United States Maritime Bankruptcy

United States Maritime Bankruptcy

In United States, bankruptcy laws protections are available to shipowners like other businesses. United States federal district courts create jurisdictional complications in United States Maritime Bankruptcy.

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 Bankruptcy 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 Maritime 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 Maritime 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 Maritime 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 Maritime Bankruptcy proceeding in the hopes of undoing the ship sale after the bankruptcy case has closed.

Maritime Bankruptcy Law 

Under United States law, United States Maritime 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 Maritime 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 Maritime 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.

Shipowners 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 Maritime 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 Maritime 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.

Maritime 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. Maritime 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.

Maritime Liens in the United States 

United States Maritime 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 Maritime 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 shipowner must continue to perform existing charters of ships. United States Maritime 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 Maritime 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 Maritime 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.

Maritime 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.

Maritime Bankruptcy in the United States

Maritime bankruptcy in the United States is the process of addressing the financial distress of a company in the maritime industry, such as shipping companies or offshore drilling firms, under the U.S. Bankruptcy Code. The maritime industry is susceptible to market fluctuations, international trade disputes, and regulatory changes, among other factors, all of which can lead to financial instability.

Maritime companies in the U.S. typically file for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, which allows a company to continue its operations while restructuring its debts. In some cases, they might file for Chapter 7 bankruptcy if the company decides to cease operations and liquidate all assets to pay off the creditors.

Here are key considerations in the context of maritime bankruptcy:

1. Maritime Liens: These are claims against a vessel that arise from services rendered to or damages caused by that vessel. Under U.S. law, maritime liens are an inherent part of the vessel and follow it irrespective of ownership changes until they are extinguished. When a maritime company files for bankruptcy, these liens can complicate the process, especially during the distribution of assets.

2. Limitation of Liability: Under certain circumstances, the Shipowner’s Limitation of Liability Act allows vessel owners to limit their liability to the value of the vessel and its freight then pending. This Act has significant implications in the case of maritime bankruptcies, as it can reduce the potential claims against the bankrupt entity.

3. Admiralty Jurisdiction and Bankruptcy Court: There is often a conflict of jurisdiction between the bankruptcy court (a federal court) and the admiralty court (a specialized court handling maritime cases). Both can have concurrent jurisdiction over some cases, which can create procedural complexities.

4. International Considerations: Maritime industry is an inherently global industry, and a bankruptcy involving a maritime company often involves assets located in different jurisdictions. This aspect can make the bankruptcy process more complicated due to the involvement of different legal systems and international maritime laws.

5. Environmental Claims: Maritime companies often face significant environmental obligations. For example, the cost of removing a sunken vessel or cleaning up an oil spill can be substantial. These claims can play a significant role in the bankruptcy proceedings.

6. Priorities of Claims: In a maritime bankruptcy, understanding the order of priorities for claims is critical. Some creditors may have preferred maritime liens, which often take precedence over other claims in the distribution of a bankrupt company’s assets. This also includes necessaries provided to a vessel, salvage claims, or damage resulting from maritime tort.

7. Vessel Arrest and Sale: As part of the bankruptcy process, creditors might request the arrest and sale of vessels to satisfy debts. This process is typically handled through the admiralty court and must be managed carefully to preserve the value of the assets and ensure fair treatment to all creditors involved.

8. Treatment of Seamen’s Wages and Injuries: The Jones Act and general maritime law allow seamen to pursue claims for wages, maintenance and cure, and personal injuries. In a bankruptcy context, these claims may be given priority. It’s also worth noting that if the maritime company carries Protection and Indemnity (P&I) insurance, these claims might be paid by the insurance, although the dynamics can change in a bankruptcy context.

9. Cross-Border Insolvencies: Given the international nature of the maritime business, cross-border insolvency issues often arise. Recognition of foreign proceedings, dealing with international creditors, and complying with different legal systems can complicate the bankruptcy process. The UNCITRAL Model Law on Cross-Border Insolvency has been incorporated into the U.S. Bankruptcy Code and provides a framework for addressing these issues, but each situation needs to be navigated on a case-by-case basis.

10. Reorganization Plan: If a maritime company files for Chapter 11 bankruptcy, the aim is to come up with a reorganization plan that will allow it to pay its creditors over time while continuing its operations. Given the volatility of the maritime industry, these plans often need to be both flexible and robust, able to withstand future market fluctuations.

11. Legal Expertise: Because of the specificities and complexities involved in maritime bankruptcy cases, it’s imperative to seek counsel with specialized knowledge in both bankruptcy and maritime law. They will guide the process, liaise with the stakeholders, and ensure that all legal requirements are met.

Maritime bankruptcy in the U.S. is a complex process, with specific issues related to the nature of maritime business and maritime law. The proceedings require careful navigation of both bankruptcy law and maritime law, taking into account the international aspect of maritime operations and the priorities set by maritime liens and other maritime obligations.

The handling of a maritime bankruptcy case involves many complex issues requiring legal expertise in both bankruptcy law and maritime law. Like all bankruptcy cases, the goal is to either successfully restructure the company so that it can continue operating or to liquidate the company in a manner that provides the most benefit to the creditors.


US Bankruptcy Law is Debtor-Friendly 

Insolvency in the maritime industry presents intricate and often complex issues for restructuring professionals, due to the intertwining of the Bankruptcy Code and maritime legislation. Chapter 11 is tailored to provide:

  1. A momentary respite for the debtor from aggressive actions by creditors.
  2. Safeguard the worth of a debtor’s holdings for the advantage of its estate and creditors.
  3. Furnish the debtor with an avenue to reshape its business via a section 363 transaction or ratification of a plan.

Owing to these safeguards and advantages, American bankruptcy law is widely seen as supportive towards debtors. In stark contrast, maritime law typically leans towards the creditors, specifically those holding maritime liens. The driving factor behind this bias is to facilitate the unhampered progression of global commerce and international finance while discouraging vessels from evading their liabilities by simply setting sail (Equilease Corp. v. M/V Sampson, 793 F.2d 598, 602 (5th Cir. 1986)). The contrasting interests of debtors and creditors often clash in insolvencies involving maritime matters, thus birthing intricate cases.

Numerous shipping corporations operate American and foreign flag vessels delivering domestic and international transit services. The assets of a maritime debtor traverse international waters and can anchor at offshore harbors at any moment. Hence, it is absolutely pivotal for the maritime debtor’s operations and successful restructuring efforts that, following the bankruptcy declaration:

  1. The debtor’s assets are immune from seizure.
  2. Maritime liens are neither imposed nor executed.
  3. Contracts and leases are not dissolved.


Global Holdings of a Chapter 11 Maritime Debtor

A cardinal safeguard and formidable instrument offered to a bankruptcy debtor is the automatic stay, enshrined in section 362 of the Bankruptcy Code. Unleashed instantaneously upon the submission of a bankruptcy appeal, it effectively halts nearly all actions and processes directed towards the debtor and their estate, on a global scale, incorporating:

  1. The execution of remedies related to collateral.
  2. The imposition of judgments from before the petition.
  3. Legal disputes.
  4. Collection drives.
  5. Measures to create, solidify, and enforce liens established prior to the bankruptcy appeal’s submission.

Due to its pivotal role in a debtor’s restructuring strategies, courts have generously interpreted the automatic stay and acknowledged its global implications. Along with the automatic stay, section 365(e)(1)(B) of the Bankruptcy Code shields a debtor from a counterparty cancelling an ongoing contract or unexpired lease due to the debtor’s insolvency, financial status, or bankruptcy filing, even if a contract permits a counterparty to do so by its provisions (referred to as an ipso facto clause).

While the automatic stay precludes international entities from seizing the debtor’s assets, overseas suppliers who engage with international maritime debtors frequently either fail to comprehend or feel obliged to adhere to the automatic stay or the nullification of ipso facto clauses. For instance, an Asian-based supplier of fuel or other necessaries to ships that has no connections to the US might elect to detain a debtor’s vessel during a journey beyond the US, despite the bankruptcy regulations.

To circumvent such instances, transnational maritime debtors ought to solicit comfort orders from the Bankruptcy Court, reaffirming and enforcing the automatic stay on all assets, irrespective of their geographical location, to alleviate any disturbance to their post-petition operations. As a reference for a motion seeking such alleviation, see the Standard Document, Chapter 11 Motion to Enforce the Automatic Stay (SDNY) (W-004-9910).

When an international maritime firm initiates its primary insolvency procedure in a foreign jurisdiction, it might also be required to file a Chapter 15 proceeding to safeguard its US assets. If instigating an ancillary Chapter 15 proceeding becomes requisite, legal advisors should be cognizant that the automatic stay:

  1. Is only applicable to assets situated within the territorial jurisdiction of the US.
  2. Does not commence until the ancillary proceeding gains recognition under section 1517 of the Bankruptcy Code.

Therefore, the foreign representative must attain urgent injunctive relief by petitioning for a temporary restraining order to shield a maritime company’s assets from seizure or other creditor enforcement actions pending the recognition hearing.



A maritime lien epitomizes a non-possessive entitlement to a ship, which attaches to the vessel instantaneously when the debt materializes, as established in the Dresdner Bank AG versus MV Olympia Voyager case. The vessel itself is financially encumbered with the obligation, and may be auctioned to reconcile the debt. The existence of maritime liens enables suppliers and vendors to confidently provide materials or services to a vessel, despite the likelihood of it embarking away from the port.

According to the Commercial Instruments and Maritime Lien Act (CIMLA), an individual who provides “necessaries” to a privately owned ship, under the instruction of the ship’s owner or a person endorsed by the owner, retains a maritime lien on the ship. They may also institute an in rem civil action to execute the lien without having to contend or substantiate that the ship was given credit.

The term “necessaries” as defined by Commercial Instruments and Maritime Lien Act (CIMLA) encompasses repairs, supplies, towage, and the utilization of a dry dock or marine railway. This terminology is broadly interpreted to incorporate any item that is reasonably required for the vessel’s venture. Notwithstanding this extensive interpretation, purported maritime liens should be scrupulously assessed and contested where justified. A prevalent rationale for disputing a maritime lien centers around the confirmation of the underlying goods or services indeed being provided to the vessel on the order of the owner or an individual authorized by the owner.


Apart from preferred ship mortgages, maritime liens are not mandated to be documented or registered to be deemed valid or perfected. This implies that a lien remains legitimate and enforceable even if a ship is sold to an oblivious purchaser who is uninformed about the lien’s existence. Lenders offering debtor-in-possession (DIP) financing must exercise meticulous diligence in evaluating a maritime debtor’s liabilities. Unanticipated maritime liens, which are attached as soon as the debtor acquires the obligation, may persevere through the Chapter 11 case and supersede debtor-in-possession (DIP) liens granted by the court.


Multiple parties may hold maritime liens against a single vessel. The rules determining the priorities of these liens are intricate and vary from one country to another. In the US, these rules are rooted in common law and Commercial Instruments and Maritime Lien Act (CIMLA). Contending maritime liens are classified based on the type of claim and the moment they were incurred. Unlike other security mechanisms under US commercial law, more recent maritime liens take precedence over earlier maritime liens. This “last in time, first in right” principle stems from the notion that a later provider of goods or services sustains the vessel for the advantage of earlier lienholders.


In the US, a maritime lien may only be enforced through an in rem action in a court possessing admiralty jurisdiction, such as a US District Court, against the vessel itself. Given the mobility of the asset and the velocity at which vessels can traverse into and out of ports, promptness is paramount in arresting a vessel to enforce a maritime lien.



Entities with maritime liens and other secured creditors may petition for relief from the automatic injunction. As per Section 362(d) of the Bankruptcy Code, should either of two conditions be met, the bankruptcy tribunal is obligated to revoke the automatic stay, thereby enabling a creditor to action its rights beyond bankruptcy:

  1. Grounds exist, encompassing the absence of sufficient safeguarding.
  2. The debtor retains no residual value in its assets, and said assets are not requisite for a successful reconstitution.

During the initial stages of a case, a bankruptcy court typically displays hesitancy in granting relief from the stay, as it prioritizes providing the maritime debtor a chance to exhibit its reorganization potential. Nonetheless, given the propensity for maritime assets to diminish in value over time, a secured creditor may appeal to the bankruptcy court to adequately protect its stake. Such protection is designed to suit the unique circumstances of each case.

In order to preempt maritime lienholders from submitting a barrage of stay relief motions or declining to supply post-petition goods and services, it is advisable for insolvent shipping companies to proactively seek initial day relief that permits the settlement of prepetition claims from critical and foreign suppliers.



A judicatory sequestration, under the jurisdiction of an appropriately equipped maritime court, represents the most reliable method to eliminate any encumbrances on a vessel. Such a foreclosure sale facilitates the acquisition of a vessel’s ownership, devoid of all liens, claims, or encumbrances, transferring any registered mortgages, unrecorded covert liens, and claims onto the sale proceeds.

However, a transaction under the 363rd section of the Bankruptcy Code may not deliver an identical outcome. Although a debtor’s accounts and records often encapsulate all of the vessel’s debt obligations, there remains the possibility that not all covert maritime liens will be discovered if a maritime debtor opts to liquidate its assets under section 363(f) of the Bankruptcy Code. In this scenario, unidentified lienholders may not receive a warning about a sale designed to eliminate the lien from the asset’s title. Without sufficient notice of the requested prejudicial relief, the buyer cannot be guaranteed an unencumbered title.



Predominantly, maritime corporations do not possess the ships they utilize. Rather, these enterprises charter vessels from independent proprietors via agreements. Multiple types of such agreements exist, with two primary categories frequently forming the subject of litigation in bankruptcy proceedings.

The first type, a time charter, involves renting a vessel for a specified duration. While the proprietor continues to administer the ship, it is the charterer who determines the ports of call and navigates the course. Remuneration to the vessel’s owner comprises charges for consumed fuel, port expenses, and a daily lease rate.

In contrast, a bareboat or demise charter encompasses renting a ship wherein the proprietor cedes possession and any supervisory or technical maintenance obligations. Often, the charter period culminates with the charterer assuming ownership. The stipulations inherent to a bareboat charter echo the privileges of vessel ownership.

Lienholders consequently encounter challenges in asserting that the automatic stay — a bankruptcy provision that temporarily prevents creditors from collecting debts — does not pertain to their claims against the ship. Lienholders may operate under the assumption that a time charter offers more latitude concerning the application of the automatic stay.

Nonetheless, the prevailing consensus dictates that the automatic stay precludes a lienholder from confiscating a vessel in which the debtor retains a legal or equitable stake. This includes ships time-chartered by the debtor, as illustrated by the cases of In re American Trading & Shipping, Inc. and In re Hanjin Shipping Co., Ltd.

This principle holds true even though the debtor does not own the time-chartered ships; the claims lodged against these vessels partially derive from the debtor’s liabilities. As long as the debtor charters these ships, its property rights are affected. To realize the pragmatic goal of transporting cargo from the debtor’s vessels to their intended U.S. destinations — and to minimize harm to the beneficial cargo owners — it was deemed essential to extend the stay to vessels time-chartered by the debtor.


Ship Charter Charter Parties and Bankruptcy Code

Charter contracts are traditionally regarded as pending legal agreements. To validate a charter contract, the debtor must comply with the provisions stipulated in Section 365(b) of the Bankruptcy Code. A taxing charter contract might be dismissed according to Section 365(a) of the same code. Such rejection results in a general unsecured claim for compensations.

It is plausible that a demised charter contract might stipulate that, upon the occurrence of a default event (such as insolvency, bankruptcy filing, rejection, or plan approval), the leaseholder is eligible to reclaim a Stipulated Loss Value (SLV) as a form of compensation for damages.

Nevertheless, in the Tidewater Inc. case, the esteemed Brandon L. Shannon, a U.S. Bankruptcy Judge in Delaware, declared that an Stipulated Loss Value (SLV) provision is an unenforceable penalty (Case No. 17-11132 2017). Judge Shannon further decreed that a evidentiary hearing is required to ascertain the actual and justifiable damages sustained by the non-debtor counterparty due to the rejection of a demised charter contract.

Concerning this matter, Judge Shannon ruled that the Third Circuit’s decision in the case of In re Montgomery Ward Holding Corp. Case guides the correct computation of damages for a breach ensuing from a default event. This sum incorporates:

  • The total amount of any outstanding rent.
  • The present value, at the time of the breach, of the monthly rentals for the remaining duration of the lease.
  • The present value, at the inception of the lease terms, of the expected cumulative residual value of the leased equipment at the scheduled end of the lease.



In what manner does Article 1110 of the US Bankruptcy Code become applicable in maritime insolvency proceedings?

The Bankruptcy Code’s Article 1110 is applicable to maritime vessels fabricated within United States jurisdiction that are the subject of a security interest bestowed by, leased to, or conditionally vended to a waterborne debtor. It offers a reprieve of two months to debtors, protecting them from any enforcement actions undertaken by a secured party, a lessor, or a conditional vendor with respect to their contractual rights or remedies to sell, lease, or otherwise retain or dispose of the vessel.

This Article stipulates that such actions are temporarily halted under Article 362 of the Bankruptcy Ordinance if:

  1. Within the initial sixty days following the date of the petition the debtor consents to uphold all its obligations as per the security agreement, lease, or conditional sale contract.
  2. The debtor rectifies any default, with the exception of an ipso facto default as specified in Article 365(b)(2).

The debtor, alongside the secured party, lessor, or conditional vendor, may mutually agree to lengthen the sixty-day timeframe, subject to the court’s approval. Additionally, the debtor is obligated to seek approval from the court prior to entering any agreement to continue the fulfillment of its contractual obligations and to rectify any non-ipso facto defaults.



In the lexicon of maritime legislation, the Merchant Marine Act of 1920, colloquially dubbed as the Jones Act, stands as a significant federal decree. Its enactment is rooted in the intention to endorse and preserve the integral fabric of the American merchant navy. This statute governs the nautical trade within the territorial jurisdiction of US waters, imposing four quintessential prerequisites on cargo vessels traversing between United States harbors:

  1. These carriers ought to be the property of US corporations, governed by American nationals, with a minimum threshold of 75 percent ownership vested in the US.
  2. A workforce constituting at least 75 percent US nationals is a mandate onboard.
  3. The vessels should be a product of American shipyards, either initially constructed or subsequently refurbished.
  4. The vessels must pledge their allegiance to the US through registration.

Any blueprint of restructuring proposing a foreign-oriented change of management in the newly restructured company necessitates compliance with the Jones Act. Through the judicious application of certain methodologies, companies have accomplished the perpetual ability of maritime firms to participate in the US coastal commerce. These include:

  1. The bifurcation of fleet administration and supplementary operations into a distinct body, allowing foreign ownership. At the same time, a stringent observation is maintained to ensure Jones Act compliant resources reside within a US enterprise, overseen by American citizens or entities.
  2. Restricting the collective ownership of ordinary shares by non-US nationals to a cap of 25 percent of the organization’s exceptional common stock. It also extends the provision of warrants or subscription rights, contingent upon any procurement of restructured equity pursuant to these warrants or subscription rights being in adherence to the Jones Act.