IMSML Website Article 17/2024: The Owners and/or Demise Charterers of the Ship or Vessel ‘Edzard Schulte’ v The Owners and/or Demise Charterers of the Ship or Vessel ‘Setia Budi’ [2023] 12 MLJ 53 - A Battle Royale between the ‘Personification Theory’ vs the ‘Procedural Theory’ for Writs in Rem
This case was heard before Ong Chee Kwan J at the High Court of Kuala Lumpur. There was an Allision between the Ps’ stationary (and at anchor) vessel, the Edward Schultz, and the accommodation barge, Setiausaha Station 2 that was being towed by the Ds’ tugboat, the Setia Budi. The incident occurred on 12 January 2021, around 1932 at the inner anchorage of Kuantan Port. The Setia Budi was performing this towage in conjunction with another tug, the Setia Fajar.
Based on Electronic Chart and Display System (ECDIS) data, and the analysis of a nautical expert, show that the tandem towed Setia Station 2 drifted together towards the Edzard Schulte, see Para [9]. The Setia Station 2 could not avoid the allision with the Edzard Schulte even though she was tandem towed. After the allision, the Setia Fajar tugboat was successfully disconnected from the Setia Station 2, whilst the Setia Budi remained connected to the Setia Station 2, see Para [9]. The evidence pointed to the Setia Budi (and alternatively the Setia Fajar) being in control of the tow, ie the accommodation barge, the Setia Station 2.
Just after this incident, the Ps contacted the Ds regarding the claims arising from the allision. Numerous without prejudice communications and discussion took place between the parties. The Ps then requested payment from the Ds. However, there was no further progress since February 2022. The silence continued when the Ps’ solicitors wrote to the Ds on 9 June 2022, to demand payment, or alternatively, security for the Ps’ claims.
What the Ps did not know were corporate developments behind the scenes involving the Ds. On 21 May 2021, the owners of the Setia Budi, Alam Maritime Resources Bhd (AMRB) and Alam Maritime (M) Sdn Bhd (AMSB) filed an originating summons at the High Court of Kuala Lumpur (hereinafter referred to as the First Scheme Court). The purpose of this was to convene meetings of creditors for a proposed scheme of arrangement and compromise under the Companies Act 2016, Section 366(1), see Para [13].
On 19 November 2021, AMRB and AMSB obtained from the First Scheme Court, and order under the Companies Act 2016, Section 368(1), restraining and staying 'all current and further proceedings in any legal actions or proceedings against AMSB and/or assets of AMSB for a period of three months from 19 November 2021 except by leave of the Court' (ie hereinafter referred to as the First Retraining Order). Among the matters under restraint at Para [15] included:
[1] Court winding up and arbitration proceedings as well as 'any intended or future proceedings';
[2] Execution or enforcement process, extra judicial 'proceedings or other proceedings';
[3] Demands for payment, 'exercise or intended exercise of any liens, securities', undertakings and guarantees under any documents, performance bonds, bank guarantees or security documents;
[4] The restraint and stay will be for a period of 3 months, 'except by leave of this Court'.
As the Ds never informed the Ps of these proceedings, and had stayed silent after demands were made by the Ps for compensation, the Ps commenced an action in rem against the Setia Budi on 11 July 2022. This writ was served on the Setia Budi on 14 September 2022, see Para [18]. When the bailiff and lawyers for the Ps boarded the vessel to serve the writ, no crew was on board. The court was informed of this, and the tugboat continues to be unmanned until the litigation commenced in court. The Vessel's certificates and document could not be found on board. They were probably removed. Although request by the Port Authorities and the Sheriff to crew the ship and provide necessary supplies, the Ds did not shift the Vessel from its current location to a safer location in the port. The Ds had also turned off the AIS , see Para [19].
The Ds did not immediately enter appearance to the action in rem although the Setia Budi was served on 14 September 2022. Therefore, on 18 October 2022, the Ps filed for a judgment in default of appearance against the Ds, see Para [20]. Finally, on 4 November 2022, the Ds entered appearance. Later on 15 November 2022, the Ds filed an application to strike out the write in rem and warrant of arrest. It was then that the Ps found out about the First Scheme Court and the First Restraining Order, see Para [21].
On 15 December 2022, the Ps filed an application that the commencement of the writ in rem did not require any leave from the First Scheme Court to circumvent the First Restraining Order, and the Ps could maintain this action if leave is given by the court for a nunc pro tunc (ie to retrospectively correct a previous order), see Para [22].
On 18 November 2022, the First Restraining Order expired, because pursuant to the Companies Act 2016, Section 368(2), the original order was valid for 3 months. Further, the court only had the power to extend the Order for a maximum of 12 months, see Para [23]. The Ds were not able to convene the requisite creditors' meetings for the proposed scheme of arrangement prior to the expiry of the First Restraining Order on 19 November 2022.
On 11 January 2023, a Second Scheme Court gave the Ds leave to convene a fresh creditors' meeting, and obtained an accompanying Second Restraining Order. Although only valid for 3 months, the Second Restraining Order was extended a further 6 months to 10 October 2023, see Para [26]. It was this Second Restraining Order which the Ds invoked against the Ps' writ in rem, see Para [27]. The Vessel Setia Budi remained under arrest and no alternative security was provided by the Ds, see Para [28].
Is Leave Required Under the Companies Act 2016, Section 368(1)?
This issue arises because of the phrase '... restrain further proceedings in any action or proceeding against the company except by leave of the Court ...'. Ong Chee Kwan J explained that the reasoning behind the statutory provision is to give 'breathing space' for the company in financial trouble to devise a restructuring plan that could meet with the approval from the creditors at the scheme meetings free from any distraction arising from legal actions and proceedings that may threaten the creditors' confidence in the success and viability of the scheme, see Para [45]. Citing with approval the case of Re Top Builders Capital Bhd and Others [2021] 10 MLJ 327, his Lordship said that this was to provide the company with the necessary time and resources to be devoted to coming up with a scheme that may be acceptable to the creditors, see Para [45].
It was illogical that the First Restraining Order was to be confined to just providing a moratorium to existing (ie current) legal proceedings at the time of the application. Logically, it should also cover future legal actions and this must be kept in mind when interpreting the Restraining Order, see Para [46]. 'Future proceedings' must necessarily refer to 'future proceedings' that are distinct from 'current proceedings'. Once 'current' proceedings are stayed, logically, there cannot be 'further proceedings' from the 'current proceedings', see Para [47].
As the Companies Act 2016, Section 368(1) also refers to the 'winding up', this is clearly a reference to 'future proceedings'. Ong Chee Kwan J held that since there was no existing winding up proceedings filed against the Applicants (ie the Ds), 'to my mind, the scope of the first restraining order also acts pre-emptively against proceedings that have yet been commenced', see Para [48]. Therefore, his Lordship rejected the P's contention that the P's writ in rem not being in existence at the time of the first restraining order (because the writ in rem was filed on 11 July 2021), falls outside the scope of the first restraining order, see Para [49].
Relying on the The ‘Ocean Winner’ and Other Matters [2021] SGHC 8 (HC), counsel for the P had also contended that commencement of the writ in rem was not ‘proceedings’ under the Companies Act 2016, Section 368(1) and the the first restraining order. Singapore High Court Judge Ang Cheng Hock J held that the filing of the writs in rem were meant to create statutory liens on the vessel, and could not be said to be commencement of proceedings.
This submission was rejected by Ong Chee Kwan J. His Lordship held that the plain and ordinary meaning of the words must necessarily include the commencement of legal proceedings, ie actions commenced by ordinary legal process, and/or a writ in rem. Ong Chee Kwan J explained that unlike a maritime lien on the facts of the Edzard Schulte case, a claimant with the statutory lien in The Ocean Winner is not a secured creditor until the writ in rem is filed and issued. His Lordship explained that if the claimant failed to commence an action in rem before the shipowner files for a scheme of arrangement or judicial management, and a moratorium is effective, there is no reason why the claimant with a statutory lien ought to be permitted to proceed to commence an action in rem without the leave of the court, because the process allowed the acquisition of the status of a secured creditor when they were not so prior to the moratorium, see Para [58].
Are In Rem Claims in Admiralty Law an Action Against the Res and Not the Company?
In order to answer this question, Ong Chee Kwan J identified that this area of the law reflected in a conflict between the ‘personification theory’ and the ‘procedural theory’ of an action in rem, see Para [60]. The discussion is dominated by two distinctive features of remedies in maritime law. The first is ‘maritime liens’. The second is ‘statutory liens’, see Para [61].
A summary of the features of maritime liens, see Para [62]-[65]:
[1] Created by operation of law;
[2] Secret in nature and attaches to the vessel from the time the claim occurs and no registration is required;
[3] Lien holders do not need to have possession of the res to have the lien and arrest the ship;
[4] Legal rather than contractual in nature;
[5] A creditor can recover debts from the proceeds of a judicial sale, regardless of who owns the ship;
[6] Follows the ship despite the peripatetic nature of the res;
[7] A privileged claim that ranks above all other claims (except for some statutory claims, cost of arrest and Sheriff’s disbursements);
[8] Inchoate until it is enforced by an action in rem and the Vessel is arrested;
[9] Only discharged when there is a judicial sale;
[10] Created by salvage, damage done by the ship, crew / master wages, see UK Senior Court Act 1981, Section 21(3);
A summary of ‘statutory liens’, see Para [66]-[69]:
[1] Includes claims for loss or damage to goods carried on board the vessel, breach of charterparty, claims for good supplied to the vessel, see UK Senior Court Act 1981, Sections 20(e) to (r);
[2] Purely a procedural remedy to force the owner of the Vessel to appear and submit to the jurisdiction of the court;
[3] Arise with the writ in rem, not the claim. It will be extinguished with the provision of suitable security and the Vessel released;
[4] Become secured claims only after the writ in rem is issued;
[5] In a judicial sale, the statutory lien ranks after the ship mortgage and much lower than maritime liens;
[6] Must have a link with liability in personam, ie at the time when the action arose.
The Essence of the ‘Personification Theory’, see Para [72]:
[1] The Vessel itself is the Defendant;
[2] Judgment is obtained against the Vessel;
[3] Enforcement is limited to the value of the Vessel;
[4] The Vessel is deemed to have separate and distinct legal personality from the shipowner.
The Essence of the ‘Procedural Theory’, see Para [73]-[74]:
[1] An action in rem is a device for forcing the appearance of the shipowner in personam;
[2] When the shipowner is forced into court, there is compulsion to provide security for the claim;
[3] The action is deemed as an in personam action against the shipowner at the time of the commencement of the writ in rem.
The Rise and Rise of the Procedural Theory with The Indian Grace; Republic of India and another v India Steamship Co Ltd [1998] 1 Lloyd’s Rep.1
The claim in the Indian Grace case was based on a statutory lien where an action in personam was taken out against the Defendants in India. Judgment was entered against the Defendants in India. A subsequent action in rem was brought in England, which the Defendants sought to strike out on the ground that it was barred under the UK Civil Jurisdiction and Judgments Act 1982.
The House of Lords preferred the procedural theory and allowed the action in England to be struck out. The same issue should not be litigated again between the same parties, ie there was no separate wrongdoer in the form of the Vessel, ie rejecting the personification theory, see Para [75]-[76].
It is important to note that the Indian Grace is confined to statutory liens. The House of Lords did not comment on maritime liens which arise independently of the personal liability of the shipowner. The facts of the Indian Grace did not concern maritime liens, see Para [77].
Rejection of the Indian Grace in Australia and Singapore
In the Australian case of The STX Pan Ocean; Yu v STX Pan Ocean Co Ltd (South Korea) [2013] FCA 680, Buchanan J treated the Vessel as a Defendant which was different / distinct from the debtor company. Therefore, his Lordship allowed a claimant to bring a subsequent action in rem to enforce a maritime lien, even though an earlier stay of proceedings was granted under the Modal Law, Article 20, see Para [78]. Two years later, two more Australian cases have followed The STX Pan Ocean, see Kim v Daebo International Shipping Co Ltd [2015] FCA 684, and Hur v Samsun Logix Corp [2015] 1009 ACSR 137.
Meanwhile, in Singapore, the Court of Appeal in Kuo Fen Ching v Dauphin Offshore Engineering and Trading Pte Ltd [1999] 2 SLR(R) 793, the Court of Appeal followed The Kusu Island and held that although both and action in rem and an action in personam run in parallel, both actions remain separate and distinct. Hence a judgment in rem can be entered even where there was dissolution of the Vessel owner’s company, see Para [79]. The Indian Grace was distinguished as the decision to strike out the proceedings were based on the doctrine of res judicata, and the application of the UK Civil Jurisdiction and Judgments Act 1982, see Para [79].
More than a decade and a half after Kuo Fen Ching, the Singapore High Court followed the same approach of the Court of Appeal. In Precious Shipping Public Company Ltd and Others v OW Bunker Far East (Singapore) Pte Ltd and Others [2015] SGHC 187, Steven Chong J expressed the view that both the action in personam against the shipowner, and an action in rem against the ship were technically different in nature. Both actions did not concern the same debt, see Para [80].
Application of the Law in the ‘Edzard Schulte’ and ‘Setia Budi’ case
The P’s entire case is based on the ‘personification theory’. If proven, the P’s claim is secured from the moment the damage is caused to the vessel, ie giving an inchoate substantive property right in the Vessel, see Para [84]. The basis for this is that the maritime lien held by the P arose from an allision that occurred between the Edzard Schulte and the Setia Budi on 12 January 2021, see Para [83].
An ace up the D’s sleeve was that the first restraining order under the Companies Act 2016, Section 368(1) did not make a distinction between secured and unsecured creditors. This position is further reinforced by the High Court’s decision in Re Panglobal Berhad [1999] 1 MLJ 590, where even secured creditors were restrained enforcing their secured claims, ie they were caught by the moratorium which extended beyond unsecured creditors, see Para [85].
This fleeting glimpse of hope for the Defendant was snuffed out by Ong Chee Kwan J who pointed out that the Companies Act 2016, Section 386(1) provided a restraint against actions or proceedings against ‘the company’, see Para [86]. His Lordship elaborated that an action in rem based on a maritime lien is an action against the vessel, and not ‘the company’, if the personification theory is applicable. This is a ‘pure’ in rem claim that is directed against the res, not the shipowning company, see Para [87].
Ong Chee Kwan J then went on to list down the ‘good many reasons to adopt the ‘personification theory’ (as opposed to the ‘procedural theory’) to claims based on the traditional maritime liens which are recognised as secured creditors’, see Para [88]-[91]:
[1] The traditional categories of maritime liens are widely recognised and absolutely essential to the shipping industries;
[2] Allowing a stay would put the claimant’s rights at risk. The ship may have left the jurisdiction by the time leave is obtained from the court;
[3] The claim maybe time-barred by the time leave is obtained;
[4] The Vessel may continue to accumulate maritime liens if it continues trading, to the prejudice of the Claimant. Note, as a general rule, the last lien in time has the highest priorities;
[5] A moratorium would cause delay and unnecessary expenses in the enforcement of the maritime claim;
[6] A delay in enforcement by requiring leave will risk the value of the Vessel deteriorating, or an increase in maintenance costs pending judicial action.
[7] The shipping industry relies on a speedy judicial sale to preserve the value of the Vessel and minimise expenses;
[8] Delays will also affect the financing system for the Vessel;
[9] The Vessel may sail to other jurisdictions that do not recognise the moratorium. The Vessel may then be arrested and sold in this other jurisdiction via a judicial sale. The Claimant may not even get notice of this. Further, a judicial sale here will also extinguish the claimant’s maritime lien;
[10] Excluding the maritime lien from the moratorium will have minimal impact on the creditors as the Claimant is only a secured creditor up to the value of the Vessel;
In the light of the reasons above, Ong Chee Kwan J held that the allision between the two Vessels in this case was a pure action in rem. The court should therefore recognise and adopted the personification theory when the arrest of a ship is based on a claim involving maritime liens, see Para [92]. In doing so, his Lordship restricted the Indian Grace to its own peculiar facts as that House of Lords case was based on a statutory lien, as opposed to a maritime lien, see Para [93]. Therefore, the first restraining order does not apply to an action in rem filed by the P against the Vessel on 11 July 2022. The subsequent warrant of rest issued on 12 July 2022 and its execution when the Vessel was arrested on 14 September 2022 was based on a maritime lien, which is a pure in rem action against the ship, see Para [95].
Counsel for the D also argued that the first restraining order covered ‘the assets of [the company]’, therefore, the moratorium would include the vessel Setia Budi, see Para [96]. This suggestion was rejected by Ong Chee Kwan J, see Para [97]. The Companies Act 2016, Section 368(1) restrains further proceedings against the company. Hence, the restraint was only effective against an in personam action against the company, see Para. [98].
Counsel for the D also suggested that the first restraint also cover a maritime lien because of the Companies Act 2016, Section 369(1)(3)(if) extends to ‘any liens, securities …’, see Para [99]. Once again, this was rejected by Ong Chee Kwan J, see Para [100]. His Lordship explained that a maritime lien does not arise under any security document, but rather arose automatically by operation of law at the time the relevant event occurred. On the facts of the Edzard Schulte and the Setia Budi case, the maritime lien arose as a result of the allision between the two Vessels, see Para [100]. Therefore, the commencement and filing of the P’s writ in rem, did not require any leave from the First Scheme Court under the first restraining order, see Para [101].
What happens when the D Enters Appearance?
If the owner does not enter appearance with respect to a claim based on a maritime lien, and judgment is obtained, this can only be enforced against the ship, see The Fierbinti; Romline SA Shipping Co v Owners of Cargo Lately Laden on Board the Shipping or Vessel ‘Fierbinti’ [1994] 3 SLR 864, following the The Kusu Island case [1989] 2 SLR(R) 267 (CA), applied in Malaysia by The Neptune; Wei Hsing Food (S) Pte Ltd v The Owners or Demise Charterer of the Ship or Vessel ‘The Neptune’ and another action [2005] 5 MLJ 702 (HC). However when the shipowner enters appearance before the Court, the in rem action continues, but it also assumes a character of an action in personam, see Para [103]. Ong Chee Kwan J stressed that both the in rem action, and the in personam action that arise after the appearance of the shipowner are both distinct and separate actions, see Para [104]. His Lordship was applying the case of Precious Shipping Public Company Ltd and others v OW Bunker Far East (Singapore) Pte Ltd and Others [2015] SGHC 187 (HC). His Lordship explained that if the P wants to continue against the D shipowner in personam, the P will have to seek leave of the court under either the first or second restraining order. If no such leave is granted, the P can still proceed with the action in rem and thus against the res, ie the Setia Budi only, see Para [104].
On the facts of the Edzard Schulte and the Setia Budi case, the moratorium under the first restraining order was spent by the time appearance was entered into on 4 November 2022 by the D. Therefore, Ong Chee Kwan J held that technically, what happened post-appearance was no longer a live issue, see Para [107].
Counsel for the Defendant argued that the second restraining order was an extension of the first order. This submission was made because the D counsel pointed out that both are similarly worded. This contention was rejected by Ong Chee Kwan J because the second restraining order was made pursuant to a ‘revised’ scheme of arrangement, ie therefore new and fresh, see Para [109]. His Lordship also held explained that the maximum period for a restraining order in respect of the proposed scheme of arrangement, was 12 months. There was no further extension after that, see Para [108].
The Concluding Views of Ong Chee Kwan J
His Lordship restricted his judgment in this case to the application of the personification theory where a maritime lien gives rise to a claim. His Lordship made it very clear that he was not extending the personification theory to cases where a maritime claim is based on statutory liens, see Para [130].
Although not necessary for the decision in this case, his Lordship expressed the view (ie obiter dicta) that the procedural theory will probably hold sway in cases where a maritime claim is based on statutory liens. Hence a maritime claim based on statutory liens would be subject to the moratorium under the restraints under the scheme of arrangement for the company. To exclude claims based on statutory liens from the moratorium would be to elevate a claimant from the status of an unsecured creditors to that of a secured creditor merely after filing of insolvency proceedings, including a scheme of arrangement. This goes against the objective of insolvency regimes of ensuring fair play amongst creditors, see Para [130].
Note, that Vincent J in The Neptune; Wei Hsing Food (S) Pte Ltd v The Owners or Demise Charterer of the Ship or Vessel ‘The Neptune’ and another action [2005] 5 MLJ 702 (HC) has adopted the ‘procedural theory’ in respect of a claim based on a statutory lien, describing the procedural device as a ‘son of legal fiction to assert a maritime claim against the relevant person, see Para [131]. Vincent J was applying The Nordglimt [1987] 2 Lloyd’s LR 470).
Thank you for reading IMSML Website Article 17/2024
Stay tuned for the next IMSML Website Article 18/2024: FIMBank Plc v The Owners and/or Demise Charterer Ship or Vessel now known as ‘Bao Lai’ [2023] 6 MLJ 563
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
Tuesday, 27 February 2024
Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my