Hanjin Shipping’s bankruptcy raises questions about how to resolve cross-border maritime restructuring and insolvency cases and the legal implications for the different organisations in the shipping industry when a bankruptcy occurs.
The Hanjin Shipping Company, which was the seventh largest in the world, applied for court protection on August 30 2016. It left a chaotic global supply chain behind, with an estimated $14 billion worth of goods stranded. After attempts to restructure its debt failed due to Hanjin’s falling liquidation value and the lack of sponsors, the Seoul Central District Court finally declared the company bankrupt on February 17 this year, the biggest collapse in container shipping history. Lawyers and academics told Asialaw the matter highlights their concerns about different national rules as when many countries, each with their own maritime laws, make claims for damages under breach of contract.
A number of challenges during the rehabilitation proceedings, including determining the type of damage claims and deciphering the legal responsibilities of the organisations affected, such as freight forwarders, liner shipping companies, stevedores and banks. “Determining whether the damages claims at the commencement of rehabilitation proceedings arising out of the breach of contracts were public interest claims or rehabilitation claims was a difficult task,” says Sang-Goo Han, partner at Yoon & Yang, which advised creditors of Hanjin.
“The governing law of the relevant contracts was not Korean law, but each country involved applied a different set of maritime laws,” adds Han. “Since each country has a distinct legislative regime regarding a stay order, efficiently carrying out a cross-border insolvency case was not an easy task.”
Hanjin Shipping’s collapse affected groups such as freight forwarders, liner shipping companies, stevedores and banks.
“Freight forwarders that acted as contractual carriers for the cargo interests were affected since cargo interests who suffered delay damage made claims against them,” says In Hyeom Kim, director of Maritime Law Centre at Korea University. Tort claims were brought about against the freight forwarders since Hanjin was in restructuring proceedings. While Korean transport law requires freight forwarders to buy insurance up to a maximum of $100,000, the amount was too small to protect the cargo interests’ damages. “Freight forwarders made recourse claims against Hanjin but they are classified as rehabilitation claims as a general creditor which has the lowest ranking among claims according to the Rehabilitation Act,” says Kim.
As Hanjin was a member of the CKYHE liner shipping alliance, which comprised COSCO, K Line, Yanming, Hanjin and Evergreen, with cargo being allowed to be carried interchangeably between the liner shipping companies, container boxes of Evergreen as the carrier were on board the Hanjin vessels and consequently, Evergreen became an innocent victim. While Evergreen may make recourse claims, they are rehabilitation claims that are low on the creditor priority list.
|In Hyeom Kim|
Pilot and tug boats also made claim notices to the bankruptcy court through maritime liens under Korea Commercial Code. The law of the vessel’s flag is applicable for deciding on maritime liens. “Pilot and tug boat claims are classified as rehabilitation claims protected by security while pilot charges incurred after the start of rehabilitation proceedings are classified as claims contributed to the common interest, allowing them to be fully paid instantly during the Rehabilitation Act,” says Kim.
Hanjin did not have enough money to pay stevedores delaying cargo delivery and causing cargo receivers to lose money. “Liability insurance, surety insurance, protection & indemnity insurance or a fund collected by liner companies may be an option to achieve the goal of securing a stevedore when a liner company goes bankrupt,” says Kim.
Almost all of Hanjin’s vessels were beneficially owned through the creation of a segregated portfolio company (SPC) as an asset holding vehicle, with banks being the owners of vessels. “The banks which lent money to Hanjin were forced to sell vessels to another owner or charter it out to another operator,” says Kim. “The bank is eligible to get stipulated damages from Hanjin.”
“If the vessel is regarded as the property of Hanjin, then it is not allowed to be arrested for auction sale; however, the Korean court decided that the vessel was owned by the registered owner in Panama, which made the vessel subject to auction sale, resulting in loss for the bank,” says Kim.
Creditors in countries other than Korea were involved so measures such as stay orders and maritime liens required cross-border resolution. The effect of a stay order is that as soon as rehabilitation proceedings start, the property of the debtor is not allowed to be executed by the creditors under the Korean Rehabilitation Act. An issue arises when a court’s order does not have the same effect in neighbouring countries. Singapore and the US issued stay orders such that the vessels should not be arrested by the creditor, giving wider protection than the Korean courts.
Issues around maritime liens arose where a vessel is under a Korean flag, the bunker supplier does not have maritime lien whereas a vessel with a Panama flag, for example, does under the International Private Law. “The same claimant against the same owner can be treated differently depending on the flag of the vessel,” says Kim. “There is a strong need to unify maritime law and arrest of vessel among countries, which give foreseeability to stakeholders. The United Nations Commission on International Trade Law (UNCITRAL) Cross-Border Insolvency Model Law should be adopted by national governments as much as possible.”
Legal implications of Hanjin’s bankruptcy
Hanjin’s bankruptcy proceedings, which have already started, will require a report of claims, admission or denial of the reported claims, and bankruptcy distribution. “If Hanjin is subject to a bankruptcy declaration under article 6(2) of the Debtor Rehabilitation and Bankruptcy Act, a few special provisions may apply,” says Han. “For example, the creditors who already reported their claims during the rehabilitation proceedings are not required to file their reports again for the bankruptcy proceeding.”
“Public interest claims from the rehabilitation proceedings become estate claims, which take precedence over general bankruptcy claims,” says Han. This would affect general bankruptcy creditors as they would likely receive less bankruptcy distributions after estate claims are paid first.
Looking at the lessons learned from Hanjin, the shipping industry will have to think carefully about the drafting of service contracts to ensure remedial language is included to protect parties in case of an unenforceable contract due to bankruptcies. It is a challenge for different stakeholders to come to agreement especially with the interdependent nature of industry participants. The industry will also have to reach a better understanding of the validity of stay orders and maritime liens when multiple jurisdictions are involved. With claims by creditors due by May 1 and the first meeting of creditors to be held on June 1, it is clear the Hanjin Shipping matter has some way to go before it is resolved.