On 28 January 2016 the Baltic Dry Index closed at 324. That is about a 50% fall from the highs of 2014. If one looks further back to the heady days of 2008, the fall is even more dramatic. On 20 May 2008 the index was at 11,793. That is a fall of over 97% from peak to trough. What is more, there is no sign of the slide abating with many predicting sub 300 levels by the middle of the year and no substantial upturn until 2018. Many owners are now looking at scrapping vessels more than 12 years old as well as hot and cold lay up.
Whilst we are not in the business of predicting markets, we have noticed an increase in those approaching us for advice on what to do if their business partners default. Many shipping companies face huge pressures as a result of the recent market troubles. Others find themselves in contractual chains where one or more of those in the chain are on the cusp of defaulting.
There are of course examples of what happens when shipping companies fail. The aftermath of the 2007 crash saw many insolvencies. At BDM our lawyers have first hand experience of dealing with the legal issues that result. We represented creditors of Britannia Bulk, Korea Line, STX Pan Ocean, Woolworths, Copenship, OW Bunkers and Daiichi Chuo. Those cases established that in an insolvency situation creditors are often faced with the bleak prospect of having to file and prove their claims against the insolvent estate along with all other creditors. Rarely do creditors recover more than a few cents on the dollar in such circumstances.
The UNCITRAL Model Law on cross border insolvency promotes the protection of parties seeking protection in their home states by recognising those proceedings in other contracting states. In England and Wales, the Cross Border Insolvency Regulations 2006 give effect to the Model Law., which prevents creditors from pursuing a claim against a party that has applied for insolvency protection in another contracting state.
There are limited circumstances where it is possible to circumvent the Cross Border Insolvency Regulations, for example where a claimant has managed to obtain security by arresting a vessel owned by the defaulting party and/or where through use of legal proceedings it has been possible to obtain some sort of security.
In view of the above, it is always advisable for those who fear that their contractual partners may default to take prompt action to obtain some form of security. Many of our clients are already looking at their legal options. Others are looking at a form of restructuring with their partners and financiers rather than having to deal with an insolvency scenario in due course.
So what are the options for those facing the risk of default by one or more of their contractual partners?
Broadly the options are:
1. Arrest of a vessel legally or beneficially owned by that party;
2. Attachment of property e.g. bunkers owned by that party;
3. A contractual lien over property belonging to that party e.g. cargo on a ship;
4. A contractual lien over sub hire, freights and sub freights; or
5. Renegotiation of the contract.
The first two options depend on the law of the place where the asset is located. Options 3 & 4 are often used where the insolvent party is a charterer, shipper or consignee of cargo. Option 5 is increasingly in vogue but it depends on the parties reaching some form of agreement to restructure the obligations of the party facing difficulties.
All of the above options require careful thought and legal input. In the event of a renegotiation, it is important for the party contemplating restructuring to take a view of their other legal options. It is only by doing this that they will know what their best and worst case scenarios are on a default. Having done that, they can then take a view on what sort of restructuring they may be prepared to contemplate.
At BDM we have considerable experience of insolvency and cross border issues in the shipping context. One of our lawyers represented the Japanese receiver on the first ever stay obtained under the Cross Border Insolvency Regulations. More recently we have persuaded the Companies Court to lift a stay of proceedings to allow creditors to proceed with their claim where an English arbitration is the better forum for determining the merits. Our lawyers have extensive international connections with lawyers around the world so we are well placed to advise our clients on their arrest and attachment options. Our senior partner chairs an annual arrest conference attended by the leading maritime lawyers from around the world. We also have extensive experience when it comes to claims against directors of insolvent companies. One of our partners represented a non-executive director in the leading Equitable Life litigation on a multi-billion pound claim made against him.