Indian law update: overlap of Admiralty Court jurisdiction and Company Court jurisdiction, Maritime and Transport Law, July 2020
Taurus Legal, Mumbai
In the last four years, there has been a change in the landscape of the company law and admiralty law of India. The uncodified Indian admiralty law was finally codified by the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (‘Admiralty Act’). Under the old company law regime, if a company was unable to pay its debts it was taken to Court and would face only liquidation. There was no mechanism for reviving the company. This was changed by the Insolvency & Bankruptcy Code, 2016 (‘IBC’), which provided that a company unable to pay its debts, which was taken to the Company Law Tribunals, would undergo a resolution process. During this resolution process, plans would be invited from prospective bidders, looking to take over the entire company. Only if the committee of financial creditors did not approve any plan within the stipulated time frame, then the company would face liquidation. During the resolution process, there would be a moratorium barring the institution or continuance of any other legal proceedings against the corporate debtor and a Resolution Professional would be appointed to manage the affairs of the company.
In this context, the Bombay High Court has on 19 May 2020 in the matter of Raj Shipping Agencies v/s Barge Madhwa & Anr.[Admiralty Suit No. 6 of 2015] finally settled two issues that have been the subject of debate among Indian maritime lawyers:
(a) Is there a conflict between actions in rem filed under the Admiralty Act and the provisions of the IBC and if so, how is the conflict to be resolved?
(b) Whether under the old company law regime, leave of the company court was required for the commencement, or continuation of, an Admiralty action in rem, where a winding up order has been made, or the Official Liquidator has been appointed as Provisional Liquidator of the company that owned the ship?
The matter before the honourable Court arose from the plethora of admiralty cases filed against vessels of GOL Offshore Ltd. and TAG Offshore Ltd., which were undergoing liquidation and resolution process, respectively.
The honourable Court contemplated three scenarios:
Scenario I: If a Plaintiff has commenced Admiralty proceedings in rem and obtained an order of arrest of a ship from an Admiralty Court, subsequent to which insolvency proceedings are filed against the owner of the vessel and the company law tribunal declares a moratorium under the IBC.
Court’s observations: If security has not been furnished and the vessel remains under arrest, the Admiralty Court will not order the sale of the vessel during the moratorium period, in order to avoid any disturbance to the insolvency resolution process, unless an application for sale is made by the Resolution Professional, or if the vessel is not being manned, equipped and maintained by the Resolution Professional during the moratorium and all charges for the same are not being paid by the Resolution Professional, or if the vessel becomes a navigational hazard. In such a case the Admiralty Court will have the discretion to sell the vessel, at the instance of any party who has filed an Admiralty Suit and has a maritime claim. The order of sale is made to ensure that the value of the vessel is not put at risk and the vessel is preserved and prevented from becoming a waste and further encumbered with claims and liabilities during the moratorium period. This is done with a view to maximising the value of the ship (asset) and also to secure the interests of the secured creditors qua the ship in question, which is also the objective of the IBC. This will be a matter entirely in the discretion of the Admiralty Court.
In all such cases, notice will be given to the owner, who may be represented by the Resolution Professional, before any sale of the ship is carried out by the Admiralty Court. In all cases of the sale of the vessel during the moratorium period, in view of exigencies mentioned in the preceding paragraph, the proceeds will not be distributed, but will be retained by the Admiralty Court, to await the outcome of the resolution process or liquidation, as the case may be. All expenses incurred for preservation and maintenance of the vessel, during the period of arrest with the permission of the Admiralty Court, will be paid out in priority from the sale proceeds of the ship, if the company is liquidated or be accorded priority in the resolution plan as resolution process costs.
Scenario II: If a moratorium has been declared under Section 14 of the IBC before any Admiralty Suit in rem is filed for enforcement of a maritime lien or maritime claim.
Court’s observations: An action in rem against a ship cannot be equated to an action against the asset of the corporate debtor. Merely because the corporate debtor (owner) of the ship is also liable in personam does not detract from the essential characteristic of an action in rem, which is only against the ship and the sale proceeds which will be used to satisfy the claim. A judgment in rem against the ship does not bind the owner (corporate debtor).
Scenario III: If the owner of the vessel (corporate debtor) is in liquidation at the time the Plaintiff commences Admiralty proceedings in rem for the arrest of the vessel.
Court’s observations:An action in rem can be entertained even at the stage of liquidation of the corporate debtor as the claim is against the res and not against the corporate debtor.
By arrest of the ship, the Plaintiff would become a secured creditor to the extent of the value of the res only, but not a secured creditor of the corporate debtor’s other assets. Therefore, this will not affect other secured creditors of the corporate debtor. However, by not permitting the action in rem and arrest of the vessel, the rights in rem given to a maritime claimant under the Admiralty Act (whether a maritime lien or a maritime claim) would be defeated and denied. Once a Plaintiff obtains an order of arrest, the vessel can then be sold by the Admiralty Court, in order to realise maximum value, as it is only a judicial sale by an Admiralty Court that is recognised the world over as extinguishing all maritime liens against the res and thereby giving a clear title to the buyer. A sale by the Liquidator will not extinguish maritime liens and therefore the vessel may not attract any bidders and even if it does, will fetch a lower value as it would not be free of all liens and encumbrances.
Thus, the honourable Court held that there is no conflict in allowing a maritime claimant to perfect his right in rem by arrest of the ship, even if the corporate debtor is in liquidation, to ensure that the vessel is sold by the Admiralty Court in a manner such as to maximise its value, which is in the interest of all creditors and consistent with the intent and purpose of the IBC
Thus, an action in rem can be filed and the ship arrested, before the moratorium under the IBC comes into effect, or during the moratorium period, or even when the corporate debtor is ordered to be liquidated. A maritime claimant ought to be permitted to enforce his right in rem and obtain an order of arrest of the ship in question. This will enable him to perfect and/or crystallise his maritime lien or maritime claim, as available to him under the Admiralty Act. The action in rem will not proceed until the moratorium is in place. The action in rem will proceed if the corporate debtor is ordered to be liquidated. As the action in rem will proceed in accordance with the applicable law, namely the Admiralty Act, the priorities for payment out of the sale proceeds will also be determined in accordance with the Admiralty Act and not in accordance with the IBC.
Furthermore, the honourable Court held that the Admiralty Act, which is a special statute, would prevail over the old company law, which was general and no leave was required under the old company law (Companies Act, 1956) for commencing a suit under the Admiralty Act, or proceeding with a pending suit against the Company under the Admiralty Act when a winding up order has been made, or the Official Liquidator has been appointed, as Provisional Liquidator. Likewise, priority of claims would also be as per the Admiralty Act and not as per the company law.