The “Ocean Winner” – [2021] SGHC 8 case brought a win for charting a way forward at the crossroads of admiralty law and insolvency law. Singapore-based CJC Associate Benjamin Lim discusses this Singapore High Court decision.
The waters where admiralty law and insolvency law meet have, until recently, been relatively uncharted and have therefore been difficult and treacherous for courts and litigants to navigate. Fortunately, the Singapore High Court was recently presented with an opportunity to make some headway in clarifying the law involving admiralty actions in the context of company restructuring in its decision in the “Ocean Winner” [2021] SGHC 8.
This matter arose out of the massive insolvency currently ongoing involving Hin Leong Trading and its related companies including Ocean Tankers and Xihe Group, a saga that for over a year has been making headlines in Singapore shipping news.
Facts
On 17 April 2020, Ocean Tankers (Pte) Ltd (“Ocean Tankers”) applied to the Singapore High Court for moratorium relief to facilitate its formulation of a debt restructuring scheme of arrangement pursuant to what was at that time section 211B(1) of the Singapore Companies Act (the “s211B moratorium”). That section and others relating to schemes of arrangement have since been repealed and re-enacted in Part 5 (sections 63-72) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”).
As a consequence of Ocean Tanker’s application for the s211B moratorium, an automatic moratorium came into immediate effect, which was to last for 30 days or until the s211B moratorium application was heard and determined, whichever came earlier – sections 211B(8) and (13) of the Companies Act, presently sections 64(8) and (14) of the IRDA.
One effect of this automatic 30-day moratorium was to immediately suspend the commencement or the continuation of all legal proceedings against Ocean Tankers (save only where permitted by the court), while it awaited the order of court for the implementation of the actual s211B moratorium itself, which would come at some point shortly after the application was made.
On 22 April 2020, the plaintiff in this action, PetroChina International (Singapore) Pte Ltd (“PetroChina”), filed four admiralty in rem writs (the “Writs”) against four vessels, each of which was demise chartered by Ocean Tankers and owned by companies in the Xihe Group. Each of the four Writs were premised on alleged cargo mis delivery claims.
Ocean Tankers then entered appearance as demise charterer of the four vessels and sought summonses to set aside or strike out the Writs, which were filed without leave of court, on the basis that they had been filed by PetroChina in direct and flagrant disregard of the automatic moratorium which was in effect on the date when they were filed.
PetroChina, in response, argued that the automatic moratorium did not operate to bar the filing of the Writs, even though they were filed without leave of court, simply because as in rem actions, the Writs were filed against the vessels (i.e. the res) and not against Ocean Tankers. Further, PetroChina’s act of filing the Writs was not equivalent to “execution, distress or other legal processes” against Ocean Tanker’s property, which was prohibited without leave of court during the period of time an automatic moratorium was in force over Ocean Tankers (section 211B(8)(d) of the Companies Act, now section 64(8)(d) of the IRDA).
Questions before the court
The relevant sections of the Singapore Companies Act (presently re-enacted in the IRDA) which the Singapore High Court was invited to consider were sections 211B(8)(c) and (d) (presently 64(8)(c) and (d) of the IRDA):
Section 211B(8)(c)
no proceedings (other than proceedings under section 210 or 212 of the Companies Act, or this section or section 66, 69 or 70) may be commenced or continued against the company, except with the leave of the Court and subject to such terms as the Court imposes;
Section 211B(8)(d)
no execution, distress or other legal process may be commenced, continued or levied against any property of the company, except with the leave of the Court and subject to such terms as the Court imposes;
Two main issues arose for determination in this case.
- Was PetroChina’s filing of the admiralty in rem Writs the commencement of “proceedings” against “the company”, Ocean Tankers, under section 211B(8)(c)?
- Was PetroChina’s filing of the admiralty in rem Writs an “execution, distress or other legal process” against “property” of Ocean Tankers under s 211B(8)(d)?
Decision
The court answered these two questions in the negative, thereby allowing the Writs to stand. In coming to this conclusion, the Singapore High Court considered the statutory objective of the automatic moratorium and the nature of cargo claims specifically under Singapore’s High Court (Admiralty Jurisdiction) Act (the “HCAJA”).
First, the automatic moratorium mandates an automatic 30-day stay of proceedings against Ocean Tankers, once a s211B moratorium application for a scheme of arrangement is filed, so that Ocean Tankers has breathing space to develop, refine and propose a restructuring plan to its creditors. Such breathing space would allow Ocean Tankers to properly devote its attention and resources towards devising a restructuring plan that would have the highest prospect of success at the eventual vote for the scheme of arrangement. Thus, the underlying purpose behind the automatic moratorium is to prevent creditors from taking action or proceeding with their claims against Ocean Tankers while it is working on a scheme proposal. Some semblance of the status quo must prevail so that its officers can have the necessary bandwidth to engage meaningfully with the creditors, instead of spending time and resources on fending off creditors’ claims.
Second, for the purposes of admiralty jurisdiction under Singapore law, cargo claims are classified as “statutory lien claims” under the HCAJA. That is, admiralty claims brought pursuant to “statutory rights of action in rem”. Cargo claims are not recognised as maritime lien claims under Singapore law and therefore PetroChina’s rights of action in rem for its cargo claims were only limited to those provided by statute (i.e. the HCAJA). This being the case, for statutory lien claims such as cargo claims, the act of filing and the subsequent issuance of the in rem Writs serves to create and crystallise PetroChina’s statutory lien, where none had previously existed. The main purpose of creating the statutory liens by the issuance of the in rem Writs was to protect them from any change of the four vessels’ ownership thereafter even though the Writs have not been served, since service of the Writs is not necessary for the creation of the statutory lien and its protection from change of ownership. PetroChina’s statutory liens, once created by the issuance of the Writs, attach to the ships named in the Writs. Even if there is a subsequent change of ownership of the ships, the new shipowner’s title remains encumbered by the statutory lien created by the Writs, thereby protecting PetroChina’s cargo claim.
Taking the two together, the court held that the automatic moratorium leading to the scheme of arrangement could not have been intended to operate in such a way as to deny PetroChina’s creation of its substantive legal rights represented by the statutory liens, which is exactly what PetroChina sought to do by filing the Writs. PetroChina filed the Writs to protect its claims against time bars and/or change of the vessels’ ownership, and the automatic moratorium in favour of Ocean Tankers was not meant to deny them this. The automatic moratorium only acts to postpone the pursuit and/or enforcement of such legal rights to a later time so that the company’s officers will not be too distracted and are able to focus their energies on coming up with a scheme of arrangement. The filing of the Writs alone did not militate against such an objective.
The creation of the statutory lien by filing the Writs merely served to crystallise and create a security interest for PetroChina’s cargo claim. That did not deny Ocean Tankers any breathing space or hinder its efforts to properly devise and propose a scheme of arrangement. On the other hand, if PetroChina was hindered from filing its Writs, for example by the necessity to seek leave of court because of the subsisting moratorium over Ocean Tankers, then its substantive legal rights to bring a statutory lien claim under the HCAJA would be at risk of being destroyed by Ocean Tankers. If PetroChina was unable to file the Writs to even create its statutory lien, then all Ocean Tankers needed to do was to terminate the bareboat charters in advance before the Writs were filed, leaving them off the hook and thereby frustrating and defeating PetroChina’s in rem claims. The moratorium was never intended to defeat or deny the creation of substantive legal rights.
As to whether the Writs represented proceedings against Ocean Tankers, which Ocean Tankers contended they were protected against by the moratorium, the court clarified that every action in rem begins life only as an action against the res, not the owner or demise charterer of the vessel. Only when the owner or demise charterer enters appearance and subjects itself to the court’s jurisdiction will the action in rem transform to become a hybrid action in rem against the res and in personam against the owner or demise charterer. Where no such appearance is entered, the action remains in rem against the res only. Therefore, to determine if the Writs were “proceedings” against Ocean Tankers such that the moratorium applied, the critical issue was whether Ocean Tankers would have been liable in personam for the Writs at the time when they were issued. This was clearly not the case, since the Writs when they were issued were targeted at the four vessels alone, and Ocean Tankers only entered appearance thereafter. Hence it was found that the Writs were not proceedings against Ocean Tankers such that the moratorium applied.
However, since Ocean Tankers subsequently entered appearance while under a subsisting moratorium in its favour, turning the in rem actions into hybrid actions in rem and in personam, the court ruled that PetroChina would have to obtain leave of court to proceed with their claim, including service of the Writs and arrest of the vessels, as such steps would amount to “continuing” with proceedings against Ocean Tankers, from which it is protected under the moratorium.
The second question was disposed of easily by the court reading the words “other legal process” in the statute ejusdem generis with the preceding words “execution” and “distress”. Hence the court held that the words “other legal process” referred only to legal processes involving the enforcement of judgments or orders of court, such as garnishee proceedings, and did not cover PetroChina’s filing of the Writs, which was not an enforcement proceeding. Hence the filing of the Writs, which served to create the statutory liens over the vessels, was not something caught by section 211B(8)(d) of the Companies Act.
Analysis
This decision should be of some comfort to prospective plaintiffs looking to Singapore as a favourable arrest jurisdiction. There is now at least some clarity that even when the shipowner or demise charterer is operating under a moratorium pending the approval and finalisation of a scheme of arrangement, that does not prevent plaintiffs from filing admiralty writs against their vessels to protect their maritime claims.
However, it is important to note that the court was careful to highlight the following differences:
The difference in terms of the objectives of a scheme moratorium, as opposed to a liquidation moratorium.
Similar moratoriums exist elsewhere in the IRDA, and they operate in the context of corporate insolvency/liquidation (“winding-up” – section 133(1) of the IRDA) and judicial management (sections 95-96 of the IRDA).
In particular, a liquidation moratorium exists to prevent otherwise unsecured creditors from becoming secured creditors. The filing of an admiralty writ provides an erstwhile unsecured claimant with precisely that opportunity, to its unfair advantage and to the detriment of the other unsecured creditors, with whom it is supposed to rank pari passu in a liquidation situation. A liquidation moratorium therefore must work to prevent any unsecured creditor from stealing a march on its fellow unsecured creditors, since the interest of every creditor in a liquidation scenario is to seek greater priority in repayment from the assets of the debtor company. These concerns do not arise under a scheme moratorium, where the focus is instead on restructuring and rehabilitating the company.
As such, this decision is unlikely to be helpful to claimants who file admiralty writs against vessels demised chartered to or owned by companies operating under a subsisting liquidation moratorium. Such writs are likely to be seen as squarely defeating the objectives of a liquidation moratorium and should not be allowed to stand if filed without the leave of court.
On the contrary, if the demise charterer or shipowner is under judicial management, then this decision may still be helpful, given that the relevant statutory provisions for the moratorium under the judicial management regime in Singapore are in pari materia with the provisions for the moratorium under a scheme of arrangement. Also, the concern (in liquidation) of unsecured creditors unfairly becoming secured creditors is absent in a judicial management situation. This however has yet to be tested.
The difference between statutory lien claims brought under section 4(4) of the HCAJA, versus maritime lien claims brought under section 4(3) of the HCAJA
The other important point highlighted by the court is that this decision may not help those plaintiffs whose maritime claims are brought on the basis of maritime liens, and not statutory liens. The key difference lies in the fact that maritime liens arise, accrue and attach to the ship and travels with her regardless of ownership change from the moment the plaintiff’s cause of action arises. A maritime lien therefore does not need to be created and crystallised in the same manner a security interest resulting from a statutory lien needs to be. As such, in maritime lien cases, the issuance of the writ is not meant (or required) to crystallise and create the plaintiff’s security interest or right of action. Instead, the plaintiff’s security interest and the right of action already pre-exists the issuance of the writ, which is issued in pursuit of these interests and rights.
Based on the distinction drawn in this decision between admiralty writs filed to create a statutory lien, as opposed to those filed to pursue a pre-existing maritime lien, it may well be that writs in rem premised on maritime liens will need to be filed with leave of court when the owner or demise charterer is under a scheme moratorium, as that may amount to commencement or continuation of proceedings against the company. Again, the Singapore courts have not yet had the opportunity to decide this.
Conclusion
Admiralty writs in rem are often filed urgently to:
(1) prevent the in rem claim from being time barred (e.g. the 1 year time bar under the Hague or Hague-Visby Rules); and/or
(2) prevent a “statutory lien” claim from being extinguished by any change of ownership in the vessel or termination of bareboat charters.
It is clear from this decision that the requirement to seek leave would have been too onerous for such "statutory lien" claimants.
To date, this appears to be the only reported common law decision (apart from the High Court of Bombay’s decision in Raj Shipping Agencies v Barge Madhwa Raj) dealing with the issue of how admiralty law interacts with a “restructuring moratorium”.
We keenly await developments of the impact of this decision not only in Singapore but in other jurisdictions, such as in England in the still-rarely traversed intersection of admiralty law and insolvency law.