Maritime arrest is a legal action to seize a vessel, cargo, container or other maritime property as security for a claim or to enforce a maritime lien. Maritime arrest against a vessel is available in a range of situations, including but not limited to claim for ownership or possession of a vessel, claim for damage done by or suffered to a vessel, claims for goods or materials supplied to a vessel for its operation or maintenance. If a vessel is arrested, it will be prevented from moving or trading until the claim is resolved or security of the claim is provided.

An arrested vessel may be sold by the Court for the purpose of enforcing a maritime lien. Where the amount of claim exceeds the proceeds of sale, the Court must determine the manner in which the proceeds should be distributed. This article focuses on the order of priorities which is regularly applied by the Court in the distribution of proceeds of sale, as demonstrated by a recent admiralty case Asset Wonder Ltd v Stellar Shipping Co LLC, The Bareboat Charterer of the Ship ‘Ruby Star’ [2015] HKCU 1147.

The prima facie order of priorities
In practice, the court follows a well settled order of priorities in dealing with the proceeds of sale of an arrested vessel, which can be summarized as follow:

1.         the Court’s bailiff fees for the arrest, preservation and sale of the vessel would have first charge on the proceeds of sale and will be paid out in priority to any other claim;

2.         the expenses of arrest, preservation and sale pending the litigation would have next priority;

3.         after the Court’s bailiff fees and the expenses have been satisfied, priority is granted to the arresting party in respect of costs of his action up to and including the arrest. The rationale is that the arresting party has provided funds to effect the sale for the benefit of all claiming parties and hence such expenses should have priorities over other creditors’ claims;

4.         maritime liens attached to the vessel in connection with which the claim arose would have priority over all other types of claim;

5.         secured maritime claims; and

6.         unsecured maritime claims.

After all of the above claims have been satisfied, the owner of the vessel at the time she was sold by the court would be entitled to the balance remaining, if any.

The Asset Wonder case

Background
The Plaintiff, Asset Wonder Ltd, is a wholly owned subsidiary of Abu Dhabi National Leasing LLC (“ADNL”). It was agreed between ADNL and the Defendant, Stellar Shipping Co LLC, that ADNL would provide financing for the Defendant to purchase a Vessel, the Ruby Star, in the following terms: (1) Ruby Star would be registered in the absolute ownership of the Plaintiff; and (2) the Defendant and the Plaintiff would enter into an 84-month bareboat charter for the Vessel, at the end of which and assuming due performance, the Defendant would become the owner of the Vessel.

Subsequently, the Defendant failed to pay instalments of charter hire to the Plaintiff. By two letters dated 30 April 2013, the Plaintiff was informed by Stellar Ocean Transport LLC (“SOT”) that SOT had been managing the Vessel and the Defendant had failed to pay SOT’s management fee and operating costs for the Vessel. Therefore, SOT claimed to be entitled to exercise a maritime claim against the registered owner of the Vessel. On 15 July 2013, a writ of summons was issued by SOT and served on the Vessel. Meanwhile, by a writ of summons dated 18 July 2013, the Plaintiff also commenced the in rem proceedings against the Vessel/the Defendant.

On 10 September 2013, the Plaintiff applied for the sale of the Vessel and the application was granted by the Court unopposed. Thereafter, the Plaintiff had obtained a summary judgment in respect of the outstanding charter hire on 2 December 2013 ([2014] HKCU 89) (the “December Judgment”). Meanwhile, in our April newsletter, “The Importance of Proper Accounting Treatment in Ship Arrest Application”, we have discussed SOT’s in rem claim. The Court of Appeal decided that the Court had no jurisdiction in rem over the Vessel and dismissed SOT’s claim.

The Plaintiff’s application
The Plaintiff submitted that it held the only judgment against the Vessel and made an application for orders that the December Judgment had first priority against the remaining sum held by the Court in respect of proceeds of sale of the Vessel, the bunkers thereon and the interest thereon.

The Court applied the above mentioned principle in determining the distribution of proceeds of sale. The Court noted that the first priority, i.e. the bailiff’s fees and expenses had already been paid out from the proceeds of sale.  Further, the Plaintiff’s costs for arrest, preservation and sale pending the litigation had also been agreed with the Defendant.

As the Defendant did not have a claim against the Vessel and SOT’s in rem claim had been dismissed, the Court was satisfied that there was no other claim in rem over the Vessel or the proceeds. In the circumstances, the Court ordered that the Plaintiff be paid the entire remainder of the proceeds together with interest in satisfaction of its costs of the arrest, sale pending the litigation and in partial satisfaction of its judgment.

Conclusion
While there is a well settled order of priorities which is regularly applied by the court, it is important to note that this order is a prima facie ranking only. The determination of priorities is an equitable jurisdiction and in theory the court may exercise its discretion afresh in the circumstances of each case, taking into account the claimant’s unconscionable conduct, gross delay in bringing or pursuing his claim causing prejudice to another claimant, claimant’s failure to assert priority in due time, etc. Therefore, it is prudent for potential claimants to take immediate actions in bringing in rem action against the defendant’s vessel in order to preserve priority.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.