Admiralty Claims Trump Cross Border Insolvency

You Sik Kim & Another v STX Pan Ocean Co Ltd.

Background

Korean shipping company STX Pan Ocean Co Ltd (STX), the demise charterer of M.V. New Giant, found itself in financial strife and sought relief under Korean bankruptcy laws to enable a re-organisation of the business to occur. Meanwhile various creditors with claims against the ship sought to protect their themselves by filing proceedings in admiralty and arresting the ship. The administrators of STX obtained an order in New Zealand under the Insolvency (Cross-Border) Act 2006 (Act) recognising the Korean proceeding as a "foreign main proceeding”. This had the effect of automatically staying the New Zealand admiralty proceedings. The New Zealand admiralty claimants thereupon sought leave to continue their claims against the vessel.

Chronology

The order of events is critical to the decision and is set out below:

• On 7 June 2013, STX applied for an order commencing rehabilitation in Korea. On the same day the Korean Bankruptcy Court imposed an interim moratorium pending determination of STX’s application and made orders preventing STX from paying creditors or dealing with its assets, and preventing creditors from exercising various recovery rights.
• Between 12 and 14 June 2013, two admiralty claimants filed in rem proceedings in New Zealand against the MV New Giant and the vessel was arrested on 14 June 2013.
• On 17 June 2013, the Korean Court made an order placing STX in rehabilitation and appointed the administrators.
• On 25 June 2013, STX’s administrators applied for recognition in New Zealand of the Korean rehabilitation proceeding as the foreign main proceeding under the Act. The proceeding was recognised as such on 1 July 2013, triggering a stay of all proceedings in New Zealand.

Stay applicable to admiralty proceedings

The claimants initially argued that the stay did not apply to the admiralty proceedings, on the basis that ship was not an asset of STX, but this was later conceded. The Court concluded that in fact the admiralty proceedings were covered by the stay.

The Court considered the meaning of "asset” under the UNCITRAL Legislative Guide on Insolvency Law and concluded that the ship, on charter by demise, which gave STX the right to possession and control and an option to purchase the ship, was an asset in terms of the Act. Even if that had not been the case, the Court held that the admiralty proceedings concerned STX’s "rights, obligations or liabilities” in terms of art. 20(1)(a) of Schedule 1 to the Act.

Claimants allowed to continue with the in rem proceedings

The Court then considered whether it should exercise its discretion under art. 20(2) of Schedule 1 to the Act to allow the claimants to continue their admiralty proceedings. The Act gives the Court a broad discretion to grant leave in appropriate circumstances. The Court considered that its discretion under the Act was comparable to the Court’s discretion under s.248 of Companies Act 1993, which deals with stays of proceedings following the commencement of a liquidation in New Zealand. Generally, before exercising its discretion under s248, the Court will need to be satisfied that a creditor will not gain an advantage over other creditors when continuing or commencing proceedings against a company in liquidation.

The Court, applying the English decisions Re Aro Co Limited and The Cella, held that the admiralty claimants obtained security by issuing proceedings in rem against the M.V. New Giant. STX’s rights became subject to those secured claims. Because the admiralty proceedings were issued (by 14 June 2013) before commencement of the rehabilitation, the Court gave leave to continue the proceedings. The Court held that this this decision was consistent with its usual practice followed under s.248 of the Companies Act 1993, where leave would normally be allowed to secured creditors to continue proceedings against a company in liquidation.

One of the admiralty proceedings had been commenced by the wrong party. The application to substitute the correct party was declined because the new plaintiff would then obtain a security right it did not have at the time the rehabilitation proceeding was commenced and recognised in New Zealand.

Should the moratorium imposed by the Korean Bankruptcy Court prior to the commencement of the admiralty proceedings in New Zealand lead to another conclusion?

STX’s administrators argued that the admiralty proceedings were commenced after the interim moratorium was ordered in Korea (on 7 June 2013) and, thus, that leave to continue the admiralty proceedings should be declined.

The Court considered the specific wording of the interim orders made by the Korean Bankruptcy Court pursuant to ss.43 and 45 of the Korean Debtor Rehabilitation and Bankruptcy Act 2005. It was common ground that claimants in Korea have in personam rights only and cannot bring actions in rem.

The Interim Order under s45 provided that: "In regards to this matter, until there is a decision to commence the rehabilitation proceeding, all rehabilitation creditors and secured rehabilitation creditors shall be prohibited from conducting compulsory execution, provisional seizure, provisional disposition, or auction sale proceedings to exercise collateral rights based on rehabilitation claims or secured rehabilitation claims.” Rehabilitation claims are defined as including "Asset claims based on grounds that arise before rehabilitation procedures commence for the debtor”.

The Court did not accept the administrators’ argument that the arrest of the MV New Giant was either a "provisional seizure” or "the exercise of a security right” in terms of the Interim Order and held that the Order did not prevent the claimants from filing admiralty proceedings. The admiralty proceedings could not be described as "the exercise of a security right” given that the plaintiffs obtained their security interest only upon the filing of the proceedings. The subsequent arrest did not alter the claimants’ status as secured creditors. The Court held that, in any event, the arrest of the ship could not be categorised as a "provisional seizure”.

In addition, the Court held that the original Interim Orders made by the Korean Bankruptcy Court did not purport to have extraterritorial effect and decided that the New Zealand claimants were entitled to pursue their in rem claims notwithstanding the Interim Orders. The Court also suggested that STX management or the subsequent administrators could have applied to the New Zealand Court for interim relief to protect the assets of STX under art. 19 of Schedule 1 to the Act, immediately following the Interim Orders, but did not do so.

Comment

Under s.2 of the Companies Act 1993, a "secured creditor” is defined as "a person entitled to a charge on or over property owned by that company”. "Charge” is defined as including "a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to [general] creditors”. It is clear that holders of registered ship mortgages are secured creditors as they are given this status by s.40 of the Ship Registration Act 1992. Maritime lien holders have traditionally been held to have secured status. It is obviously good news for admiralty creditors with statutory in rem claims, that their claims are also being given secured creditor status in New Zealand upon the issuing of admiralty proceedings.
Article 19 of Schedule 1 to the Act specifies that a foreign representative (in this case the Korean administrators) has the right to apply for urgent measures under art. 19, from the time of filing the application for recognition. At the time of the Interim Orders, a foreign representative had not yet been appointed so it is difficult to see how orders for urgent measures could have been obtained prior to 17 June 2013, when the rehabilitation order was made by the Korean Bankruptcy Court and when the administrators were appointed.

It will be interesting to see whether an appeal eventuates.