Maritime Liens in a European Insolvency: Man Overboard?

In recent years, a few illustrious bankruptcies in the maritime industry have revealed the legal issues that arise when maritime law and cross-border insolvency law come into conflict. Most notable were the bankruptcies of the Danish global market leader in bunker fuel supply to ships ‘OW Bunker’ in 2014 and of the South Korean shipping company ‘Hanjin Shipping’ in 2016-2017, formerly the seventh largest shipping company in the world.

The crippling effects of these insolvencies on the maritime industry were enormous. Not only were there exceptional commercial losses, caused by cargo being stranded in ports around the world and ships laying idle, but also human dramas were caused by the legal uncertainty regarding the administration of maritime insolvencies. In the case of Hanjin, for instance, seafarers became somewhat prisoners on the Hanjin ships with supplies aboard running low, partially because different stakeholders were reluctant to allow the ships to enter territorial waters of countries as it was highly uncertain what the fate of these ships would be if they eventually did so.

These issues mainly originate from the clashing of maritime law and cross-border insolvency law at the moment a shipping company goes insolvent. Maritime law provides for specific security rights to protect significant maritime interests, but, when a shipping company goes insolvent, these rights seem to be neglected and dissolve, as it were, in cross-border insolvency frameworks. This is not any different in the EU under the European Insolvency Regulation (EIR), which seems to neglect an important category of maritime security rights, ie maritime liens.

Maritime liens are instruments which arise by operation of law, protecting claims that are crucial for the operation of the ship, such as seafarers’ wages, collision, and salvage claims. Under the EIR, however, maritime lienholders risk losing this protection provided for by maritime law. As such, this protection risks becoming toothless precisely when the financial concerns of the shipping company call for the most protection of lienholders. In addition, the interests of numerous other maritime stakeholders are impaired when maritime liens lose their protection during an insolvency because the claims protected by maritime liens guarantee the smooth continuation of maritime commerce; there is a ‘knock-on’ effect when liens are not effective to protect lienholders.

More specifically, the protection of maritime lienholders under the EIR is jeopardised as follows. Lienholders risk losing their priority over other creditors as provided for by maritime law. In other words, maritime lienholders would turn into ordinary creditors from the moment a shipping company goes insolvent. Moreover, maritime law also grants maritime lienholders direct enforceability and droit de suite of their claim on the ship. These two mechanisms, in essence, guarantee that the lienholder can enforce its privileged claim directly on the ship regardless of the identity of its actual debtor. Direct enforceability guarantees that the identity of the shipowner at the time the claim arises has no bearing on the creation of the maritime lien, whereas droit de suite guarantees that, if the shipowner changes after the claim has arisen, the lienholder can yet enforce its claim on the ship. Both these protection mechanisms are also in jeopardy under the EIR.

Nevertheless, protecting maritime liens appropriately under the current framework of the EIR is not a ‘mission impossible’. The ‘in rem exception’ of article 8 of the EIR potentially forms a safe haven for maritime liens as it provides that rights in rem are not to be affected by the opening of insolvency proceedings when the ship is located outside the Member State where insolvency proceedings have been initiated. It is precisely these lienholders to a ‘foreign’ ship that need protection because the liens connected to ships located in the Member State of the insolvency proceedings are generally respected in these domestic proceedings. Therefore, if maritime liens are classified as rights in rem, lienholders can retain the protection that is afforded to them by maritime law regardless of the location of the ship. This would, in turn, guarantee the smooth continuation of maritime commerce in EU Member States, even during insolvency.

Unfortunately, however, under the current state of law, maritime liens are not unequivocally classified as rights in rem for the purpose of article 8 of the EIR, because this provision mainly refers to the domestic classifications of the Member States to determine which rights are in rem. For maritime liens, the domestic classifications differ considerably despite strong conceptual similarities across borders. As a result, German maritime liens are, for instance, definitely protected by article 8 of the EIR; Dutch maritime liens are categorically not protected; and the fate of French and Belgian maritime liens is ambiguous.

To appropriately administer maritime liens under the EIR and protect maritime commerce in the EU, however, maritime liens should be protected unequivocally by article 8 of the EIR, regardless of the domestic law that they originate from. For this purpose, both domestically as well as on the EU level, the definition of rights in rem and whether maritime liens fall within this category should be reconsidered. For future insolvencies, the appropriate protection of crucial maritime interests as well as the legal certainty that this would produce should mitigate the uncertainty and chaos as experienced in past examples such as Hanjin’s.

Warren de Waegh is a PhD candidate in commercial law at the Erasmus School of Law.