Timing can be everything

A recent case in which ITIC supported a ship agent Member in pursuing a claim in the New Zealand High Court shows that timing can be everything when it comes to pursuing a claim against a ship owned by a company in financial difficulty.

ITIC was contacted by the ship agent who had, over a period of time, acted for the bareboat charterer of a fleet of ships which regularly called at ports in New Zealand, to carry cargoes bound for Asian ports. The agent had been pressing their principal for settlement of their outstanding accounts. They became concerned when payment was not forthcoming and rumours were circulating in the market that the debtor may enter some form of insolvency proceedings.

Their fears were realised when the debtor applied to the South Korean Bankruptcy Court for an order commencing rehabilitation proceedings.

ITIC became concerned that the debtor would look to obtain protection against its ships being arrested in New Zealand (and other countries). Both New Zealand and South Korea are signatories to the Uncitral Model Law on Cross Border Insolvency (“the Convention”), and have incorporated its provisions into their domestic laws. The Convention is aimed at ensuring that no creditor takes priority over another, irrespective of where they are located.

Once it was established that, under New Zealand admiralty law, the agent was entitled to arrest one of the debtor’s ships, proceedings were issued against this ship (known as an in rem action) and it was subsequently arrested at anchor off a port in New Zealand. An in rem action is directed at (in the case of admiralty law) a ship, as opposed to the owners or operators of the ship. The key benefit to the claimant is that he does not have to take action against the debtor company, who will likely be located out of the jurisdiction.

At this point, the agent had security for their claim – that security being the ship under arrest.

Three days after the arrest, the Korean court made an order placing the debtor into rehabilitation.

Subsequently the debtor was granted an order by the New Zealand High Court recognising the Korean rehabilitation proceedings, the effect of which was to trigger a stay of proceedings against the debtor.

Following discussions between the agent’s lawyers and those appointed by the debtor’s administrators the ship was released from arrest when alternative security was provided by way of payment of the funds due to the agent (as well as an allowance for interest and costs) into a Court bank account in New Zealand.

The agent then had to persuade the Court that the stay obtained by the debtor should not apply in respect of the agent’s in rem action.

In doing so, the Court considered whether the agent would receive an unfair advantage if permitted to continue with their in rem claim. Crucially, when the debtor was placed into rehabilitation, their rights in the ship were subject to the agent’s secured claim. For that reason, the Court decided that the agent would not be obtaining an advantage over other creditors.

As such, the agent was permitted to continue its admiralty claim. Given that there was no dispute that the agent was owed the funds, these were promptly paid out of the funds previously deposited by the debtor as security. The agent therefore made a full recovery, including interest, and ITIC received a recovery towards the legal costs incurred.

The agent’s prompt notification of their claim to ITIC, as well as the fact that their files were in good order, allowed ITIC to quickly take steps on the agent’s behalf to obtain security for its claim by way of the ship arrest. This ultimately saw the agent make a full recovery.