Asset preservation

COMMERCIAL disputes are inevitable. As the volume of goods carried by sea between the PRC and the rest of the world increases, so will the amount of disputes that arise, and the need to enforce claims or preserve assets. To help demystify the steps involved for a maritime creditor seeking to enforce a claim in the PRC, it is necessary to be aware of the ship arrest and judicial sale procedures which are available.

Pre-arrest

  • A legalised and notarised power of attorney and a certificate of the identity of the legal representative of the company must be executed by the claimant in favour of a local PRC lawyer.
  • All supporting documents need to be translated into Chinese and legalised and notarised to file along with the arrest application.
  • Remit the filing fee.
  • File the arrest papers in the maritime court.
  • Counter-security must be provided prior to the arrest being effected. In Shanghai, the maritime court usually requests counter-security equivalent to thirty days' charter hire (to cover the initial thirty-day arrest period). Such security is generally provided in the form of a PICC or Bank of China letter of undertaking. In a recent case, the Shanghai maritime court agreed to accept a guarantee directly from a foreign bank with a branch in Shanghai.

Arrest

  • Arrest the vessel. The arrest papers may be served directly on the master.
  • A bill of complaint for the substantive claim must be filed within thirty days of the date of arrest or the vessel will automatically be released.
  • Service of substantive claim
  • The Shanghai maritime court takes a pragmatic and flexible approach to service of the bill of complaint. This is particularly important to avoid the need for service on foreign owners via diplomatic channels, which can take anywhere from six months to one year.
  • It is usual to negotiate directly with the court to obtain its approval for a particular mode of service on the owner. Service on an owner's registered office via a service agent, service on the vessel's agent and on the master directly have all been deemed acceptable means of service.

Hearing

  • The owner has thirty days after the date of service of the bill of complaint to respond.
  • The court will usually set a hearing date approximately fourteen days following the expiration of the thirty-day reply period.
  • The court will hold a hearing whether or not the owner enters an appearance. The court will review the evidence and subsequently deliver its judgment.
  • It is possible for owners to appeal to the Intermediate People's Court thirty days after service of the judgment.

Auction

  • If the owner has not put up security to have the vessel released from arrest within the initial thirty-day arrest period, and the bill of complaint has been filed, the claimant may then apply for the vessel to be auctioned. This may be done prior to service being effected.
  • An applicant for an auction may be required to provide counter-security to the court. Theoretically, the amount of counter-security should be the value of the vessel. The purpose of the counter-security provided prior to auction is to compensate for the value of the vessel should the sale prove wrongful. This security would most likely take the form of a PICC or Bank of China letter of undertaking. It should be noted that this requirement is at the discretion of the court. In some cases, it has been possible to persuade the court that the need for counter-security for the auction should be dispensed with.
  • An auction committee of three to five members will be appointed, including the court execution officer, a certified accountant and ship surveyor. They will arrange a survey and valuation in order to set the reserve price for the vessel, in addition to organising and presiding over the auction and the other formalities involved in selling the vessel.
  • Thirty days prior to the date of the auction, the auction must be advertised by the auction committee and the court must issue a notice to the registration authority of the country where the arrested vessel is registered, known holders of rights of priority over the vessel, known mortgagees, and the owner.
  • If creditors do not register their claims against the vessel to be auctioned prior to the expiration of the period of public notice, they are deemed to have renounced their rights to receive payment out of the fund held in court.
  • The auction is public, with the highest bid above the reserve price succeeding.
  • The buyer must pay twenty per cent of the purchase price immediately and the balance within seven days, unless an alternative agreement is made with the auction committee.

Payment out of court

  • The court will evaluate the claims of the creditors or claimants who have filed for registration of a claim. When each claimant applies to register its claim it must provide evidence to prove its claim. The court will then undertake an investigation and confirm or reject each application.
  • Each claimant that has had its application for registration approved must file a bill of complaint in relation to its substantive claim. Each substantive claim is subsequently heard by the court.
  • Once judgments have been handed down in relation to all the substantive claims, the priority of these claims must be determined.
  • The court will then call a creditor's meeting to determine the priority of distribution from the proceeds of sale in accordance with PRC law, as follows:

    (a) The legal costs of the forced sale, expenses of preserving and selling the ship, expenses for distribution of the proceeds of sale and other expenses incurred for the common interests of the claimants;
    (b) Crew wages and other remuneration, repatriation costs and social insurance costs;
    (c) Death or personal injury claims in connection with the ship's operation;
    (d) Unpaid tonnage tax, pilotage fees, harbour duties and other port fees;
    (e) Salvage claims;
    (f) Compensation claims resulting from tortious (i.e., negligent) acts committed during the ship's operation;
    (g) Claim of a shipyard or shiprepairer secured by a possessory lien;
    (h) Claim secured by a ship mortgage;
    (i) Other claims.

  • The court will issue a ruling in relation to the priorities to the fund in court.
  • The court will then apply to the state administration of foreign exchange to obtain approval to remit foreign currency out of the PRC. After approval is obtained, payments may be remitted out of the PRC in US dollars.

Timeframe

  • The timeframe will obviously depend on whether or not the proceedings are defended by the owner.
  • If undefended, a judgment may be obtained and the vessel sold by auction within six months. Depending on the number of claimants to the fund in court, physical payment out of the fund in court may take another three to six months.
  • To expedite matters (when acting for mortgagee banks) it is possible to successfully apply for payment out of the majority of the fund in court, leaving sufficient funds to cover the remaining claims which are yet to be determined.
  • If the owner defends the claim, it is presumed that a P&I club letter would be put up to cover the substantive claim and the vessel would be released, avoiding a judicial sale. If not, while a sale may be achieved within six months, it may take longer to obtain a judgment in relation to the substantive claim. Obtaining payment out of the fund in court would also inevitably take longer if the owner defends the fund, and depending on the number of other claimants may realistically take up to a year.
  • The court will allow remaining competing judgment creditors to make compromises among themselves in order to expedite payment out.

While the PRC has, in the past, had 'transparency issues' for foreign litigants, the reputation of China's specialist maritime courts continues to grow. In recent times these courts have proven themselves to be commercially minded and pragmatic in dealing with international maritime claims.