The Posidon

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DMC/SandT/17/09

Singapore

The “Posidon” and another matter

Singapore High Court; Belinda Ang Saw Ean J; [2017] SGHC 138

Joseph Tan Jude Benny LLP for Piraeus Bank SA, Plaintiffs

Rajah & Tann Singapore LLP for World Fuel Services (Singapore) Pte Ltd, World Fuel Services Europe Ltd and World Fuel Services Trading DMCC, the Interveners

CLAIMS AGAINST SHIP SALE PROCEEDS: PRIORITIES: CIRCUMSTANCES IN WHICH ESTABLISHED ORDER OF PRIORITIES MAY BE DEPARTED FROM: CIRCUMSTANCES IN WHICH NECESSARIES CLAIM MAY RANK ABOVE MORTGAGEE’S CLAIM: WHETHER REQUIREMENT OF KNOWLEDGE OF NATURE AND EXTENT OF EXPENDITURE DIFFERS FOR DIFFERENT KINDS OF NECESSARIES CLAIMS

Summary

In this judgment, the Singapore High Court confirmed that, in determining the order of priorities between competing claimants to the proceeds of a ship’s sale, the proposition that the established order of priorities may be altered if the equities in any particular case demand it, is part of Singapore law, but emphasized that the established order of priorities may only be departed from in exceptional or special circumstances.

This note has been contributed by Leong Lu Yuan, LLB (Hons) NUS

Facts

The vessels “POSIDON” and “PEGASUS” were arrested by the Plaintiff mortgagee bank, Piraeus Bank SA (“the Bank”), and judicially sold. The Bank filed two routine applications for the determination of the order of priorities of various in rem claims against the proceeds of sale, and also sought the payment out of the balance sale proceeds in partial satisfaction of in rem judgments in the Bank’s favour.

World Fuel Services (Singapore) Pte Ltd, World Fuel Services Europe Ltd and World Fuel Services Trading DMCC (“the Interveners”), who were necessaries providers who had supplied bunkers to the two vessels, intervened in the action.

After deduction of the Sheriff’s commission and expenses in and about the arrest, appraisement and sale of the vessels and their bunkers, and the Bank’s costs and disbursements in relation to the arrest, appraisement and sale of the vessels, the net funds in court were insufficient to meet the in rem claims of both the Bank and the Interveners.

The Interveners sought to argue that the recognised order of priorities should be departed from, and that the Interveners’ necessaries claims would have priority over the Bank’s mortgage claims.

Judgment

The judge dismissed the Interveners’ application.

1. While there appeared to be no Singapore cases directly on point, the Court considered the position in England and other commonwealth jurisdictions, namely Australia, New Zealand and Canada, and accepted that Singapore law followed English law in this regard. The proposition that the established order of priorities may be altered if the equities in any particular case demand it, is part of Singapore law.

2. However, for the established order of priorities to be disturbed, there had to be a “powerful reason” and “truly exceptional or special circumstances” (“exceptional” and “special” being used interchangeably), and the departure must be “essential to prevent an obvious injustice”.

3. There are three main factors that “cumulatively go to the equities of the particular case to warrant a departure from the established order of priorities”, such that a mortgagee’s claim would rank below a necessaries claim.

3.1. The mortgagee had knowledge that the mortgagor was insolvent.

3.2. The mortgagee was fully aware, in advance, of the nature and extent of the expenditure incurred by the competing claimant; and

3.3. Such expenditure brought about some benefit to the mortgagee.

4. These factors were listed in no particular order of importance and the overarching consideration is the justice of the case that calls for the order of priorities to be altered.

Benefit to the Mortgagee

5. The Interveners made a fairly novel argument that there was benefit to the mortgagee because “the bunkers supplied provided motive power to the vessels, thereby ensuring the physical safety of the bank’s security (enabling the vessels to move out of harm’s way and avoid physical hazards at sea) whilst the vessels were operational, and enabling the vessels to trade and generate earnings like freight or charter hire to the benefit of the bank.” However, the Court considered this argument to be overly simplistic, given that a highly mobile income generating asset like a vessel exposes itself to a wider spectrum of risks while it is trading

6. The Interveners further argued that in this case, the Bank had directly benefitted from the earnings of the vessels because it had been in the thick of the vessels’ operations, and because the relevant Facility Agreement provided for all income earned by the vessels to be paid into the borrowers’ Operating Account (which was a bank account pledged to the Bank) and assigned to the Bank. The Court rejected the argument, as the borrowers had exclusive use of the Operating Account at the material times. The earnings of the vessel were of direct benefit to the borrowers as shipowners and vessel operators, and not the mortgagee bank.

7. Finally, the Interveners submitted that certain bunkers supplied in Yemen on 8 September 2014 were intended for the Posidon’s arrest voyage to Singapore. The Court accepted that if this was the case, this could conceivably be a benefit to the Bank, but found that the said bunkers were not supplied for the arrest voyage.

8. In the circumstances, the Court held that the Interveners were unable to show that benefit had accrued to the Bank and/or its security because of the supply of bunkers by the Interveners.

Knowledge of Borrower’s Insolvency

9. In determining whether a company was insolvent, the question to be asked is "when was the company unable to pay its debts as they fell due?” and it ought to be answered by focusing on the company’s financial position taken as a whole by reference to whether a person would expect that at some point the company would be unable to meet a liability.

10. The Interveners raised three arguments in relation to the borrower’s insolvency and the Bank’s knowledge of the same. The Court rejected all three arguments.

The “interest payment argument”

11. The Interveners submitted that the borrowers had fallen behind repeatedly in their interest payment obligations, and there was clear indication to the Bank that by 22 February 2014, the borrowers were insolvent. Alternatively, the Bank would have known of the borrowers’ insolvency by 21 May 2014, three months after the Grace Period, and the date on which a fifth interest payment ought to have fallen due, but was unpaid.

12. The Court held that the relevant facility agreement allowed the borrowers to capitalise interest that fell due during a certain grace period, including the interest payment due on 21 February 2014. The said capitalisation would not have been cause for alarm.

13. For procedural reasons, the Interveners were not entitled to argue that the Bank would have known of the borrower’s insolvency by 21 May 2014 – in any event, evidence appeared to show that the Bank had extended the interest period from three to six months after expiry of the grace period and had proceeded as if the next interest payment would only have fallen due on 21 August 2014.

The “control argument”

14. The Interveners argued that the Bank, having exercised control over the borrowers’ financials at the material time, should be taken to have knowledge of the borrowers’ dire financial situation. Specifically, the interveners argued that the Bank had de facto control over the borrowers’ finances for the operational needs of the vessels, was "disguising its involvement by ordering necessaries, such as bunker supplies for the [vessels], through the [borrowers] so as to circumvent any responsibility for these trade debts”, and had also approved the bunkers supplied during June and July 2014.

15. The Court took the view that this argument was a bald assertion and untenable, and held that the borrowers’ finances were not under the Bank’s control as the borrower retained control of the relevant Operating Account and the Bank was not involved in the management or operation of the mortgaged vessels. While the Bank would obtain control over the Operating Account in the event of an Event of Default, such event did not occur until after the relevant bunker purchases had been made.

The “involvement argument”.

16. The Interveners also argued that the Bank had been so involved and apprised of the borrowers’ finances that it ought to have known that the borrowers were insolvent between June 2014 and September 2014.

17. While the Bank was aware that the borrowers had been operating at a loss from January 2013 to August 2014 and had accumulated substantial trade debts, this did not mean that the borrower was insolvent. In particular, the borrowers had on 4 June 2014 informed the Bank of upcoming fixtures secured for the vessels, and indications were that the borrowers were still carrying on business and the outlook was positive.

18. While the Bank had provided an additional loan to pay for bunkers in July 2014, the Bank’s impression was that the borrowers were experiencing short liquidity in July 2014, and that additional funds supplied by the Bank were to assist the borrowers until the next freight payment was received.

Knowledge of supplies made

19. The Interveners argued that “general knowledge” that bunkers were being supplied would be sufficient, and that the supply of bunkers should be distinguished from the provision of ship repairs (where complete knowledge of the repairs done would be required). The Court rejected the argument and held that it would be “artificial and obfuscating” to read into the authorities a different degree of knowledge depending on the type of necessaries claim involved.

20. Given the requirement for exceptional or special circumstances and for the mortgagee to be “fully aware, in advance” of the arrangements made by the necessaries supplier, it would not be sufficient to say that since all ships require bunker fuel to have motive power, the mortgagee must be taken to have knowledge of the fuel supplies being procured.

21. The bunker invoices relied upon to assert that the Bank was kept informed of outstanding bunker invoices owing to the Interveners were for supplies that had already been procured. As such, they could not be given any weight, since the Bank had to be aware of the arrangements in advance.

22. Fixture lists referring to upcoming fixtures did not establish the necessary knowledge as there were no details on the date, amount and location of the bunker purchases.