IMSML Website Article 14/2024: United Overseas Bank Ltd v The Owners and/or Demise Charterers of and/or Other Persons Interested In The Ship or Vessel ‘Limin Rosmina’ (Petronas Carigali Sdn Bhd, Intervener) [2023] MLJU 1322 - Can Bids from the First Round of Tenders for a Ship be Accepted After a Second Round of Bids is Sought?

The 'Limin Rosmina' case is about a court's attempt to sell a ship, and where possible, get the highest price possible for her. This case was heard in the High Court of Kuala Lumpur before Ong Chee Kwan J. Full disclosure here that Counsel for the Plaintiff, Mr Abd Azim bin Abd Razak (of Rahmat Lim and Partners), is one of my former Jessup Mooters. His team won the National Rounds in 2013. He also won the Best Oralist prize at that competition. UiTM's 2013 team represented Malaysia at the White and Case International Rounds at Washington DC.

The P is a mortgagee that obtained summary judgment against the Defendant for a sum of USD2,794,278.82 (approximately RM11,752,736 at 27 January 2022, based on an exchange rate of USD1 = RM4.206). The Court authorised the sale of the Limin Rosmina to satisfy the judgment debt either by private treaty or public auction. The Sheriff was instructed by the Curt to accept an offer equal to, or more than the appraised value of the vessel.

M3 Marine Offshore Brokers Pte Ltd (M3ME) was appointed by the Court as surveyor and appraiser for the Limin Rosmina. On 14 December 2022, M3ME surveyed and appraised the Vessel. On 21 December 2022, the confidential report was handed to the Sheriff.

The First Round of Tenders for the Limin Rosmina and her bunkers was advertised and the deadline for receipt of the bids was 7 February 2023. At this point, 6 bids were received, but all were below the appraised value, see Para [4].

The Sheriff was then authorised by the Court to conduct a Second Round of Tenders (or as many as necessary) to obtain bidders, see Para [5]. Note, that the Court did not authorise the Sheriff to reject any bids from the First Round of Tenders, when conducting the Second Round of Tenders, see Para [6]. The deadline for the Second Round of Tenders was 30 March 2023. This time around, only 1 bid was received, which also did not meet the appraised value of the vessel, see Para [7].

As no bids, either from the First or Second Round of Tenders met the appraised market value of the Vessel, the Plaintiff submitted that the Vessel should nonetheless be sold. The sale should proceed with the highest bidder determined from both rounds of the tenders, even if it were below the appraised market value. Based on this, the P suggested that the Sheriff should accept the bid from Aussie Offshore Pte Ltd as they had put in a bid of RM6,562,697.00, see Para [10].

The Sheriff did not agree with this suggestion and explained that all first round bidders had been rejected, and could no longer be used. Note that ARC Offshore India (AOI) was among the 6 bids received in the First Round of Tenders. The Sheriff said that the First Round of Tenders was 'rejected ... on the basis of contract law', see Para [10].

The P then reached out three of the highest bidders from the combined first and second rounds of tenders. Only AOI (the third highest bidder with a bid of RM6,399,999.00) showed a continuing interest with the sale of the Limin Rosmina, see Para [11]. The P then sought leave of the Court to proceed with the sale to AOI, see Para [12]. This was opposed by the Defendant who argued that the ship should be sold to Proactive Ship Management PvT Ltd (PSM) who had issued a position letter indicating that it would purchase the Limin Rosmina in the 'range of RM7 million', see Para [13].

The P made two submissions before the Court:

[1] The Sheriff has the authority to sell the Vessel to AOI even though its bid was below the appraised value of the ship;

[2] The position letter of PSM should be rejected as PSM had not submitted bids in either the first or second round of tenders.

Ong Chee Kwan J nicely summed up the main issue in this case at the start of his judgment at Para [2]:

Can the Sheriff accept a bid that was made in the first round of tenders under an order for sale, after a second round of tenders had been proceeded with?

In addition, three sub-issues have to be considered by the Court at Para [15]:

[1] Can the offer from PSM be considered as an available bid for acceptance?

[2] Is the offer from AOI still valid, open and capable of acceptance?

[3] Is a sale below the appraised value justified in the circumstances?

The First Sub-Issue: Can the offer from PSM be considered as an available bid for acceptance?

There are instances when a departure from a fair sale process may result in a higher price for the ship. However, the primary duty of the Marshall (Sheriff in the case of Malaysia) to obtain the best price for the Vessel, does not provide an excuse for the Marshall to depart from the equally important duty to conduct a fair sale process, see the view of the Australian Federal Court in The Island Escape (No.2) [2023] FCA 101.

Using the The Island Escape, Ong Chee Kwan J explained that there is an expectation that the highest bidder will be accepted on or before the time of expiry of the offer. If this highest bid is below the market valuation for the Vessel, and the bid is not accepted, the Marshall should consider Court direction on whether an alternative sale strategy is likely to produce a higher sale price. However, a participant in the bidding / tender process does not expect the Marshall to depart from the tender process, before the tender process is completed in accordance with the advertised terms, see Para [49] of the Island Escape case.

A departure from these terms would not be fair to the bidding parties. It would be unfair for the Marshall to commence negotiations with persons who did not participate in the tender / bidding process, especially where the negotiations commenced before the date for acceptance of tender offers had expired, see Para [49]. Maintaining public confidence in the Marshall and the Court is paramount as the judiciary must be seen to be impartial and transparent in a judicial sale. This is also to prevent 'gazumping' by other parties before the offer period has expired. This prevents erosion of confidence in future sales, and see Para [50] of the Island Escape case.

Ong Chee Kwan J held in the Limin Rosmina case that the D's invitation to the Court to consider the PSM offer, is 'gazumping' and detrimental to the fair administration of the judicial sale, see Para [19]. Only if the Sheriff conducted a third round of tenders, and PSM joined that, could the court consider PSM's bid, see Para [19].

Second Sub-Issue: Is the offer from AOI still valid, open and capable of acceptance?

The D contended that when a second round of tenders is conducted, the first rounds of bids would have lapsed, citing the Hong Kong case of Fratelli Cosulch Bunkers (HK) Ltd v The Owners and/or Demise Charterers of the Ship or Vessel 'Fair Wind 28' [2008] HKFC 356; HCRAJ 88/2007 (hereinafter referred to as the Fratelli case). Ong Chee Kwan J rejected this submission because the Fratelli case does not establish this principle, see Para [28]. His Lordship explained that in Fratelli, the Court had accepted an earlier bid. Therefore its hands were tied and could not accept a subsequent bid. The Court did not hear any submissions on what was the effect of the second bid on the earlier first bid, see Para [28].

In fact, Ong Chee Kwan J points out that the Fratelli case is authority for the proposition that the conditions of the judicial sale take precedence and determine or regulate the sale process, see Para [29] The special conditions attached to the order for sale are a safeguard. This is to ensure that if a bid comes under the appraised value, then the court has the option to order a sale by special treaty, see Para [16] of the Fratelli case.

This approach can also be seen in Natal Province Division Court of South Africa in Shandal v Jacobs and Another, 1949 (1) SA 320 (hereinafter referred to the Shandal case) where the court answered the following question in the affirmative: Do the conditions of sale constituent a contract between the auctioneer and a bona fide bidder for any article which is put up? See Para [30] of the Limin Rosmina case. Perhaps the best expression of this legal position is found in Estate Francis v Land Sales (Pty.), Ltd. And Others (1940 NPD 441 at p 457) per Broome J:

‘An auction is a form of competitive bargaining with the object of a contract of sale resulting carried out in accordance with certain rules. These rules are the conditions of sale. They are framed by the seller to represent the terms upon which he is prepared to submit his property to competition. They are, so to speak, the rules of the game and they bind all the players.

In the light of the authorities above, Ong Chee Kwan J held that when the second round of tenders were carried out, the offers / bids made under the first rounds 'were still well within the validity period for acceptance', see Para [33]. Note that Clauses 3 and 10 of the “Sheriff’s Terms and Conditions for Sale” provide that the offers from the bidders, unless otherwise rejected, stand irrevocable for acceptance by the Sheriff for a period of 3 months from the deadline for the closing of receipts of the bids, ie from 7 February 2023 to 7 May 2023, see Para [33] and [35].

Ong Chee Kwan J also accepted the P’s submission that the second round of tenders did not affect the integrity of the first rounds of tenders, where the P cited a non-shipping case of Pratt Contractors Ltd v Transit New Zealand BC9860748 (8 June 1998, unreported) (hereinafter referred to as the Pratt Contractors case) in support of the submission, see Para [36] and [37]. Based on this as well as the Sheriff's Terms and Conditions for Sale, Clauses 3 and 10, Ong Chee Kwan J held that the first round of tenders remained open for acceptance for 3 months from the date of closure of the bids. After this 3 months period, the offers are no longer open for acceptance by the Sheriff, see Para [43]. However, the Sheriff can still approach the bidders to extend their offers, although this is subject to steps taken to ensure the proprietary and integrity of judicial sale process. This is to ensure that the Court retains control over the sale process so that it is not adversely affected, see Para [43].

On the facts of the Limin Rosmina case, AOI (from the first round of tenders, and ranked third highest bidder across the two rounds of bidding) had affirmed that their offer was still open (via a letter dated 2 June 2023) and extended its period of validity for the Court to consider its bid, see Para [45]. Ong Chee Kwan J explained that even where a sale with the highest bidder failed to materialise (for whatever reason), it is not unusual for the Sheriff to accept the second highest bid in a judicial sale, see Para [46].

His Lordship cited the case of Dan-Bunkering (Singapore) Pte Ltd v The Ship Yangtze Fortune (No.2) [2023] FCA 148 (hereinafter referred to as the Yangtze Fortune case). In this case that was decided by the Australian Federal Court, the highest bidder was unable to complete the sale as it failed make a payment of deposit by the deadline. The Marshall tried to facilitate the sale process by even agreeing to proof of remittance by SWIFT confirmation the next day (ie in effect and extension of the deadline). When the highest bidder failed to even do this, the Marshall applied to Court to terminate the sale contract with the highest bidder, and seek judicial authorisation to accept the second highest bidder (which was later granted).

Ong Chee Kwan J observed that '[it] is discernible from the Yangtze Fortune case, that despite the amendments or variations to the conditions of sale by granting extensions for payment, the court still considered the bids from the highest bidder and thereafter the second highest bidder as being part of the same judicial process and it did not affect its nature as a valid bid received in the normal course of the established bidding process', see Para [48]. Similar to the Yangtze Fortune case, Ong Chee Kwan J therefore concluded that the status or nature of the offer from AOI was a valid bid received in the normal course of the established bidding process that is not affected by the fact that: First, A second round of tenders was invited; and Second, AOI had agreed to keep their offer open for a further period for the Court to consider, see Para [49]. His Lordship rejected the Defendant's proceeding with a sale involving AOI was a sale by private treaty, see Para [50].

Elaborating on the second rounds of tenders, Ong Chee Kwan J held that the second round of tenders was not a rejection of the first round bidders. When the second tender was called, it contained words that indicated that it was a continuity of the first round (ie no words indicating a rejection of the first round): 'A SECOND ROUND OF OFFERS ARE INVITED', see Para [51]. There was no authority to reject the first round of tenders as the Sheriff was merely given 'LIBERTY TO RECEIVE A SECOND ROUND OF BIDS 9OR AS MANY ROUND OF BIDS THEREAFTER AS MAY BE DEEMED NECESSARY BY THE SHERIFF' (emphasis added in upper caps), see Para [52]. Hence, Ong Chee Kwan J reiterated that AOI's bid was valid, open and capable of acceptance by the Sheriff pursuant to the judicial sale of the Vessel dated 19 September 2022, see Para [54].

Third Sub-Issue: Is a sale below the appraised value justified in the circumstances?

Determining the appraised value of a Vessel is the first step in a judicial sale of the vessel, ie the Sheriff will be assisted by professional and experienced court appointed experts. This is followed by placement of advertisements by the Sheriff inviting bids for the purchase of the Vessel. The practice is for the highest bid to be accepted by the Sheriff and then approved by the Court. However, where the highest bid is below the appraised value, the Sheriff will hand over the appraisement report (by the court appointed appraiser) in a sealed envelope to the court for consideration. The integrity of the judicial sale process is maintained by ensuring that the appraised value is not revealed to the public, see Para [56] where Ong Chee Kwan J cites the Singapore High Court case of The Turtle Bay [2013] SGHC 165.

It is trite law as expressed in The Silla [1981] 2 Lloyd's Rep.534 that the duty of the Sheriff is to realise the highest price from the sale for the benefit of all interested parties, see Para [19] of the Turtle Bay case. Further guidance on the thinking behind a judicial sale was provided by the Singapore High Court at Para [22] in the Turtle Bay case, which was quoted with approval by Ong Chee Kwan J in the Limin Rosmina at Para [59] and [60]. There are two competing concerns which require balancing:

[1] Accepting the highest bid where there was a fairly concluded sale by the Sheriff;

[2] Benefitting all persons interested.

For [1] above, the court has the discretion to reject a sale where there is a great disparity between the highest bid and the appraised valuation. Sale of the vessel at a relatively low price could prejudice in rem creditors and the Defendant shipowner. This option is available to the court which has a wide discretion to conduct the sale, even where there is no evidence that the sale conducted unfairly, or that a higher realisable sale price was possible, see the High Court of Singapore Para [22] in the Turtle Bay case.

Ong Chee Kwan J at Para [61] observed that that there were two major differences between the Turtle Bay case and the dispute in the Limin Rosmina.

[1] In the Turtle Bay case, the mortgagee applied to court for a 'private direct sale'. The ordinary process of conducting an appraisement, advertisement and receipt of sealed bids was not followed;

[2] In the present case involving the Limin Rosmina, two rounds of tenders were conducted in accordance with court supervised procedures. The sale under consideration was to AOI, the third highest bidder (from the first round of tenders), was the only remaining party that participated in the bids.

Note, that PSM, who made the highest offer, did not participate in either the first or second round of tenders.

In the light of the principles above, Ong Chee Kwan J held that the balance is tipped in favour of granting the application for a sale to AOI, even though it was below the appraised value of the ship. His Lordship gave several reasons for this conclusion at Para [62]:

[1] The judicial sale process was conducted fairly by the Sheriff. There was proper commissioning of the valuer, advertisements were made accordingly and the bidding process was conducted fairly;

[2] It was in the best interest of all parties that the sale was made to AOI.

(a) There was little value in conducting a third round of tenders as a higher price is unlikely to be realised;

(b) After the vessel was advertised in the proper markets, no buyers were willing to pay the appraised value or higher;

(d) In the unlikely event that a third round of tenders was called for, the cost of maintaining the Vessel will exceed any advantage that a higher price may fetch. There was no prospect that a third round of bids would attract a bid that would have a net benefit to the creditors (ie taking into account the additional costs).

Therefore, Ong Chee Kwan J ruled that a sale to AOI could proceed for a sum of RM6,399,999.00, even though it was below the appraised value, as the offer was still valid, open and capable of acceptance, see Para [63].

Thank you for reading IMSML Website Article 14/2024

Stay tuned for the next IMSML Website Article 15/2024: Black Swan Petroleum DMCC v The Owners And/Or Demise Charterers Of The Ship Or Vessel ‘Oceania’ Of The Port Of Antwerp, Belgium [2023] MLJU 3048

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.)(Glamorgan); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

Thursday, 15 February 2024

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my