Ship Bankruptcy

In United States, bankruptcy laws protections are available to ship owners like other businesses. United States federal district courts create jurisdictional complications in United States maritime bankruptcies.

United States bankruptcy laws are designed to protect debtors from creditors. On the other hand, traditional maritime remedies favor creditors in order to promote the smooth flow of international commerce. Jurisdiction of United States bankruptcy court and jurisdiction of a federal district court exercising its admiralty jurisdiction are not always clear. Effectiveness of the automatic stay afforded in United States bankruptcies always a foregone conclusion in non-U.S. jurisdictions. In United States, maritime bankruptcies over the last decades may help in clearing up some of these tensions in the law and practice as additional precedents are created.

Generally, a lot of factors make maritime bankruptcies potentially challenging:

  • Ship owning and ship operating companies tend to have much of their equity in capital intensive assets subject to secured debts, which means that their most significant assets like ships, terminals, containers etc. may be encumbered with secured indebtedness.
  • Range of people and companies with secured claims established through maritime liens, including seafarers with merchant mariner wage liens and suppliers with liens for fuel, provisions and other necessaries, is usually much greater than land-based bankruptcies.
  • Shipping companies tend to be multilayered international businesses, which can create significant cross-border difficulties in a bankruptcy case.

In United States, filing of a bankruptcy petition affect ongoing admiralty proceedings against the debtor’s property. Generally, filing of a bankruptcy petition under federal United States law results in an automatic stay of all proceedings against property of the debtor, including admiralty proceedings involving ships owned by the debtor. Afterwards, creditor then must seek bankruptcy court approval to take any steps to enforce its rights against bankrupt debtor’s property. Filing of a bankruptcy petition does not terminate maritime liens. Filing of a bankruptcy petition will stay enforcement proceedings, but it will not terminate accrued maritime liens. Nevertheless, sale of a ship through the bankruptcy court will generally extinguish maritime liens against the ship. Maritime lien can be extinguished by a bankruptcy court over the objection or without the consent of a maritime lienholder is murky according to recent court decisions. However, if the holder of a maritime lien appears in the bankruptcy proceeding to prosecute its claim for the underlying debt, lien will certainly be terminated by the bankruptcy court as part of its adjudication process. Bankruptcy court can extinguish maritime lien without the consent of the lienholder, to do so would require the lienholder to take the risk of ignoring the bankruptcy proceeding in the hopes of undoing the ship sale after the bankruptcy case has closed.

Under United States law, United States bankruptcy court have jurisdiction over debtor’s property outside the United States or anywhere in the world. United States courts exercise that jurisdiction over property through the court’s jurisdiction over the debtor and any creditor who has filed a claim with the court. However, issues may arise in situations where a creditor has not filed a claim or otherwise consented to the court’s jurisdiction. Salvage creditor in Singapore may find it expedient to arrest a bankrupt debtor’s ship through a local admiralty court and seek to enforce its salvage lien and obtain immediate payment of the outstanding salvage claim owed by the debtor. If the salvor has not filed a claim in United States bankruptcy proceeding, United States bankruptcy court may lack the ability to enforce the automatic stay against that creditor. Even if the foreign creditor does not file a claim in the bankruptcy proceeding, it may still be subject to the United States bankruptcy court’s jurisdiction if it has its own property in the United States. In that case, if foreign creditor takes action in violation of the automatic stay, United States bankruptcy court could find the foreign creditor in contempt and proceed against its United States assets. Even if a foreign creditor has filed a claim in United States bankruptcy proceeding, if it does not have any assets in the United States, it is probably safe from any contempt finding that might be issued by United States bankruptcy court for ignoring the automatic stay.

Ship mortgagees (lender, financial institution) may prevented from enforcing their mortgages by the bankruptcy automatic stay. Ship mortgagees (lender, financial institution) subject to the jurisdiction of bankruptcy court are prevented by the automatic stay from exercising their foreclosure rights. Nevertheless, ship mortgagees (lender, financial institution) have the right to seek relief from the bankruptcy court in the event that they are threatened by a loss of value of the mortgage lien. Decision to lift the automatic stay to allow foreclosure on a ship is a matter within the discretion of the bankruptcy court, judges are likely to be sensitive to the fact that ships that continue to be operated will be exposed to the risk of further maritime liens. When ship is laid up, ship will continue to accrue costs for seafarers, maintenance, insurance, provisions.

Ship owners can continue their shipping business during bankruptcy proceeding:

  • by either seeking recognition of the automatic stay by foreign courts
  • by requesting that the bankruptcy court enter an order permitting continued payment of critical vendors like fuel suppliers, port agents and spare parts suppliers.

Critical Vendor Motions are routinely filed in maritime bankruptcy cases to ensure that such vendors (like fuel suppliers, port agents and spare parts suppliers) can be paid currently and to avoid foreign ship arrest entanglements.

Lien holder can be subject to the bankruptcy court jurisdiction in order to protect its interest when the ship is arrested in a foreign country. However, lien holder must move very quickly. When a ship owner is in bankruptcy proceedings, a ship faces a greater risk of being arrested by maritime lien holders in a foreign port. If a ship is arrested in foreign port, all other parties with liens against the ship will need to make an appearance in the foreign court to ensure that the ship is not sold free of their liens with the funds distributed to lower priority lien holders.

When a ship is arrested in a foreign country, mortgagee (lender, financial institution) and other lien holders should seek an emergency court order lifting the automatic stay to permit them to appear in foreign proceeding and assert their liens against the ship. Mortgagee (lender, financial institution) must act quickly. Once the ship is sold by the foreign court, all preexisting liens will be extinguished. Maritime lien holders will still have their claims against ship owner in the bankruptcy proceeding, those claims will be unsecured once the ship is sold.

There are critical steps in balancing the bankruptcy case with the foreign ship arrest case. The most important first step is to move quickly to appoint competent maritime counsel to appear in the maritime case. Once a ship is arrested, all parties with liens against ship, and in some jurisdiction, parties with other maritime claims against ship owner, will appear to assert their claims against the proceeds of the ship.

Most of the European jurisdictions allow sister-ship claims. Claim related to one ship can be brought as a lien claim against another ship under common ownership. In that case, each party with a claim will need to engage local counsel and more experienced counsel tend to be engaged quickly. If lien holder is late, lien holder will be unable to engage experienced counsel in the port. Mortgagee (lender, financial institution) could be left out of key initial decisions regarding the ship until mortgagee (lender, financial institution) makes an appearance.

When ship mortgagee (lender, financial institution) is in the foreign arrest proceeding, ship’s mortgagee (lender, financial institution) play a key role in the case. Generally, ship mortgagee ship’s mortgagee (lender, financial institution) has largest lien against the ship and that preferred ship mortgage lien ranks ahead of liens for bunkers, provisions etc. Lead party, usually ship mortgage lien holder, work with arresting of the ship in foreign country and coordinate ship’s sale. In some jurisdictions, court may allow mortgagee (lender, financial institution) to sell the ship through a court approved private sale process.

Bankruptcy court is likely to require that parties permitted by lift stay order to participate in the foreign case keep the other parties to the bankruptcy case informed. Because, those parties have at least deemed interest in the proceeds from a sale of the debtor’s ship.

If lift stay order does not expressly grant such permission, lien holders may also need to obtain permission from the bankruptcy court to negotiate with other parties in the foreign case to resolve or settle competing claims. Bankruptcy court is likely to order that lien holders given permission to appear in the foreign proceeding provide an accounting of any proceeds received from the sale of the ship by the foreign court. Bankruptcy court is also certain to require ship owner to deposit into the bankruptcy accounts any proceeds remaining after the resolution of maritime liens.

United States bankruptcy court have jurisdiction over maritime liens. Through statutory delegation of authority from district courts, United States bankruptcy courts have jurisdiction over maritime liens, including potentially deciding priority as between maritime liens and ship mortgages.

Maritime liens may arise in ordinary course after the filing of a bankruptcy petition. Maritime liens can continue to arise after the filing of a petition in bankruptcy as ships are operated in ordinary course of debtor’s business.

United States bankruptcy courts claim jurisdiction derived from federal statute over a debtor’s property wherever located. Maritime liens inherently relate to the ship and travel with the ship. When the ship is not within the custody of the bankruptcy court, but is instead within the physical custody of another court outside of the United States, United States bankruptcy court will have concurrent jurisdiction over ship with the foreign court, and will not have any jurisdiction over the foreign claim of lien.

In United States, under federal bankruptcy law, certain payments or transfers of property made by the bankrupt debtor during 90 days prior to the filing of a bankruptcy petition are voidable by the bankruptcy court. If payments are made in ordinary course of a maritime business, like ship bunkers, then these payments are not voidable. If ship purchases meet the Bankruptcy Code‘s definition of having been made in ordinary course or are otherwise for new value, then payments are not voidable preferential transfers. Furthermore, if ship supplier would otherwise have been entitled to valid lien at the time it rendered service, it may be able to claim secured creditor status and thereby rebut any charge of having received a preferential transfer.

Bankrupt ship owner must continue to perform existing charters of ships. United States bankruptcy law grants bankrupt debtor the right to continue to perform ongoing charters, called executory contracts or to reject such contracts. Generally, it is common practice in maritime bankruptcies for bankrupt ship charterers to reject chartered in ships if the charter hire rate is above-market or otherwise disadvantageous and return the ship to the ship owner. On the other hand, if ship charter rate is at below market rates, it may give the disappointed charterer a claim for damages and a maritime lien against ship.

United States bankruptcy courts have the power to review a bareboat charter. Like other finance-related leases and re-characterize the charter as a financing arrangement rather than as a true charter. If the charter is re-characterized, title owner of the ship would lose its ownership rights in the bankruptcy proceeding and could become an unsecured creditor for the amount of remaining unpaid charter hire. Nevertheless, recent statutory projects in some countries, like Marshall Islands, have enacted provisions that charters re-characterized as financing arrangements will give rise to preferred ship mortgages, as long as the charters are recorded with the ship registry.

Bankruptcy court can apply order of priority of maritime liens otherwise applicable to such liens. United States bankruptcy rules otherwise applicable, bankruptcy courts apply maritime law to determine which maritime claims are valid and priority among those claims. Preferred maritime liens come ahead of preferred ship mortgages under the Ship Mortgage Act 1920 and Federal Maritime Lien Act. Preferred maritime liens also come ahead of ship mortgages in ship bankruptcy proceedings. Unpaid seafarer wages, which are preferred maritime liens, would be payable before preferred ship mortgage. United States bankruptcy court has jurisdiction to sell a ship within its custody free and clear of all liens.