Wong Chee Chien writes a case update on when an admiralty claim trumps insolvency.
More often than not, a creditor with an admiralty claim would take steps to arrest a ship or vessel of the debtor, for the purposes of selling it so that the proceeds of sale will be held as pre-judgment security for the creditor.
However, if the debtor subsequently goes into liquidation, what happens to the proceeds of sale from the arrested vessel? Should the proceeds be paid to the creditor, or should they be distributed to all unsecured creditors pari passu? These issues were dealt with by the High Court in Dan Bunkering (Singapore) Pte Ltd v The Owners of the Ship or Vessel “PDZ Mewah” & Anor (see grounds of judgment dated 9 August 2021).
Although this decision deals with several issues, this case update focuses on the question of whether the creditor’s admiralty claim trumps the insolvency regime of pari passu distribution among unsecured creditors.
Summary of Decision
Decision by: Atan Mustaffa JC
Following the sale of an arrested vessel via a judicial sale, the creditor applied for the proceeds of the sale of the vessel to be paid to the creditor (after the relevant commissions, cost and expenses are paid).
The debtor opposed the application on the main basis that as the debtor had been ordered to be wound up, the proceeds of sale of the vessel should be distributed by the liquidator of the debtor to all unsecured creditors equally.
The court rejected the debtor’s argument and held among others that:
- When the admiralty action was commenced, this accorded the creditor the status as a secured creditor over the proceeds of sale of the vessel;
- As the creditor’s secured right over the proceeds of sale of the vessel was accorded before the winding up petition was presented, the proceeds of sale of the vessel should not be distributed to the unsecured creditors equally; and
- The creditor has priority over the proceeds of sale of the vessel.
Background Facts
Dan-Bunkering (Singapore) Pte Ltd (the “Creditor”) had sold and supplied marine fuel oil and gas to various vessels owned by Perkapalan Dai Zhun Sdn. Bhd. (the “Debtor”) for the operation and maintenance of those vessels. One of those vessels is known as “PDZ Mewah”.
The Debtor failed to pay for the goods and services supplied, and the Creditor commenced legal action against the owners of PDZ Mewah and the Debtor.
In January 2017, the Creditor invoked the admiralty jurisdiction of the High Court by filing a Writ of Summons in Action in Rem and a warrant of arrest was issued. On 24 January 2017, the PDZ Mewah was arrested.
Subsequently, on 27 February 2017, a third party had presented a winding up petition against the Debtor. In April 2017, the Debtor was ordered to be wound up and the liquidator was appointed.
In July 2018, the PDZ Mewah was eventually sold via a judicial sale in the admiralty court. The proceeds of sale were paid into a stakeholder’s bank account pending determination of the dispute between the Creditor and Debtor.
In August 2020, judgment was entered in favour of the Creditor, and the Debtor was ordered to pay the debt due and owing to the Creditor (the “Judgment”).
With the Judgment, the Creditor applied for an order that the proceeds of sale of the PDZ Mewah be paid in the following order:
- The Sheriff’s commission in respect of the sale of PDZ Mewah;
- The Sheriff’s expenses incurred for the preservation and maintenance of PDZ Mewah;
- The Creditor’s cost incidental to the arrest of PDZ Mewah;
- The Creditor’s claim as a statutory lienholder pursuant to the Judgment; and
- All other unsecured claims.
The Creditor’s application was opposed by the Debtor. One of the grounds raised was that the proceeds of sale of the PDZ Mewah should be distributed by the Debtor’s liquidator in accordance with section 527 of the Companies Act 2016 (“CA 2016”) as the Debtor was already wound up.
Section 527 of the CA 2016 sets out the list of priority payments to be made to unsecured creditors of a wound up company.
Decision: Distribution of the Proceeds of Sale of a Vessel
The court held that the Creditor had commenced the admiralty action before the winding up petition was presented and before the winding up order was made. Therefore, the proceeds of sale of PDZ Mewah should not be distributed in accordance with section 527 of the CA 2016.
The court explained that the admiralty action commenced by the Creditor was an in rem action, and this accorded the Creditor the status as a statutory lienholder over the proceeds of sale of the vessel. This status is accorded pursuant to the United Kingdom’s Supreme Court Act 1981 (which extends its jurisdiction to the High Court of Malaya pursuant to section 24 of the Courts of Judicature Act 1964).
Accordingly, the Creditor was held to be a secured creditor and it is entitled to have the first bite of the proceeds of sale of PDZ Mewah (after the relevant commissions, cost and expenses are paid). Any excess monies from the proceeds of sale of PDZ Mewah should then be distributed amongst the unsecured creditors pari passu.
The court proceeded to conclude that the Creditor was not subject to the laws under the CA 2016 or the Insolvency Act 1967 (an Act governing personal bankruptcy) despite the Debtor being in liquidation. The Creditor was a secured creditor over the sales proceeds and the proceeds can be used to satisfy the Creditor’s claim in the admiralty action.
Comments
This decision illustrates how a creditor with an admiralty claim ought to be treated in insolvency. A few discussion points can be drawn out.
First, in this case, the creditor filed the admiralty writ in rem before the filing of any winding up petition. The creditor is accorded the status akin to a secured creditor as there is deemed to be a statutory lien over the vessel. This security is regardless of whether there was an actual service of the writ in rem or the arrest of the vessel yet.
Second, if the creditor filed the admiralty writ in rem after the filing of any winding up petition, there is no such security and the writ in rem is liable to be set aside. This is based on the Singapore Court of Appeal decision of The Hull 308 [1991] 2 SLR(R) 643 and also a reading of section 472 of the CA 2016. Essentially, section 472 provides that there is void disposition and void attachment of property of the company after the filing of the winding up petition.
Third, even in the case of filing the admiralty writ in rem before the filing of any winding up petition, there may be the issue of undue preference. Undue preference is where, essentially, there is any transfer or mortgage of the property of an insolvent company during the period up to six months before the filing of a winding up petition (see section 528 of the CA 2016). If the company is wound up, the liquidator could deem that transfer or mortgage to be void. Nonetheless, a creditor could mount certain defences under section 528(4) to (6) of the CA 2016.
Fourth, I am of the view that a creditor with a statutory lien would still fall within the CA 2016 insolvency regime. A creditor with a statutory lien can fall within the provision governing the rights and duties of secured creditors (as set out in section 524 of the CA 2016). Under that provision, a secured creditor can realise the property subject to charge, value the property and claim for the balance in the winding up, or even surrender the charged property to the liquidator for the general benefit of the creditors.
In conclusion, liquidators of companies will need to ascertain the timing as to when a creditor commenced an admiralty claim. The timing can be significant as to whether or not that creditor is deemed a secured creditor by virtue of the statutory lien under the admiralty jurisdiction.
Wong Chee Chien is a commercial litigator and restructuring and insolvency lawyer with Lim Chee Wee Partnership.