shipping on bank loans is directly proportional to the capital intensity and cyclical nature of the industry.

(i) CAPITAL INTENSITY

In historical terms, the industry’s requirement for finance has intensified as ship size has increased, and with the subsequent rise in shipbuilding, purchase and retrofitting costs, particularly since the 1960s. During the first half of the 19th century, when shipbuilding and/or purchase costs were considerably lower, shipping finance was mainly based on private equity, and bank loans were primarily provided to cover working capital or the costs of repair and maintenance.¹ This pattern continued until the early 20th century, when debts arising out of loans represented only 20% of the value of ships.² Although this conservative strategy was accompanied by low yields (6% annually, compared with 15% for the general corporate index),³ it protected shipping companies from the effects of economic cycles, particularly during periods of recession and crisis, and averted the risk of insolvency.

The situation has changed radically since the 1960s due to the sharp growth of the shipping finance market. The need to attract more funds, in view of the rise in ship acquisition costs, in conjunction with easy access to “cheap money”, resulted in a dramatic rise in the gearing ratio⁴ for shipping companies,⁵ with both positive and negative effects. On the one hand, it promoted rapid and diversified business development but, on the other, made shipowners more vulnerable to external developments. By way of illustration, container ships and tankers can cost up to US$100 million each (about the same as a jumbo jet), while LNG tankers cost up to US$190 million each.⁶ Moreover, according to bank sources, the global ship finance market had an outstanding loan portfolio in 2012 of US$475 billion, and it is estimated that around US$50–60 billion of new loans are required every year for new builds, second-hand acquisitions and refinancing.⁷

(ii) MARKET CYCLES

The vulnerability of shipping companies is much more apparent when analysed in combination with the risks entailed by the cyclical nature of the market. Cyclicality occurs when economic activity displays phases of cyclical upturn and downturn, which alternate periodically and rhythmically at intervals that are not fixed absolutely.⁸ The four economic cycles of recession, crisis, recovery and boom⁹ occur in all sectors, including the shipping industry.

What is different in shipping is that cycles in the freight market are determined, both in terms of intensity and duration, by external rather than endogenous factors. Such external factors include, but are not limited to: the international trade situation (growth or recession), the geographical and qualitative orientation of global trade, inflation, national shipbuilding policies, climatic conditions and their impact on the production and carriage of goods, stockpiling or congestion, as well as abrupt changes in the prices of basic raw materials. The 1973 oil crisis is a typical example of the latter, as it gave rise to various chain reactions, including restrictions on the transportation of oil via the Persian Gulf, and therefore a fall in demand for tankers, the opportunity to discover new exploitable resources, and consequently to develop new transport streams, a rise in the production cost of petroleum-based products, higher bunker costs, a shift in demand to other types of ships due to the increased use of other sources of energy¹⁰ and, in general, in the geopolitical nature of energy transport. Special reference should be made to external factors, such as war, political disturbances and embargos in various geographical areas, which have a significant effect on sea carriage, both positively and negatively, depending on the nature of the cargo and the flag of the vessel.¹¹ Endogenous factors that are directly related to external factors include: the psychology of the maritime community, its investment policy, current and future freight rates, the ship scrapping and lay-up strategy of companies, and particularly ship finance.¹²

There is continuing debate among economists about the usual length of shipping cycles. According to one view, which tends to be influenced by the shipbuilding cycle, the usual length of shipping cycles is short, namely between three and five years, although they can also be longer, at around 20 years.¹³ However, according to another widely endorsed view,¹⁴ shipping cycles have different components,¹⁵ are irregular and present four stages (trough, recovery, peak and collapse) in conjunction with factors of uncertainty, such as strategy, psychology, technology, over-investment and risk assessment. Experience shows that, on average, they last between eight and ten years, depending on the historical context and the segment of the shipping sector,¹⁶ although any predictions made on that basis would be extremely unreliable.

The specific conditions of the freight market, and particularly the high volatility of revenues, which are affected by the supply and demand of tonnage, as well as the freight rates established as the meeting point between supply and demand, are directly related to cyclicality. Indeed, in the shipping industry, the prices obtained for the services provided may undergo downturns that seldom occur among land-based industries.¹⁷ Such fluctuations consequently affect the ability to foresee variations in freight rates and ship prices, and therefore to plan new orders, as well as the right time to make investments in shipping. This has the knock-on effect that the liquidity of shipping companies may become vulnerable as corporate objectives shift between the value of ships and the enhancement of cash flow.¹⁸

1.1.1.2 Micro Characteristics of Borrowers

In micro terms, shipping finance also displays certain specificities associated with the structure of many modern shipping companies. Even though it is not possible in practice to identify a single organizational model (as there are significant differences between liner and tramp shipping companies, as well as between listed shipping companies and unlisted groups of companies), the structure of Greek-owned companies may be considered as representative in the tramp sector. Their common features may be summarized as follows: (i) legally independent (normally single ship) shipowning companies; (ii) with common shareholders, who are natural or legal persons, and are further controlled by the same ultimate beneficial owners at a third or fourth layer; (iii) which entrust the management of the ship, as their only asset, to a ship management company controlled by the same interests; and (iv) are usually established in Greece under Art. 25 of Law No. 27/1975. The main consequence of this type of structure, from the viewpoint of the present study, is that more than one jurisdiction, and therefore more than one set of applicable laws, are frequently involved. More specifically, shipowning companies, in general, have their registered office in non-European third countries, while administration and supervision are carried out in Greece or in another European country, where the key decisions are made regarding their operation and where their accounts are concentrated and cleared.¹⁹ The choice of the State of incorporation is associated (less now than in the past) with the flag of the vessel, which is usually the company’s only asset. Shipowning companies are attracted to the flags of States with an open registry, due to several benefits relating to taxation, crew composition, payroll costs and social security, as well as with a view to avoiding political instability, seeking less stringent safety rules, etc. and they often combine the registration of the vessel and the incorporation of the company so that they can enjoy full access to these advantages. These benefits are also combined with other advantages which facilitate the establishment of corporations by foreign nationals in terms of procedure, capital requirements and the conditions of incorporation and operation.

Foreign shipowning companies can also register their ships in the Greek registry, under the terms of L.D. No. 2687/1953 on the protection of foreign capital investment, which enjoys constitutional status. This Law (and particularly Art. 13), which aims to attract foreign vessels controlled by Greek nationals to the Greek shipping register, allows vessels of over 1,500 GRT owned by foreign companies to be registered as foreign capital with the State’s administrative “act of approval”. Under this statutory framework, it has become common practice to set up a company abroad (in terms of its registered office) for the purpose of ship building or purchase, and subsequently to register the ship in Greece as foreign capital in the name of the foreign company. In general, the company’s actual headquarters is in Greece, where its management is in fact conducted.²⁰ Foreign shipowning companies are usually “established” within Greek territory, with the authorization of a joint decision of the Minister of Finance and the Minister of Shipping.²¹

Contrary to what might be expected, single-ship companies are viewed favourably by shipping financiers for two main reasons: the nature and the scope of the collateral (in rem or in personam) provided to secure the claims of the financiers, as well as the radial structure of the shipping enterprise and the group’s involvement in the funding scheme.

It should be noted that single-ship companies, which are controlled by the same natural persons at a second, third or further layer, entrust the management of their ship to a foreign company set up specifically for that purpose by the same natural person or persons (the shareholders of the shipowning companies) aiming at coordination. As a rule, ship management companies are also established in Greek territory, with State authorization, and are usually responsible for the entire spectrum of the technical and commercial management of the vessels assigned to them.²² They are often the ones that undertake negotiations with financial i...