Australia: When two systems collide - the intersection between cross-border insolvency protection and the Admiralty action in rem

Last Updated: 15 April 2014
Article by Dimity Maybury


When the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) was introduced into Australian law in 2008, Australian admiralty practitioners expressed concern that the legislation which enacted the Model Law into Australian law did not take into account its potential impact on the right to arrest a ship in Australia. The concern was that the Model Law would prevent parties from arresting ships in Australia, if the shipowner or charterer was the subject of foreign insolvency proceedings.

The recent Federal Court of Australia decision of Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (Receivers appointed in South Korea) [2013] FCA 680 (Yu v STX Pan Ocean) has provided some much needed clarity around this issue in Australia.

The judgment confirmed that the Model Law, as it applies in Australia, is read subject to the operation of local insolvency laws with the following consequences:

  1. the right to arrest a ship, owned or chartered by an entity (subject of foreign insolvency proceedings), to enforce an in rem common law maritime lien such as salvage, crew wages or claims for damage done by a ship, is not extinguished even where the foreign insolvency proceedings have been recognised as "foreign main proceedings" under the Model Law; and
  2. the Court did not consider other statutory in rem claims, so it still remains unclear whether these are extinguished in the event there are existing foreign insolvency proceedings.
  3. As a practical matter, the Court also decided that:

  1. the issue of a warrant to arrest any ship owned or chartered by the entity, subject of foreign insolvency proceedings, is to be dealt with by a judge of the Federal Court of Australia, not the admiralty marshal, and may require leave of the court to proceed; and
  2. at the time of making the arrest application, the applicant must also make full disclosure that the foreign insolvency proceedings have been recognised under the Cross-Border Insolvency Act 2008 (Cth) (Cross-Border Insolvency Act) and draw the terms of any judgment to the court's attention.


On 17 June 2013, the plaintiff was appointed receiver of STX Pan Ocean Co Ltd (South Korea), a South Korean dry bulk shipping line, by the Seoul Central District Court, Bankruptcy Department. In the proceedings before the Federal Court of Australia, the foreign receiver sought the following relief:

  1. the South Korean rehabilitation proceedings to be recognised as a "foreign main proceeding" pursuant to Article 17 of Model Law; and
  2. the appointed South Korean receiver to be recognised as a "foreign representative" within the meaning of Article 2 of the Model Law.

The foreign representative of STX Pan Ocean also sought additional relief pursuant to Article 21 of the Model Law, for the administration and realisation of all of STX Pan Ocean assets located in Australia to be handed over to him. The additional relief sought was essentially for the purpose of preventing the arrest of STX Pan Ocean's ships calling into Australia, which could compromise a successful re-organisation of the business necessary to preserve the company.

The Federal Court of Australia recognised the South Korean rehabilitation proceedings as a foreign main proceeding and recognised the South Korean receiver as a foreign representative within the meaning of the Model Law.

However, in relation to the additional relief sought, the issue before the Court was whether maritime claimants should be able to exercise their in rem rights by arresting a ship in Australia, where the cross-border insolvency regime applies.

The Application of the UNICTRAL Model Law to the Action in rem

The Model Law is enacted into Australian law pursuant to Schedule 1 of the Cross-Border Insolvency Act. Upon recognition by an Australian court of a foreign main proceeding, Article 20 of the Model Law is engaged with the consequence that an automatic stay is imposed against the commencement or continuation of proceedings and enforcement against the debtor's assets.

The policy of the cross-border insolvency regime aims to provide a universal approach for protecting the debtor's assets for the benefit of the debtor's creditors. The recognition of the rehabilitation proceedings as a "foreign main proceeding" under the Model Law, is therefore likely to impact the ability of creditors to exercise their rights against the debtor's business and assets in Australia, including in rem rights to arrest the debtor's ships.

Nevertheless, Article 20 of the Model Law, as applied in Australia, is subject to local insolvency laws including the relevant provisions of the Corporations Act 2001 (Cth) (Corporations Act). The Corporations Act gives the court a wide discretion to vary or lift the automatic stay, depending on the differing circumstances.

In the context of domestic insolvency proceedings, it has been held that the arrest and subsequent sale of a ship is not characterised as "a process of execution". Therefore, although the leave of the court to proceed in the Admiralty jurisdiction after the insolvency of the debtor is required, the right to arrest a ship is usually forthcoming, particularly in circumstances where the in rem writ was issued before presentation of a petition for winding up.

However, the Model Law does not define the term "execution". In considering whether the additional relief sought under Article 21 of the Model Law was appropriate in light of the fact that (i) the debtor has no permanent assets in Australia, and (ii) such assets that may be subject to the order are ships, the Court was mindful of the interaction between protecting the interest of the creditors under insolvency law and rights available under Admiralty jurisdiction. If the additional relief sought by the South Korean receiver was granted, this would have had adverse consequences for creditors seeking to arrest a ship in Australia to obtain security for their claims.

The Court emphasised that, as the Model Law is to be read subject to the operation of local insolvency laws, the recognition of a foreign main proceeding does not alter the power of the court to grant leave to commence a proceeding, or an enforcement process in appropriate circumstances and for the preservation of secured creditors rights' under the Corporations Act.

Ultimately, the Court found that enforcement of a common law based maritime lien (such as salvage, crew wages and claims for damage done by a ship) falls within the scope of the Corporations Act and, therefore, the rights of the secured creditors to enforce their in rem claims are not affected by the application of the cross-border insolvency regime.

However, the Court did not consider the rights of other statutory maritime claimants (that is, those claimants with general maritime claims or proprietary maritime claims under section 4 of Australia's Admiralty Act 1988 (Cth)) and whether such maritime creditors will be similarly able to exercise their in rem rights against the foreign debtor's ships.

Implications for creditors in Australia

  1. Treatment of common law based maritime lien vs statutory general maritime claims

In Yu v STX Pan Ocean, the Court emphasised that a secured creditor's rights under the Corporations Act to realise, or otherwise deal with, their security is preserved even where the cross-border insolvency regime applies. On this basis, the Court held that common law based maritime lien holders are allowed to exercise their rights in rem to arrest a ship, owned or chartered by an entity subject of foreign insolvency proceeding with the leave of the court.

It is however unclear from the judgment whether statutory maritime claimants would be similarly treated. It appears that in such circumstances, these issues will need to be resolved by the court on a case by case basis at the time the application for an arrest warrant is sought.

Whether or not a statutory maritime claimant is able to exercise its right in rem and arrest a ship may depend on the timing of when the writ in rem was filed with the court – if it was filed prior to the commencement of the winding up of the foreign debtor, the general maritime or proprietary maritime claimant is likely to be viewed as a secured creditor and therefore not subject to the Model Law.

The timing is critical because under Admiralty law, a maritime lien attaches to the ship or other property at the time the circumstances occur which gives rise to the maritime lien, and prevails even if there is a subsequent change in ownership in the ship or property. On the other hand, a statutory right in rem only attaches upon the in rem writ being filed with the court.

  1. Increased costs and delay when arresting a ship

As a practical matter, the requirements of the court arising from Yu v STX Pan Ocean mean that it will not be possible to arrest a debtor's ship without first obtaining an order from the court where the cross-border insolvency regime applies.

While it is still possible to arrest a ship in such circumstances, maritime claimants seeking to arrest a ship should allow more time for the arrest and assume additional costs will be incurred noting that a short hearing to obtain leave from the court to arrest a ship will be necessary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Dimity Maybury
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