Sheriff’s Expenses — The Requirement to Obtain Prior Sanction of the Court or the Sheriff

A case note by Rajasingam Gothandapani and Lynnette Tan Hui Ling.

Introduction

It is trite that in the distribution of proceeds of a judicial sale of a vessel, the Sheriff’s expenses would take priority over the claims of other parties having an interest in the vessel. It is, however, an established rule of practice that before an item of expenditure may be cast as a Sheriff's expense, and so rank as first charge on the proceeds in the hands of the Court, there are two pre-requirements to be satisfied: (1) it must arise from the preservation and good management of the vessel; and (2) it must also receive the prior sanction of the Court or the Sheriff.

This rule of practice is recognised in authorities such as The “Eastern Lotus” Ex “Spring Flower”; Urzad Morski W Szczecinie v Moscow Narodny Bank Ltd¹ and The ‘Euroexpress’². The same position has recently been affirmed by the High Court in The Hongkong and Shanghai Banking Corporation Limited v The Owners and/or Demise Charterers and/or other Parties Interested in the Vessel “SEA CORAL” of the Port of Cook Islands³ (“Sea Coral”).

Facts

In Sea Coral, the plaintiff, The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) had provided a trade facility to the defendant (The Owners and/or Demise Charterers and/or other Parties Interested in the Vessel “SEA CORAL” of the Port of Cook Islands (“Owners”)).

The trade facility was secured by a general pledge, where the Owners pledged their interest over six original Bills of Lading representing the cargo carried on board four vessels, including Sea Coral.

The Owners subsequently defaulted on the trade facility and HSBC sought to exercise the general pledge only to discover that the Owners had released the cargo to another party without the production of the original Bills of Lading that were still in HSBC’s possession. HSBC commenced an in rem writ action against the Owners for mis-delivery of cargo and proceeded to arrest Sea Coral. The Owners did not enter appearance.

HSBC successfully applied to have Sea Coral appraised and judicially sold. The proceeds from the judicial sale were paid into Court. Thereafter, several parties claiming interest in the proceeds of the judicial sale of Sea Coral applied to intervene in the proceedings.
Whilst the proceedings were underway, the 4^th Intervener filed an application seeking an order that the expenses incurred by the 4^th Intervener as anchorage fee for Sea Coral when it was anchored at a designated area licensed to the 4^th Intervener post arrest, be ranked as Sheriff’s expenses.

The 4^th Intervener’s application was grounded on a Ship-To-Ship Anchorage Service Agreement (“the Agreement”) entered between the 4^th Intervener and Ocean Tankers Pte Ltd, a company that had common directors and shareholders as the owners of Sea Coral. Under the Agreement, Ocean Tankers Pte Ltd had agreed to pay a monthly sum of USD140,000.00 for several services to be provided by the 4^th Intervener, which included Ship-To-Ship Transfer services.

After Sea Coral’s arrest, the Sheriff’s agent had requested for a quote of anchorage fee from the 4^th Intervener. The 4^th Intervener quoted a monthly sum of USD140,000.00 citing the Agreement. In response, the Sheriff’s agent informed the 4^th Intervener that the Agreement was neither applicable to nor binding on the Sheriff, and consequently the 4^th Intervener was requested to negotiate a fresh agreement with the Sheriff to secure anchorage fee. Subsequently, the 4^th Intervener filed its application in Court seeking an order to rank the anchorage fee of Sea Coral as Sheriff’s expenses.

4^th Intervener’s submission

In support of its application, the 4^th Intervener submitted that as Sea Coral was still anchored at the designated area it had incurred daily anchorage fee. The 4^th Intervener further contended that HSBC and all other claimants had benefitted from the provision of safe shelter to Sea Coral by the 4^th Intervener.

Thus, relying on the authority of Kleinwort, Benson Ltd v Sherkate Sahami Sakht (The “Myrto” — No. 1)⁴, the 4^th Intervener contended that the anchorage fee was a necessity and was an expense ordinarily incurred in the preservation and good management of the vessel.

The 4^th Intervener further contended that it had acted appropriately in accordance with the legal principles set out in The “Eastern Lotus”⁵ and The ‘Euroexpress’⁶ by informing the Sheriff’s Agent of the anchorage fee that was being charged to the vessel.

HSBC’s submission

HSBC submitted that it was settled law and sound practice of the Admiralty Court that the 4^th Intervener should have obtained the prior approval, consent and/or agreement of the Sheriff to treat anchorage fee as Sheriff’s expenses, as per the authorities of The “Eastern Lotus” Ex “Spring Flower”; Urzad Morski W Szczecinie v Moscow Narodny Bank Ltd⁷ and The ‘Euroexpress’⁸. It was pointed out to the Court that the 4^th Intervener had failed to do so. The 4^th Intervener had also not taken steps to have the vessel relocated outside the designated area after the arrest.

The Court was informed that the 4^th Intervener had not entered into a fresh agreement with the Sheriff to incur anchorage fee for the vessel commencing from the time of her arrest. The Court also noted that the Agreement relied upon by the 4^th Intervener had expired 11 days after Sea Coral was arrested by the Sheriff.

Both the 1^st and 3^rd Interveners echoed HSBC’s submission in opposing the 4^th Intervener’s application.

Decision of the High Court

The High Court agreed with HSBC (1^st and 3^rd Interveners) that whilst anchorage fees may be treated as Sheriff’s expenses as it relates to the preservation and good management of the vessel, it must, however, receive the prior sanction of the High Court and/or the Sheriff before it can be treated as Sheriff’s expenses (The “Eastern Lotus” Ex “Spring Flower”; Urzad Morski W Szczecinie v Moscow Narodny Bank Ltd⁹ and The ‘Euroexpress’¹⁰).

The High Court found that the 4th Intervener had not satisfied the requirement that prior consent, approval or agreement from the Sheriff must be obtained for the 4^th Intervener to incur anchorage fee and for this head of expenses to be treated as Sheriff’s expenses.

Prior to the 4^th Intervener’s filing the application to rank anchorage fee as Sheriff’s expenses, the 4^th Intervener had not alerted the Sheriff or the Sheriff’s Agent that the vessel had been incurring, and was continuing to incur, the anchorage fee whilst she remained under arrest at the designated area and that the 4^th Intervener wished to treat this expense as Sheriff’s expenses.

The High Court ruled that an application to the Sheriff or to the Court for an order to have the anchorage fee be treated as Sheriff’s expenses ought to have been made at the earliest opportunity.

The High Court dismissed the 4^th Intervener’s application with costs.

High Court’s recent decision

The requirement that there must be prior consent from the Sheriff for an expense to be ranked as Sheriff’s expenses was recently reaffirmed by the High Court in The Hongkong and Shanghai Banking Corporation Limited v The Owners and/or Demise Charterers and/or other Parties Interested in the Vessel “OCEAN WINNER” of the Port of Singapore¹¹.

In dismissing the 4^th Intervener’s application for leave to rank lay-up fee as Sheriff’s expenses, the High Court referred to The ‘Euroexpress’¹² and opined that it was a rule of admiralty practice to obtain prior sanction of the Court or Sheriff before an expenditure can be cast as Sheriff’s expenses and further that it was not sufficient for a party to merely prove that the expenditure was incurred for the preservation and good management of the vessel.

The Court further held that an agreement concluded between the 4^th Intervener and a third party prior to the arrest of the vessel did not entitle any claims arising under that agreement to be ranked as Sheriff’s expenses. Such agreements do not bind the Court, the Sheriff or the Sheriff’s agent.

Expenses incurred in consultation with or with the knowledge of the Sheriff are not regarded as expenses approved by the Sheriff. Merely informing the Court that the 4^th Intervener had a claim for lay-up fee did not automatically bind the Court or its Sheriff.

The 4^th Intervener’s application was dismissed with costs.

Conclusion

A party wishing to rank an expense incurred by it in connection with the preservation and good management of a vessel under arrest as Sheriff’s expenses is obliged to seek prior sanction and/or approval of the Court or its Sheriff to enjoy a higher priority in the distribution of proceeds of a judicial sale of the vessel.

RAJASINGAM GOTHANDAPANI AND LYNNETTE TAN HUI LING
SHIPPING & MARITIME PRACTICE GROUP

Please contact us for further information regarding shipping & maritime matters.

Endnotes:

¹[1980] 1 MLJ 137.
² [1988] 3 MLJ 367.
³ Kuala Lumpur High Court Admiralty In Rem No.: WA-27NCC-39-05/2020.
⁴ [1984] Lexis Citation 1462.
⁵ [1980] 1 MLJ 137.
⁶ [1988] 3 MLJ 367.
⁷ [1980] 1 MLJ 137.
⁸ [1988] 3 MLJ 367.
⁹ [1980] 1 MLJ 137.
¹⁰ [1988] 3 MLJ 367.
¹¹ Kuala Lumpur High Court Admiralty In Rem No.: WA-27NCC-52-06/2020.
¹² [1988] 3 MLJ 367.