The Sahand

DMC/SandT/11/27

Singapore

The Sahand

Singapore High Court : Quentin Loh J : [2011] SGHC 27

Winston Kwek and Joseph Tang (Rajah & Tann LLP) for the plaintiff

Thomas Tan and Janice Choy (Haridass Ho & Partners) for the defendants

Ho Hsi Ming Shawn (Attorney-General’s Chambers) for the Attorney-General

Jeyendran Jeyapal, Leong Weng Tat and Lionel Leo Zhen Wei for the Sheriff

Vivian Ang (Allen & Gledhill LLP) for one of the bidders

ARRESTS OF VESSELS IN SINGAPORE OWNED BY IRANIAN COMPANIES: ASSETS FREEZE IMPOSED BY UNITED NATIONS SECURITY COUNCIL RESOLUTIONS 1737, 1747, 1803 AND 1929: WHETHER SECURITY COUNCIL RESOLUTIONS REQUIRE IMPOUNDMENT OR DETENTION OF VESSELS OWNED OR CONTROLLED BY DESIGNATED PERSONS OR ENTITIES OR THEIR SUBSIDIARIES: EFFECT OF ASSETS FREEZE ON ARREST OF SHIPS PURSUANT TO ADMIRALTY JURISDICTION OF COURT

Summary

The Singapore High Court, while deciding on the facts that the vessels arrested in Singapore were not owned by designated persons or entities targeted by sanctions imposed under United Nations Security Council Resolutions 1737, 1747, 1803 and 1929 (“UN Resolutions”) in respect of Iran, went on to provide guidance on the likely effect and consequences had they been so owned.

The Court, in interpreting the relevant sanctions, took the view that the obligation to freeze assets of a designated person or entity does not extend to the impoundment or detention of vessels owned by the designated persons or entities.

The Court nevertheless observed that the full application of the UN Resolutions would seriously impact the arrest of a vessel pursuant to the admiralty jurisdiction of the Court, as the obligation on financial institutions to freeze assets of designated persons or entities would affect its ability to provide security for the release of the arrested vessel and an arresting party’s ability to enforce any judgment obtained against the proceeds of sale of the arrested vessels or monies paid into court by the designated persons or entities.

This case note has been contributed by Ang and Partners, International Contributors to the website for Singapore

Facts

The three Defendants in the case were one-ship companies, wholly owned by the Islamic Republic of Iran Shipping Lines (“IRISL”). The Plaintiff, a French bank, was one of the lenders in a syndicated loan agreement to the Defendants and other related companies to finance the construction of several vessels. The Defendants’ vessels “TUCHAL”, “SAHAND” and “SABALAN” were mortgaged to the Plaintiff as security for the loan.

The Defendants and the other borrowers defaulted on the syndicated loan. The Plaintiff bank commenced admiralty actions in rem against the three mortgaged vessels, and obtained orders for the sale of the vessels pendente lite (while the actions were proceeding). Following the sale orders, the Plaintiff’s claims were paid and the Defendants applied to the Court for the sale orders to be discharged and their vessels released from arrest.

As the Defendants were wholly owned subsidiaries of the Islamic Republic of Iran Shipping Lines (“IRISL”) a designated person or entity targeted by the UN sanctions, the Court examined the provisions of the sanctions and, on finding that the Defendants were not caught by the same, granted their applications. The sale orders were discharged and the vessels released as the Plaintiffs’ claim had effectively been satisfied.

One of the issues considered by the Court was whether the asset freeze required under UN Resolutions extended to the impoundment or detention of vessels owned by a designated person or entity, or by subsidiaries of a designated person or entity.

Judgment

1. The Defendants who were the owners of the three vessels arrested in Singapore and ordered to be sold by the Court were designated persons or entities under the relevant UN Resolutions.

2. Even so, the asset freeze required by the UN Resolutions did not extend to or require the impoundment or detention of vessels owned by such persons or entities. In coming to this view, the Court had regard to -

a. Article 16(2)(d) of the EU Council Regulation 961/2010 imposing the EU sanctions (the “EU Regulation”) and Paragraph 8 of the Financial Sanctions/Counter Illicit Finance Notice issued by the United Kingdom Treasury dated 27 October 2010 in relation to the EU Regulation, which the Judge said indicated that the obligation to freeze the funds and economic resources of IRISL and of designated entities owned or controlled by IRISL did not require the impounding or detention of vessels owned by such entities.

b. There were no known cases of any vessel being impounded or detained pursuant to the UN Resolutions in the six months following the passing of the resolutions.

3. However, even though vessels owned by designated persons or entities were not subject to impoundment or detention under the UN Resolutions, the UN Resolutions would nevertheless seriously impact the arrest of a vessel pursuant to the admiralty jurisdiction of the Court because -

a. Singapore has enacted legislation implementing paragraph 12 of Resolution 1737, and this required financial institutions in Singapore to freeze funds, financial assets or economic resources of designated persons or entities as well as entities owned or controlled by, and acting on behalf of or under the direction of designated persons (“implementing legislation”).

b. Financial institutions covered by the implementing legislation would be unable to receive funds or financial assets from a designated person or entity as consideration for issuing guarantees to secure the release of arrested vessels, as they would be required to freeze any funds or financial assets from a designated person or entity upon receipt thereof.

c. If the arrested vessels were sold pursuant to a Court Order, the proceeds of sale of the vessels, as well as any payment into court to secure their release, would be frozen by the financial institutions administering funds held by the Court, with the result that the arresting party might not be able to enforce any judgment that it obtained against the proceeds of sale or the amounts paid into court.