Sinking Ship: IBC vis-à-vis Admiralty Act
Adv. Prasad Warkar
(Pursuing Graduate Insolvency Program at the Indian Institute of Corporate Affairs)
नवारंभः अन्यारंभस्यांतादायाति ।
हर एक नयी शुरुआत किसी अन्य शुरुआत के अंत से ही प्रारम्भ होती है ।
(Every Beginning comes from some other Beginning’s End.)
We say that every beginning is the end of something. But it is not the end of every related thing. There are certain things that develop and grow parallelly irrespective of their start. In light of these lines, the author aims to draw a parallel between the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as IBC) and the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (hereinafter referred to as the Admiralty Act).
The Insolvency and Bankruptcy Code was introduced in 2016 and it consolidated and amended the laws relating to insolvency and reorganization of corporate persons. With regard to Maritime Claims, there is an internationally accepted position that a vessel is to be treated as an “independent juristic person”. Any person with a maritime claim can proceed against the vessel independent of the owner of such vessel. Considering this international principle, the admiralty law was codified in India through the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017.
However, with the development of both the laws, for the first time in 2020, an interesting conflict arose before the Hon’ble High Court of Bombay with respect to the interplay between the said laws in the matter of Raj Shipping Agencies Vs. Barge Madhwa & Anr. (2020) ibclaw.in 96 HC.
Points of conflicts between the provisions and proceedings under both the laws:
1. Proceedings:
The proceedings under the Admiralty Act are action in rem with regard to the vessel in question, whereas the proceedings under the IBC are action in personam against the corporate debtor. Also, section 2 (1) (e) of the Admiralty Act lists down certain High Courts that are to have jurisdiction over the proceedings under the Act. On the other hand, National Company Law Tribunal (NCLT) is the Adjudicating Authority under IBC.
2. Treatment of Plaintiff as a Secured Creditor
Under the Admiralty Act, if the plaintiff secures arrest order from an Admiralty Court, the vessel stands charged with his claim, making such plaintiff a secured creditor. Parallel to this, section 3 (31) of IBC defines “Security Interest” as any right, title, interest or claim to property created to secure the payment or performance of an obligation. Thus, no such provisions are specified under the code creating any charge; rather the secured creditor, if any, is bound by moratorium u/s 14 and cannot take the asset out of the control of the Corporate Debtor. Also, the code has further emphasized on the commercial wisdom of creditors, that too mostly the unrelated financial creditors, if any.
3. Distribution of proceeds and priorities (Waterfall mechanism)
Both the said acts have provisions of priority for distribution of proceeds, distinct from each other. Under the Admiralty Act, section 9 provides for inter se priority on maritime lien and section 10 provides for order of priority of maritime claims. The IBC has a non obstante clause and provides for the waterfall mechanism u/s 53 of the liquidation assets. Additionally, under IBC, the secured creditor has an option to enforce his security interest and remain outside the liquidation process altogether u/s 52.
4. Vessels as independent juristic person
The Admiralty Act, as discussed earlier, is based upon the international principles in relation to the Maritime Laws. The act considers the vessel as a distinct juridical entity separate from that of its owner or the shipping company which owns such vessel. Looking at the Insolvency Code, the interim resolution professional or the resolution professional or the liquidator, as the case may be, is duty bound to take control and custody of the assets of the corporate debtor and also manage the affairs of such corporate debtor as a going concern. However, if a shipping company is the Corporate Debtor and undergoing Corporate Insolvency Resolution Process (CIRP), then the control and custody of such assets needs to be taken care of by the interim resolution professional or the resolution professional or the liquidator, as the case may be. Problem arises when the plaintiff under the Admiralty Act secures an arrest of the vessel of the corporate debtor from the admiralty court and the Adjudicating Authority admits application for initiating the Corporate Insolvency Resolution Process against the shipping company simultaneously.
Addressing the interplay w.r.t. the aforementioned points between both the laws in light of the decision of the Hon’ble High Court of Bombay in Raj Shipping Agencies Vs. Barge Madhwa & Anr. (2020) ibclaw.in 96 HC case and in the case of Angre Port Private Ltd. Vs. TAG 15 & Anr. (2022) ibclaw.in 02 HC:
The Hon’ble Court at first concluded that there is no conflict between the provisions of both the statutes. It was held that both the laws can be harmoniously interpreted because only one of these statutes has the non obstante clause, and definitely such statute with the non obstante clause would prevail over the other, however, only while considering the provisions of the other statute harmoniously.
1. Proceedings:
As the proceedings in Admiralty Act are considered to be action in rem and that of the Insolvency and Bankruptcy code as action in personam, it was held that the proceedings before the Admiralty Court are capable of being initiated simultaneously during moratorium u/s 14 or during liquidation as well. It was further held that
“…the Court which is winding up the Company would not have jurisdiction to entertain or dispose of an action in rem against a ship filed in a High Court which has been conferred with Admiralty jurisdiction under the Admiralty Act. Such a suit in rem is not against the company and can only be entertained by the High Court under the provisions of the special Act, viz., the Admiralty Act.”
However, it was also held that the if the owner of such a vessel under arrest appears before the admiralty court and furnishes the required security, in such a case, the admiralty suit would no longer be an action in rem but it would then be an action in personam against the owner of such vessel.
2. Treatment of Plaintiff as a Secured Creditor
Considering the provisions of both the statutes, the Court held that when the plaintiff obtains or secures an arrest under the Admiralty Act, the vessel would stand with his claim, thus making him a secured creditor. Subsequently, the resolution applicant shall consider such plaintiff as a secured creditor up to the amount of his claim/charge on the vessel i.e., maritime claimants apart from being treated as secured creditors should ordinarily be ascribed full value for their claim, and the scheme of priorities under the Admiralty Act should be adopted in the resolution plan. The Court further ruled that the vessels arrested before the moratorium can only be released by the Admiralty Court upon full payment of security.
3. Distribution of proceeds and priorities (Waterfall mechanism)
With regard to this point, the court held that the admiralty court under the Act “…can proceed to judgement against the ship or its sale proceeds without the presence of the Owner. The resultant decree does not bind the Owner unless he has entered appearance and submitted to jurisdiction.” The court also considered the position of both the laws: Admiralty act being a special law with respect to maritime claims and IBC being a general consolidated law.
4. Vessels as independent juristic person
The Hon’ble Court, considering the decision of the case of MV Elisabeth v. Harwan Investment and Trading (P) Ltd., held that the vessel has a “separate juridical personality”. To give effect to the provision under both the statutes, it further held that the existence of a moratorium would not preclude the initiation or continuation of admiralty proceedings. However, they would not proceed beyond the arrest of the vessel since that would defeat the very purpose of insolvency resolution under the IBC.
Conclusion:
The Hon’ble High Court i.e., the Admiralty Court has tried to harmonize the interplay between both the statutes in the case of Raj Shipping Agencies Vs. Barge Madhwa & Anr. and also, in the case of Angre Port Private Ltd. Vs. TAG 15 & Anr. The moratorium u/s 14 of the IBC limits the initiation or continuation of proceedings against the corporate debtor as well as the assets of the corporate debtor. However, the proceedings against the vessel which is ultimately the asset of the corporate debtor is an exception to this general rule of moratorium. The decision ultimately alters the “waterfall mechanism” as specified u/s 53 of IBC, considering the Admiralty Act as a special statute.
However, the Interim Resolution Professional or the Resolution Professional or the Liquidator, as the case may be, will now be duty bound to approach and get directions from the Admiralty Court while taking control and custody of the assets of the corporate debtor, which is a shipping company, in case there are any proceedings before such Admiralty Court.
Considering the decision of the Hon’ble High Court to harmoniously interpret both the statutes, the author would like to highlight a quote:
“Growth is never by chance; it is the result of forces working together”
References:
- Raj Shipping AgenciesBarge Madhwa, (2020) ibclaw.in 96 HC
- MV ElisabethHarwan Investment and Trading (P) Ltd., 1993 Supp (2) SCC 433
- Angre Port Private Ltd. Vs. TAG 15 & Anr. (2022) ibclaw.in 02 HC
- Hero Fincorp Ltd. Vs. Liquidator of TAG Offshore Ltd. (2022) ibclaw.in 328 NCLAT
- The Insolvency and Bankruptcy Code, 2016.
- The Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017.
- The Companies Act, 2013.
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.
