1. International Conventions

By virtue of Sections 12B-12E of the High Court Ordinance ("HCO"), and with a number of exceptions, the provisions of the International Convention Relating to the Arrest of Seagoing Ships, Brussels, 10 May 1952 (the "1952 Convention") now apply in Hong Kong.

2. Orders for sale

Probably the first piece of advice a lawyer will offer to a client when a shipowner is defaulting in some way will be to arrest and sell the ship. However, it is not as simple as that and there are different routes which can be followed.

An order for sale can be of two types:

(i) pendente lite; or

(ii) order upon judgment.

The first is the more common form of judicial sale. Before the order is granted, an admiralty action in rem must have been commenced by the claimant, a writ served on the vessel and the vessel arrested. The court also has jurisdiction to enforce a foreign judgment or arbitral award. A claimant who has such a judgment or award may either:

a. commence a fresh action in rem based on the original cause of action, arrest the vessel and proceed to a judicial sale; or

b. he may register the foreign judgment or sue upon the judgment at common law if registration is not possible and, having entered judgment, issue a writ of fieri facias, possibly obtaining an interim injunction beforehand. Selling a vessel in one of these two ways is relatively unusual. This paper will therefore focus on arresting and selling a vessel pendente lite.

3. Locating the vessel

It is first necessary to locate the vessel before deciding whether to arrest it then and there, or wait until the vessel arrives at a more convenient jurisdiction. There are various ways in which it is possible to monitor the movements of the vessels. Lloyds MIU has a computerised tracking system which is updated by reports from Lloyds Agents throughout the world. The Marine Department in Hong Kong also publishes daily movements lists, as do many ports throughout the world. In Hong Kong, this is on the internet and is updated about every thirty minutes. It is the responsibility of the individual solicitors to keep track of the vessel, to see whether it is about to come to Hong Kong or has arrived in Hong Kong, and then to make the application for the issue of the warrant. The claimant's solicitors are under a duty to make full disclosure to the court in an ex parte (without notice) application. Such an application is made on behalf of the claimant without the attendance of the defendant or its representatives.

4. Forum shopping

The difference between the law and procedures of various jurisdictions will be important in deciding which is the most convenient forum for an arrest and sale. Important factors include the requirement that counter-security be provided as a condition of arrest, the rules as to liability for wrongful arrest, the existence of a right to seek a sale pendente lite and so on. The importance of the above factors may vary from case to case but, frequently, the most significant factors for a claimant will be simplicity, speed, cost and priority.

5. Jurisdiction

The only court in Hong Kong with admiralty jurisdiction is the High Court. The arrest is carried out by the Bailiff upon a warrant issued by order of the Registrar, both of whom are court officials. The territorial jurisdiction of the High Court extends to any vessel in Hong Kong territorial waters. An in rem writ cannot be served outside the jurisdiction of Hong Kong. It can only be served on the vessel if it enters Hong Kong, unless a defendant outside the jurisdiction decides to instruct agents or solicitors in the HKSAR to accept service of the writ of summons on its behalf or to enter an acknowledgment of service of its own accord.

6. Jurisdiction and arbitration clauses

Particular problems may arise if the contract under which the claim is pursued contains a foreign jurisdiction or arbitration clause. The mere existence of such a clause does not deprive the court of its admiralty jurisdiction. An arrest warrant will still be issued, but the burden is upon the Owner to apply to stay or strike out the proceedings prior to the time at which the defence is to be served.

It should be noted that where the claim is subject to an arbitration clause or foreign jurisdiction clause, the fact must be disclosed to the court before the arrest is ordered, otherwise the court may discharge any security obtained as a result of the arrest. However, the court may not set aside the warrant of arrest even though the claimant has failed to disclose existing proceedings in another jurisdiction, provided certain procedural rules have complied with.

If the contract contains an arbitration clause which provides for arbitration in Hong Kong between parties who are either Hong Kong nationals, habitually resident in Hong Kong, or bodies incorporated in, or whose central management and control is exercised in, Hong Kong, the court has a discretion whether to stay the proceedings. If, however, it is not a domestic arbitration agreement, under the Arbitration Ordinance, the court must stay the proceedings. A defendant in HKSAR proceedings wishing to pursue a dispute by way of arbitration must acknowledge service of the writ, indicating that it is contesting the court's jurisdiction but ensuring that it takes no further step in the proceedings, otherwise it will be treated as having submitted to the court's jurisdiction.

However, staying the proceedings is separate from releasing the vessel, where the court has a discretion. If the claimant can show that the arbitral award is unlikely to be satisfied, the court may allow the arrest to stand, or order release subject to the provision of adequate security.

Similarly, where the contract contains a clause providing for the jurisdiction of a foreign court, the court will normally stay the proceedings unless strong cause for not doing so is shown, but has a discretion with regard to releasing the vessel. A defendant opposing the court's jurisdiction has the burden to apply for a setting aside of the writ or a stay of proceedings within the period stipulated in by the RHC.

Further arguments may also arise if the claimant has already taken steps to commence proceedings in a foreign jurisdiction before taking action in Hong Kong. A claimant who commences proceedings in an alternative jurisdiction in breach of a contractual jurisdiction clause may be held to have waived its right to rely on an exclusive jurisdiction clause.

7. Maritime liens

The development in Hong Kong law of the admiralty jurisdiction of arrest is historically linked to the maritime lien. The first comprehensive and concise definition of a maritime lien was given by Sir John Jervis in the "Bold Buccleugh". He wrote as follows: "... a maritime lien is well defined ... to mean a claim or privilege upon a thing to be carried into effect by legal process by a proceeding in rem ... This claim or privilege travels with us in to whatsoever possession it may come. It is inchoate from the moment the claim or privilege attaches, and, when carried into effect by legal process by a proceeding in rem, relates back to the period when it first attached". However, no definition of a maritime lien exists either in the domestic legislation of Hong Kong or in any source of international law. Similarly, no Ordinance in Hong Kong law lists the maritime liens, which are only to be found in the decisions of the Admiralty Court. The very limited number of maritime liens which Hong Kong law recognises are:

(i) salvage;

(ii) collision damage;

(iii) seaman's wages; and

(iv) Master's wages and "disbursements on account of a ship".

A maritime lien is defeated by the destruction of the ship, cargo or freight to which it has attached or by a judicial sale or, finally, when time-barred. Maritime liens are considered to be "secret" interests since no provision for their registration is made. Accordingly, there are standard clauses in ship sale contracts which oblige sellers to indemnify buyers in relation to the exercise of maritime liens.

8. Claims for which you can arrest

The list of admiralty claims has been what might be regarded as a growth industry. Once only the maritime lien allowed the right to the action in rem, i.e. the right to arrest the asset. The right to arrest is enshrined in Hong Kong law. Although ships are normally the object of arrest, cargo, freight and bunkers may also be arrested. The list of claims generating a statutory right of arrest is as follows:

(a) any claim to the possession or ownership of a ship or to the ownership of any share therein;

(b) any question arising between the co-owners of a ship as to possession, employment or earnings of that ship;

(c) any claim in respect of a mortgage of or charge on a ship or any share therein;

(d) any claim for damage received by a ship;

(e) any claim for damage done by a ship;

(f) any claim for loss of life or personal injury sustained in consequence of any defect in a ship or in her apparel or equipment, or in consequence of the wrongful act, neglect or default of (i) the owners, charterers or persons in possession or control of a ship; or (ii) the master or crew of a ship, or any other person for whose wrongful acts, neglects or defaults the owners, charterers or persons in possession or control of a ship are responsible; being an act, neglect or default in the navigation or management of a ship, in the loading, carriage or discharge of goods on, in or from the ship, or in the embarkation, carriage or disembarkation of persons on, in or from the ship;

(g) any claim for loss of or damage to goods carried in a ship;

(h) any claim arising out of any agreement relating to the carriage of goods in a ship or to the use or hire of a ship;

(i) any claim in the nature of salvage;

(j) any claim in the nature of towage in respect of a ship or an aircraft;

(k) any claim in the nature of pilotage in respect of a ship or an aircraft;

(l) any claim in respect of goods or materials supplied to a ship for her operation or maintenance; (Note: This claim is in respect of what are commonly described as 'necessaries', namely bunker fuel, repairs, spare parts, paints and the like);

(m) any claim in respect of the construction, repair or equipment of a ship or dock charges or dues;

(n) any claim by a master or member of the crew of a ship for wages (including any sum allotted out of wages or adjudged by a superintendent to be due by way of wages);

(o) any claim by a master, shipper, charterer or agent in respect of disbursements made on account of a ship;

(p) any claim arising out of an act which is or is claimed to be a general average act;

(q) any claim arising out of bottomry;

(r) any claim for the forfeiture or condemnation of a ship or of goods which are being or have been carried, or have been attempted to be carried, in a ship, or for the restoration of a ship or any such goods after seizure, or for droits of Admiralty; and

(s) any claim arising under Section 7 of the Merchant Shipping (Prevention and Control of Pollution) Ordinance (Cap 413).

9. Preconditions to an arrest

Generally, the only requirement is that the claim falls within the HCO, meaning that it is either a maritime lien or a claim giving rise to a statutory right of arrest. However, in the case of claims falling within Section 12A(2)(e) to (q) of the HCO, the additional conditions laid down in Section 12B(4) must also be met.

The existence of a right of arrest depends on when the cause of action arose, as well as when the writ in rem is issued. Section 12 B(4) in essence provides that an action in rem may only be brought against a vessel which, at the time the cause of action arose, was owned, chartered, or in the possession or control of the person who would be liable in an action in personam and further that that person must be the beneficial owner of the vessel named in the writ (whether or not it is the same vessel or a sister ship) or the demisecharterer of the same vessel at the time the writ is issued.

10. The beneficial owner

One question is: what is the meaning of "beneficial owner"? In The I Congreso del Partido [1978] 1 QB 500 Robert Goff J held at 538E-F that the words "beneficial ownership" in AJA 1956 referred "only to cases of equitable ownership, whether or not accompanied by legal ownership, and are not wide enough to include cases of possession and control without ownership, however full and complete such possession and control may be." Goff's definition was approved in ITS Inc v. The Convenience Container [2007] 3 HKLRD 575. In that case Hon Stone J held at 115 that "the term "beneficial ownership" within section 12B(4) is an expression connoting title vesting in an owner with the right to sell or dispose of a vessel, and that expression connotes a situation wherein the legal and equitable interests have not been separated..." .

Generally, the Hong Kong courts are very reluctant to pierce the corporate veil, limiting it to cases of fraud and shams. The HCO refers to beneficial owners and allows the court to look at beneficial ownership, thus looking behind the legal identity of the company. However, they will not always do so. They will only do so where there is a dispute as to beneficial ownership and there is a suggestion of a trusteeship or nominee holding.

The mere fact that ships are owned in a one-ship structure is no reason to lift the corporate veil. Indeed the courts recognise the one-ship company as being a legitimate business arrangement, and it is not possible to lift the veil in the absence of fraud.

11. The charterer

The term "charterer" is not restricted to a demise charterer but can include a voyage or time charterer. A slot charterer is a voyage charterer of part of a ship. In relation to the date of termination of a demise charter, the English courts have held that this takes place when a valid notice of termination under the charterparty is given and not when physical redelivery is effected.

12. Sister ships

The HCO permits the arrest of sister ships. At the time of issuing the writ, the person liable for the claim must either be the owner or demise charterer of the ship connected with the claim or the beneficial owner of the sister ship to be arrested.

It is not open to a claimant to arrest within the jurisdiction of the Hong Kong courts any number of sister ships of the vessel in question. Although it may name any number of vessels in a writ of summons, it is only permitted to serve the writ on and arrest one vessel in relation to the same claim, whether that be the vessel in question or a sister ship.

A maritime claim gives rise to a right to arrest. However, only those maritime claims set out in Section 12A(2)(e)-(q) of the HCO can give rise to the statutory right to arrest a sister ship. Whereas a maritime lien subsists against the vessel involved regardless of a change in ownership, the sale of a sister ship results in the loss of the right to arrest that sister ship unless court proceedings were brought before the sale. Although a maritime lien usually ranks above possessory and statutory liens, it is worth noting that in an arrest of a sister ship, the claim giving rise to the lien has no favoured priority.

13. Priority of competing claims

There may be other trade creditors seeking to arrest the vessel. This often raises the question of priorities and for most creditors the critical question is: does my claim rank above the other creditors or not? What are my rights in relation to the other creditors? As to priorities, the usual order of priority in Hong Kong is:

(i) special legislative rights e.g. those given to the Marine Department to detain vessels in respect of damage to docks and non-payment of harbour dues;

(ii) Hong Kong Bailiff's charges and expenses for the arrest, detention, appraisement and sale;

(iii) legal costs and expenses of the party causing the arrest and sale up to the date for order of appraisement and sale;

(iv) possessory liens of repairer;

(v) salvage (maritime lien);

(vi) damage/collision (maritime lien);

(vii) Master/Crew wages and Master's disbursements (maritime liens);

(viii) registered mortgages; and

(ix) statutory rights in rem, such as necessaries claims, agent's claims, cargo claims, charterer's claims, towage claims, etc.

The mortgagee therefore ranks below holders of maritime liens and the costs of arrest but above other unsecured creditors.

14. Court fees & expenses

Hong Kong court fees and expenses for the arrest, detention, appraisement and sale are generally not substantial. By way of a general illustration they might, typically, be as follows:

a. port charges: about US$6.50 per 100 tonnes per day;

b. Bailiff's expenses - security guard, etc: about US$90 per day;

c. appraiser's fees: about US$5,000;

d. newspaper advertisements: about US$8,000;

e. legal costs for arresting and applying to sell: about US$15,000 - US$20,000; and

f. court commission - 1% of gross sale proceeds.

These are very approximate estimates and could alter substantially if third parties tried to interfere or object to the sale. They also do not take into consideration the issue of priorities or multiple claims against the vessel.

15. Bailiff's charges

The Bailiff may incur expenses in keeping the vessel, e.g. employment of watchmen, provision of bunkers and stores and the performance of emergency repairs and services, such as towing. The Hong Kong Marine Department also invoices the Bailiff for anchorage and moving charges in respect of vessels under arrest. Accordingly, when an application is filed for a warrant of arrest, the claimant's solicitors must file a personal undertaking to pay the Bailiff's costs of arrest, custody and release of the vessel. Moreover, the Bailiff will normally ask the claimant's solicitors to pay an initial deposit on account within a few days of the arrest being effected.

Safety is of paramount concern and the court will have to comply with directions from the Marine Department as to where the vessel should lie. During the typhoon season, special precautions will have to be taken. It is therefore worthwhile completing a sale before the typhoon season or contacting the Marine Department in advance of a vessel's arrival, so it can proceed directly to the appropriate anchorage.

It is also sometimes necessary for the Bailiff to incur expenses in improving or maintaining the ship in order to obtain the best price.

The Bailiff will not usually insure the vessel such that the claimant will have to make arrangements for insurance. However, a mortgagee may have the benefit of Owner's hull and machinery and P&I cover.

16. Possessory rights

It should also be noted that possessory rights may be exercised over the vessel, which will take priority over the claim. The Bailiff may have to pay off such claims in order to pass clean title to the buyer, and such payments will often form part of his recoverable expenses from the sale of the vessel. Particular examples of such claims might be ship repairers' claims if the ship is still in the possession of the repairers. The same may apply if the vessel is already in the Bailiff's possession pursuant to enforcement proceedings carried out by a third party creditor who has obtained judgment.

17. Damage liens

The HCO refers to "damage done by a ship". The extent of the maritime lien for damage is defined by the common law. The most obvious example of such a lien is that which arises from contact damage to one vessel in a collision with another, but also included are such matters as:

(i) claims by the owners of fixed or floating objects (e.g. piers or buoys) for contact damage caused by a vessel;

(ii) claims against one vessel for death or personal injury to passengers aboard another vessel and loss of baggage or cargo aboard that other vessel;

(iii) claims in respect of damage caused by one vessel to another vessel, or to a fixed or floating object, in circumstances where there has been no physical contact – e.g., wash damage, damage caused by pumping water overboard and damage sustained whilst taking evasive action to avoid a collision; and

(iv) claims against a vessel for oil pollution emanating from the vessel.

18. Arrest procedure

Hong Kong is a favourable jurisdiction for arrest and sale of a vessel. The court procedure is reasonably quick and can be completed in about 8 to 12 weeks depending on the availability of the court.

The first step is usually to arrest the vessel. This will require the issue of a writ, which must be served within one year of its date of issue, and preparation of a short affidavit setting out details of the claim prior to making the application for an arrest order. This can be done very quickly, within a day if all the relevant information is available.

The Registrar will then read the affidavit, and if he is satisfied that the claim is one for which it is possible to effect an arrest, he will issue a warrant of arrest. Like the writ, the warrant is valid for one year from the date of issue. If the vessel is in port, or as soon as it arrives, the Bailiff will immediately effect service of the writ of summons and the warrant of arrest on the vessel or other res.

It may often be the case that another creditor arrests the vessel and initiates the procedure for it to be sold. In such circumstances, a claimant can enter a caveat against release to prevent the vessel being released or other dealings with the arrested property taking place without its knowledge. To enter a caveat, it is not necessary to first issue a writ in rem; the procedure is very simple and only involves filing a simple form with the court. This operates as a very cost effective way for a claimant to monitor events. If the vessel is sold by the other third party, the claimant will be kept advised and will be given the opportunity to file its claim against the proceeds. If the vessel is released, a claimant will be given the opportunity to decide whether it wishes to effect a further arrest for its claim.

Prior to serving the arrest warrant, the claimant must give an undertaking that it will pay all the accrued fees and expenses of the Bailiff in respect of the arrest of the property, and its care and custody.

The ship is obliged to acknowledge service of the writ within 14 days. If it fails to do so, the claimant has the right to apply for judgment in default and for an order for appraisement and sale. Even if service is acknowledged a claimant may apply to the court at any time for an order for appraisement and sale. In case there is a late acknowledgement, given that the application for default judgment would fail if there is any bona fide defence, it is worth accompanying the application for default judgment with an application for a sale pendente lite.

19. Wrongful arrest

The owner of the arrested vessel can make a claim for damages against the claimant (i.e. the arresting party), where the claimant or its solicitor has acted in bad faith or in a grossly negligent manner. The onus of proving bad faith lies with the party alleging it and is a heavy one. Generally speaking, bad faith may be demonstrated if it can be shown that the affidavit sworn by the claimant's solicitor to lead to the warrant of arrest deliberately concealed material facts known to the claimant or its solicitor at the time the affidavit was sworn. A solicitor should therefore take care when preparing his affidavit. Provided full disclosure of all material facts is given in the affidavit, such a claim is unlikely to succeed.

20. Sale pendente lite

A sale pendente lite is a procedure which enables the vessel to be sold where otherwise it would waste. A sale can thereby be effected prior to any judgment being obtained. A sale pendente lite is not something to which a creditor has a right. He must establish before the court not only that the vessel is a wasting asset, but also that it would be just to make an order for sale. Usually, this means that a valuation will be required, together with evidence both of the condition of the vessel and the costs of maintenance.

Once the order is obtained, two appraisers are appointed, usually a shipbroker and a ship surveyor. They inspect the vessel and prepare a summary of its condition giving details, if appropriate, of the costs of bringing it up to reasonable working condition. The broker and surveyor will try to agree on a valuation. If they are unable to agree they will report to the court, whereupon the court may appoint a third person, who will fix a figure as the valuation. The court usually asks that appraisements be submitted within about 2 weeks.

The appraisements remain confidential. The Bailiff advertises the vessel for sale on 2 consecutive days inviting sealed tenders, together with bank drafts for 10% of the amount being offered. The tenders are opened on the appointed day, normally about two to three weeks after the advertisements appear, and the vessel is sold to the highest tenderer, provided the amount he offers is at least equal to the appraised value. If it is not, the court may still direct that the vessel be sold to the highest tenderer unless the mortgagee requests that the vessel be re-advertised, in which case it will have to give an undertaking to indemnify the court if subsequent tenders are lower than those obtained in the first round. Alternatively, the court itself can decide that the vessel should be re-advertised. There are also procedures available to auction a vessel. The court rarely orders the sale of vessels by public tender or by private treaty.

Normally, about 7 days after tenders are opened by the court the sale is complete with the payment of the 90% balance and the execution of a bill of sale.

The sale proceeds are retained in a court deposit account, where they earn a comparatively low rate of interest, but this can be improved by asking the court to place the monies in a 24-hour deposit account. After ordering the sale of a vessel, the court will hear and determine any question arising as to title to the proceeds of sale. Frequently, there will be a number of other claimants and it will be necessary for the claimant to try and reach agreement with them concerning the order of priority. If there is agreement between all interested parties, the Registrar may order payment out pursuant to the Rules of Court. However, if agreement cannot be reached, the court will have to be asked to make an order on priorities and direct that the proceeds of sale be paid out of court and distributed accordingly. This aspect can take some time to resolve, depending on the nature of the claims/disputes.

There are no restrictions on the export of the proceeds, and there is no tax deducted from interest earned upon funds in court. A party who buys a vessel in Hong Kong court proceedings receives a title free from all claims, liens and encumbrances arising before the date of sale.

21. Proceedings against companies in liquidation

Where a vessel is served with a writ and arrested, but winding-up proceedings against the shipowners are already under way or are subsequently commenced in Hong Kong, the action is barred from continuing by virtue of Hong Kong law, except in the circumstances outlined below. The company being wound up may be a Hong Kong company or a foreign-registered company with assets in Hong Kong.

A claimant will be granted leave to continue the action if:

(i) it is a maritime lienor or mortgagee; or

(ii) it holds a statutory lien by virtue of issuing a writ in rem prior to the date of the winding-up order.

This is to be contrasted with the situation where a ship-owning company is subject to a foreign winding-up. A foreign liquidation does not result in an automatic stay of pending Hong Kong proceedings. Moreover, it does not inhibit the subsequent issue or service of in rem writs on the vessel or its sale proceeds.

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.