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Injunction Over the Right of Disposal of Ships

By Mykola Kozachenko & Aleksey Remeslo
Interlegal

www.interlegal.com.ua
Odessa, Ukraine
Tel: 0038 (0487) 52-89-31

Injunctions Over the Right of Disposal of Ships

Maritime business has always been subject to high-potential risks and losses deriving from various reasons, beginning with the natural perils of the sea to the human factor, which includes the non-commercial approach of some business players. Of course the best investment in the serenity of every manager is pre-contractual research of the counterparty and double-checking for any possible risk, however, in practice, that is not always the case, and anyone may face issues in contract performance by the other party.

In such cases, the innocent party would be happy to know and understand the possible instruments and remedies that could bring about the desired result without extraordinary losses or expenditures, or at least minimizing them.

When talking about dealing with ships and shipowners, it is necessary to bear in mind the variety of situations, such as when the ship may become a debtor in the course of her operation, but the owner would not be willing to settle the dues. Such a misconduct from the owner’s side would lead to the logical creditor’s question: “What can I do to recover the debt?”.

The first answer to this question that comes to mind is to arrest the vessel, claiming the indebted amount from the owner. This instrument is a good way that has many positive grounds. However, it should be admitted, that in certain circumstances an arrest is not the best way to achieve the goal, namely to factually recover the debt.

Such a situation may appear, for example, when the creditor wants to claim money from the debtor’s accounts and to secure its claim with the debtor’s assets at the same time. In case of arrest, the ship’s detention in the port would prevent her operation, and, therefore, the movement of funds on the debtor’s account would stop. As a result, the debtor cannot pay its debts because of lack of profit and the only remedy for the creditor is to enforce the claim against the ship, which could take additional time and costs, depending on jurisdiction, and will definitely bring commercial relations to an end.

Fortunately, some jurisdictions, in addition to ship-arrest, offer another practical and useful mechanism to secure the claim related to the operation of a ship, which is referred to as a general term – injunction.

Injunction in this context is the right of the flag-State court to order a prohibition to sell, transfer, or deregister the ship fling the flag of that State.

Some jurisdictions provide different requirements for this kind of instrument, which are to be discussed on a State-by-State basis.

1. Panama

There has been practice in Panama when the Maritime Court ruled for interim injunctions in cases arising outside the Republic of Panama. Injunctions are available to applicants who reasonably fear that imminent or irreparable danger exists and that, as a consequence, could lead to a situation where the result of due process on merits would not be guaranteed. The court order prescribes to indicate in the ship registry data-base that the trial is ongoing and that the prohibition to sell or transfer the ownership is granted.

There is a number of evidence proving the reasonability and necessity of the injunction that shall accompany an application for injunction. Previously, the courts ordered such interim measures against the Panama-flagged ships deriving on the sole condition of the flag itself. However, since recent times, the higher courts have imposed additional requirements for such procedures.

Hence, as for now, in order to satisfy the procedural requirements for an injunction application against a Panamanian ship, it should be acknowledged that the presumed or actual owner of the ship has its principal business domicile in Panama. This leads to the situation when, even if the owner’s company is Panamanian or registered as a foreign company in Panama or has branches or affiliates in Panama or the ship is registered in Panama, but the owner’s effective and real business domicile is outside the Republic of Panama, the courts would decide on its lack of jurisdiction on the cause, therefore, the claim would not be admitted.

Thus, the injunction procedure exists and works in Panama, however such procedure may not be applied to every ship owned by a Panamanian company.

2. Cyprus

A similar procedure also exists in Cyprus, however it is even more convenient there, as far as there is no requirement for the owner’s domicile in the State of flag.

The Court may, if it thinks fit, upon the application of any interested person, make an order prohibiting for a time specified any dealing with a ship or any share therein. The Court may amend its order with any additional terms it considers necessary with further passing of the order to the State Registrar. The Registrar, without being made a party of the proceedings, shall on being served with an official copy thereof obey the order and take care of the ship not to be transferred from the ship registry of Cyprus.

3. Malta

In Maltese legal society, this form of injunction is usually referred to as a “Section 37 injunction”, which means that the procedure is prescribed by Section 37 of the Merchant Shipping Act.

This instrument gives a creditor the right to apply to the courts for an injunction over any Malta-flagged ship, in order to secure, that it cannot be sold, transferred or deregistered from the Maltese ship registry. The convenient point is that it does not matter where the ship is located or trading at the time of application, whilst the time itself is irrelevant as well.

Moreover, this procedure is applicable irrespective of whether the shipowner is a Maltese entity. The courts of Malta can apply Section 37 injunctions against any company owning a ship flying the Maltese flag, even if it is domiciled abroad.

If the flag-State injunction over the ship is not challenged by the owners and therefore remains maintained, it would remain registered in the ship’s registry. This means that once the owner wishes to sell or deregister the ship, he would be prevented to do so until the debt is paid or the injunction crashes through its appeal. Hence, it is quite possible that the mere restriction of the owner’s right to sell the ship creates adequate pressure on the debtor to pay its dues.

So it appears that shipowners’ creditors have an attractive option for choosing an instrument in aims to recover debts from the owners apart from a traditional ship arrest. Even though this instrument is specifically developed in legislations of just a few States, it is of utmost importance to bear in mind that the registers of the named three states cover around 25% of the world’s number of merchant ships and, therefore, the use of the instrument may become very valuable for anyone who doesn’t want his debts to remain unpaid.