The Admiralty law, like the seas it governs, has evolved in solitude over the years, unhindered and with little regard for other potentially conflicting laws. On the other hand, Insolvency and Bankruptcy Code,2016 (IBC) is a relatively new act that has been shaping itself as and when the need arises. The two acts, in their purpose, the procedure followed, and the remedy offered are entirely different and hence a conflict between the two acts seemed unlikely, only until recently when the Bombay High Court (The court) in Raj Shipping V/s. Barge Madhwa And Anr. came with a 123 page judgement striving to resolve the conflict between the two.

The Interface

One of the unique features of IBC, is the imposition of moratorium for the preservation of corporate debtor and its assets. The recent developments have tilted the debate on the scope of moratorium in favor of IBC [1]. On the other hand, admiralty law has developed as a special law for protecting the rights of claimants by giving them rights in rem.

Some questions which have intrigued curiosity and have been dealt with in this judgment are:

Whether moratorium would apply over admiralty proceedings in rem against the defendant vessel whose owner is under insolvency?
Whether permission is required under S-446 (1) of Companies Act, 1956 to continue admiralty proceedings when the owner of defendant vessel is being wound up under the Companies Act?

Held

The court held that if there are two acts, one which has a non-obstante clause and the other doesn’t, the act with the non-obstante clause will prevail even if it’s earlier in time. Hence, IBC 2016 would prevail over Admiralty Act,2017 in case of conflict.

Hence moratorium would apply on all proceedings against the corporate debtor[2]. However, in the present case, it was observed that an arrest proceeding in admiralty court is in rem and against the ship (a juristic person) and not against the corporate debtor or its assets and hence moratorium does not apply. Therefore, the Court held that the ship can be arrested in spite of a moratorium.

However, the Court held that post such arrest, the proceeding will be stayed and post such stay, the court reasoned that an arrest gives the claimant the status of a secured creditor up to the value of ship or the value of security deposited for release of the arrest. The claimant can then participate as a secured creditor in the CIRP process and additionally participate as an operational creditor for the unsatisfied part of his claim. If the CIRP is unsuccessful, the secured creditor can exercise his rights under S-52(4) of the IBC and proceed outside IBC.

With regards to the question whether permission is required under S-446(1) of the Companies Act,1956 to continue admiralty proceedings, the court held that admiralty act being a special enactment, would prevail over Companies Act.

Comments

Minimal interference of admiralty court

The Court noted that there were previous instances, where the basic necessities for maintaining the ship such as crew wages, fresh water and bunkers were not paid for by the Resolution Professional or the Committee of Creditors, often times forcing the crew to abandon the ship and rendering the ship a navigational hazard. Therefore, the admiralty court has revealed its intention to play a more proactive role in maintenance of the ship. Pursuant to this judgment, the Admiralty Court will liquidate the ship, if it is not properly manned and maintained. However, there are provisions for maintaining the corporate debtor as a going concern, paying for the necessary services provided to the corporate debtor under the various IBC Regulations. Therefore, the IBC already has safeguards of its own to deal with these concerns. The Court has not reasoned as to why these safeguards are insufficient.

Unequal treatment given to rest of creditors under IBC

Under IBC, maritime claims such as port charges, ship management and maintenance services, provision of bunkers come within the definition of operational debt giving the claimant the status of operational creditor. However, pursuant to this judgment, initiating proceedings under Admiralty Act has elevated the position of these claimants to that of secured creditors for no apparent reason. The Court has held that the ship will exclusively be used as a security for the maritime claimants and if there is some part of their claim that is left unsatisfied in the approved Resolution Plan, they simultaneously become an operational creditor for the unsatisfied part of their claim. IBC has never experienced the precedent of ever allowing the same creditor to recover as secured creditor, and then recover simultaneously as an operational creditor. A scenario like this goes against the basic tenets of IBC and is in effect, a double recovery afforded to the maritime claimants. This would amount to an unequal treatment to the rest of the secured creditors who do not have such a right for their unsatisfied claims and would amount to bypassing the haircut mechanism. The court additionally observed that the mortgagee of a ship can file his claim under Admiralty Act, get the ship arrested and then participate in the CIRP as a secured creditor. This is analogous to invocation of mortgage clearly barred by the IBC post moratorium and would be unfair to the rest of the secured creditors who could not invoke their pledge or moratorium before moratorium had started. For example – Creditors who had mortgage on the land property of the corporate debtor and not the ship do not have the right to invoke mortgage after moratorium has begun.

Lastly, allowing in rem claims to be filed even after commencement of moratorium is bound to frustrate the CIRP as there will be a persistent risk of new admiralty suits being filed.

Wrongful Arrest

The Court failed to appreciate that ships are often arrested on a prima facie case and the claim is not conclusively established. Generally, such undecided claims are not accepted under section 9 of the IBC. Thereby, the Court has again afforded an elevated status to the maritime claimants. The Court did not consider the possibility that ship arrests can be wrongful, and as a result, there is no addressal of how such a scenario will be remedied in the judgment.

NCLT not bound by High Court

NCLT is not subordinate to high court[3] and would be bound by a high court decision only when it exercises writ jurisdiction under Article 226 of the constitution when exceptional facts and circumstances have been made out by the petitioner[4].

In the present case, the court has exercised its admiralty jurisdiction under S-3 of Admiralty Act, 2017 and it remains to be seen as to whether the NCLT and especially NCLAT would be bound by this decision rendered under admiralty jurisdiction.

The In Rem Dilemma

The court has placed an unnecessarily high emphasis on the personification theory to show that proceedings in admiralty court are against the vessel and not against the corporate debtor owner.

The reasoning made by Lord Steyn in The Indian Grace[5] that in rem proceedings are merely a mechanism employed by the Court to compel the shipowner to submit to the jurisdiction of the admiralty court has been disregarded by the court stating that the same has been overruled by the Court of Appeal in Stolt Kestrel[6]. However, in Stolt Kestrel, Justice Tomlinson merely distinguishes the judgment in The Indian Grace with the Stolt Kestrel on the basis that the former was a case of maritime claim and the latter a maritime lien. The peculiarity of a maritime lien is that once it attaches to the ship, it remains attached to the ship, no matter any change in ownership. Therefore, in case of a maritime lien, the ownership (in personam liability) does not matter. But what the Bombay High Court failed to appreciate that in cases of maritime claims other than lien, the ownership of the ship is an especially important aspect. A perusal of section 5 of the Admiralty act clearly shows the importance of establishing the in personam liability of the shipowner to the claimant before the Court can arrest the ship in rem. Therefore, in cases other than lien, in rem and in personam are intermingled and the ratio laid down in The Indian Grace ought to have been followed.

Hence the approach towards maritime claim and lien should be different. The US’s unique position in handling maritime lien and claim sets a perfect example. Maritime claims are considered quasi in rem where ship is attached to compel the owner to enter in the jurisdiction. It is an extension of in personam jurisdiction through the personal property of the defendant [7]. Whereas, maritime liens are considered purely in rem proceedings where a ship is arrested and proceeded against to satisfy the lien[8]. In case of a maritime claim, the bankruptcy court can vacate the attachment (arrest) on the ship and retain the jurisdiction[9], whereas in a case of maritime lien, the bankruptcy code gives way for the admiralty court to deal with the same[10].

Conclusion

The heavy emphasis laid on in rem proceeding by the Court has caused certain unprecedented and even absurd changes to the process under IBC.

Practical difficulties that might arise need to be resolved. For example, unexpected claims of admiralty during moratorium would hinder the CIRP and delay it and make the purpose of moratorium infructuous. Questions such as whether arrested ship will be considered as property of demise charterer (corporate debtor) for the purposes of moratorium are also left unanswered.

Thus, Bombay High Court has initiated the IBC vs. Admiralty debate which will also shape the intersection of cross-border insolvency and admiralty. This opens the floodgate to more judgments and development for Indian law that will influence India’s position in the global commercial market.

Footnotes:

[1] Mr. Anand Rao Korada Resolution Professional Vs. M/s. Varsha Fabrics (P) Ltd. & Ors. 42(IBC) 42/2020; Ms. Anju Agarwal vs. Bombay Stock Exchange & Ors. CA(AT)No. 734 of 2018; Alchemist Asset Reconstruction Company Ltd. S. M/S. Hotel Gaudavan Pvt. Ltd. & Ors. Civil Appeal No. 16929 of 2017