Interface between Admiralty and Insolvency

Introduction

In rem admiralty proceedings and the insolvency of a ship owner is fraught with tension. The advantage of arresting a ship, which elevates a maritime claimant to the status of a secured creditor, sits uncomfortably with principles of insolvency law, which do not contemplate an action in rem and the peculiar consequences that follow from it.

The conflict between these two special jurisdictions came to a head before the Bombay High Court, which in a recent judgement in Raj Shipping Agencies Vs Barge Madhwa and Anr , attempted to reconcile the irreconcilable.

Facts

Arrest orders were passed by the Bombay High Court against vessels, whose owners were insolvent. The High Court issued a winding up order against one of the ship owners under the Companies Act, 1956 (“Companies Act”). In parallel, insolvency proceedings were commenced against another ship owner by the National Company Law Tribunal and a moratorium ordered against commencement or continuation of all proceedings against that owner and its assets under the Insolvency and Bankruptcy Code, 2016 (IBC).

The official liquidator in the winding up proceedings objected to the continuation of the admiralty actions without the leave of the Company Court under Section 446 of Companies Act, 1956² . As regards the insolvency proceedings against the other vessel owner, the maritime claimants argued that the moratorium under the IBC would not prevent continuation of the admiralty actions in the Bombay High Court.

The questions of law that arose for consideration were: –
Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

Whether leave under Section 446(1)³ of the Companies Act is required for continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed?

Issue 1: Is there a conflict between actions in rem filed under the Admiralty Act and IBC and if so, how is the conflict to be resolved?

The Court after hearing elaborate submissions, observed that its endeavour would be to give effect to both statutes and their objectives so as to avoid conflict. The judgement proceeded to analyse the distinction between an action in rem under the Admiralty Act and an action in personam under IBC. The Court reasoned that an action in rem is not an action against the corporate debtor/owner of the ship or the assets of corporate debtor/owner. It accordingly concluded that the moratorium under the IBC would not apply to an action in rem under the Admiralty Act for arrest of the ship and consequently would not prevent the commencement of admiralty proceedings.

However, with a view to avoiding a clash between the two jurisdictions, it ruled that an action in rem could be commenced but not continued, as this would defeat the moratorium and the very purpose of the insolvency process under the IBC. The Court held that a maritime claimant had a statutory right in rem that could not be subordinated to the IBC, which entitled it to arrest the ship, but not to continue proceedings, so as to give the corporate debtor the time and opportunity to be rescued/rehabilitated. Those maritime claimants who arrested the ship according to the Court, would be characterized as secured creditors for insolvency purposes.

According to the court, maritime claimants apart from being treated as secured creditors, should ordinarily be ascribed full value for their claim and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court ruled that vessels arrested before the moratorium can only be released by the Admiralty Court, upon full payment of security.

The Court similarly reasoned that Section 33(5) of the IBC which bars the commencement or continuation of proceedings in liquidation, would not apply to an action in rem, as the claim is against the res and not against the corporate debtor.

Issue 2: Whether leave under Section 446(1) of the Companies Act is required for the continuation of an Admiralty action where a winding up order has been made or the Official Liquidator has been appointed that owned the ship?

The Court observed that the Admiralty Act, 2017 is a consolidating enactment dealing with arrest of ships, maritime claims, judicial sale of ships and determination of priorities. The jurisdiction of the Admiralty Court was found to be special, unlike that of regular civil courts. A judicial sale of a ship by an Admiralty Court in a public auction is free from all prior claims, liens and encumbrances and the purchaser at the auction acquires a clean title free from any maritime liens, claims or encumbrances. This is unlike a sale of property conducted by the Company Court. The Court accordingly held that no leave of the Company court was required as the Admiralty Act, 2017 being a special enactment, would prevail over Companies Act, 195

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Conclusion

The judgement though well intentioned and has given much food for thought on the interaction between insolvency and admiralty. The Court’s finding of the action in rem being independent of the personal liability of the vessel owner, is wholly contrary to Section 5 of the Admiralty Court Act, 2017, which permits an arrest of a vessel, only if the owner is liable for the maritime claim. The personification theory of the ship, (which is now regarded as a legal fiction) has been carried to an extreme, so as to avoid the rigours of the moratorium under the IBC.

The moratorium contemplated by Section 14 of the IBC bars the commencement or continuation of proceedings against the corporate debtor and its assets. The judgement, by permitting maritime claimants to arrest a ship, during the moratorium and the insistence on full security to be furnished for vessels arrested before the commencement of the moratorium, alters the scheme of priorities under insolvency law, as such claimants would not be regarded as secured creditors under the IBC. There are also difficulties with the Court’s reasoning that an admiralty action in rem is not a ‘suit’ or an ‘action’ whose commencement or continuation is barred under Section 14 of the IBC,

Apart from the practical challenges in implementing the directives of this judgement, some of the issues a future court would need to consider would be the powers and duties of the Resolution Professional to take control and custody of the assets of the corporate debtor, which would now be subject to the directions of the Admiralty Court and not the insolvency rules. Similarly, the supremacy of the commercial wisdom of the Committee of Creditors in framing a resolution plan, as upheld by the Supreme Court in Essar Steel’s case, being subjected to the scheme of priorities under Admiralty law and the requirement to ascribe full value for a maritime claim, may warrant re-consideration.

The judgement is nonetheless a welcome contribution to Indian jurisprudence and enriches the debate on the interplay between admiralty and insolvency. It is hoped that the conflict between admiralty and insolvency jurisdictions be resolved by appropriate amendments to Indian insolvency law. An ideal that the judgement correctly aspired to but could not achieve given the complexity of the case.