In June 2023, we outlined the law on the judicial sale of ships in Australia using the Federal Court of Australia case involving the ship "Yangtze Fortune" (Vessel) as an example. Since then, the Court has handed down its judgment on the distribution of the Vessel's sale proceeds. Significantly, the Court ruled that the registered owner of the Vessel, Soar Harmony Shipping Ltd (Soar Harmony), was able to claim against the proceeds of the Vessel's judicial sale.
In this article, we consider the background to and reasoning behind the Court deciding that Soar Harmony's claim should succeed thereby allowing it to receive a distribution from the proceeds of the judicial sale of its own vessel.
Procedural background to the decision
On 20 December 2022, following an application by Dan-Bunkering (Singapore) Pte Ltd (Dan-Bunkering), the Court made orders for the sale of the Vessel. The Vessel was sold in March 2023. Following payment from the fund of the costs of the arrest and sale and the undisputed priority claims of the crew, approximately US$4,700,000 and AU$40,000 remained for distribution.
On 16 March 2023, the Court ordered the publication of a notice of application to determine priorities from the sale proceeds, requiring anyone with a claim against the proceeds to file and serve a statement of claim in the proceedings by a certain date.
2 parties filed statements of claim in order to press their claims against the fund. These parties were:
- Australasian Global Exports Pty Ltd (Global Exports), who had also issued a writ against the ship on 9 November 2022 claiming an amount in damages for breach of a booking note
- Soar Harmony, the registered owner prior to the completion of the judicial sale.
The mortgagee of the Vessel, the Export-Import Bank of China, and another supplier of bunkers, China Merchants Energy Trading (Singapore) Pte Ltd, also made claims. However, the former ultimately discontinued its claim, while the latter filed its claim out of time and was refused leave to proceed out of time.
On 25 January 2024, judgment was entered for Soar Harmony and Global Exports. Dan-Bunkering relied on its default judgment made on 23 December 2022 following the orders for the sale of the Vessel.
The relevance of Global Exports and Soar Harmony seeking judgment against the fund, and Dan-Bunkering having obtained a judgment against the Vessel before it was sold, is that no claim can lead to a payment of the proceeds of a judicial sale unless the claimant has recovered a judgment in rem against the vessel which was served with a writ and arrested, or a judgment against the fund which stands in its place (as demonstrated in Opal Maritime Agencies Pty Ltd v Skulptor Konenkov [2000] FCA 507; 98 FCR 519 at [29] per Black CJ, Cooper and Finkelstein JJ).
The focus of this article is on the decision by the Court to enter judgment for Soar Harmony in relation to its in rem claim against the Vessel and consequently, the sale proceeds fund.
Soar Harmony's claim against the Vessel
Soar Harmony's claim against the Vessel was advanced on the basis that it had bareboat chartered the Vessel to Yangtze Fortune Co Ltd (Yangtze Fortune) which failed to pay the charter hire from the 20th instalment onwards. Soar Harmony claimed the unpaid hire for the 20th, 21st and 22nd instalments totalling $US2,066,525.72, all of which became due and payable before it terminated the charter and before the Vessel was sold by judicial auction.
Soar Harmony expressed its claim to be a general maritime claim within the meaning of section 4(3) of the Admiralty Act 1988(Cth) (Act) and relied on section 18 of the Act for the basis of its claim. Section 4(3)(f) of the Act provides that a general maritime claim includes:
"A claim arising out of an agreement that relates to the carriage of goods or person by a ship or to the use or hire of ship, whether by charterparty or otherwise."
On this basis, Soar Harmony argued, because of the bareboat charter arrangement it had with Yangtze Fortune, its claim was one "arising out of an agreement" between it and Yangtze Fortune, "relat[ing]...to the use or hire of a ship", albeit its own ship.
Section 18 of the Act states:
"18 Right to proceed in rem on demise charterer's liabilities
Where, in relation to a maritime claim concerning a ship, a relevant person:
(a) was, when the cause of action arose, the owner or charterer, or in possession or control, of the ship; and
(b) is, when the proceeding is commenced, a demise charterer of the ship;
a proceeding on the claim may be commenced as an action in rem against the ship."
Accordingly, as the Court explained, section 18 requires the parties to prove a connection between the relevant person (the debtor in personam) and the vessel at 2 distinct points in time. First, when the cause of action arose, and second, when the proceeding was commenced. It is the latter that was relevant to Soar Harmony's claim.
While both Global Exports and Dan-Bunkering argued that allowing Soar Harmony, as the owner of the Vessel at the time and beneficial owner to the proceeds of sale, to commence a proceeding against its own vessel would be highly unjust, both parties acknowledged that if Soar Harmony could establish the requirements of section 18, then it was entitled to commence an action against the Vessel. The Court agreed.
In other words, provided Soar Harmony could establish that its claim was a general maritime claim under the Act and met the requirements of section 18, specifically that Yangtze Fortune, as the in personam debtor, was the demise charterer of the ship when Soar Harmony commenced its action against the Vessel, it was entitled to an action in rem against the Vessel.
Was Soar Harmony's claim a general maritime claim?
Global Exports argued that Soar Harmony's claim for the unpaid charter hire did not relate to the "use or hire of a ship". Instead, it argued that the relationship between the parties was a sale and lease-back transaction whereby the ultimate purpose of the bareboat charterparty arrangement between the parties was to facilitate the repayment of a loan agreement between Soar Harmony and Yangtze Fortune under the guise of a demise charter in which upon expiry of the charter period, the Vessel was to be sold back and returned to its original owner, Yangtze Fortune.
The Court concluded that there was no credible basis on which it could be concluded that the charter did not operate as an agreement for the use and hire of the Vessel during its term, or that Soar Harmony's claim was not a claim arising out of that agreement. On its terms, the agreement between Soar Harmony and Yangtze Fortune was undoubtedly an agreement that "relates to" "the use or hire" of the Vessel and included all the usual bareboat charter terms with regards to the owners' and charterers' respective responsibilities, term, hire, cancellation, maintenance, insurance indemnities etc.
Therefore, the Court was satisfied that Soar Harmony's claim was a general maritime claim for the purpose of the Act.
Was Yangtze Fortune the bareboat charterer when Soar Harmony commenced its proceeding?
Soar Harmony commenced its proceeding on 10 March 2023. Accordingly, Soar Harmony had to establish that Yangtze Fortune was the bareboat charterer on this date.
Dan-Bunkering and Global Exports both contended that the demise charterer had been terminated prior on the basis that Yangtze Fortune had terminated the charter by email to Soar Harmony on 11 November 2022 or alternatively, Soar Harmony had accepted repudiatory conduct by Yangtze Fortune before it commenced its proceeding against the Vessel. Global Exports also attempted to argue that Yangtze Fortune had lost possession of the Vessel before 10 March 2023 and was therefore no longer the demise charterer at the relevant time.
The Court rejected these arguments and ultimately found that Yangtze Fortune was the demise charterer at the time Soar Harmony commenced proceedings on 10 March 2023.
Was Soar Harmony's claim enforceable against the fund?
The final question to be decided was whether Soar Harmony's claim was enforceable against the fund. Relevantly, Global Exports contended that Soar Harmony's claim could not be validly pursued because it had not served its writ on the Vessel, rather, it had served its writ on the Federal Court Registry. According to Global Exports, this meant the jurisdiction of the Court had not been invoked.
The Court dismissed this argument and concluded that the relevant question was not whether the jurisdiction of the Court was invoked, but when a claimant's statutory right of action in rem became effective, or crystallised, such that it transferred to the fund of the sale of the ship. Relying on established case law, the Court held that this occurs when the writ is issued. As a result, Soar Harmony had an enforceable claim against the fund.
Decision and distribution of the funds
For the reasons above, the Court granted judgment for Soar Harmony against the fund and ordered distribution between all the claimants, who were of the same class and ranked equally without preference.
Key takeaway
This case is significant because it is the first time in Australia that a registered owner has successfully claimed against the judicial sale proceeds of its own vessel.
While it may seem a curious, or even, an unjust result, Soar Harmony was able to claim against the Vessel because it established that its claim was a general maritime claim and fell within the parameters of section 18 of the Act. The settled position is that "once the requirements for an action in rem under section 18 have been established, there is no discretion available to the Court to dismiss or not recognise the claim." Accordingly, all that was left was for the Court to decide was that by issuing its claim, Soar Harmony had an enforceable claim against the proceeds of the judicial sale of the Vessel and could therefore participate in the distribution of the funds.
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