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Lien or bust: insolvency and charterparty liens on sub freights

In times of increasing charterer insolvency, the contractual right of lien on sub hires and freights is an important weapon in a shipowner's armoury.

Cosco Bulk Carrier Co Ltd v (1) Armada Shipping SA (2) STX Pan Ocean Co Ltd – Companies Court (Briggs J) [2011] EWHC 216 (Ch)

In times of increasing charterer insolvency, and now that Rule B relief in the United States is no longer available, the contractual right of lien on sub hires and freights is an important weapon in a shipowner's armoury to secure payment of time charter hire from resistant or impecunious charterers.

Usually the lien will be exercised via notice, served on sub charterer(s), which requires payment of sums normally due to their disponent owner, to instead be made directly to the owner making the demand. When effectively exercised the owner receives payment direct from the sub charterer and this neatly resolves the issue: the owner gets paid, and the sub charterer is deemed to have made proper payment for the purposes of its charter. Problems can sometimes arise, for example in relation to timing of notices, as highlighted in our May 2008 newsletter reporting of Samsun Logix Corporation v Oceantrade [2007] EWHC 2372.

In terms of potential pitfalls and complications, this recent decision in the Chancery Division illustrated a further jurisdictional/insolvency dimension coming to the fore. This was in circumstances where there are arbitration proceedings dealing with the underlying debt and the lien, but where at the same time the debtor charterer becomes subject to local insolvency proceedings, and its hire/freight entitlement (liened by the disponent owner) is seen as a potential asset in a winding up.

Procedural conflicts

Here, the English court had to grapple with this conflict and decide which forum - London arbitration or Swiss insolvency court - should deal with the matter of the lien. This brought into focus the application of the Cross-Border Insolvency Regulations 2006 and a Recognition Order made under Article 17 of the UNCITRAL Model Law on Cross Border Insolvency, which recognised the Swiss liquidation as a "foreign main proceeding".

By way of background, Cosco had time chartered "Spar Sirius" to Armada, who sub time chartered to STX Pan Ocean, both on amended NYPE forms providing under clause 23 for the usual right of lien. Cosco claimed from Armada US$1.2 million for unpaid hire, bunkers and arrest release costs and on 30 December 2009 served notice of lien on STX, demanding direct payment. To avoid the "double jeopardy" risk of paying twice, STX paid the sum into escrow for Cosco and Armada to argue over.

Two sets of London arbitration proceedings were then started, the first being Cosco's claim against STX for sums due pursuant to the lien, and the second being a claim by STX against Armada seeking a declaration of non- liability to pay hire. Meanwhile a Swiss bankruptcy order was made on 11 January 2010, and the Swiss liquidator ("Office Holder") appointed, who then obtained a recognition order under the Model Law.

Briggs J. had to unravel the procedural impact of this, and concluded that whilst the application of Art. 20 of the Model Law had the initial effect of staying the London arbitrations, under Art.22 the English court had a discretion to allow the arbitral proceedings to continue if the interests of the creditors and other interested persons, including if appropriate the debtor, were adequately protected.

The court had to consider what was the better route to decide the underlying dispute i.e. the two competing proprietary and/or contractual claims by Armada and Cosco in relation to a single asset, namely the chose in action of STX's obligations to make payments under the sub-charter. Those issues were as a matter of contract governed by English law, arbitrations were already afoot and there should be no difficulty in Armada/the Office Holder being joined to the first arbitration. On the other hand if the issue was determined in Switzerland, experts on English shipping law would inevitably be required which might entail additional complication and cost.

On the basis of its broad discretion, the focus being the best route for the resolution of the underlying dispute "to best serve the interest of justice, being that which is right in all the circumstances", the court concluded the arbitrations should be permitted to proceed.

Nature of lien

As an aside to the main procedural issue, the court passed interesting comment on the nature of the charterparty lien, which was under English law "a well known and long unresolved problem" which had not yet been determined by the English appeal courts. It recognised the conventional view seen in first instance decisions such as The "Ugland Trailer" [1986] Ch 471, that an owner's lien on sub-freights operated as an equitable charge on what was due from the shipper to the charterer. However there was "formidable dissent" based on the Privy Council decision on Agnew v Commissioners of Inland Revenue [2001] 2 AC 710 to the effect that the lien on sub freights was a personal contractual right of interception analogous to an unpaid seller's right of stoppage in transit, and was not a charge or proprietary right at all.

Briggs J. acknowledged that the answer may not in practice make much difference to priority issues arising from a charterers' insolvency. If the lien operated as a floating charge, under both English and Swiss insolvency law, it conferred less than absolute priority on the chargee, and would be trumped by claims of preferential creditors.

The decision demonstrates that whilst liens can be a problematic area in their own right, when coupled with parallel insolvency proceedings a further layer of complexity can be added in relation to the procedural/jurisdictional aspects.

It seems, however, that whilst the determination of creditor priorities will always be a matter for the local insolvency court, the English court will be keen to ensure that, in the first instance, the answer to contractual entitlement (or otherwise) to a debt and the nature of any security, will be decided in the agreed contractual forum- as here, in London arbitration.

Mike Burns
Partner, Weightmans LLP
mike.burns@weightmans.com