Issues in Cross-Border Shipping & Maritime Bankruptcies

curtis, mallet-prevost, colt & mosle llp

almaty I ashgabat I astana I buenos aires I dubai I frankfurt I houston istanbul I kuwait city I london I mexico city I milan I muscat I new york I paris I washington, d.c.

www.curtis.com

Inter-Pacific Bar Association 23rd Annual Meeting and Conference

Seoul, Korea

Issues in Cross-Border Shipping and Maritime Bankruptcies

19 April, 2013

2

The State of the Shipping Industry

Ø  The shipping industry is among the sectors worst affected by the financial and economic crisis. The downturn has already driven several large fleet operators into bankruptcy.

Ø  In 2006-2007, charter rates increased dramatically, which resulted in the over-ordering of vessels. As the economy has declined, shipping companies are dealing with a high supply and low demand for cargo capacity and the loss of these vessels’ value.

Ø  In 2009, the portfolio of new orders for European shipyards was almost 4 times lower than in 2008.

Ø  Vessels are costly to maintain and lose value relatively quickly. Ø  Factors affecting the shipbuilding industry can be divided in two groups: macro

factors (world seaborne trade, oil prices, economic stability, and political stability) and market factors (subsidies by the government, scrapping of old vessels, charter rates, vessels on order).

Ø  An analysis of 1,400 South Korean companies by AlixPartners found that shipping was the industry with the highest portion of companies in danger, 44%, followed by construction at 35%.

3

Case Study

Ø  Shipping Company Ltd. has significant amounts of expertise and experience in one sector of the shipping market. Shipping Company Ltd. does, however, wish to diversify and wishes to expand its areas of operations but feels that it does not have the necessary expertise to do so alone. Shipping Company Ltd. has therefore entered into a joint venture with a Singapore based shipping company for the purpose of acquiring a number of specialist vessels for a specific sector. The Singapore based shipping company, which we will refer to as the "Singapore Joint Venture Partner", has significant market knowledge and expertise that Shipping Company Ltd. does not possess in such sector.

Ø  The joint venture will operate through a SPV (special purpose vehicle) that is incorporated in the Cayman Islands, solely for the purpose of owning and operating the ships that are to be acquired by the joint venture. We will refer to the joint venture as the "Ship Owning SPV".

Ø  Following the establishment of the joint venture through the Ship Owning SPV, the Ship Owning SPV enters into a number of Memoranda of Agreement pursuant to which the Ship Owning SPV will purchase a number of second-hand vessels of the type that are required in order to operate in the target sector of the Ship Owning SPV. These MoAs have each been entered into on the Norwegian Sale Form, and one such MoA has been entered into between the Ship Owning SPV as buyer and a Norwegian shipping company as seller. We will refer to the seller as the "Seller".

4

Case Study (cont’d.)

Ø  Some of the purchases of vessels under the MoAs were successful. Unfortunately, prior to the Ship Owning SPV purchasing one of the vessels from the Seller, the Seller became the subject of insolvency proceedings.

Ø  Thankfully, Ship Owning SPV successfully purchased a number of second hand vessels of the type that are required in order to operate in the target sector of the Ship Owning SPV. Ship Owning SPV, now the proud owner of a small fleet of vessels, charters out a vessel to a chartering company based in the US. We will call this company "US Charterer".

Ø  US Charterer has unfortunately suffered during the decline in the shipping market and has entered Chapter 11 proceedings in the US. As a result, Ship Owning SPV will need to consider its options and the issues that may arise from being the owner of a vessel that is on charter to a company that has entered Chapter 11 proceedings.

Ø  Ship Owning SPV is by now having to deal with multiple issues as a result of a difficult market. Singaporean Joint Venture Partner has however also become the subject of insolvency proceedings in Singapore.

5

Helen Tung

Barrister – London

6

Helen Tung, One Temple Avenue Chambers

Ø  How does EU ship building industry look?

Ø  What are the problems facing the EU/UK maritime and shipbuilding industry?

Ø  What types of bankruptcy proceedings are available in the UK?

Ø  How does Cross-Border Insolvency Regulation apply?

Ø  Case studies

Ø  Ideas for shipping clients?

7

How Does EU Ship Building Industry Look?

Ø  An annual turnover of around € 34 billion, more than half of it through exports

Ø  An industrial network of more than 9,000 companies

Ø  A workforce of more than 350,000 people

Ø  A key driver of maritime excellence with 10% of turnover spent on research, development and innovation through a high level of prototyping and the predominance of one-of-a-kind products

Ø  Strong global market positions in complex vessels and ship repair

Ø  UK ship building–public sector

8

What are the Problems Facing the EU/UK Maritime and Shipbuilding Industry?

Ø  World shipbuilding suffers from a persisting imbalance of supply and demand

Ø  Injurious pricing practices add to the distortion of competition

Ø  The resulting price depression and price suppression are leading to losses and ultimately state subsidies and protectionism in many forms

Ø  International trade rules are difficult to apply to shipbuilding

Ø  Failure to meet deadlines

Ø  Delays

Ø  Cancellations

9

What Types of Bankruptcy Proceedings are Available in the UK?

Ø  Bankruptcy definition- way of dealing with any debts and inability to pay

Ø  Insolvency definition- unable to pay debts though other methods for taking control of finances

Ø  Relevant legislation:

–  Companies Act 2006;

–  Insolvency Act 1986 (as amended);

–  Insolvency Rules 1986 (as amended);

–  Council Regulation (EC) No 1346/2000;

–  Enterprise Act 2002.2; and

–  Cross-Border Insolvency Regulations 2006 (SI 2006/1030)

10

How Does Cross-Border Insolvency Regulation Apply?

Ø  Cross-Border Insolvency Regulations 2006 (SI 2006/1030)

–  Enactment of UNICTRAL Model law

–  Not to impose global insolvency law

–  Regulation instead

Ø  Assistance is sought in Britain by a foreign court or a foreign representative in connection with a foreign proceeding

Ø  Assistance is sought in a foreign state in connection with a proceeding under British insolvency law

11

How Does Cross-Border Insolvency Regulation Apply? (cont’d)

Ø  Concurrent insolvency proceedings in a foreign state and Britain

Ø  Creditors or other interested persons (Article 1, Schedule 1, and the Regulations)

Ø  Foreign company can apply for recognition of foreign proceedings where the debtor has a place of business or assets in Britain and it is an appropriate forum (Articles 4 and 15), e.g., collective insolvency proceedings, subject to the supervision and control of a foreign court (this would therefore exclude receiverships or equivalent foreign proceedings)

12


Ø  Matters include Foreign main proceedings

Ø  Foreign non-main proceedings: proceedings which the debtor has an establishment (in the EC Insolvency Regulation, which is not of a temporary basis) (Article 17)

Ø  If foreign proceedings are recognised as foreign main proceedings, an automatic stay will apply, including:

–  The commencement of proceedings concerning the debtor’s assets, rights, obligations or liabilities; execution against the debtor’s assets; and the transfer or disposal of the debtor’s assets (Article 20)

–  The stay will not affect a right to enforce security over the debtor’s property or to exercise set-off

13


Ø  Rights of access:

–  Alongside recognition, company can obtain certain rights of access to the British courts, to apply to the British courts under the anti-avoidance provisions

–  Anti-avoidance orders may be granted even though there is no corresponding British administration and/or liquidation proceeding in respect of transactions entered into after 4 April 2006

–  Foreign creditors may also have right to commence and/or start insolvency proceedings as creditors in Britain (Article 13)

14

Case Studies

Ø  Case 1: Cosco Bulk Carrier Co Ltd v Armada Shipping SA & Anor [2011] EWHC 2016(Ch)

–  Owners Cosco Bulk Carrier Co. Ltd (“Cosco”) had time chartered the Spar Sirius to Armada Shipping on an amended NYPE 93 form.

–  Armada had sub-chartered to STX Pan Ocean Co. Ltd (“STX), also on NYPE 93 form

–  Both time charters contained London arbitration and English governing law clauses. Both provided that hire was payable every 15 days in advance.

15

Case Studies (cont’d)

Ø  Case 2: Maxwell Order

–  Case resulted from the bankruptcy of Maxwell Corp., a British publishing company founded by the late Robert Maxwell (who was lost at sea off the stern of his yacht)

–  His debt-ridden company, with 80% of its assets in the United States, petitioned the High Court in England for an "administration order" under the U.K. Insolvency Act 1986

16

Case Studies (cont’d)

Ø  Case 3: Samsun

–  Samsun, a Korean shipping conglomerate, applied for rehabilitation under the Korean Debtor Rehabilitation and Bankruptcy Act (“DRBA”) on 6 February 2009

–  On 6 March 2009, the Korean Bankruptcy court made an order and appointed a representative of the management as Receiver to manage the company’s business, subject to the Korean Bankruptcy Court’s supervision

Ø  Case 4: Rainy Sky S.A. & Ors v Kookmin Bank [2011] UKSC 50

–  The Supreme Court confirmed view that it would take a commercial approach towards interpreting ambiguities in commercial contracts

17

Ideas for Shipping Clients?

Ø  The EC Insolvency Regulation will continue to regulate the administration of cross border centre of main interests (or establishment) in the EU and the Regulations specifically provide that, in the event of conflict, the EU Insolvency Regulation will prevail.

–  Maintain and further develop a strong position in selected higher-value market segments

–  Ensure world leadership in product and process innovation

–  Develop a strong customer orientation

–  Further improve the networked industry structure

–  Optimise production processes and increasingly focus on knowledge-based products

18

Identify Problems and Opportunities

Ø  Shipbuilding projects are capital-intensive, but yards are not well-suited to organise all necessary financing elements

Ø  A number of commercial banks are pulling out of ship financing

Ø  Non-EU competitors can rely on advanced state-supported financing instruments

Ø  Export financing principles are not fully applicable to shipbuilding projects

Ø  Going public?

–  Case study 1: Dongfang Shipbuilding

–  Case study 2: McNulty Offshore Construction Ltd

19

Andrew Rigden Green

Partner – Hong Kong

20

Charterer’s Insolvency

US Charterer Chapter 11

(USA) Charter Out

Ship Owning SPV (Owner)

Owned Fleet

21

The Problem

Part A:

Ship Owning SPV charters vessel to Charterer which becomes subject of Chapter 11 insolvency proceedings

Part B:

How to avoid insolvency proceedings

22

Background

Ø  Ship Owning SPV has heard rumours in the market Charterer is experiencing financial difficulty. Charterer says they are experiencing cash flow problems but that the problem is temporary and they are working with their creditors and banks and they are confident of a solution.

Ø  Charter hire becomes due but Charterer does not pay when due.

Ø  Charter hire becomes overdue. Ship Owning SPV is considering what action to take when Charterer files a petition for Chapter 11 in the US Bankruptcy Court.

Ø  Read in paper/you receive notice from Charterer.

23

Jurisdiction

Ø  How can Charterer file for Chapter 11 – jurisdiction

–  Marco Polo

24

Pre-petition Debt

Ø  What happens to overdue Charter hire that I am due?

–  Cannot take enforcement action – automatic stay –worldwide.

–  But some companies have taken action to arrest a ship when owner was in Chapter 11. Not all companies respect the automatic stay (arrest by Turkish supplier of Omega ship) – what happens if you don’t?

–  File proof of claim.

–  Knock on effect – lack of hire may cause difficulties for Ship Owning SPV making repayments to its bank.

25

Can Shipowner Terminate the Charter?

Ø  Charter contains clause that insolvency proceedings are default/cause automatic termination of charter.

Ø  Stay prevents enforcement. Ignore?

26

Post-petition Debt

Ø  Will the Shipowner receive hire that is due to me and accrues after the date of the Chapter 11?

–  Charterer files budget with US court.

–  Critical vendors – is Shipowner a critical vendor?

27

What Else Might Happen During Chapter 11 That Affects Me?

Ø  Charterer disclaims onerous charter?

Ø  Chapter 11 plan – in order to be approved, Charterer needs to make sure plan is feasible – negotiate lower rate?

28

Part B: How to Avoid Insolvency Procedures

Ø  To avoid insolvency proceedings consider “out of court” restructuring.

Ø  Charter rate is significantly above market. Charterer is late in paying hire or failed to pay in full.

Ø  Charterer contacts you and asks for forbearance / standstill.

Ø  Charterer and Shipowner enter into a Standstill Agreement.

29

What is a Standstill Agreement?

Ø  Possible terms:

–  Charterer continues to pay hire but at adjusted market rate for standstill period.

–  Difference between charter rate and adjusted market rate are rolled up to be converted into equity on completion of restructuring.

Ø  Agreed not to take enforcement action.

30

Question

Ø  Charterer enters into restructuring discussions with its lenders, chartered in vessel owners and other interested parties.

Ø  Should you participate in these discussions?

31

Question

Ø  Charterer asks you to enter into a restructuring agreement.

Ø  Possible terms:

–  Formalise the standstill between the parties.

–  Commits the parties to support restructuring efforts.

–  Includes addenda to the time charter.

•  Adjusted market rate

•  Rolled up unpaid charter hire to be converted to equity

•  Profit share if charter earnings exceed threshold

32

US Insolvency Proceedings

Ø  Insolvency proceedings against US Charterer = Corporate Strength / Earnings threatened

Ø  US Charterer renegotiates terms of time charter?

Ø  Assignment of time charter by Ship Owning SPV to financial institution?

Ø  Ship Owning SPV able to terminate time charter?

Ø  US Charterer able to disclaim time charter if onerous?

Ø  Event of Default?

Ø  Restructuring arrangements.

33

Myung Ahn Kim

Associate – Seoul

34

Shipping/Shipbuilding Market

Ø  In the wake of shipping crisis in 2008 (94% drop in BDI Index in December, 2008), approx. 11 shipping companies and 7 shipbuilding companies (mostly mid-to-small size) in Korea have filed for rehabilitation proceedings.

Ø  Samsun Logix, Daewoo Logistics completed the rehabilitation proceeding and normalized their business operation in May/June of 2011, respectively.

Ø  Others are continuing under the rehabilitation proceedings (e.g., Korea Line Corporation).

Ø  Rehabilitation proceeding for others have been terminated and a bankruptcy proceeding is commenced against them.

34

35

Overview on Insolvency & Restructuring in Korea

Ø  For shipping or shipbuilding companies, 2 categories of insolvency proceedings are available in Korea (Debtor Rehabilitation and Bankruptcy Act (DRBA)): (1) rehabilitation; (2) bankruptcy.

Ø  A main goal of a rehabilitation proceeding is to “rehabilitate” a financially distressed debtor or its business by streamlining the parties’ interests.

Ø  Cf. Bankruptcy

35

36

Rehabilitation Proceeding

Ø  Commencement:

-  By filing the application with the court.

-  Commenced voluntarily by the debtor, or by one or more of creditors having qualified claims (i.e. corresponding to at least 10% of the total amount of issued equity interest of the debtor at face value or KRW50 million if the debtor is not an llc or joint stock company), or holders of the debtor’s equity (holding at least 10% of the total amount of issued equity interests of the debtor).

Ø  Meeting with Interests Parties:

-  Each class of interested party (secured and unsecured creditors and shareholder/equity holders) votes on the rehabilitation plan and submits for court approval.

-  The court usually renders its decision within 1 month after the filing. Approx. 8 months before rehabilitation plan is approved.

36

37

Rehabilitation Proceeding (cont’d)

Ø  Appointment of Receiver: −  The incumbent representative director of the debtor usually is appointe

d, subject to the court’s approval.

Ø  Comprehensive Preservation: −  Once the rehabilitation proceeding starts, claims that are secured by th

e debtor’s property at the start of the rehabilitation proceeding (e.g. a loan secured by mortgage) or claims against the debtor arising out of causes that preceded the commencement of rehabilitation proceedings are stayed.

−  The court also issues a preservation order imposing restrictions on creditors’ ability to enforce their claims against the debtor.

37

38

Recognition of Foreign Insolvency Proceeding in Korea

Ø  Under the DRBA, foreign insolvency proceeding may be recognized in Korea by way of: (1) suspending enforcement of claims by creditors; and/or (2) ordering preservation of the debtor’s assets, etc.

Ø  Creditors are treated in the same manner regardless of the nationality.

Ø  Korea is not a signatory to any relevant international treaties. DRBA is modeled on the UNCITRAL Model Law on Cross Border Insolvency 1997.

38

39

Recognition of Korean Insolvency Proceeding in Foreign Jurisdictions

Ø  Case Study: Rehabilitation Proceeding Involving Korea Line Corp. (“Korea Line”)

–  January 25, 2011: Korea Line applied for rehabilitation in Korea under DRBA.

–  January 26, 2011: the Korean Court received the application and issued the order prohibiting the attachment and execution of Korea Line’s property and the transfer of Korea Line property and leasing assets.

–  Under Korean law, any attachment or execution of Korea Line assets made after the issuance of such order is deemed void.

–  February 15, 2011: the Korean Court issued an order commencing the rehabilitation proceeding with respect to Korea Line.

–  Accordingly, new attachments by creditors over the properties of Korea Line were prohibited (Supreme Court of Korea, April 23, 2004, 2003 da 6789).

39

40

Recognition of Korean Insolvency Proceeding in Foreign Jurisdictions (cont’d)

Ø  In the event a stay order is rendered under the DRBA, creditors are prohibited from attaching or enforcement against the assets of a debtor.

Ø  Under Article 58(1) of the DRBA, if a commencement order for rehabilitation is rendered in respect of a debtor, the creditors may not proceed with enforcement against the assets of the debtor.

Ø  Reasoning in pari passu, i.e., like creditors should be treated alike (Articles 218, 243 of the DRBA).

Ø  In principle, under Korean rehabilitation procedures, creditors may only obtain satisfaction of claims pursuant to a rehabilitation plan.

40

41

Recognition of Korean Insolvency Proceeding in Foreign Jurisdictions (cont’d)

Ø  Recognition of Stay/Preservation Order in Foreign Jurisdictions

–  Korean Court’s stay/preservation order on Korea Line’s assets was recognized in Canada, US, Japan, South Africa, Mexico, Australia and Japan (countries which adopted the UNCITRAL Model Law on Cross Border Insolvency 1997).

–  Afforded considerable protection from enforcement against the ships owned and chartered by Korea Line which travelled all over the world.

–  C.f. Belgium

41

42

Issues Due to Having Rehabilitation Proceeding in Korea and a Judicial Auction Outside Korea

Ø  Case Study: Co-existence of rehabilitation proceedings in Korea and the j

udicial sale of the vessel in Belgium [SPV Sam Dragon Inc v. GE Transpor

tation Finance (Ireland) Limited].

42

43


Ø  Facts:

–  Plaintiff: SPV Sam Dragon, company incorporated under the laws of Panama, owner of the M/V Sam Dragon (formerly, M/V Pretty Flourish, the “Vessel”).

–  Vessel: previously owned by Samsun Logix Corporation (“Samsun”), a Korean company involved in the rehabilitation process.

–  Defendant: GE Transportation Finance (Ireland) Limited (“GETF”), financial service company incorporated in Ireland.

–  Sept 30, 2006: GETF entered into a US$35m loan facility agreement with Samsun which at the time was the owner of the Vessel. The Vessel was registered on the Korean Shipping Register. Security for the loan facility included a mortgage on the Vessel.

–  Feb. 6, 2009: Samsun filed an application to commence rehabilitation, proceedings were filed, and the preservation order was issued.

–  Feb. 13, 2009: Samsun defaulted in making a monthly repayment on the ship’s mortgage and under the terms of the mortgage.

43

44


Ø  Jan ~ Feb., 2009, the Vessel was arrested in the Port of Ghent, Belgium by various creditors of Samsun for the aggregate amount of approx. US$51.5million.

Ø  March, 2009: Rehabilitation proceedings commenced in Korea.

Ø  Uncertainty as to what would happen in the event no scheme of arrangement was approved by court and Samsun went into bankruptcy. Defendant did not voluntarily vacate the mortgage entry/charge on the Korean Shipping Register until such time it received the proceeds of sale of the Vessel pursuant to the judicial sale in Ghent.

Ø  April 1, 2009: Conservatory Arrest Order on the Vessel granted in Belgium. Vessel sold to SPV Sam Dragon by way of judicial auction in Belgium.

44

45


Ø  January 5, 2010: the Jeju District Court in Korea refused an application of Samsun (the original owners of the Vessel) for deregistration of the Vessel from the Korean Shipping Registry on the ground that: (a) the preservation order made by the rehabilitation court; and (b) the mortgage had not been cancelled.

Ø  June 8, 2010: final order made by the Belgium court concerning the distribution of proceeds to GETF.

Ø  July 24, 2010: the appeal period from the final court order to the distribution of proceeds of sale of the Vessel expired.

Ø  August 31, 2010, the entry on the mortgage on the Korean Shipping Register was deleted per the consent of GETF.

45

46


Ø  Plaintiff’s Claim

–  Cause of action included misrepresentation, abuse of right, and infringement on Plaintiff’s liberty to exercise property rights.

–  Claimed damages and expenses incurred by it in registering the Vessel in Hong Kong Shipping Register on the ground that the additional charges arose as a result of GETF’s failure to comply with the Plaintiff’s request to remove the entry of the mortgage from the Korea Shipping Register.

46

47


Ø Main Issue in Dispute

–  Did the mortgagee of the Vessel have a legal duty to:

(1)  make any representation or to warrant accuracy at the time of the Vessel arrest; or

(2)  take affirmative steps to delete the entry of the mortgage on the Korean Shipping Register while there has been a judicial sale in a country other than the country of registration

47

48


Ø  Our opinion under Korean law:

-  GETF was entitled to mortgage enforcement via judicial auction purely to exercise its right as mortgagee.

-  Unlike in a private ship sale, GETF had no obligation to make any type of representation, warranty or declaration to other parties in the judicial auction.

-  GETF had no obligation to represent that it had accepted its legal claim against the Vessel would be transferred to the sale proceeds by the effect of the judicial auction.

-  If the new owner (buyer) intended Korea to be the flag country of the said vessel, the Korean court would, upon completion of the sale, order the Korean Ship Registry to: (a) delete any pre-existing mortgages and encumbrances from the vessel’s entry on the ship register; and (b) enter the name of the buyer as the new registered owner of the vessel.

-  It would then be open to the buyer to take steps to transfer the vessel to another flag, if it wished to do so.

48

49


Ø  Ruling

–  Applicable Law: Per Art. 4(3) Rome II Regulation (Regulation (EC) No. 864/2007) “Where it is clear from all the circumstances of the case that the tort/delicit is manifestly more closely connected with a country other than [the law of the country in which the damage occurred or where the person claimed to be liable and the person sustaining damage both have their habitual residence]… the law of that country shall apply.”

–  Korean law applied (i.e., alleged wrong arising out of the failure to delete the entry of the mortgage from the Korean Shipping Register is mostly connected with Korea).

49

50


Ø  Under Korean law, GETF’s stance would be upheld, i.e., in judicial sale, a mortgagee would not be expected to cooperate in removing the entries from the Shipping Register where the ship had formerly been registered.

Ø  The burden would be on the new owner to sort out on the basis that the mortgage would have been extinguished by the judicial sale.

Ø  Supported by International maritime practice [Thomas on Maritime Liens -1989 (Vol. 14 British Shipping Laws)]: “A sale by order of a court of competent jurisdiction in proceeding in rem operates to extinguish all liens attaching to the res and to convey a valid title to the purchaser free of encumbrances and good against the whole world”.

Ø  Mortgagee would never been asked to delete its mortgage from a Shipping Register in circumstances where there was a judicial sale.”

50

51

Application of Stay/Preservation Order on SPCs

Ø  Whether the protection from asset enforcement would apply to companies other than the debtor company under rehabilitation proceeding in Korea (SPCs/one-ship companies).

Ø  Separate entity vs. alter ego theory

51

52

Lynn P. Harrison 3rd

Partner – New York

53

Overview of U.S. Bankruptcy Law

Ø  Types of bankruptcy proceedings available for corporate debtors of Title 11 of The United States Code, as enacted (the “Bankruptcy Code”):

–  Liquidation (Chapter 7)

–  Reorganization (Chapter 11)

–  Ancillary and Cross-Border Proceedings (Chapter 15)

Ø  Maritime debtors most commonly file for Chapter 11 or Chapter 15 protection.

54

Chapter 15 – Ancillary and Cross-Border Proceedings

Ø  Chapter 15 was enacted in 2005 and modeled after the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency.

Ø  Chapter 15 is an ancillary proceeding for debtors that are already in bankruptcy or insolvency proceedings outside of the U.S. who seek to protect their assets located within the U.S.

Ø  Objectives of Chapter 15:

–  Cooperation between courts of the U.S. and foreign countries;

–  Greater legal certainty for trade and investment;

–  Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors;

–  Protection and maximization of the value of a foreign debtor’s assets; and

–  Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

55

Chapter 15 – Ancillary and Cross-Border Proceedings (cont’d)

Ø  A Chapter 15 proceeding is commenced upon the filing of a petition for recognition of a foreign insolvency proceeding with a U.S. Bankruptcy Court.

Ø  By granting recognition of a foreign insolvency proceeding, a U.S. Bankruptcy Court may assist a foreign court by enforcing orders that affect or involve the debtor’s assets located in the U.S., or provide any other assistance consistent with the principles of comity.

Ø  The Bankruptcy Court may also grant provisional relief for the period after the filing date and before the date of recognition.

56

Chapter 11 – Reorganization

Ø  The main purpose of Chapter 11 is to allow a business to reorganize its debts and continue to operate rather than liquidate. However, some companies have filed under Chapter 11 with the intent to liquidate in order to avoid the appointment of a trustee that would otherwise accompany a Chapter 7 filing.

Ø  Instead of a trustee, generally the debtor (as a “debtor-in-possession”) continues to control the company and operate the business.

Ø  A Chapter 11 Plan of Reorganization provides for distributions to be made to creditors and is accompanied by a disclosure statement, which details the new structure (if any) of the company when it emerges from bankruptcy.

57

Chapter 11 vs. Chapter 15 Protection in the U.S.

Ø  Under Chapter 11, management remains in place to run the debtor company, while under Chapter 15, management is subject to insolvency regime existing in the foreign jurisdiction where the main proceeding is pending.

Ø  Certain advantages are provided to Chapter 11 debtors that are not available to Chapter 15 debtors, e.g., the power to pursue avoidance actions under the Bankruptcy Code.

Ø  The bar for becoming a debtor under Chapter 11 is relatively low - an international debtor need only demonstrate that it has a minimal amount of property located in the United States. In re Aerovias Nacionales de Colombia S.A., 303 B.R. 1 (Bankr. S.D.N.Y. 2003). –  In In re Global Ocean Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 2000), the

court held that a few thousand dollars in a bank account and the unearned portions of retainers provided to local counsel constituted property sufficient to qualify as a Chapter 11 debtor.

–  Recently, the Bankruptcy Court for the Southern District of New York held in the Marco Polo Seatrade BV case that the working capital reserve maintained by Marco Polo's New York-based pool manager and the unused fee retainer held by the debtor’s professionals comprised sufficient property in the U.S. to sustain Chapter 11 jurisdiction.

58

Requirements for Recognition of a Foreign Proceeding

Section 1517 of the Bankruptcy Code provides for recognition of a foreign proceeding where:

Ø  the foreign proceeding is a foreign main or foreign nonmain proceeding; —  Section 1517(b) of the Bankruptcy Code mandates that the court

recognize the foreign proceeding “(1) as a foreign main proceeding if it is pending in the country where the debtor has the center of its main interests [COMI]; or (2) as a foreign nonmain proceeding if the debtor has an establishment within the meaning of section 1502 in the foreign country where the proceeding is pending.”

—  “Establishment” is defined in section 1502(2) of the Bankruptcy Code as “any place of operations where the debtor carries out a nontransitory economic activity.”

Ø  the petition for recognition was filed by a foreign representative; and Ø  the petition satisfies all of the requirements under section 1515 of the

Bankruptcy Code. —  Section 1515 outlines certain documentation requirements relating to the

petition for recognition.

59

Ø  COMI, the “center of main interest,” determines whether a proceeding qualifies as a foreign main or foreign nonmain proceeding and thus will qualify for recognition under Chapter 15.

–  Section 1516(c) states that “[i]n the absence of evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor's main interests,” creating a rebuttable presumption that COMI is the location of the debtor’s registered office.

–  Courts have noted, however, that the foreign representative bears the burden of establishing COMI. See Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. 63, 80 (Bankr. S.D.N.Y. 2011); In re Bear Stearns High–Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 128 (Bankr. S.D.N.Y. 2007).

Ø  The relevant date for the determination of COMI is the date of commencement of the foreign proceeding. Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. at 75.

Center of Main Interest (COMI)

60

Center of Main Interest (COMI) (cont’d)

Ø  Courts have considered the following factors in determining COMI: –  Location of debtor’s headquarters; –  Location of debtor’s managers; –  Location of debtor’s primary assets; –  Location of a majority of debtor’s creditors or creditors who would be

affected; –  Jurisdiction whose law would apply to most disputes; and –  Whether the COMI would be “ascertainable to third parties.”

Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. at 76. Ø  Many courts have also held that COMI should be “ascertainable by third parties.”

See In re Betcorp Ltd., 400 B.R. 266, 291 (Bankr. D. Nev. 2009); In re Bear Stearns High–Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 129 (Bankr. S.D.N.Y. 2007); In re Basis Yield Alpha Fund (Master), 381 B.R. 37, 47 (Bankr. S.D.N.Y. 2008).

61

Foreign Proceedings Granted Recognition Under Chapter 15

Korea: Ø  In re Korea Line Corp, Case No. 11-10789 (REG) (Bankr. S.D.N.Y.

Apr. 20, 2011). Ø  In re Daewoo Logistics Corp, Case No. 09-B-15558 (BRL) (Bankr. S.D.N.Y.

Oct. 21, 2009). Ø  In re TriGem Computer, Inc., Case No. 2:05-bk-50052-TD (Bankr. C.D. Cal.

Dec. 7, 2005). Ø  In re Ho Seok Lee, Case No. 06-40043 (Bankr. W.D. Wash. May 25, 2006). Japan: Ø  In re Elpida Memory, Inc., Case No. 12-10947 (Bankr. D. Del. Apr. 24, 2012). Ø  In re Iida, Case No. 06–00376 (RJF) (Bankr. D. Hi. Jul. 14, 2007). China: Ø  In re China Med. Techs., Inc., Case No. 12-13736 (REG) (Bankr. S.D.N.Y.

Oct. 11, 2012).

62

Considerations for Shipping and Maritime Debtors in the U.S.

Ø  The Automatic Stay

–  After a Chapter 11 case is filed, section 362 of the Bankruptcy Code provides for the automatic implementation of a stay prohibiting any action against any property of the debtor’s estate.

–  While section 1520 of the Bankruptcy Code does provide a stay, it is only granted upon recognition of a foreign main proceeding. Further, the stay is only applicable with respect to property of the debtor within the jurisdiction of the United States. See In re Pro-Fit Holdings Ltd., 391 B.R. 850, 864 n. 48 (Bankr. C.D. Cal. 2008).

–  If the foreign proceeding is pending in a jurisdiction that is not the debtor’s COMI, then the stay may be imposed upon the request of the foreign representative of the debtor.

63

Considerations for Shipping and Maritime Debtors in the U.S. (cont’d)

–  The Power of U.S. Courts to Adjudicate Maritime Liens

•  The issue of which court has authority to adjudicate maritime liens when a shipping company has filed for protection under the Bankruptcy Code has been the subject of much discussion.

•  Bankruptcy courts do have the authority to determine the validity and priority of maritime liens. See In re Topgallant Lines, 154 B.R. 368 (S.D. Ga. 1993); U.S. v. ZP Chandon, 889 F.2d 233 (9th Cir. 1989).

•  Bankruptcy courts do not have the authority to approve the sale of a debtor’s vessels “free and clear” of maritime liens.

64

Considerations for Shipping and Maritime Debtors in the U.S. (cont’d)

–  Recently, in In re Millennium Seacarriers, Ltd., the Second Circuit Court of Appeals held that the bankruptcy court’s subject matter jurisdiction under 28 U.S.C. § 1334 “extends to vessels that have not been arrested within the court's jurisdiction…” 419 F.3d at 85.

•  However, the determining factor in Millennium was that the lienors consented to the jurisdiction of the bankruptcy court because they litigated their claims before the bankruptcy court, and thus the decision in Millennium is not treated as definitive on the issue.

•  The Second Circuit Court of Appeals also states in the Millennium opinion that “[t]raditional admiralty principles suggest that only a federal admiralty court acting in rem” can “conclusively” extinguish maritime liens. Id. at 92.

Issues in Cross-Border Shipping & Maritime Bankruptcies

Documents

Transcript of Issues in Cross-Border Shipping & Maritime Bankruptcies