Maritime Cross-Border Insolvency under the UNCITRAL Model Law Regime

Commonwealth and US Perspectives

Jingchen Xu

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509936007
• Edition: 1
• Topic: Law
• Subtopic: Maritime Law
• Index: Law

This book covers the pressing issues of cross-border cases involving admiralty and bankruptcy law. For example, what should happen when a shipowner files an insolvency proceeding in one country, while at the same time facing an in rem action against its vessel in another country? Should the in rem action arising in one country be stayed or dismissed because of the existence of insolvency proceedings in another country? The book discusses the relevant issues regarding the treatment of maritime creditors throughout insolvency proceedings, the determination of the 'centre of main interest' of an offshore shipping company, and the scope of a debtor's assets. The author uses a comparative law analysis, selecting four leading shipping countries – Australia, the UK, the US, and Singapore – and examines their approaches to the above three problems when applying the UNCITRAL Model Law regime. The book also proposes a solution to help eliminate the ambiguity arising from maritime cross-border insolvency cases under the UNCITRAL Model Law regime, with a view to enhancing the development of the shipping industry.

1

Introduction

Both admiralty and insolvency law have their roots in antiquity, but they have never been compatible.¹ An early codification of insolvency (or bankruptcy) law can be found in Table III of the Twelve Tables (around 450 BC), which provided that ‘if a debt for which a judgment was given remain unpaid for thirty days, the debtor could be taken captive by his creditors’.² It was not until the nineteenth century that the law of insolvency gradually abandoned its criminal characteristics and became related only to merchants.³ However, insolvency law has been developing in line with national social and economic policies, which lie fundamentally in the distribution of assets and relate to the interest of sovereignty.⁴ Therefore, the law of insolvency varies dramatically from nation to nation. Nevertheless, insolvency practice is usually land-based and focuses on land-based issues.⁵ The basic principle of insolvency law is to treat equivalent creditors equally for the purpose of distribution and rehabilitation and to stay all other proceedings once the insolvency proceeding begins. This basic principle was further strengthened by the trend towards universalism in the area of cross-border insolvency at the end of the twentieth century, when the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the Model Law) was enacted.⁶ The concept of universalism calls for all courts to co-operate with each other and to ensure that all of the debtor’s assets are distributed to its creditors under a single and orderly system of distribution in the debtor’s home insolvency proceeding.⁷

On the contrary, admiralty law developed centuries earlier than the bankruptcy regime. It is an ancient and well-established body of law that focuses on the special nature of the international shipping industry and on the enforcement of maritime claims against maritime assets.⁸ The origin of maritime law can be traced back to 800 BC to a maritime code that was purportedly administered on the island of Rhodes; the first mention of this code is found in Justinian’s Digest in the sixth century AD.⁹ In addition, early codification of maritime rules in the Middle Ages can be found in the Rôles of Oléron, which consisted of both stated principles and judgments relating to the sea, ships, seamen and merchants.¹⁰ For centuries, maritime law has developed a ‘sophisticated and generally harmonious’ system of dealing with the bankruptcy of shipowners, which provides sufficient and special protection for maritime creditors, especially for maritime lien holders.¹¹ As Lord Mansfield elaborated, ‘the maritime law is not the law of a particular country, but the general law of nations’.¹² In particular, maritime creditors are allowed to arrest vessels in rem wherever they are found and to realise their claims from the proceeds of the vessels’ judicial sale, regardless of, and independent from, the shipowner’s foreign insolvency proceeding.¹³ Creditors and claims without a sufficiently direct connection to the ship and its operation are excluded from this admiralty process. It may, therefore, be argued that admiralty law is based on maritime exceptionalism, justified by maritime heritage and customs and the particular policy considerations that arise in the context of the international shipping industry.

Since shipping companies, by their very nature, are involved in cross-border transactions, the international scope of these companies and worldwide dispersal of their assets might give rise to insolvency proceedings in multiple jurisdictions. ‘A res may concurrently be the subject of an arrest in the admiralty court and an asset capable of liquidation in insolvency proceedings’.¹⁴ However, due to the unique mobility of ships and the special operational structures of shipping companies, it is difficult to harmonise the international cross-border insolvency regime with the admiralty regime governing ships. Furthermore, the Model Law has been developed with little regard to the admiralty in rem proceeding, in the sense that it provides a regime of automatic stay order upon the recognition of a foreign main proceeding, freezing all claims in the local forum from commencing or continuing any action against the insolvent debtor.¹⁵

Therefore, this book will explore the fundamental tensions that arise between the cross-border insolvency regime and maritime law when a shipowner files an insolvency proceeding in one country, but has simultaneously to deal with admiralty arrests of its vessels in other countries. In other words: should an in rem action that arises in one country be stayed or dismissed because of the existence of an insolvency proceeding in another country? Suppose that a shipping company suffers from financial distress and subsequently initiates an insolvency proceeding or raises a risk of insolvency. The primary assets of the shipping company are vessels, travelling internationally. Maritime creditors may arrest the companies’ ships around the world at any port where the vessels are calling, either before or when the insolvency of the shipping company is initiated. Under such circumstances, it is important for a maritime claimant to be able to ascertain which jurisdiction or legal process is available to him to recover the claim, admiralty or bankruptcy? Also, how should the forum arresti deal with the assets that have been arrested by creditors in its jurisdiction? Should the forum arresti transfer its authority over the assets to the forum in which the bankruptcy proceeding has been brought by the debtor? Alternatively, should it retain the arrested assets and proceed to satisfy the claims of domestic creditors against the insolvent debtor? If the forum arresti adopts the Model Law, does the Model Law provide any solution to this issue? Should the Model Law be allowed to hurt or shake the regime of maritime lien, which is the most fundamental regime and the underlying basis of credit of the generally harmonised admiralty system?

The problem of maritime cross-border insolvency has risen to prominence in recent years with the global financial crisis and the current declining shipping market. The impact of ‘the Great Recession’ (2008–2011) on the shipping industry has been extremely severe. Due to the worldwide economic crisis, the demand for export and import is sharply declining. The declining trade and surplus shipping capacity lead to low freight rates and tight credit, resulting in negative cash flow and increased financial pressures. In order to raise funds, shipping companies may be forced to sell their vessels at a distress price far below their book values. Such a vicious circle leads to a stagnation of the shipping market, and finally distress as market pressures overwhelm inertia.¹⁶ The whole shipping market has been impacted by the Great Recession, from the liner shipping market and the dry bulk shipping market to the tanker market.¹⁷ Accordingly, cross-border insolvencies have become increasingly commonplace for many international shipping companies in recent years. Many shipping companies have been forced to seek reorganisation or other insolvency proceedings, trying to extricate themselves from financial difficulties. Prominent examples include Korea Line Corporation,¹⁸ Sanko Steamship,¹⁹ STX Pan Ocean,²⁰ and recently Hanjin Shipping.²¹ As a result of all these issues, maritime cross-border insolvency has become a vitally important problem that urgently needs to be resolved.

The current declining shipping market shows the pressing need to address these issues at both the theoretical and practical levels. In theory, it is important for each country to balance the interests between an admiralty proceeding and an insolvency proceeding, and the interests between the insolvent shipping company and its creditors. Due to the sharply divergent policy objectives of bankruptcy law and admiralty law, these two legal branches choose different approaches to deal with insolvent shipowners and their creditors when shipowners encounter financial difficulties. In practice, the tensions and inconsistencies in the way in which maritime cross-border insolvency scenarios have been dealt with by the courts of different countries have given rise to significant debates and need to be addressed urgently. In order to promote international trade and the shipping market, both debtors and maritime (and indeed non-maritime) creditors need certainty and predictability. The conflicts arising from maritime cross-border insolvency cases, especially from the recent bankruptcy of Hanjin Shipping, illustrate the need for greater clarity and certainty for all involved parties.

The aim of this book is to examine three major problems arising when the application of the UNCITRAL Model Law regime involves maritime creditors and maritime assets at both a theoretical and practical level. In addition, the book endeavours to provide policy reflections on each problem in order to eliminate the ambiguity of the characteristics of maritime claims in cross-border insolvency cases, with an eye to enhancing the development of the shipping industry.

The first problem is the treatment of maritime creditors in insolvency proceedings. Under the regime of the Model Law, it is envisaged that all claims against the debtor and its assets – including maritime claims – should be suspended by an automatic stay, upon the recognition of a foreign main proceeding in the arresting country. This book will analyse the question whether maritime creditors can be exempted from the automatic stay mechanism granted by the Model Law; if not, should the Model Law provide an exception for maritime claims to proceed regardless of a foreign insolvency proceeding?

The second problem is how to determine the centre of main interest (COMI) of the debtor. COMI is a critically important new concept introduced by the Model Law, but the Model Law itself does not define it. The Model Law only provides a presumption that, absent proof to the contrary, the debtor’s COMI is the state where the debtor’s registered office or habitual residence is located. This book will analyse whether this presumption is consistent with the realities of maritime commercial practice and the shipping industry; and if not, to what extent the presumption can be rebutted.

The third problem is the scope of the debtor’s assets. In order to reduce maintenance costs and meet the commercial need for fleet flexibility, it is common for shipping companies to charter vessels (demise, time or voyage charter) from third parties. This book will analyse whether chartered vessels should be regarded as the debtor’s assets and therefore should be included into the asset pool and subjected to the automatic stay order under the Model Law regime. In addition, this book will also answer the question of whether the surety bond or security provided by a debtor or a third party for the release of vessel arrest is regarded as the property of the debtor.

This book begins by examining the most significant concepts of the cross-border insolvency regime (including the UNCITRAL Model Law regime) and the maritime law regime. This analysis explores the different policies underpinning these two regimes and demonstrate how the three problems mentioned above arise.

This chapter has introduced the historical development of the conflicts and tensions between bankruptcy law and maritime law, such as the conflicts of legislative purpose, the conflicts of underlying policies, the conflicts of jurisdictions and the conflicts of enforcement of security interests, etc. It has further explored the practical problems arising from these conflicts, and how these problems become more complex when a third factor, ie cross-border insolvency is involved. The chapter has also explained the urgency and necessity of solving these problems, and outlined the basic structure and methodology of this book.

Chapter 2 gives a brief policy review of the domestic bankruptcy proceeding. It illustrates the fundamental aims of bankruptcy or insolvency law – fresh start of the debtor, maximisation of the debtor’s assets and equal treatment of creditors. In addition, the chapter differentiates the liquidation and reorganisation proceeding, which are the two most common bankruptcy proceedings. The scope and effect of the stay order for different insolvency proceedings are examined. Finally, Chapter 2 highlights the distinction between secured creditors and unsecured creditors. Secured claims usually receive greater protection and higher priority in bankruptcy proceedings because of their interest in the security, as compared with unsecured claims. This difference leads to different analyses of the treatment of maritime creditors in later chapters.

Chapter 3 begins with a brief overview of the conflicting issues arising in the area of cross-border insolvencies. The chapter then discusses the different theories underpinning international insolvency law, including territorialism, universalism, co-operative territorialism, and modified universalism, and argues that the overarching key question remains the proper balance of the competing interests of local protection versus international co-operation. Finally, Chapter 3 concludes that the current trend is towards a collective and co-operative approach to addressing international insolvency. Although universalism is the future of international bankruptcy, this ultimate goal may take time to achieve. Thus, as an interim or transitional solution, modified universalism has currently emerged as the dominant theory.

Since the Model Law represents an attempt to impose a modified universalism approach, Chapter ...