Maritime law and corporate rescue in Malaysia: is leave of the court required to bring an in rem action against a ship where the owner has the benefit of a restraint of legal proceedings against it?
Siva Kumar Kanagasabai
Skrine, Kuala Lumpur
Louise Jacqueline Azmi
Skrine, Kuala Lumpur
Overview
In every corporate rescue mechanism (CRM) under the Companies Act 2016, almost invariably, a restraining order is granted, which imposes a moratorium on all legal proceedings against the company, except with the leave of the court.[2] This is to give the financially distressed company time and opportunity to rehabilitate and extricate itself from financial difficulties.
What happens when an in rem action is brought against a ship that is owned or bareboat chartered by a Malaysian company that is subject to a restraining order? Considering that an in rem action is an action against the ship and not the company, is leave of the court required? In The Owners and/or Demise Charterers of the Ship or Vessel 'Edzard Schulte' v The Owners and/or Demise Charterers of the Ship or Vessel 'Setia Budi' [2023] 12 MLJ 53 ('The Edzard Schulte'), the High Court answered that question in the negative, but only if the in rem action is premised on a maritime lien. However, once the defendant enters an appearance (which converts the claim into an in personam action as well), the plaintiff would need leave to proceed with the in personam action against the defendant.
The High Court, however, drew a distinction between a statutory lien and a maritime lien. The High Court commented that a claimant premising an in rem action on a statutory lien would require the leave of the Court where the shipowner has a moratorium against legal action.
The following should also be noted from this decision, which now represents the position under Malaysian common law:
- The exemption from obtaining leave for in rem actions when there is a moratorium against legal action is more limited in Malaysia compared to other common law jurisdictions, such as Singapore and India.
- As Malaysia has not adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the 'Cross-Border Insolvency Model Law'), no leave is required when the in rem action is against the vessel of a shipowning company that is subject to bankruptcy or other CRM protection overseas.
Maritime liens and statutory liens distinguished
An in rem action in the admiralty context is an action commenced against the vessel, not in personam against the owner or bareboat charterer. However, the action will transform into a mixed action in rem and in personam after the shipowner or charterer enters an appearance. It is only after the entry of an appearance that any judgment sum can be enforced against the shipowner or charterer personally. Where no appearance is entered by the shipowner or charterer, judgment is enforceable only against the res and no more.
There are two categories of claims that can be used to bring an in rem action: a maritime lien or statutory lien.
Maritime liens are pure in rem actions. A proprietary right attaches to the vessel at the time when the action commences. Maritime liens are created by operation of law and can be brought against the vessel irrespective of its present ownership and of any link to liability in personam on the part of the shipowner at the time the claim is brought. It is a privileged claim that ranks in priority against all other claims (save for Sheriff's expenses) and travels with the vessel regardless of any change in ownership. The recognised claims that give rise to maritime liens are:
- salvage;
- damage done by the ship;
- seaman's and master's wages;
- bottomry; and
- master's disbursements.[3]
Maritime liens are distinct from statutory liens. The High Court in The Edzard Schulte described the difference as follows:
'[68] Although a statutory right in rem resembles the maritime lien in that it involves proceeding against the res as distinct from the person, i.e. the action is in rem and not in personam, it differs in the following respects: (1) the nature of the statutory right in rem is purely a procedural remedy and not a substantive remedy. These are rights granted by statute (sic) to arrest a vessel in an action in rem to obtain a security for the maritime claim that is in essence in personam in nature. It is a procedural device to force the owner of the vessel to appear and to submit to the jurisdiction of the court; (2) statutory rights in rem do not arise with the claim but arise with the issue of the writ in rem and will be extinguished with the provision of suitable security and the vessel's release; (3) they do not travel with the ship in the sense that if the ship is sold before… the writ in rem is issued, the statutory right in rem is extinguished. Hence, they are secured claims only after the writ in rem is issued prior to the change of ownership; and (4) in the case of distribution of the proceeds of the vessel in a judicial sale, the statutory right in rem ranks after the ship mortgage and much lower than maritime liens.'
The High Court's decision
In The Edzard Schulte, the plaintiffs' claim arose from an allision that resulted in damage to the plaintiff's vessel. It transpired that, in May 2022, the owners of the vessel that caused the allision had been granted a restraining order preventing the bringing or continuation of legal proceedings against the company except by leave of the Court.
The plaintiffs filed the in rem action against the vessel, and the writ in rem and warrant of arrest were served in September 2022. Following this, the defendant owners entered an appearance in the proceedings and applied to strike out the writ in rem and warrant of arrest on the grounds that the plaintiffs had not obtained leave of the Court before bringing the action.
The High Court decided that, in the case of a claim that gives rise to a maritime lien, leave was not required to commence the action, even where there was a restraining order in existence against the company. The Court's power to restrain proceedings under section 368 (1) of the Companies Act 2016 expressly refers to '… further proceedings in any action or proceeding against the company except by leave of Court…' The Court held that, thus, this provision refers only to an in personam action or proceedings against the company.
Noting that if the shipowner enters an appearance in the proceedings, the claim would be converted from an in rem to an in personam action, the High Court held that, if the claimant intends to continue the action against the shipowner in personam, leave will then be required from the Court. If no leave is applied for, the action will continue in rem only.
The High Court reasoned that to hold that the claimant must first apply for leave of the Court to arrest the vessel would carry an inherent risk that the vessel may have left the jurisdiction by the time such leave has been granted. In the intervening period, the vessel may also accumulate more maritime liens to the prejudice of the earlier claimant. The impact of excluding the maritime lien from any moratorium under an insolvency regime would have minimal impact on the remaining creditors, as the claimant is a secured creditor only up to the value of the vessel.
The High Court commented obiter that a claimant with a cause of action under a statutory lien will require leave of the court as the action is not a pure in rem claim. To exclude the writ in rem based on statutory liens from the moratorium would mean that the claimant would change from an unsecured creditor to a secured creditor after the filing of insolvency proceedings. The Court stated that this would be against the objective of ensuring fair play among the creditors.
Comparison with other common law jurisdictions[4]
Based on the High Court's decision, Malaysia's common law position on the situations when leave is not required in circumstances of insolvency or CRM appears to be narrower than the position in India and Singapore.
In India, following the enactment of the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act 2017 (the 'Indian Admiralty Act'), there have been several decisions that have held that leave is not required for the commencement or continuation of an in rem action when a winding up order is made against the shipowner.[5] The position in India does not appear to draw a distinction between maritime liens and statutory liens. The decisions of the Indian courts were also based on the reasoning that the Indian Admiralty Act is subject-specific legislation that would prevail over a general provision relating to a broad subject, such as insolvency in their Companies Act 1956. In that regard, the Malaysian position differs because Malaysia does not have a standalone specific legislation that confers admiralty jurisdiction on the Malaysian courts.[6]
In Singapore, the High Court in The 'Ocean Winner' and other matters [2021] SGHC 8 ('The Ocean Winner') held that the filing of a writ in rem premised on a statutory lien does not require the leave of the Court when there is a subsisting moratorium in favour of the owner/charterer in the context of a CRM. The Singapore High Court distinguished the Singapore Court of Appeal case of The Hull 308 [1991] SLR 304 ('The Hull 308'), which had struck off a writ in rem that had been commenced without leave of the Court on grounds that it involved a winding up order, not a CRM. The High Court of Malaya in The Edzard Schulte considered, but did not agree with, the position taken by the Singapore High Court in The Ocean Winner and agreed with the position in The Hull 308 insofar as statutory liens are concerned, even when it involves a CRM.[7]
Unlike Malaysia, Australia has adopted the Cross-Border Insolvency Model Law. This means that where a shipowning company is subject to bankruptcy or other CRM protection overseas, it may apply to the court for recognition of the foreign proceeding. In the Australian case of Yu v STX Pan Ocean Company Ltd (2013) FCA 680, the plaintiff was appointed receiver of the defendant under rehabilitation proceedings commenced in Seoul, Korea. The plaintiff applied for recognition of the Korean proceedings as a foreign main proceeding, and for an additional order entrusting the plaintiff with the administration and realisation of all the defendant's assets located in Australia. The defendant had no assets in Australia, but vessels owned and operated by the defendant called into Australian ports. The plaintiff was concerned to avoid the possibility that the defendant's vessels might be arrested. The Australian Federal Court held that the Korean proceedings would be recognised as a foreign main proceeding for the purposes of the Cross-Border Insolvency Model Law. However, the Court, in refusing the application for the additional order, held that, in circumstances where there are significant questions of public interest connected with the ability to enforce the security of a maritime lien by the use of an action in rem, there is no reason for the making of an additional order to curtail or foreclose the exercise of rights that are recognised by the Cross-Border Insolvency Model Law itself.
Conclusion
Whether leave will be required to commence an admiralty claim after the imposition of a moratorium under an insolvency scheme will depend on the nature of the claim. In the case of a maritime lien, it is a pure in rem claim, and leave will not be required, as long as it is prosecuted as an in rem claim. However, in the case of a statutory lien, it is likely that leave will be required in Malaysia, as the identity of the owner/demise charterer at the time the in rem action is brought is critical to establishing a statutory lien.
Notes
[1] S 368(1), Companies Act 2016.
[2] S 368(1), Companies Act 2016.
[3] See s 21(3) of the United Kingdom Supreme Court Act 1981, now the Senior Courts Act 1981 (the 'SCA').
[4] Malaysia does not have its own standalone admiralty jurisdiction legislation. However, s 24(b) of the Courts of Judicature Act 1964 states that the High Court shall have the same jurisdiction and authority in relation to matters of admiralty as those heard by the High Court of Justice in England under the UK Supreme Court Act 1981, now known as the SCA. This means that, for a determination as to whether the local High Court has admiralty jurisdiction, reference will need to be made to ss 21–24 of the SCA.
[5] Raj Shipping Agencies v Barge Madhwa and Another, 19 May 2020, Supra Gauri Gaekwad 122/123 ADMS-6-2015; and Prathiba Shipping Company Limited v Praxis Energy Agents SA (2019) 6 MLJ 385.
[6] See n 3 above.
[7] By implication, the High Court in The Edzard Schulte did not agree with the distinguishing factor that The Hull 308 involved a winding up that was relied on by The Ocean Winner.