For the first time, the New Zealand courts have directly considered the interrelationship between cross-border insolvency and Admiralty claim.(1) An administration order was made in Korea over STX Pan Ocean Ltd (“STX”).  It was recognised by the New Zealand High Court as a qualifying foreign proceeding under the Insolvency (Cross-Border) Act 2006 (“Act”) and, therefore, operated as an automatic stay of proceedings in New Zealand.  However, the Court granted an application made by claimants,(2) who had provided shore services to STX, to continue their Admiralty claims against a vessel under demise charter to STX.  

The Court considered the following issues: whether the vessel under demise charter was an asset of STX so that the automatic stay applied and whether the Court should exercise its discretion to allow the admiralty claims to continue.   

Facts

On 7 June 2013, STX, applied to the Korean Court for an order commencing rehabilitation proceedings, which are the equivalent of administration proceedings in New Zealand.  

On the same day, the Korean Court made two orders imposing an interim moratorium pending determination of the application.  The first of these orders prevented STX from paying or securing any of its existing liabilities or dealing with its assets.  The second orders prevented creditors from exercising various recovery rights.  

Between 12 and 14 June 2013, the claimants filed statutory in rem admiralty proceedings against the vessel, the New Giant.  STX was, at all material times, the charterer by demise of the vessel.  The New Giant was arrested in New Zealand on ISS-McKay’s application on 14 June 2013. 

On 17 June 2013, the Korean Court made an order placing STX in rehabilitation and appointed administrators.  

On 25 June 2013, the administrators applied for recognition in New Zealand of the Korean rehabilitation proceeding as a foreign main proceeding under the Act.  The proceeding was recognised as such on 1 July 2013 which triggered a stay of all proceedings in New Zealand pursuant to the Act.

Subsequently, the claimants applied to the High Court for leave to continue their statutory claims in rem against the vessel in accordance with the Act.

Insolvency (Cross-Border) Act 2006

The Act implements the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997, amended and supplemented in order to apply to New Zealand.  It provides “a framework for facilitating insolvency proceedings when a person is subject to insolvency administration (whether personal or corporate) in 1 country, but has assets or debts in another country or more than 1 insolvency administration has commenced in more than 1 country in relation to a person.”

Article 20(1) of sch 1 of the Act provides that, upon recognition by the High Court of a qualifying foreign insolvency proceeding, all actions or proceedings concerning the debtor’s assets, rights, obligations or liabilities and execution against the debtors assets are stayed, and the right to transfer, encumber or otherwise dispose of any assets is suspended.  However, under article 20(2) the Court can, on application, order that the stay or suspension does not apply in respect of any particular action or proceeding, execution, or disposal of assets. 

Vessel under demise charter an asset of STX

The claimants initially argued that the stay did not apply to their admiralty proceedings because the New Giant is not an asset of STX, but conceded at the hearing that the vessel was an asset of the STX and that the stay applied.  The Court confirmed this in its decision.  

The Court considered the definition of “assets of the debtor”.  Section 5 of the Act provides that the Act may be interpreted using the Model Law and any document relating to it originating from UNCITRAL or the working group who assisted in preparing the Model Law.  The UNCITRAL Legislative Guide on Insolvency Law (Parts One and Two) defines “assets of the debtor” as:

property, rights and interests of the debtor, including rights and interests in property, whether or not in the possession of the debtor, tangible or intangible, movable or immovable, including the debtor’s interests in encumbered assets or in third party-owned assets.  

STX operated New Giant under the terms of a charter by demise.  This gave it the right to possession and control of the ship including the right to provide the master and crew.  The Court found that STX’s interest under the demise charter was an asset of STX for the purposes of the Act and, even if this were not the case, admiralty proceedings concern STX’s rights, obligations or liabilities in terms of article 20(1) so the admiralty proceedings were stayed.  

Discretion to allow proceedings to continue

Having found the automatic stay applied, the Court considered the application by the claimants to continue the proceedings the Court found that art 20(2), which contains the discretion, was intended to allow enacting states to grant protection to those classes of people who would normally receive protection in insolvency proceedings in the enacting state.  The Court observed that New Zealand Parliament had not identified any particular exceptions in enacting the Model Law but had conferred a broad discretion to grant leave in appropriate cases.  This approach is consistent with the general approach taken to stays of execution and proceedings under New Zealand’s domestic insolvency regime.  Therefore, the discretion reserved under art 20(2) should enable the High Court to exercise the same type of discretion to override consequences of stay or suspension as it can under other domestic insolvency provisions.  

Drawing on a test applied to a comparable New Zealand statute, which grants the Court a similar discretion in relation to domestic insolvencies, the Court held that before exercising its discretion, it must generally be satisfied that the commencement of the proceedings will not enable a creditor to gain an advantage over other creditors, that the proposed proceeding is the most convenient way of establishing the claimed right, and that the claim is at least arguable, so that the assets of the company are not dissipated in wasteful litigation.    

Applying this test, the Court first considered the nature of the claimants’ rights and when they arose.  The claimants did not have maritime liens and therefore did not acquire any secured interest in New Giant at the time their services were provided.  The claimants had statutory in rem rights arising under the Admiralty Act 1973.  The Court found that the claimants obtained a secured interest in the vessel upon the issue of the admiralty proceedings which was before the rehabilitation order was made in Korea.  This meant that STX’s rights to New Giant became immediately subject to these secured claims and were reduced to the equivalent of a right of redemption (right to obtain release of the ship from arrest upon payment of the proved in rem claims).  This is the only right that STX had at the time the rehabilitation proceedings commenced and is the only right that would ordinarily be available to the administrators in Korea to be managed or distributed for the benefit of the creditors.  The Court held that the Insolvency Cross-border Act is procedural in nature and is designed to facilitate the management or realisation of the debtor’s assets in a single jurisdiction in accordance with their substantive rights or interests, but it is not intended to deprive creditors of their substantive rights or interests.   

On this basis, the Court found that the claimants would normally be entitled to leave to continue their proceedings because it would not give the claimants unfair advantage over other creditors because their rights and interests would normally be determined as at the time the rehabilitation proceedings commenced, the continuation of the admiralty proceedings is the most effective way of the claimants being able to establish their secured interest in the vessel, and there is no dispute that the claimants have good arguable claims. 

The Court rejected an argument by the administrators that the Court should decline to grant leave because the admiralty proceedings were commenced after the interim moratorium was ordered in Korea on 7 June 2013.  The administrators argued that the moratorium covered the arrest of the New Giant either because it was a “provisional seizure” or because it was “the exercise of a security right” based on the rehabilitation claim or the rehabilitation security right.  The Court held that the interim orders did not purport to prevent creditors from filing proceedings.  The claimants obtained their security rights simply by filing their admiralty proceedings.  The subsequent arrest did not alter their status as secured creditors.  In any event, the arrest could not be categorised as “provisional seizure” and the issue of admiralty proceedings could not be described as “the exercise of a security right” as there was no security right until the proceedings were filed.  The moratorium did not purport to restrict creditors with maritime liens or statutory rights in rem against New Giant from pursuing in rem claims.  

Comment

The implementation of the Model Law in New Zealand by way of the Insolvency (Cross-border) Act provides a framework for facilitating insolvency proceedings commencing outside of New Zealand where assets are held within New Zealand.  However, the courts have shown that they will not interfere with creditors substantive rights, obtained by way of in rem proceedings, to those assets.  In this case, the Court found that the claimants had security interests in the relevant assets before the overseas insolvency proceeding was recognised under the Act.  As those rights had already crystallised, it was consistent with the purposes of the Act to allow the claimants’ in rem claims to continue.      

_{(1)  Kim & Yu v STX Pan Ocean Co. Ltd [2014] NZHC 845.
(2)  ISS-McKay Limited, Inchcape Shipping Services Pty Limited, Inchape Shipping Services (Korea) Co. Limited, Inchcape Shipping Services Inc and Horizon Shipbrokers Limited.}  

A version of this article appeared in the International Law Office newsletter on 22 July 2014 by Kerryn Webster