liath@ag-law.gr

Cross-border insolvencies in

the shipping business

ILA Regional Conference- Greece 2013

L.I.AthanassiouAss. Professor – Law Faculty of

AthensAttorney at law

liath@ag-law.gr

Introductory remarks

1. Global expansion of economic activity has put the focus on the problems encountered in case of the insolvency of transnational businesses

2. Telecommunications, e-commerce, energy, finance and, of course, shipping

3. The company may be subject to conflicting insolvency laws and procedures

4. Insolvency law: newcomer in the international legal system 5. Insolvency and Maritime Law overlap when a shipowner becomes

insolvent6. Three main questions:

(I) Is there a practical interest in discussing CBI in the shipping sector?(II) Is there a conflict between the purposes of Insolvency & Admiralty law?(III) How may the conflict be addressed?

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A. The practical interest of the subject

Shipping is a violently cyclical and capital intensive industry Each eco cycle runs through 4 phases which last for short or longer periods (recession, crisis, recovery & booming) During the crisis phase, freight rates drop to a floor, tending to reach the ship’s running costs or even get lower than those; ship values have the tendency to drop in line with the freight market During the recovery phase, freight market starts picking up, it goes the same for the prices of second hand ships Many factors affect the shipping cycles: international financial situation, volumes of international trade, weather conditions, political events (war, embargos etc), sudden changes to the prices of a basic materials (i.e. oil crisis 1973 – decrease in the quantities of oil delivered-increase to the price of products- increase in the share of transport cost)

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A. The practical interest (cont’d)…

1950s’ boom generated by the Korean War economies of scale were seen as the key to efficiency – increase in size and cost of bulk vessels 1970s’ boom – state backed shipbuilding capacity – tanker market development 1973 – 1979 : oil crisis- tanker crisis – corporate collapses mainly because of excessive debt financed expansion (i.e. Colocotronis) – Short recovery in early 80s Mid-1980s unparalleled depression in the tanker sector, widespread financial distress among modern bulk owners and some prominent casualties in the liner sector (i.e. Hellenic Lines) 1990s: new loans, equity offerings, mergers, use of derivatives to manage shipping risk 2018-12: sovereign debt crisis in Europe, austerity measures, national disasters, growing geopolitical tensions – vessel oversupply (continuing expansion of world fleet), unprofitable freight rates

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B. The conflict

Insolvency v. Admiralty law: divergences1. The partial universality of Insolvency law Developed on a national level to adjudicate claims relating to local land-based assets –

not designed for mobile assets Territoriality v. Universality Territoriality: each state has jurisdiction over assets within its borders Each nation’s Insolvency law reflect different social and political goals Not practical to harmonize the bankruptcy laws – difficult to reconcile contradictory

goals (debtor-friendly and creditor-friendly systems) Universality: “one court, one law” – predictability, administration efficiency, market

symmetry to avoid duplication of procedures, discrimination between creditors, non recognition of

foreign orders, increased costs of international transactions Some common main features: (i) liquidation – reorganization, (ii) moratorium on

creditor action, (iii) secured & unsecured creditors (iv) land-based liens Realistic approach: promotion of international co-operation on procedural issues

(modified or mitigated universality)

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International initiatives

A. UNCITRLAL Model Law on Cross-Border Insolvency (adopted by consensus on May 30, 1997)

The purpose- exercise in realism & in the art of the possible- respects differences between national procedural laws- it does not address issues of substantive law

The concept- model law solution (insolvency very close to national judicial & civil procedure laws)- fast adoption – acquire more experience before drafting a treaty- accompanied by a Guide to Enactment

The main features- cooperation among the courts of the States where the debtor’s assets are located- granting of access- according recognition to orders issued by foreign courts

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UNCITRAL Model Law cont’d

Wide scope of application: extends to any foreign proceeding relating to insolvency where the purpose of the proceeding is the reorganization or liquidation of the debtor if the proceeding is collective and assets and affairs of the debtor are subject to court control or supervision.

Expedited and direct access of foreign representatives (inbound request) : procedural standing to commence local proceeding, actions to protect creditors, participation in proceedings in the enacting State, intervention in individual actions

Creditors: equal treatment with local ones for the purpose of commencing or participating in a local proceeding (key role of creditors) – equality does not affect ranking of claims

Foreign Assistance for an Insolvency Proceeding in the Enacting State (outbound request)

Recognition: Depends upon whether the foreign proceeding is characterized as main or non-main proceeding

Main proceeding: where the debtor has its “center of main interests” (EU term) Non-main proceeding: based on establishment

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UNCITRAL Model Law cont’d

Relief: mainly, stay of actions of individual creditors/ stay of execution on the debtor’s assets/ suspension of the debtor’s right to transfer or encumber the assets (mandatory effects for main proceedings)Cross-border cooperationCoordinating Concurrent Proceedings (proof that debtor is insolvent)No definition of applicable law: Model law only specifies the effects, in terms of relief, that should automatically apply on recognition

Delay and partial implementation – Main issue the reciprocity concern US Chapter 15, Australia (Cross-Border Insolvency Act 2008) Canada New Zeland, Corea, Japan CanadaGreece: Law 3858/2010UK: Cross-Border Insolvency Act 2008

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International initiatives

Reg. 1346/2000 on Insolvency Proceedings (regional instrument)Basic principles

- model of mitigated universality- EU connection (proceedings opened in a MS against EU debtors and governs intra-EU

effects)- “Center of main interests” with a double function

Applicable law- The Lex fori concursus as general rule (it does not concern if and when a claim exists,

but only the collectivisation phase)- Exceptions :- Rights in rem: immunised if located in another MS- Effects on rights subject to registration (cumulative application)

Territorial Insolvency proceedings: based on establishmentEffects

- automatic and immediate recognition (extension model)- liquidator- public policy exception

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B. Conflict (cont’d)

2. The international nature of Maritime Law

Given its origins and purpose, maritime law inherently international in nature International Conventions – substantial similarity among nations Maritime rules adapted to the highly mobile nature of the maritime assets involved – Need to encourage credit : if we offer too much protection to the debtor and restrict rights of creditors, this may have the effect of discouraging lending. Lenders need to be reassured that their rights will be recognized when needed the most, i.e. when the borrower becomes insolventParallel system for enforcing claims relating to maritime creditors – relies on maritime liens Maritime liens are internationally recognized as giving the lienor the ability to arrest a vessel and hold it as security until an admiralty court can enforce a judgment on the merits Reliance on the res - 1952 Arrest Convention (L. 4570/1966) A court’s judgment under admiralty law, pursuant to an arrest in rem, receives international recognition The debtor-owner has 3 options: a) to pay, b) to post a bond or other security, c) to let local court sell the vessel (free of liens) and distribute the proceeds to the maritime lienors

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C. Problems of intersection

Certain but underdeveloped as far as research is concerned Insolvability law is “company” connected, although maritime law is “vessel”

connected (None of the insolvency regimes are designed with mobile assets in mind)

Insolvency law intrusion complicates established solutions

A. PROCEDURAL OVERLAPING CIRCLES

1st EXAMPLE – EU CONNECTION

Maritime company with main establishment in Greece- shipowning companies in Liberia- ship registered under the flag of Cyprus- agency in London

Main insolvency proceedings may be initiated in Greece (eventually for the whole group) Secondary proceedings in UK (country of establishment) Greek law applicable as lex fori concursus –it covers EU creditors However, for mortgage, Cypriot law – most probably also for non-registered liens

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Intersection (cont’d)

2nd EXAMPLE – INTERNATIONAL DIMENSION Maritime company with business in US – ships registered under Liberian flag- one vessel arrested in Piraeus-mortgagee bank in US- company gets protection under Chapter 11 with stay of action

Recognition of foreign proceedings upon request, within the model law system It covers at least creditors related with the two countries Result: stay of action. What about the arrest procedure? How long is the vessel going to stay without trading? If trading is allowed by the court, the vessel may be arrested in another port by a creditor not exposed to the above legal ordersThe mortgagee in an non-enviable position; even if he intervenes, perhaps order for sale and priority to proceeds subject to permission of non-maritime US courts The core problem: enforcement of liens by maritime creditors

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Intersection (cont’d)

B. CONCURRENT JURISDICTION OF TWO BODIES OF LAW OVER A SINGLE ASSET Arrest Convention 1952 v. Insolvency proceedings

Which body of rules has priority? No singly reply (Australia: arrest of ship does not amount to a process of execution, UK:

sale following an arrest is the equivalent of execution, US: no unanimous position but it seems that maritime liens under jurisdiction of bankruptcy courts, Belgium: primacy of International CV 1952 establishing a close system for maritime claims)

Generally, the maritime claimant unable to bring in rem proceedings Admiralty proceedings are not recognized as foreign proceedings Maritime lienors’ Rights at Risk: the moratorium prevents creditors from enforcing their

liens, while the vessel continues to accumulate claims; in addition, foreign courts (acting outside international cooperation) may always arrest the vessel

Insolvency law intrusion: temporary & unnecessary – delay – costs of supervising the maritime lienors

Hindering of Vessel Finance: admiralty collection methods simple and encourage investment in shipping

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IV. Summary conclusions

Real conflict with possible effects upon ship finance No clear solutions (still understanding the problem- working group in the context of CMI) Partial (procedural) universality of Insolvency Law accentuates instead of reducing problemsIt seems appropriate that primacy of admiralty law be recognized over maritime assets – that would prohibit a bankruptcy proceeding from interfering with an admiralty action practical reason: when a vessel inevitably arrives in a port of a nation that does not share an insolvency treaty with the nation adjudicating the bankruptcy, the vessel and the maritime creditors participating in the bankruptcy proceeding will soon find themselves back in court pursuant to admiralty law, after having traveled an expensive route.