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UNCITRAL Model Law on Cross-Border Insolvency does not necessarily defeat maritime lien or quasi-lien claims

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17 Nov 2015

Yakushiji v Daiichi Chuo Kisen Kaisha [2015] FCA 1170 - ]]>http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2015/2015fca1170 ]]>

For centuries, international maritime law developed its own security regimes.  Potential conflict arises where the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) does not recognise or take account of international maritime law and the operation of Australian and British Admiralty legislation.  

Background

Daiichi Chuo Kisen Kaisha (DCKK) is a well-known Japanese marine transportation firm providing local and overseas shipping services, mainly for grain, iron ore and other dry bulk cargo.  It does most of its business in the tramp trade.  As at 31 March 2015, DCKK owned directly or indirectly 45 vessels, and had chartered another 140 vessels.  DCKK is a joint stock company incorporated under Japanese law, with corporate headquarters and registered office in Tokyo, but also many other domestic offices in Japan, and international offices in New York, Manila, Hong Kong, London, Shanghai, Brisbane, and Vietnam. 

DCKK also has a “shikumisen subsidiary” known as Star Bulk which is incorporated in the Republic of Panama in order to take advantage of tax and other legal systems advantageous to the shipping business.

Japanese rehabilitation proceedings

DCKK found its business difficulty after 2008 because of conditions in the trade, not least due to a number of long-term time charters which had been negotiated at higher rates than currently prevail.  Therefore DCKK and Star Bulk commenced “civil rehabilitation” proceedings in the Tokyo District Court under the Civil Rehabilitation Act of Japan (Minji saisei hô, Law no. 225/1999).  These proceedings provide for court appointment of a supervisor, the payment of unsecured creditors, and the return of the companies to solvency.

DCKK and Star Bulk sought cross-border recognition of the Japanese proceedings in USA, UK, Canada and Australia.  The Australian application came before Allsopp CJ in the Federal Court of Australia.  The Cross-Border Insolvency Act 2008 (Cth) applies the Model Law in Australia.

Whether a Panamanian subsidiary can have its Centre of Main Interest in Japan

Allsopp CJ had no difficulty in recognising the DCKK rehabilitation proceedings as a “foreign main proceeding”.  However, Star Bulk’s registered office is in Panama City, and Article 16(3) presumes in the absence of contrary evidence that the registered office is the Centre of Main Interest (COMI) of a debtor company, where the “foreign main proceedings” will be located.  His Honour held that the presumption in this case was displaced, and that Star Bulk’s COMI is Japan, for the following reasons: 

  • Star Bulk is a wholly-owned subsidiary of DCKK;

  • Star Bulk is wholly controlled by persons located in Japan, including its three directors who are Japanese citizens;

  • Star Bulk had no employees of its own and relied on staff of DCKK including for operations, accounting, financial reporting and related functions;

  • Star Bulk owned no assets in Panama (or Australia for that matter);

  • Star Bulk’s operations in Australia were restricted to sending its chartered and owned ships into Australian waters and ports;

  • Most of Star Bulk’s creditors were located in Japan.

Conflict between maritime liens and the Model Law

Allsopp CJ followed Yu v STX Pan Ocean Co Ltd (South Korea) [2013] FCA 680, where Buchanan  J declined to make orders pursuant to the Model Law that would prevent the enforcement of maritime liens by ship arrest.

His Honour noted the importance of giving effect to the Model Law as much as possible, whilst also protecting the interest of those who may hold maritime liens.  This is the more so because there is a real jurisprudential question as to the nature of the maritime lien as a security interest or privilege in the hull of the ship.1  A maritime lien runs with the ship irrespective of sale, and the only mechanisms for its removal from the hull of a ship are either by payment of the claim or by sale of the ship by an Admiralty Court pursuant to a maritime process.  A related issue arises in respect of non-lien in rem claims made pursuant to the Admiralty Act 1988 (Cth).  Such claims, once filed, may be seen to create a form or species of qualified or quasi security, although that issue has not been resolved.2  There could be good reason why a foreign representative under the Model Law would wish a maritime court (whether in Australia or elsewhere) to have charge of the sale of a ship – the highest price on the international market may well be obtained by a maritime court because it would only be through such a sale that the hull would be “cleaned” of all other maritime liens.

Allsopp CJ held that the protection given by the Model Law to a shipping company should not necessarily defeat maritime lien claims; rather, the status of such claims, as well as any “quasi lien claims”, should be resolved in litigation.  For this reason, he considered that it would be wrong to make orders now that would forestall any vindication by lien and quasi-lien claimants, yet it would also be wrong to prevent the rehabilitation proceedings being supported by the Model Law merely on the possibility that lien or quasi-lien claims are asserted.

His Honour therefore made the declarations sought by DCKK and Star Bulk concerning the status of the Japanese rehabilitation proceedings as foreign main proceedings, and the representatives of DCKK and Star Bulk as foreign representatives entrusted with the administration or realisation of all those companies’ assets in Australia.  He made no order restraining creditors from proceeding with enforcement of maritime liens against the assets of DCKK and Star Bulk in Australia, but he ordered that any application for issue of a warrant for the arrest of a vessel owned or chartered by DCKK and Star Bulk must be made to a judge of the Federal Court of Australia (not a registrar) and a copy of his reasons for judgment, as well as those of Buchanan J in Yu v STX, must be provided to that judge.

Implications

Although there is still no appellate decision on this issue, this decision reinforces the practice of Australian courts to craft orders pursuant to the Model Law in such a way that the rights of creditors claiming maritime liens or quasi-liens to enforce those liens pursuant to international maritime law are preserved. 


1See the recent decision of McKerracher J in Reiter Petroleum Inc v Ship “Sam Hawk” [2015] FCA 1005.  Note also that McKerracher J declined to apply The Halcyon Isle (1981) AC 221 in Australia.  Hence, it is possible for a claim that gives rise to a maritime lien e.g. under US law but not under Australian law, to still be enforced as a maritime lien in an Australian court.

2See generally Kim v Daebo International Shipping Co Ltd [2015] FCA 684 per Rares J (referring to In re Aro Co Ltd [1980] Ch 196).