Right to Enforce an "in rem" Claim Transfers to the Proceeds of Sale

January 2015

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In the recent case of Bank of Tokyo-Mitsuibishi UFJ Ltd v Sanko Mineral (The MV Sanko Mineral), the English Court considered the requirement of section 21(4) of the Senior Court Act 1981 (SCA). This provides that a condition for commencing an in rem claim is that the person liable in personam is the beneficial owner of the vessel at the time when the action is brought. The court reaffirmed the long standing principle that a claim in rem could be enforced against the proceeds of sale.

Facts

In May 2012, Glencore filed a claim in the US District Court against Owners for breach of its contract of carriage as a result of delays to the voyage whilst the vessel was under arrest. The Bill of Lading under which the claim was brought incorporated a time bar of 12 months from date of discharge for London arbitration proceedings to be commenced.  

Subsequent to this, as a result of financial difficulties, Owners entered into a reorganisation under the Japanese Corporate Reorganisation Act in July 2012. This was recognised by the English Court as the foreign main proceedings under the Cross-Border Insolvency Regulations 2006.

The cargo was delivered in September 2012 and following this Glencore submitted its claim in the Japanese reorganisation proceedings. The basis of its claim was that it had suffered losses of US$3,850,000 as a result of the vessel’s four month delay.

In April 2014 the claimant mortgagor (the Bank) commenced in rem proceedings against the vessel in the English Admiralty Court. Shortly thereafter the vessel was arrested. The Bank obtained judgment and a court order was issued for the vessel’s sale, the order for this provided that any party with a claim in rem should apply to the court to commence the claim within 60 days. The vessel was subsequently sold and the proceeds paid into court.

Within this 60 day period Glencore applied for permission to commence an in rem claim. Glencore argued that under Japanese law, its security interest, derived from its maritime lien under US law and/or from the status of the claim under Japanese law as a statutory lien, would take priority over the Bank’s mortgage. As a result, Glencore also requested a caution against the release of the proceeds of sale.

An order was issued for payment of the proceeds of sale less US$3,850,000 which was to remain in court pending determination of the dispute as to priorities between the Bank and Glencore.

In October 2014 the trustee of Owners applied for an order that the caution be withdrawn or struck out and the proceeds of sale remaining in court be paid out to the trustee. This was on the grounds that:

  • Glencore had no claim as no arbitration had been commenced within 12 months of discharge;
  • an in rem claim had not been issued prior to the sale and as such it was no longer able to satisfy the conditions of the SCA.

Judgment

Firstly, it was held that as a matter of English law Glencore’s claim was time barred as a result of arbitration not having been commenced within 12 months of discharge. However, it was noted that, subject to Japanese law, Glencore’s claim in the reorganisation proceedings may succeed.

As to the second issue, Glencore’s claim was an admiralty claim within section 20(2)(h) of the SCA and therefore it must meet the conditions set out in section 21(4). The condition of particular concern to this claim was 24(b)(ii) which provides that at the time when the action is brought the person who would be liable in personam is either the beneficial owner of that ship or the charterer by demise.

The Judge noted that it was a well-established principle that when a vessel is sold by the Admiralty Court, rights in rem are transferred to the proceeds of sale provided that the person liable in personam is the beneficial owner of those proceeds. Whilst it may be arguable that the wording of section 21(4) is clear and should therefore be given its natural meaning, where a vessel has been sold by the Admiralty Court, the operation of section 21 of the SCA must be understood in that context. As such, if a holder of a maritime lien has not issued a claim before the vessel is sold, he may still do so afterwards by obtaining permission to commence a claim within the time period set by the court and enforcing against the sale proceeds.

Therefore, Glencore had not lost its statutory right of action in rem.  Although its claim for breach of the contract of carriage was time barred under English law, given that the reorganisation claim may still succeed, payment out of court to the trustee would only be ordered on terms that the proceeds be kept in a separate US dollar account to the order of the Tokyo Court.

Comment

Insolvency of vessel owners continues to be a concern to the shipping industry and creditors will look to enforce any claims against vessels or proceeds of sale. This case provides useful guidance and confirmation of how a claim in rem may be enforced when proceedings have been issued for the vessel’s sale. It also provides an important reminder that taking steps to enforce a claim in rem is not sufficient to protect time and a separate claim must also be filed in accordance with any contractual jurisdiction provisions and time bars.

Article by Heloise Clifford, Syndicate Associate