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29 August 2012
In a recent judgment the Maltese courts rejected a foreign liquidator's application to have a precautionary warrant of arrest lifted on the basis of the EU Insolvency Regulation (1346/2000).
In 2006 a German shipowner entered into a shipbuilding contract with a Chinese yard for the construction of a vessel (later named the MV Beluga Sydney). The following year, the shipowner assigned all rights and obligations to another German legal entity. The latter was consequently scheduled to accept delivery of the vessel as its new registered owner. The delivery took place in 2010.
However, it transpired that despite several agreements between the owners and the yard, a large sum due for the construction of the vessel had allegedly remained unpaid. In June 2011 the Chinese builders filed a request before the Maltese civil courts to obtain a precautionary warrant of arrest against the MV Beluga Sydney to secure their claim in rem, for an amount of $5,162,206.57. This represented the outstanding balance for construction of the vessel. The Maltese courts acceded to this request and the vessel, which was already within Maltese territorial waters, was immediately arrested.
One month later, the local courts of Bremen in Germany ordered the commencement of insolvency proceedings against the shipowner. The courts appointed a provisional administrator to look after the company's affairs. The administrator was subsequently also appointed as liquidator of the company when the Bremen courts ordered its liquidation in November 2011.
Later that month, the appointed liquidator filed an application before the Maltese courts demanding that the precautionary warrant of arrest be lifted, or alternatively that the arresting creditor put up a counter-security. Among the various arguments raised to support the request to have the arrest lifted, the liquidator sustained that the precautionary arrest was invalid in accordance with the EU Insolvency Regulation.
The liquidator argued that, in terms of Article 4 of the regulation, German law should be the applicable law determining the validity or otherwise of any judicial proceedings affecting the ranking of creditors in the courts of any member state, including precautionary warrants of arrest. Accordingly, the liquidator argued that under Article 88 of the German Insolvency Code, the arrest of the vessel (which took place one month before insolvency proceedings were commenced) was invalid.
The liquidator attempted to link the above argument with one of the grounds in the Maltese Code of Organisation and Civil Procedure under which a precautionary warrant can be lifted - in cases where it would be unreasonable to maintain the precautionary act in force or where the precautionary act is no longer necessary or justifiable.
The court decided that none of the arguments put forward in the liquidator's application merited lifting of the precautionary warrant. Likewise, the court held that there was no justifiable reason as to why the arresting creditor should be forced to put up a counter-warrant.
With respect to the argument raised in terms of the regulation, the court accepted that the regulation had direct effect in Malta and that it was therefore directly applicable in proceedings before the Maltese courts. However, the court also highlighted that the aforementioned European regulation differentiates between different classes of claim brought against insolvent parties.
The court referred to Paragraph 25 of the regulation's preamble, which explicitly states that different rules should be followed in the case of rights in rem. The basis, validity and extent of every right in rem should normally be determined according to the lex situs (ie, the law of the place in which the property in question is situated) and should therefore be unaffected by the opening of insolvency proceedings in another member state. The court also referred to Regulation 5(1), which expressly states that the opening of insolvency proceedings shall not affect the in rem rights of creditors over both movable and immovable assets belonging to the debtor which are situated in the territory of another member state at the time of the opening of insolvency proceedings.
The court therefore decided that the mere fact that insolvency proceedings had been opened in Germany should not mean that legal proceedings already instituted by creditors in Malta to secure their rights in rem against the vessel should be stopped.
This judgment is to date the only judgment delivered by the Maltese courts in which the effects of the EU Insolvency Regulation on legal proceedings instituted in Malta to secure maritime claims in rem have been discussed. The court's conclusions with respect to the effects of insolvency proceedings on claims in rem also complement the relevant provisions in the Merchant Shipping Act.
The act, and more specifically Article 37A(1), acknowledge that when dealing with actions and claims in rem, ships and other vessels constitute a particular class of moveable that should be treated as separate and distinct assets from the rest of the estate. Moreover, the same article expressly provides that where a shipowner goes bankrupt, any action or claim in rem against the ship enjoys preference in relation to the ship, over any other creditors of the shipowner's estate.
Similarly, Article 37C(1) of the act provides that any registered mortgage, special privilege, action or claim in rem against a vessel will not be affected by bankruptcy of the shipowner that takes place after the date on which the claim arose, even if the shipowner was the owner or in possession of the vessel at the commencement of the bankruptcy. Article 37C(1) also reiterates that rights in rem enjoy a preference in relation to the ship in question, over all other debts of any other creditor of the bankrupt shipowner.
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