On the waterfront: restructuring international shipping companies

The past eight years have seen unprecedented levels of distress in the shipping industry, with weak demand leading to depressed and unpredictable charter and freight rates and overcapacity in international shipping markets. Many shipping companies have been able successfully to restructure on a pre-planned basis – through formal proceedings in a range of jurisdictions or through consensual arrangements reached with creditors – enabling them to navigate through financial difficulties. Others have been left with no alternative but to file for insolvency, either to implement a restructuring and obtain protection against creditor actions or, in the most extreme cases, on a free-fall basis.

What differentiates shipping from other industries is the fact that ship-owners’ most valuable assets are by nature mobile and move from jurisdiction to jurisdiction in the ordinary course of their business. This, coupled with the common use of a number of different jurisdictions for registration and ownership of vessels, and the use of offshore holding companies for structuring purposes, presents unique challenges in the restructuring and insolvency context. While, in most cases, finance documents will be governed by English or New York law, there is a growing tendency in some cases to transact on the basis of governing laws with a less established track-record so far as commercial law is concerned - a factor which can give rise to further complexities and increased uncertainty as to the ultimate outcome. A further point is that certain jurisdictions which are favoured for maritime registration purposes have no insolvency laws. Liberia and the Marshall Islands are cases in point.

Shipping is, in some respects, a creditor-friendly industry, with trade debts or cargo claims being classed as maritime claims, allowing creditors to arrest a ship in a number of jurisdictions to secure their claims. While a solvent shipowner may be in a position to provide alternative security in order to secure the release of the ship with minimum possible impact on its revenue generation, one in financial difficulty may find that any restructuring effort is frustrated by vessel arrests.

The debtor in a shipping case will usually have a range of jurisdictions to choose from to seek temporary protection from creditors. The flip-side of the coin is that creditors and counterparties will likely be able to commence insolvency proceedings and/or invoke maritime law remedies in jurisdictions beyond the reach of the main forum. This might not be as conducive to a coordinated and centralised recovery effort (or even liquidation effort), both prior to the debtor filing or, in certain circumstances, afterwards. A key factor in devising strategy is the extent of the international reach of the main insolvency proceedings. While most jurisdictions, as a matter of domestic law, will promote a universalist approach to the conduct of restructuring and insolvency proceedings, the practical reality – including, crucially, the extent of recognition of those proceedings in other jurisdictions – can differ markedly. The widely-accepted gold-standard in this regard is the stay applicable under Chapter 11 of the US Bankruptcy Code; often, even if the strict legal position in other jurisdictions would admit unilateral enforcement action notwithstanding the existence of a Chapter 11 case, the reality is often that the international reach of creditors’ interests militates against taking action which might have adverse consequences in the US.

An alternative route for the debtor (although this and US proceedings need not always be mutually exclusive) might be to seek bankruptcy protection in its home jurisdiction and/or the jurisdiction in which it has its “centre of main interests”; and to bolster the protections available under the laws of such jurisdictions by seeking recognition of the main proceedings in different jurisdictions in which the prevention of creditor actions is critical to the delivery of a successful turnaround. In the case of those jurisdictions which have enacted into their local laws the UNCITRAL Model Law on Cross-Border Insolvency (which includes Australia, Canada, Gibraltar, Greece, Japan, the Republic of Korea, the UK and the US), that is the obvious route (where available) for foreign debtors and/or insolvency office-holders seeking recognition and/or the making of additional in-bound requests for assistance.

The concern of a debtor company – or a restructuring official or insolvency office-holder appointed to the debtor – will be to ensure an environment which is conducive to an unimpeded turnaround effort. It will be important for the debtor and its advisers to work closely together (for example, with input from in-house logistics/operations teams and referring to reports showing future vessel movements) in order to pin-point the “candidate” jurisdictions with assets present for recognition purposes. It will then be a question of deciding the jurisdictions in which to obtain recognition, in order to help bolster any central restructuring effort or a unitary insolvency proceeding. The effects of recognition in a particular jurisdiction will be a key determinant in this respect. In particular, the reach and scope of any stay which applies automatically on obtaining recognition and whether, for example, it applies to stay the commencement or continuation of court or arbitration proceedings against the debtor and its property and/or prevents the enforcement of security. Given that ships are likely to trade in multiple jurisdictions, it might not always be possible to obtain recognition in all the jurisdictions where the ships might be at risk of arrest.

A related question in terms of staying proceedings is whether it is necessary in the jurisdiction in which recognition is being sought to provide notice of the recognition application to parties to any litigation or arbitration. Giving notice gives the party in question an advantage that it would not receive in the event of the commencement of main proceedings and can provide it with an opportunity to be heard on the recognition application. This can result in the proceedings in question being carved out of the stay applicable on recognition (potentially undermining a centralised turnaround or insolvency process) and, in the extreme, potentially delay and jeopardise the obtaining of recognition.

In the case of member states of the European Union (excepting Denmark), the EC Insolvency Regulation will ensure automatic, EU-wide recognition of qualifying insolvency proceedings commenced in other member states, without any further act on the part of the debtor or insolvency office-holder concerned (although this is subject to certain exceptions). The recent revision of the EC Insolvency Regulation (with most of the changes becoming effective from June 2017) develops the existing provisions relating to the coordination between insolvency proceedings relating to the same debtor in different jurisdictions in which the Regulation applies, as well as containing a new regime for the coordination and conduct of group insolvencies. These changes can be expected to have a positive impact for debtors looking to implement restructurings across international borders.

There are many attractions to using Chapter 11 for non-US ship-owners, including allowing management to remain in situ and enabling a debtor to safeguard its assets under the protection of a stay which has worldwide effect and to impose restructuring proposals on non-consenting creditors in certain circumstances. The ease with which a debtor can invoke Chapter 11 protection – in simple terms, by demonstrating it has property in the US (a jurisdictional test which has been described as being satisfied on the basis of “a dollar, a dime or a peppercorn”) – makes this an even more appealing prospect. The effect of filing a Chapter 11 case is that US and non-US debtors alike can impose US restructuring measures on contracts and commercial relationships concluded under foreign laws. The debtor-friendly environment in the US puts paid to the exercise of maritime law remedies such as arrest or attachment which, without the protection available under Chapter 11, might well see the debtor employing a range of tactics and manoeuvres to ensure that its vessels remain out of the reach of creditors.

There are disadvantages of filing for Chapter 11 from the debtor’s perspective, including that it is a court-driven process (unlike, generally speaking, insolvency proceedings in English common law jurisdictions), which, together with a multiplicity of separately-represented parties, can mean that it is an expensive option. Furthermore, although the process is very sophisticated in terms of the restructuring options and techniques available, the time taken in order to deliver solutions can be protracted compared with measures available in other jurisdictions.

Another option for debtors looking to restructure their indebtedness is an English scheme of arrangement (either on a free-standing basis or used in tandem with administration). Strictly-speaking, when used in isolation, a scheme is not an insolvency proceeding and is outside the ambit of the Insolvency Regulation. However, experience to date suggests that a scheme of arrangement (which requires the sanction of the English court in order to become effective) will in practice be recognised and given effect in other jurisdictions, whether informally, under local enactments of the Model Law (e.g. a scheme was recognised under the US enactment, Chapter 15, in the Magyar Telecom case) or, within the EU, under the EC Judgments Regulation (although the position appears still to be in a state of flux in the case of the latter). A scheme is available to debtors if they are “liable to be wound up” in England and Wales and the English court has shown an expansionist approach to addressing this question; whilst, historically, the presence of assets or creditors in England was considered to be the touchstone, it is now normally considered to be sufficient if the debtor’s financing arrangements are governed by English law and specify that they are subject to the jurisdiction of the English courts. Clearly, therefore, the English scheme has extremely wide application, which, together with the flexibility it affords in the hands of restructuring professionals, offers very attractive possibilities for international shipping companies seeking to implement a restructuring.