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High Stakes on High Seas: Reconciling Maritime and Insolvency Laws

The author is Tanishq Bhosle, a second-year student at Maharashtra National Law University, Nagpur.


Introduction


The enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) marked a significant milestone in India's legal landscape by consolidating and standardising insolvency laws nationwide. This legislation aimed to create a systematic framework ensuring fair treatment for creditors while delineating clear priorities through the waterfall mechanism. This mechanism establishes a hierarchy among creditors for debt repayment based on their respective claims. In contrast, the Admiralty Act, 2017 addresses distinct maritime legal concerns, particularly focusing on maritime liens and facilitating the enforcement of claimants’ rights through measures such as vessel arrest and sale in cases of unpaid debts.


However, complications arise when a company owning a vessel becomes insolvent and a moratorium is imposed under Section 14 of the IBC. This legal issue pertains to the intersection of insolvency and maritime law, where conflicting priorities may emerge between creditors seeking repayment under the IBC and those seeking recourse under the Admiralty Act for outstanding maritime claims. The challenge lies in reconciling these competing interests and ensuring equitable treatment for all stakeholders amidst the complexities of insolvency proceedings and maritime liabilities.

 

Harmonising the Scheme of the IBC with the Admiralty Act


The maritime claims under the Admiralty Act are action in rem proceedings, meaning it is the claim against the ship as a separate legal entity and not against the owner of the ship. Since it is an in rem proceeding it can be continued and an arrest order for the vessel can be passed in favour of the claimant or the person holding the maritime lien even when the moratorium under section 14 of the IBC 2016 is in effect, which won’t act as a bar to the same. However,  the claimant cannot proceed further with the claim beyond the arrest while the Corporate Insolvency Resolution Process (“CIRP”) is ongoing, for example, the sale of the vessel, because that would nullify the statutory objective of the IBC.


In the case of Angre Port, the court clarified the position concerning the liquidation of the corporate debtor and held that the proceedings can be instituted against the vessel under the Admiralty Act after a liquidation order has been passed under the IBS. Such a suit won’t be barred by the contours of section 33(5) of the IBC because what it prohibits is the institution of a suit ‘against corporate debtor’ and not a proceeding against a vessel that is considered a “separate juristic person” other than its owner even if it’s undergoing CIRP or Liquidation for that matter. Thus, the action in rem can be initiated even if a liquidation order has been passed because the claim of the plaintiff would be against the vessel and not against the owner. But such a position is valid only up to the point where the owner doesn’t furnish any security or submit to the jurisdiction of the admiralty court in relation to the in rem proceedings, because in that case the nature of proceedings would get converted to ‘in personam’ and then the condition laid down under Section 14 in relation to CIRP and Section 33 in relation to liquidation will stand valid and such an owner will then need to adhere to the same.


Although it appears that judicial precedents have harmonised both statutes and struck a well-defined balance, there are still some grey areas that lack clarity as far as their legal position in the current statutory scheme is concerned.

 

The Problem with the Current Legal Position of Maritime and Insolvency Law


Following the position of maritime lien holder in Barge Madhwa, it has been settled that once an arrest order has been passed in favour of the plaintiff while the insolvency proceedings are pending, the said plaintiff will be treated as a secured creditor, and they would be treated as a secured creditor in the resolution plan only for the charge held by them under the Act.


Such a legal position is not coherent with the definition of a secured creditor under Section 3(30) of the IBC because merely obtaining an arrest order without any contractual arrangement doesn’t amount to a security interest and further proceedings cannot be pursued because of the moratorium in place, and moreover, it’s just an order saying that the ship cannot move until the claim is resolved. Such an arrangement also gives undue leverage of being recognised as a secured creditor to claimants who have received an arrest order over those who haven’t received any such order even when they are similarly placed in the capacity of the maritime lien holder.


The inconsistency is not only limited to recognising the lien holder as a secured creditor in the CIRP process but also transgresses in the liquidation process when the shipping company would liquidate immediately post the failure of CIRP. Under the Code, Section 53, which starts with an overriding clause, outlines the order of distribution for the proceeds from the sale of liquidation assets. Meanwhile, Sections 9 and 10 of the Admiralty Act address the ranking of claims. These sections often conflict with each other. For example, under Section 9 of the Admiralty Act, the wages of seamen working on a ship are considered the top priority for maritime liens. This means that when determining the order of payment, seamen's wages are given the highest priority, ensuring they are paid in full first from the vessel's sale proceeds. Granting priority to workers in different categories who are in similar situations would violate the principles of natural justice. For example, giving precedence to the wages of seamen over those of other workers, even though both groups face significant personal risks, could be hard to align with the objectives of the IBC. These conflicting priority issues must be resolved to ensure clarity and facilitate effective restructuring.


Another argument given in favour of maritime claimants is that they have a hold or charge only to the extent of that particular vessel and this doesn’t extend to other assets of the corporate debtor, and so other creditors are not affected by the same. However,  the most inherent flaw that exists in this particular argument is that the vessel which would have formed a part of the asset pool of the corporate debtor for the liquidation is now treated as a standalone asset for recovery of the maritime claim, without suffering any kind of haircuts at the instance of such a claimant or plaintiff. This is against the objective of the IBC because if all the creditors are suffering haircuts, then a different class of claimants cannot enjoy full or complete recovery of their dues while being treated as a secured creditor under the IBC.

 

Way Forward


In the USA, Section 362(a)(5) of the US code mandates that an automatic stay applies to any actions intended to create, perfect, or enforce a lien against the debtor's property, provided that the lien secures a claim arising prior to the commencement of the case. Nonetheless, secured creditors can request relief from this automatic stay on two specific grounds. First, they may argue that their interests in the collateral are inadequately protected, potentially due to a decline in the collateral's value caused by delays in proposing a reorganisation plan. Second, they may contend that the property's value does not exceed the total amount of debts secured by liens on the property.


Additionally, secured creditors must demonstrate that an effective reorganisation can proceed without the need for the property in question. In the context of the Indian insolvency regime, this principle is equally significant. Claimants seeking the status of secured creditors must provide convincing evidence that the reorganisation or subsequent liquidation of the debtor's assets can be effectively carried out without including the vessel in the corporate debtor's asset pool. This step is crucial to avoid any disruption or delay in the insolvency proceedings.


By placing the burden of proof on the claimant, such an insolvency framework ensures that these parties must clearly justify their claims to the asset in question. This requirement is designed to protect the interests of all creditors involved and to prevent any single creditor from gaining an undue advantage at the expense of others. It maintains a balanced approach, ensuring that the asset distribution process remains equitable and just.

 

Conclusion


The intersection of maritime liens under the Admiralty Act and insolvency proceedings under the IBC presents a complex legal landscape that requires careful navigation to ensure fairness and clarity. While judicial precedents have attempted to harmonise the two statutes, challenges persist, particularly regarding the treatment of maritime lien holders as secured creditors and the conflicting priorities in the distribution of assets. The current legal framework allows maritime claimants to initiate in rem proceedings and secure vessel arrest orders, even during the moratorium period under the IBC. However, this creates inconsistencies in how secured creditors are defined and treated, leading to potential inequities among similarly placed creditors. The conflict between the IBC’s waterfall mechanism for asset distribution and the Admiralty Act's prioritisation of maritime liens further complicates the matter, especially concerning the prioritisation of seamen's wages.


A potential solution lies in adopting principles similar to those in the USA, where secured creditors must prove that an effective reorganisation can occur without the asset in question. Applying this approach within the Indian insolvency regime would ensure that maritime claims do not unduly disrupt insolvency proceedings, and that all creditors are treated equitably. Ultimately, addressing these legal ambiguities and ensuring a coherent integration of maritime and insolvency laws is essential for fostering a balanced and effective insolvency system. Such reforms would protect the interests of all stakeholders, promote fair asset distribution, and support the overarching goals of the IBC in revitalising distressed entities and preserving economic stability.

 

 

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