In rem action vs insolvency law – PetroChina International v. Demise Charterer of Ocean Winner

In rem action vs insolvency law – PetroChina International v. Demise Charterer of Ocean Winner

It is not often that a shipper lawyer crosses swords with an insolvency lawyer in court.  One of the weapons in a shipper lawyer’s arsenal is the ability to commence an in rem writ against the vessel, and the ability to obtain security for the claim.  For an insolvency lawyer, the automatic moratorium provisions in the statutes provide a shield against claims made against a company in distress.

In the Singapore High Court case of PetroChina International (Singapore) Pte Ltd v. Owner and/or Demise Charterer of the vessel “Ocean Winner” [2021] SGHC 8 (the “Ocean Winner”), we see what happens when the sword of a shipping lawyer clashes with the shield of an insolvency lawyer.

Facts of the case

This case arose from the tsunami of claims further to the collapse of OK Lim’s Hin Leong Trading / Ocean Tanker empire.  PetroChina filed four writs in rem on 22 April 2020 against four vessels that were demise chartered by Ocean Tanker (“OTPL”).  The vessels were demise chartered by OTPL from Xihe Group.  The Xihe Group is part of group of companies owned by OK Lim.

Prior to the filing of the in rem writs, OTPL and Hin Leong Trading (“HLT”) filed applications for moratorium relief pursuant to Section 211B of the Companies Act (the “211B Applications”) on 17 April 2020.

On 21 April 2020, HLT filed for interim judicial management and for an order to withdraw its 211B Application.

On 6 May 2020, OTPL filed a similar application for interim judicial management and for leave to withdraw its 211B Application. 

Although the writs in rem were filed on 22 April 2020, they were not served on the vessels or OTPL.  On 8 May 2020, OTPL entered appearance in the admiralty actions commenced by PetroChina and applied to strike out the writs in rem.

One aspect of Section 211B of the Companies Act (which has since been repealed and re-enacted as Section 64 of the Insolvency, Restructuring and Dissolution Act) is that during the automatic moratorium period, no proceedings may be commenced or continued against the company except with leave of court.

OTPL argued that since the writs in rem were filed after the 211B Applications, the automatic moratorium should apply.  And since PetroChina did not obtain leave of court before it filed the writs in rem, the writs in rem ought to be struck off.

One of the arguments raised by PetroChina was that the writs in rem were action against the vessels and not against OTPL.  Therefore, Section 211B did not bar the filing of the writs in rem nor is leave of court required.

The main issue before the Court was whether the filing of the writs in rem ought to be regarded as the commencement of “proceedings” against “the company”, namely OTPL.

Eventually the Court held that the filing of the writs in rem did not come within the meaning of commencement of proceedings and dismissed the application.

 The Court’s Decision

 The Court considered and reiterated various principles in relation to admiralty proceedings, which are uncontroversial:

“1. An in rem action can only be brought if the circumstances fall within sections 4(2), 4(3) or 4(4) of the High Court (Admiralty Jurisdiction) Act (“HCAJA”).

2. The issuance of a writ in rem under 4(4) of the HCAJA creates a statutory lien. The issuance of a writ in rem protects from subsequent changes in ownership of the vessel even though the writ has not been served.

3. The creation of the statutory lien is an extremely different concept from the invocation of the admiralty jurisdiction of the Court. The invocation of the Court’s admiralty jurisdiction arises only upon the service of the writ or arrest of the vessel.

4. An in rem action is an action against the vessel. However, if the owner or charterer enters an appearance, the action also becomes an in personam action against the owner or charterer.”

The Court went on to consider the principles in relation to moratoriums in the insolvency context and held that as a matter of statutory interpretation, the Court should ascertain the legislative intent of the statute, and prefer the interpretation that favours the purpose of the statute.

The purpose behind Section 211B of the Companies Act is to provide for an automatic stay of proceedings so that the company has “breathing space” to either develop and propose a restructuring plan, or to refine and develop its restructuring plan with its creditors.

The Court goes on to contrast the difference between a Section 211B moratorium and the moratorium regime for winding up and judicial management.

In a winding up situation, it was important to put all unsecured creditors upon an equality and to pay them pari passu.  This is to prevent any creditors trying to steal a march on the other creditors.

In a judicial management situation, the intent is to minimize the depletion of economic resources and to offer the unsecured creditor a platform to make his view heard.  Judicial management provides a legal framework that would enable the rescue of a potentially viable business and thus prevent premature liquidation.  The purpose of a judicial management and a scheme of arrangement are very similar.

In this context, the Court opined that the concern about preventing an unsecured creditor from stealing a march on his fellow unsecured creditor in a liquidation context is absent in the context of a proposed scheme of arrangement.

The Court eventually found that a 211B moratorium is not intended to operate in such a way as to deny the creation of a substantive legal right.  It merely postpones the pursuit or enforcement of such a legal right so that the company’s officers will not be too distracted by dealing with claims being made against the company.  The filing of a writ in rem in cases falling within Section 4(4) of the HCAJA creates the statutory lien only upon the filing of the writ.

Since the filing of a writ in rem merely creates a security interest over the vessel in favour of the plaintiff, until it is served, the admiralty jurisdiction of the Court is not invoked.  As such, the Court held that the filing of an in rem writ without service does not fall within the definition of commencement of proceedings under Section 211B of the Companies Act.

If PetroChina wishes to serve the in rem writ or to arrest the vessels named on the writ, that would amount to either a commencement of proceeding or continuation of the proceedings.  In such a case, PetroChina would have to obtain leave of the Court before it is permitted to proceed.

Our Comments

We applaud this decision as it makes it clear that where the plaintiff’s claim is one that falls within Section 4(4) of the HCAJA, the plaintiff may proceed to file a writ in rem to protect his interest notwithstanding the automatic moratorium afforded by the scheme of arrangement and judicial management provisions.

In coming to its decision, the Court seemed to be very mindful of the fact that a statutory lien is only created upon the filing of the writ and that it would be unfair to deprive the plaintiff of their substantive right.

It is unclear if the position will be different if the plaintiff’s claim is one that is based on a maritime lien as opposed to a statutory lien.  A maritime lien is created once the cause of action arose and is not dependent on the filing of the writ.  The reasoning behind this decision is less apparent in the case of a maritime lien.  Hopefully the Court can clarify this in a later decision, and hopefully the Court will take the view that this case should apply to all in rem writs regardless of the nature of the claim.

Leaving that aside for the time being, shipping lawyers should now add another item on their checklists before proceeding with an in rem writ, namely to check on the winding up status of the company that owns or demise chartered the vessel, and also to check if the moratorium in place is that following a winding up application (for which leave of Court is required before the filing of the writ), or that following an application for judicial management or scheme of arrangement (for which leave of Court is not required provided the writ is not served).

Please do not hesitate to contact us should you have any queries relating to the above. 

Photo by Patrick Fore on Unsplash

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