IBC and Admiralty Law

INTRODUCTION.

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it.

DETAIL ANALYSIS.

The conflict between these two special jurisdictions came to a head before the Bombay High Court, which in a recent judgement in Raj Shipping Agencies Vs Barge Madhwa and Anr, attempted to reconcile the irreconcilable.

FACTS OF THE CASE.

Arrest orders were passed by the Bombay High Court against vessels, whose owners were insolvent. The High Court issued a winding up order against one of the ship owners under the Companies Act, 1956 (“Companies Act”). In parallel, insolvency proceedings were commenced against another ship owner by the National Company Law Tribunal and a moratorium ordered against commencement or continuation of all proceedings against that owner and its assets under the Insolvency and Bankruptcy Code, 2016 (IBC).

The official liquidator in the winding up proceedings objected to the continuation of the admiralty actions without the leave of the Company Court under Section 446 of Companies Act, 1956. As regards the insolvency proceedings against the other vessel owner, the maritime claimants argued that the moratorium under the IBC would not prevent continuation of the admiralty actions in the Bombay High Court.

The questions of law that arose for consideration were: –

1.   Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?
2.   Whether leave under Section 446(1) of the Companies Act is required for continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed?

Issue 1: Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

The Court after hearing elaborate submissions, observed that its endeavour would be to give effect to both statutes and their objectives so as to avoid conflict. The judgement proceeded to analyse the distinction between an action in rem under the Admiralty Act and an action in personam under IBC. The Court reasoned that an action in rem is not an action against the corporate debtor/owner of the ship or the assets of the corporate debtor/owner. It accordingly concluded that the moratorium under the IBC would not apply to an action in rem under the Admiralty Act for arrest of the ship and consequently would not prevent the commencement of admiralty proceedings.

However, with a view to avoiding a clash between the two jurisdictions, it ruled that an action in rem could be commenced but not continued, as this would defeat the moratorium and the very purpose of the insolvency process under the IBC. The Court held that a maritime claimant had a statutory right in rem that could not be subordinated to the IBC, which entitled it to arrest the ship, but not to continue proceedings, so as to give the corporate debtor the time and opportunity to be rescued/rehabilitated. Those maritime claimants who arrested the ship according to the Court, would be characterized as secured creditors for insolvency purposes.

According to the court, maritime claimants apart from being treated as secured creditors, should ordinarily be ascribed full value for their claim and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court ruled that vessels arrested before the moratorium can only be released by the Admiralty Court, upon full payment of security.

The Court similarly reasoned that Section 33(5) of the IBC which bars the commencement or continuation of proceedings in liquidation, would not apply to an action in rem, as the claim is against the res and not against the corporate debtor.

Issue 2: Whether leave under Section 446(1) of the Companies Act is required for the continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed that owned the ship?

The Court observed that the Admiralty Act, 2017 is a consolidating enactment dealing with arrest of ships, maritime claims, judicial sale of ships and determination of priorities. The jurisdiction of the Admiralty Court was found to be special, unlike that of regular civil courts. A judicial sale of a ship by an Admiralty Court in a public auction is free from all prior claims, liens and encumbrances and the purchaser at the auction acquires a clean title free from any maritime liens, claims or encumbrances. This is unlike a sale of property conducted by the Company Court. The Court accordingly held that no leave of the Company court was required as the Admiralty Act, 2017 being a special enactment, would prevail over Companies Act, 1956.

 

CONTEXTUAL BACKGROUND

While faced with arguments that Admiralty Courts are powerless to take steps to protect the ships and ensure realization of maximum value during Moratorium, the Court observed Instances where the insolvent owners abandon their ships and the Resolution Professional (“RP”), ignores his duty under the IBC to man, preserve and maintain the ships during the Corporate Insolvency Resolution Plan (“CIRP”); leaving crew members stranded without adequate food, drinking water and essential fuel for survival on board. The Court also observed that the committee of creditors (“COC”) on one hand opposes the sale of the Ship by the Admiralty Court but on the other hand does not spend any money in protecting their own mortgaged ships and ultimately sell the ship at scrap value. The Court held that in these situations the Admiralty Court must have the discretion to step in and protect not only the ship but also the rights of crew members who continue to remain on board in order to maintain, preserve and ensure safety of the ships as exercising Admiralty jurisdiction in such cases will be beneficial and assist rather than hinder insolvency resolution. It would protect the ship and in turn the security of a mortgagee who is a financial creditor. At the same time this would also indicate to the mortgagee that they must take steps to protect and preserve their security and if they do not then the Admiralty Court will step in.

The Solution:

 

• The Court held that a harmonious interpretation of the IBC and the Admiralty Act brings about a solution which would “serve the interests of all stakeholders under both statutes and would be consistent with the objectives of both acts and give effect to the same.”
•  Three scenarios emerged where the provisions of both statutes got involved and the Court provided elaborate solutions for the same and set out below.
•  Scenario I – If a Plaintiff has commenced Admiralty proceedings in rem and obtained an order of arrest of a ship from an Admiralty Court, subsequent to which insolvency proceedings are filed against the owner of the vessel and the adjudicating authority declares a moratorium under Section 14 of the IBC.
• If security for release of the vessel has been furnished prior to the declaration of moratorium:

(i) Then the Suit will not proceed as the Suit is no longer an action in rem but in personam against the corporate debtor who has furnished security.

(ii) However, Plaintiff will be considered to be a secured creditor having obtained security exclusively for his claim.

• If after furnishing security the CIRP is successful and a Resolution Plan is approved:

(i) Then the maritime claim of Plaintiff will be determined in accordance with the resolution plan approved by the COC and the adjudicating authority (“AA”) under the IBC.

(ii) Plaintiff’s status as a secured creditor and its exclusivity to the security will be considered by the COC / AA in determining the entitlement of Plaintiff and ordinarily be entitled to realise his claim to the full extent of the security provided. To this extent the Admiralty Court will protect the interest of Plaintiff and its right to the security provided to the Admiralty Court for release of the ship.

5.1 If after furnishing security the CIRP is not successful and the company is ordered to be liquidated:

(i) The Plaintiff will be a secured creditor in liquidation and will be entitled to realise its security interest in accordance with the applicable law, viz., Admiralty Act, as provided in Section 52(4) of the IBC itself.

(ii) It will be open to the Liquidator to defend the suit which right is available to him as provided in S. 35(1) (k) of the IBC.

5.2. If security has not been furnished at the time when the moratorium is declared:

(i) Then the Admiralty Court will not proceed further with the Suit in rem as it would defeat the insolvency resolution objective of the IBC.

(ii) However, the vessel will remain under arrest and it would be up to the RP to decide whether security ought to be furnished for release of the vessel. Thus the maritime claimant or his right in rem would not be prejudiced.

(iii) If no security is furnished, the vessel will remain under arrest until the end of the CIRP period.

(iv) In that event, Plaintiff’s maritime lien or claim which is a perfected claim against the vessel by virtue of the arrest, will operate as a charge on the vessel and Plaintiff will be considered as a secured creditor.

5.3. If security has not been furnished and the company is liquidated then:

(i) Plaintiff’s action being an action in rem will proceed and the vessel will be sold by way of an Admiralty sale to maximize its realisation value.

(ii) Plaintiff and any other claimant who has a maritime claim or a maritime lien and has obtained an order of arrest before liquidation, will be considered a secured creditor and will be entitled to enforce and realize his security interest in accordance with Admiralty Act.

(iii) The Admiralty Court will be entitled to invite claims against the sale proceeds by following the Admiralty procedure prescribed in the Rules.

• Parties having a maritime lien or a maritime claim will be entitled to file an action in rem against the sale proceeds as in law there is no difference between an action in rem against a ship and against the proceeds of sale of that ship.
• The determination of priorities will also be done in accordance with Section 10 of the Admiralty Act and inter se priorities of maritime liens will be decided in accordance with Section 9 of the said Act.
• Section 53 of the IBC which refers to distribution of assets will not apply.
• If the ship is sold by the Admiralty Court in exercise of its jurisdiction in rem then the machinery of the Admiralty Act will apply and the sale proceeds will be distributed on the basis of priorities determined under the Admiralty Act.
• All those claimants who are unable to recover their claim from the sale proceeds will have to pursue their claim in the liquidation as unsecured creditors.

5.4. If on the other hand if the company is not liquidated and Resolution Plan is approved, then:

(i) The Plaintiff’s claim together with that of all other Claimants who have obtained an order of arrest and have become secured creditors qua the ship will be determined in accordance with the approved plan.

(ii) Being secured creditors, their rights and claims in respect of the vessel under arrest shall be considered by the COC / AA whilst approving the Resolution Plan when it comes to payments to be made to them from the amounts made available to secured creditors by the successful Resolution applicant.

(iii) The claim of Plaintiff and all other maritime Claimants who have arrested the vessel before a moratorium was declared shall be accorded priority in respect of the value ascribed to the vessel in the Resolution Plan.

(iv) The vessel would have been sold by the Admiralty Court and the priorities would have been determined in accordance with the Admiralty Act. However, the ship value for the purpose of ascertaining the proportionate and priority entitlements of the maritime claimants will be the liquidation value assigned to that particular vessel.

5.5. Since the ship was arrested before the declaration of moratorium, the Admiralty Court will protect the interests of Plaintiff and release the ship from arrest only upon being satisfied that the claim of Plaintiff has been accorded priority as required under the Admiralty Act in respect of the value ascribed to the ship and paid accordingly.

5.6. All those claimants who had arrested the vessel but are unable to recover their claim under the Resolution Plan in part or in full because the value ascribed to the ship is not sufficient to pay all claims against the vessel in full, will rank as operational creditors of the corporate debtor as regards their unrecovered claim and may recover depending on what payment is offered to operational creditors in the resolution plan. They are not secured creditors of the corporate debtor’s other assets.

5.7. If security has not been furnished and the vessel remains under arrest:

(i) the Admiralty Court will not order the sale of the vessel during the moratorium period in order to allow the insolvency resolution process to fructify, unless an application for sale is made by the RP or if the vessel is not being manned, equipped and maintained by the RP during the moratorium and all charges for the same are not being paid by the RP including port charges or if the vessel becomes a navigational hazard.

(ii) In such a case the Admiralty Court will have the discretion to sell the vessel at the instance of any party who has filed an Admiralty Suit and has a maritime claim.

(iii) The order of sale is made to ensure that the value of the vessel is not put at risk and the vessel is preserved and / or is not allowed to waste and deteriorate and further encumbered with claims and liabilities during the moratorium period. This is done with a view to maximize the value of the ship (asset) and also to secure the interests of the secured creditors qua the ship in question which is also the objective of the IBC. This will be a matter entirely in the discretion of the Admiralty Court.

5.8. In all such cases notice will be given to the owner who may be represented by the RP before any sale of the ship is carried out by the Admiralty Court.

5.9. In all cases of sale of the vessel during the moratorium period in view of exigencies mentioned in the preceding paragraph, the proceeds will not be distributed but will be retained by the Admiralty Court to await the outcome of the CIRP or liquidation, as the case may be. Once either of these events happen, the procedure laid down in paragraph 5.4 & 5.6. above will apply as regards distribution of the sale proceeds and priorities.

5.10. All expenses incurred for preservation and maintenance of the vessel during the period of arrest with the permission of the admiralty Court will be treated as sheriff’s expenses in Admiralty and Resolution Process costs under the IBC and paid out in priority from the sale proceeds of the ship if the company is liquidated or be accorded priority in the resolution plan as resolution process costs.

6. Scenario II : If a moratorium has been declared under Section 14 of the IBC before any Admiralty Suit in rem is filed for enforcement of a maritime lien or maritime claim.

6.1 There will be no bar to filing such an action and If an order of arrest is made, the warrant of arrest will be executed against the vessel.

6.2 Upon the RP entering appearance on behalf of the owner/corporate debtor, the Suit will not proceed in rem so as not to defeat the objective of the insolvency resolution and the Admiralty action in rem will have to be stayed and not proceeded with after the vessel has been arrested, till such time as the insolvency resolution process is completed or a Liquidator is appointed.

6.3 If the vessel is trading during the moratorium period the vessel will be permitted to trade under arrest once the RP enters appearance on behalf of the corporate debtor and appropriate undertakings are provided in respect of the vessel. This will ensure that trading of the vessel is not impaired or affected, if this is in the interest of the corporate debtor or the CIRP.

6.4 The Claimant will be considered as a secured creditor and the observations in paragraphs 5.3, 5.4 & 5.6 above will apply if the insolvency resolution process is successful and a resolution plan is approved or if the resolution process fails and the liquidator is appointed, as the case may be.

6.5 At all stages, in such a situation it would be open to the RP acting on behalf of the owner to furnish security for release of the vessel if he deems fit. The RP, however, will be under an overriding obligation to maintain the vessel in any event and if this is not being it will be open to the Admiralty Court to consider an application for sale of the vessel at any stage during the CIRP. The sale proceeds will, however, not be distributed and will be retained by the Admiralty Court to await the outcome of the CIRP or liquidation as the case may be.

6.6 Same procedure for paying out the incurred expenses will apply as mentioned in paragraph 6.12.

7. Scenario III : If the owner of the vessel (corporate debtor) is in liquidation at the time the Plaintiff commences Admiralty proceedings in rem for arrest of the vessel.

7.1 An action in rem can be entertained even at the stage of liquidation of the corporate debtor as the claim is against the res and not against the corporate debtor.

7.2 Once a Plaintiff obtains an order of arrest, the vessel can then be sold by the Admiralty Court in order to realize maximum value as it is only a judicial sale by an Admiralty Court which extinguishes all maritime liens against the res and thereby giving a clear title to the buyer.

7.3 Once the sale proceeds are realized and deposited in Court, paragraph 6.6 above will apply and the matter will proceed on that basis. The Liquidator will be entitled to defend the suit.

7.4 This may also be seen from another perspective. Once Plaintiff obtains an order of arrest, Plaintiff would then become a secured creditor and realize the security interest in accordance with the Admiralty Act.

CONCLUSION

An action in rem can be filed and have the ship arrested before or during the moratorium period or even when in liquidation to perfect his maritime lien or maritime claim under the Admiralty Act. The action in rem will not proceed till the moratorium is in place. This will ensure that the rights under both the IBC & the Admiralty Act are not defeated. The priorities for payment out of the sale proceeds will also be determined in accordance with the said Admiralty Act.