A Phoenix from the Fund:
How Ship Arrest Rights Survive a Court Sale

The question of whether a claimant can commence an action in rem following the judicial sale of a vessel is one of considerable practical importance. The Sanko Mineral provides a clear answer: the right of action in rem is not extinguished but is instead transferred to the proceeds of sale. This article examines this principle through an analysis of The Sanko Mineral, a case at the confluence of Admiralty law, the statutory interpretation of s. 21(4) of the Senior Courts Act 1981, and cross-border insolvency.

A claimant’s right to arrest a vessel in connection with a maritime claim under ss 20 and 21 of the Senior Courts Act 1981 is a pivotal tool for securing the claim. The nature of that security depends on the type of claim.

Where the claim gives rise to a maritime lien – a claim in respect of for collision, salvage, wages and bottomry), it attaches to the vessel herself, granting the claimant secured status from the moment the cause of action accrues: see s 21(3) of the Senior Courts Act 1981, In re Aro Co Ltd [1980] Ch 196 and In re Lineas Navieras Bolivianas SAM [1995] BCC 666. Consequently, a maritime lien survives a private sale, allowing an action in rem to be brought against the vessel even in the hands of a new, innocent owner. However, upon a judicial sale, the purchaser acquires a clean title free from all encumbrances, including maritime liens. In this scenario, the lien is not extinguished but is transferred to the proceeds of sale, deposited in court, which represents the res. This is a principle “long established by the Admiralty Court”: The Sanko Mineral [2014] EWHC 3927 (Admlty).

Conversely, for claims giving rise only to a statutory lien, such as those arising under a contract for the carriage of goods by a ship or for the hire of a ship, security arises only upon the issuance of the claim in rem against a relevant ship: In re Aro Co Ltd. To do so, the requirements of s 21(4) of the Senior Courts Act 1981 must be met. The claim must be brought against either: (a) the vessel in connection with which the claim arose, provided the person liable in personam (the “relevant person”) is the beneficial owner or demise charterer at the time the claim is issued; or (b) any other ship beneficially owned by the relevant person at that time (a “sister ship“). It follows that if a vessel is sold by its owner before an in rem claim is issued, the right to proceed against that vessel is lost.

This raises a different and more complex question: what is the position if the vessel is sold not by the owner, but by judicial order, before an in rem claim is issued? A literal interpretation of s 21(4) would suggest that no such claim could be brought, as the relevant person would no longer be the beneficial owner of the vessel at the time of the claim’s issuance. This very issue was addressed by the Admiralty Court in The Sanko Mineral.

The case concerned a claim by Glencore for US$3.85 million arising from four months’ delay in the delivery of cargo carried aboard the vessel pursuant to a charterparty. Complicating matters, shortly before the delivery, the vessel’s owners had entered into “Reorganisation” proceedings in Japan, which were subsequently recognised in England under the Cross-Border Insolvency Regulations 2006. The charterparty contained a London arbitration clause with a 12-month absolute time bar for commencing proceedings, which would expire in September 2013. Glencore did not commence arbitration but instead submitted its claim within the Japanese reorganisation proceedings. This claim was rejected by the owners’ trustees, a decision which Glencore challenged by petitions to the Japanese court, all within the 12-month period.

Subsequently, the vessel was arrested in an in rem action initiated by the vessel’s mortgagee bank. This led to a court-ordered judicial sale of the vessel in August 2014. Glencore then sought and obtained permission to issue its own claim and lodged a caution against the release of the proceeds of sale in the same month. In September 2014, court ordered payments out, subject to holding Glencore’s claim amount of US$3.85 million. The owners’ trustees applied to strike out the caution on two grounds.

The first ground was that Glencore’s claim was time-barred for failure to commence arbitration within 12 months. Teare J held that, as a matter of English law, this was correct. However, he determined that the substantive validity of the claim, having been submitted within the Japanese reorganisation, was a matter for the Japanese courts to decide in the pending petitions.

The second, and more central, ground was that no in rem claim could be brought post-sale because the ownership requirement of s 21(4) was no longer met. In rejecting this argument, Teare J adopted a purposive interpretation, relying on the “long-established” Admiralty principle that where a ship is sold by the court, “claims in rem may be enforced against the proceeds of the sale”. He reasoned that although a claimant is not literally proceeding against the vessel, they are “regarded as doing so by means of a principle long established by the Admiralty Court”. By the same logic, he held that so long as the person liable in personam owns the proceeds of sale, that person “may be regarded, by means of the same principle, as the owner of the vessel”. The requirements of s 21(4) were therefore satisfied. Glencore’s right of action in rem was not lost but was transferred to the proceeds. The judge found this conclusion to be consistent with provisions in the Civil Procedure Rules (CPR 61.10(2)(a) and PD61 para 3.6(3)) and established commentaries (White Book Vol. 2 at p 693 para 2D-49).

The ultimate success of Glencore’s claim on the fund remained contingent. It depended first upon a favourable outcome in the pending Japanese proceedings and, second, on establishing priority over the mortgagee bank’s claim.

The decision in The Sanko Mineral, while not expressly referring to them, is consistent with earlier authorities. In The Stella Nova [1981] Lexis Citation 615 (EWHC), an in rem claim for breach of a commercial management agreement, which gave the managers the exclusive right to enter into charterparties for the vessel, brought under the then equivalent to s 20(2)(h) of the Senior Courts Act 1981, was permitted against the proceeds of sale after the vessel had been sold by court order.

An even earlier authority, The Montrosa [1917] P 1 (EWHC), involved a claim by charterers for breach of charterparty brought under the then equivalent to s 20(2)(h) of the Senior Courts Act 1981 against the proceeds of sale after the vessel, that met a casualty, had been salved and subsequently sold by court order upon the salvage claim. The court rejected the defendant’s argument that jurisdiction was absent because they no longer owned the vessel at the time the action was instituted. It was held that “where the proceeds are in Court they represent the res, the ship itself, and the action can be brought against the proceeds”. Procedurally, the defendants were rightly described in the claim as “the owners of the proceeds of sale of the sailing vessel Montrosa, now in the High Court of Justice, Admiralty Division, within the jurisdiction of this Honourable Court”, and the claim was served on the Admiralty Registrar as the custodian of the proceeds of sale.

In conclusion, The Sanko Mineral affirms a vital and pragmatic principle of Admiralty law: a judicial sale does not destroy a statutory right in rem but rather transforms it, allowing the claimant’s ‘phoenix’ to rise from the fund.