Admiralty Court's Powers and Ranking of Claims

Introduction 

Hong Kong is a chosen jurisdiction for shipping disputes. Vessels are brought there, usually at the behest of mortgagee banks, because it has a reputation as a level playing field and the Admiralty Court has a reputation for understanding intricate legal concepts and finding reasonably expeditious solutions. 

The Halcyon Isle(1) established that the system of priorities in maritime cases depends on the forum. When a ship is in Hong Kong, it is under Hong Kong law. The United Nations Commission on International Trade Law rules do not apply yet, although the United Kingdom and Canada have already signed up to them. The Supreme Court Act 1981 of England and Wales is the originating statute in Hong Kong admiralty jurisdiction. It has been incorporated into Hong Kong law and governs the types of claim that are subject to admiralty jurisdiction, including the claims for which vessels can be arrested. These claims are as follows: 

  • possession or ownership claims;
  • a mortgage on a ship;
  • claims for damage done by or to a ship;
  • claims for loss of life or personal injury due to a defect;
  • claims for loss of or damage to goods;
  • claims associated with use or hire;
  • claims for salvage, towage or pilotage;
  • claims for goods or materials supplied to a ship;
  • claims in respect of construction or repair of a ship;
  • claims by the master or crew for wages;
  • claims arising out of general average ordinance; and
  • claims arising out of bottomry and collisions. 

In contrast, non-maritime insolvency priorities are as follows: 

  • winding-up expenses;
  • preferential debts;
  • preferential charge on distrained goods;
  • general creditors' claims;
  • interest on debts in the above claims; and
  • debts or other sums due from the company to its members as members generally,

in accordance with their respective rights and interests. 

Maritime liens and statutory claims 

The key difference between maritime liens and statutory claims is that maritime claims depend on the ownership of the vessel, whereas maritime liens can be enforced against the vessel irrespective of ownership and despite a change of ownership. 

Not all claims enjoy maritime lien status and priorities vary among maritime lien claims. Statutory claims are created by statute and do not begin as maritime claims - they require the issuance of a writ to bring them into existence. Another significant distinction is that maritime liens do not require a procedure to be issued during a particular ownership: a ship is subject to such liens from launch to scrappage. 

Arresting sister vessels 

Under Hong Kong jurisdiction, sister ships can be arrested. If a claim arises in connection with a vessel and the party that would be liable under the claim in an action in personam was the owner or charterer of the vessel - or in possession or in control of it - when the action arose, an action in rem may be brought in the High Court against the vessel. This is true if, at the time when the action is brought, the relevant person is the beneficial owner of the vessel in respect of all shares therein or is the demise charterer. An action may be brought against another vessel of which the relevant person is the beneficial owner, in respect of all shares therein, when the action is brought. 

Ship arrest procedure 

Hong Kong's arrest procedure is very user friendly (for further details please see our article on ship arrest procedure). In the case of in rem jurisdiction, the ship must be in Hong Kong in order for arrest to take place, but need not be there when the writ is issued. Once the writ is issued, it is simply a matter of waiting until the ship comes in. 

Issuing a writ and warrant of arrest prompts the Marine Department to put the relevant vessel on watch - once the ship comes in, it will be placed under arrest. This is the most effective way of getting a claim paid. It works as leverage because it hurts the relevant parties' commercial interests: they have contracts and loading schedules to keep. In a more fluid situation, it is often possible to trigger payment of the claim or a settlement. In the case of a disputed claim, the claimant will generally be provided with a form of security, such as a letter of undertaking from a protection and indemnity (P&I) club.   In a total insolvency situation in which everything has broken down - hull insurance premiums and P&I calls have gone unpaid and no entity is prepared to come forward to provide security - there is generally no alternative to sale through the court.(2) 

The court will not make an order for sale pendente lite (ie, pending litigation), unless there is good reason to do so. The cost of maintaining arrest beyond the value of the claim is deemed to be sufficient grounds. If a claimant can make a case that a ship is a wasting asset, the court will make an order for sale on this basis. The arrest procedure can be effected within two hours if the firm in question is accustomed to the procedure. Salependente lite can often be completed in three months and the costs are not prohibitively high.

Unfortunately, Hong Kong has no established equivalent to the effective French remedy ofsaisie conservatoire, which allows a debtor's property to be seized and detained on judicial authority pending judgment. It may be possible to arrest a vessel by seeking an injunction, but this is more difficult and expensive. In some cases a Mareva injunction has been sought against a vessel. This pre-emptive remedy potentially has worldwide effect, but the essential requirements (ie, a good arguable case, assets within the jurisdiction, a likelihood of dissipation of assets and a duty to make full and frank disclosure) are not easily met. Obtaining Mareva injunctions against vessels in order to stop their owners dealing with them can backfire and is unadvisable. A vessel must be crewed, powered and generally maintained; if care is not taken, it can sink, break anchor or collide with another vessel, in which case the party that sought the injunction can, in certain circumstances, become liable for the resulting costs. 

The new civil justice reforms have opened up Hong Kong to claims where injunctions are available to provide support and security for foreign proceedings. This could extend to other arbitration forums and may prove useful. 

Comment 

The outlook for the Hong Kong shipping industry and the Hong Kong admiralty jurisdiction is bright. The key to its future is Hong Kong's proximity and links to China. Although the shipping markets - particularly the container trade - have been depressed by the global downturn, this should prove a relatively short-term problem in this part of Asia, as China has a voracious demand for raw material imports and a burgeoning shipbuilding industry. This will fuel future growth in Hong Kong's well-established shipping and infrastructure services, and will benefit a jurisdiction which is respected by Chinese and foreign parties for its mature administration and trusted legal system. 

Endnotes

(1) [1980] 2 Lloyd's Rep. 325, 1980 AMC 1221, [1981] AC 221 (PC).

(2) In theory, the bail system is an alternative; however, the required surety is highly unlikely to come forward.