Reed Smith recently acted for a mortgagee client who successfully purchased a vessel at a judicial auction, following default by a borrower under a loan facility and the vessel's subsequent arrest.
Time charterers of the vessel had stemmed bunkers prior to the vessel's arrest and, as is usual, the mortgagee purchaser of the vessel paid them directly for the unburned bunkers remaining onboard. The value of the bunkers was set by the local auctioneer, with reference to local spot rates.
The mortgagee paid the auction price for the vessel into court, following which various creditors formulated claims against the sale proceeds. Time charterers put in another claim for the bunkers burned during the arrest, framing the claim as one for 'preservation costs', which attracted a higher priority ranking than the mortgage.
Time charterers' claim appeared unusually high; not as a result of the quantity of bunkers claimed, but instead as a result of the price per metric tonne claimed. Time charterers' case was that it had re-purchased the bunkers from a sub-charterer at US$650 per metric tonne, which it said was the price stipulated in the charterparty and which therefore ought to be the price for the calculation against the fund.
In addition to the high price per metric tonne claimed (for bunkers stemmed at a time when oil prices were low), the mortgagee's concerns were heightened by a number of other factors: Firstly, there was a suspicion that time charterers and voyage charterers were related. Secondly, time charterers' disclosure in relation to the claim was inadequate with them unwilling to disclose the relevant charterparty (instead trying to fob the mortgagee off with some sort of revised hire calculation). They also refused to provide details of the physical stem and the price actually paid for the bunkers.
It was only upon the mortgagee objecting to the claim that time charterers eventually made proper disclosure, showing that time charterers had stemmed the vessel at around US$544 per metric tonne just after it had sub-chartered the vessel. It had then sold the bunkers to sub charterers for US$650 per metric tonne and six weeks later re-purchased exactly the same bunkers at the same price. Time charterers then relied on that inflated price in its claim against the vessel proceeds.
Following disclosure, time charterers were very quickly persuaded to abandon their claim at the higher price (along with their claim for legal costs), representing a saving to the mortgagee and the residual fund of well over US$100,000. Had the matter fallen to be determined by the court, it would have been interesting to see the formulation of time charterers' arguments and the court's response to the contractual arrangements. Whilst the arrangements were clearly not a sham, it was clear that time charterers were content to use them to their advantage to make a 'paper profit' at the expense of the creditor fund held by the court.
Those acting on behalf of residual creditors to funds constituted from vessel proceeds of sale would do well to scrutinise claims from other creditors carefully, to weed out any sleight of hand which may operate to the detriment of their clients.
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