The court’s power to appraise and sell arrested ships before final judgment

An Australian court has flexed its power to appraise and sell arrested ships on an application brought before final judgment. These decisions demonstrate that the Federal Court of Australia will adopt a practical and commercial approach to the resolution of shipping disputes.

In October 2020, the Australian Federal Court considered applications brought by a plaintiff against two ships, the “Teras Bandicoot” and “Lauren Hansen”. The plaintiff had arrested the ships in Darwin Harbour in the Northern Territory, chasing a growing debt for unpaid mooring fees owed to it by the ships’ owner.

The Court granted the plaintiff’s applications in two separate judgments^[1] and the ships were ultimately valued and sold. The decisions usefully explain the circumstances in which a court can order the valuation and sale of ships before final judgment. They also illustrate the commercial approach Australian courts take to resolve disputes of this nature. Unfortunately for the plaintiff in this case, the epilogue to these decisions also makes this tale a cautionary one for anyone who may be considering arresting a vessel to recover a debt.

We examine these decisions and the twist in the aftermath to draw some lessons for ship owners and their creditors.

Circumstances of the arrest

The plaintiff, Bhagwan Marine Pty Ltd (Bhagwan), claimed that the owner of the defendant ships, Teras Maritime Proprietary Limited (Teras), owed it over $275,000 in unpaid mooring fees and daily mooring charges accumulated while the two ships were using Bhagwan’s cyclone moorings in Darwin Harbour.

By the time Bhagwan arrested the ships, they appeared to have been present on the moorings, not crewed and in dead-ship status, for up to two years prior. In April 2020, Bhagwan had significantly increased the mooring fees payable, presumably to encourage the ships’ relocation, but to no avail.

Following their arrest, the ships were surveyed and found to be fit for towage within the harbour despite having a number of defects. In accordance with consent orders made by the Court, the ships were relocated to cheaper moorings by specialist maritime engineers and a tug subcontractor, who facilitated the movement of the ships via “tug and tow” in dead-ship status.

Plaintiff’s applications

Bhagwan applied to the Federal Court for the ships to be appraised and sold pursuant to rule 69(1) of the Admiralty Rules 1988 (Cth) (Rules). Teras did not file a defence to the plaintiff’s substantive claim, nor oppose the applications. Accordingly, the matters proceeded on the papers without the necessity for a hearing.

The evidence showed that Bhagwan had enquired with Teras whether it would provide security to secure the ships’ release from arrest. No such proposals were forthcoming.

The evidence further detailed the results of a search of the Personal Property Securities Register (PPSR) in relation to the ships’ Australian General Shipping Register Official Numbers. Australian-owned ships greater than 24 metres in tonnage length are generally required to be registered. The search revealed security interests registered against the ships in favour of a third party, Malayan Banking Berhad (Maybank). However, the extent of Maybank’s interests was unknown at the time.

By the time of the applications, Bhagwan had incurred and continued to incur substantial costs. These included nearly $60,000 for each ship’s arrest and close to an additional $5,000 per ship in mooring fees and external float inspection costs every fortnight. Bhagwan submitted that in all the circumstances, the Court was justified in ordering that the ships be valued and sold.

Relevant principles

In considering whether to exercise the power under rule 69 of the Rules, the Court referred to the seminal explanation of the guiding principle given in The “Myrto” [1977] 2 Lloyd’s Rep 243 (at 260). There, Brandon J stated that the question of whether to make such an order usually only arises where there is no appearance or defence by the ship’s owner. Then, an order can be made on the ground that:

“unless such order is made, the security for [the plaintiff’s] claim will be diminished by the continuing costs of maintaining the arrest, to the disadvantage of all those interested in the ship, including, if they have any residual interest, the [defendant itself].”

The Court also referred to an Australian case, Bayside Air Conditioning Pty Ltd v The Owners of the Ship Cape Don [1997] FCA 690. Even though the application for sale was opposed in that case, the court there held that the interests of creditors, the owner and the claimants against the ship were best served by ordering its appraisement and sale so that funds may be paid into the Court for the benefit of all parties interested in them.

Decisions

The Court was satisfied that it should make the orders sought in each application. In its consideration, the Court particularly noted that:

• the ships had been under arrest for seven weeks
• Teras had indicated it did not intend to oppose the applications or defend Bhagwan’s claim
• further maintenance work, requiring dry-docking and underwater diving surveys would need to be conducted shortly
• the beginning of Darwin’s cyclone season was imminent and the ships’ moorings needed to be tested
• the estimated value of the ships was between $800,000 to $900,000 and $350,000 to $400,000 respectively
• a third party had registered an interest in the ships on the PPSR
• Bhagwan had undertaken to pay the costs and expenses involved in the valuation and sale of the ships.

The Court declined to make orders immediately directing the manner of sale, though it could have done under the Rules. Instead, it determined that the sales should be guided by the advice of the shipbroker appointed to value the ships. This would be crucial to the efficient appraisal and sale of the ships, the Court stated, citing the “dramatically altered” character of the market for such vessels because of the events of 2020.

Enter Player Three

The ships were ultimately sold by a closed-bid tender. But, before that happened, Maybank filed a caveat against the ships’ release from arrest. It later transpired that Maybank held ship mortgages over both ships, securing loans under which Teras had defaulted. Maybank was seeking full repayment of the outstanding sums secured by the mortgages, totalling nearly US$27,500,000 plus interest.

By way of Admiralty Writs against the sale proceeds, Maybank sought a summary and default judgment ex parte in respect of the outstanding sums. The Court was satisfied that Maybank had, at the very least, a prima facie case, that Teras had taken no steps to appear or otherwise defend the claim and that there was no material before the Court of any factual or evidentiary dispute that may be raised in such a defence. Accordingly, the Court made orders for summary judgment.^[2]

Since Bhagwan had meanwhile obtained a default judgment against Teras for the debts owing to it, it became necessary for the priority between the claims to be determined. A hearing was set for 30 March 2021. However, that day the Court made orders by consent. Bhagwan was reimbursed for the costs it incurred to produce the sale proceeds from each ship — recouping a total of $44,500. Maybank got the rest.

Lessons

• If you have arrested a ship, you may ask a court to order that it be valued and sold before your claim against the owner has been finally determined. This can preserve the value of your security in the arrested vessel and thereby maximises your potential recovery of a debt from the owner.
• Australian courts will grant such applications where the costs of maintaining the arrest are building up, to the disadvantage of all with an interest in the ship, especially if the ship’s owner does not appear or is not otherwise defending the claim.
• Australian courts are mindful of the commercial realities shipping industry players face, including the impact of the COVID-19 pandemic (and the weather). Courts engage the expertise of shipbrokers when exercising such powers to ensure the interests of all parties are protected.
• Remember, if you have to arrest a ship to get its owner to pay you, chances are you are not the only person to whom the owner owes money. Keep in mind that other creditors may have security in the vessel that ranks above yours. And, there is no telling when they might crawl out of the woodwork.

Authors: Nathan Cecil & Joshua Clarke

^[1] Bhagwan Marine Pty Ltd v The Ship “Teras Bandicoot” (No 2) [2020] FCA 1481; Bhagwan Marine Pty Ltd v The Ship “Lauren Hansen” (No 2) [2020] FCA 1482.
^[2] Malayan Banking Berhad v Proceeds of the Sale of The Ship “Teras Bandicoot” [2021] FCA 285; Malayan Banking Berhad v Proceeds of the Sale of The Ship “Lauren Hansen” [2021] FCA 286.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Nathan Cecil

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