Bombay High Court Resolves the Conflict Between Admiralty and Insolvency Law

Saurish Shetye*

In Raj Shipping Agencies vs. Barge Madhwa & Anr., [1] the Bombay High Court had an occasion to consider two novel questions of law, which arose due to the interplay between the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (Admiralty Act) and the law relating to insolvency, contained in the Insolvency and Bankruptcy Code, 2016 (IBC) along with the Companies Act, 1956.

Relevant provisions

On an application filed by a maritime claimant, a High Court conferred with Admiralty Jurisdiction is empowered under the Section 5 of the Admiralty Act, to arrest a vessel within its jurisdiction for providing security against a maritime claim. An order of arrest of a vessel is an action in rem i.e. it is an action against the vessel itself and not against its owner. Once the owner of the vessel enters appearance and furnishes security, the said action gets converted into an action in personam i.e. against the owner itself.

As per sections 14 and 33(5) of the IBC, once an order of moratorium or an order of liquidation is passed against a corporate debtor, no suit or proceeding can be initiated or continued “against the corporate debtor”. Section 238 of the IBC contains a non-obstante provision giving IBC an overriding effect over any other law. Section 63 of the IBC bars the jurisdiction of the Civil Courts. Section 231 of the IBC also bars the jurisdiction of the Civil Courts in respect of any matter in which the adjudicating authority is empowered under the IBC to pass an order.

Harmonising the conflict between the Admiralty Act and the IBC

After the IBC came into force, situations arose wherein insolvency proceedings were initiated against owners of vessels. Such situations created a conflict between the provisions of the Admiralty Act and the IBC. What remained unclear was which of the two statutes would prevail.

In light of the aforesaid ambiguity, the first question that arose before the court was, what would be the effect of an order of moratorium or liquidation on an admiralty action in rem. Similarly, another uncertainty needed to be addressed was, could a maritime claimant institute an admiralty action in rem when insolvency proceedings were pending against the owner of the vessel before the National Company Law Tribunal (NCLT).

Submissions

It was argued before the court that the Admiralty Act is a special act which deals with admiralty matters whereas the IBC is a general act dealing with corporate insolvency. Even if both are considered as special acts, Admiralty Act being the later one will prevail over the IBC. As admiralty jurisdiction is conferred exclusively on eight High Courts in India as defined under Section 2(e) of the Admiralty Act, there is an implied non-obstante clause in the Admiralty Act which bars the jurisdiction of all other courts. An admiralty action in rem is not a proceeding against the corporate debtor within the meaning of Section 3(8) of the IBC. Conversely, it was argued that the IBC is an all-encompassing and comprehensive code. Therefore, the status of an admiralty creditor would have to be found within the umbrella of the IBC and not de hors the IBC.

Observations

After considering the wordings contained in the provisions of the Admiralty Act and the IBC, the court observed that the IBC contains a non-obstante provision whereas the Admiralty Act does not contain a non-obstante provision. If there are two special enactments, one of which contain a non-obstante provision and bars the jurisdiction of the Civil Court and the other which does not contain a non-obstante provision, then the former act will prevail. The principle of interpretation that the later act overrides the earlier act is not applicable in such a situation. It applies only where both special acts contain non-obstante provision and there is a conflict. However, relying on Central Bank of India vs. State of Kerala[2], the Court observed that the non-obstante clause in the IBC would give an overriding effect to the IBC only if there was anything inconsistent contained in the Admiralty Act.

The Court embarked upon giving a harmonious construction to the provisions of the two acts. A peculiar feature of the admiralty jurisdiction is that action in rem is only against a ship which is considered to be a legal personality independent of its owner. Once the ship is arrested, the maritime claimant becomes a secured creditor. If the owner of the ship enters appearance and furnishes security, the action in rem gets converted into an action in personam. Hence, a ship against whom a maritime claimant can initiate an action in rem does not fall within the definition of a ‘corporate debtor’ as defined under the IBC. On account of these salient features of the admiralty law and jurisdiction, there is minimal conflict between the Admiralty Act and the IBC. Therefore, the provisions of the two Acts can be read and construed harmoniously to give effect to both.

The court also defined the role the Admiralty Court and the NCLT would play when the provisions of the Admiralty Act and the IBC come into effect together.

Scenario I – When moratorium is declared after the arrest of the ship

If security is provided by the owner of the vessel to the Admiralty Court, the Plaintiff will be considered to be a secured creditor. The suit will not proceed during the moratorium period. The security furnished will be exclusively for the Plaintiff’s claim. If the resolution plan is approved, the Plaintiff’s claim will be determined in accordance with the resolution plan. The Plaintiff should be able to realise his claim to the full extent of the security provided. If the company is ordered to be liquidated, the suit will continue in personam and the Plaintiff will be entitled to realise its security.

If the security has not been furnished by the owner of the vessel at the time when moratorium is declared, the Resolution Professional may furnish security and secure the release of the vessel. Until then, the vessel will remain in the possession of the Admiralty Court. If the resolution plan is approved, then the secured maritime claimants shall be accorded priority in respect of the value ascribed to the vessel in the resolution plan. If the company is liquidated, the vessel will be sold by way of an admiralty sale as a vessel sold by the Admiralty Court fetches more values as the said sale is free from all encumbrances.

Scenario II – When an admiralty suit in rem is filed after moratorium is declared

There is no bar in filing an action in rem against a vessel as the same is not suit against the corporate debtor and therefore not affected by the moratorium provision. An action by a mortgagee of a vessel would also not be affected by the moratorium provision. A maritime claimant will be considered to be a secured creditor and the procedure prescribed in the aforesaid ‘Scenario–I’ will follow.

Scenario III – When an admiralty action in rem is commenced when the corporate debtor is in liquidation

An action in rem can be entertained even at the stage of liquidation as the claim is against the res and not against the corporate debtor. After obtaining an order of arrest, the maritime claimant would become a secured creditor to the extent of the value of the res but not of the other assets of the corporate debtor. Hence, the other secured creditors of the corporate debtor would not be affected. The vessel will be sold by the Admiralty Court to realize maximum value.

Commonality

In all the aforesaid scenarios, the Admiralty Court will protect the interest of the plaintiff. The Admiralty Court will always have the discretion to sell the vessel. At any stage, if the vessel is sold, the sale proceeds will not be distributed but will be retained by the Admiralty Court until the culmination of the resolution process. In that event, the Admiralty Court will be entitled to invite claims from parties having maritime lien or a maritime claim against the sale proceeds of the res. The determination of priorities will be done in accordance with Section 10 of the Admiralty Act and inter se priorities of maritime liens will be decided in accordance with Section 9 of the said Admiralty Act. As per Section 35(1)(k) of the IBC, the Liquidator will always be entitled to defend the admiralty suit. All maritime claimants who are unable to recover their claim from the sale proceeds of the res will have to pursue their claim in the liquidation as unsecured creditors.

Leave under Section 446(1) of the Companies Act

According to Section 446(1) of the Companies Act, when a winding up order is made or an Official Liquidator is appointed, no suit or other legal proceeding shall be commenced or proceeded with, against the company, except by leave of the court. Section 446(2) of the Companies Act empowers the winding up court to entertain or dispose of any suit or proceeding by or against the company. Therefore, whether the leave of the winding up court is required for initiating an admiralty action in rem and can the winding up Court entertain or dispose off an admiralty action in rem, falling for consideration before the court.

Submissions

On one hand, it was argued that the Admiralty Act being a special and a later act, will prevail over the Companies Act. A Company Court cannot exercise Admiralty jurisdiction under section 446(2) of the Companies Act as its jurisdiction is impliedly barred by the Admiralty Act. On the other hand, it was argued that the scope of Section 446 is extremely wide and the Company Court is invested with special jurisdiction to entertain or dispose of any “suit or proceeding”.

Observations

The Court observed that a suit or proceeding for which leave is necessary under Section 446(1) of the Companies Act must be a suit or proceeding capable of being withdrawn and disposed of by the winding up Court. Relying on Damji Valji Shah vs. LIC,[3] The court stated that since the admiralty jurisdiction is conferred exclusively on certain High Courts, Section 446(1) of the Companies Act will not operate on admiralty proceedings which are pending before the High Court or which may be sought to be commenced before it. Applying the principle that a special law overrides a general law, the Court held that the Admiralty Act will prevail over the Companies Act. Therefore, leave of the winding up Court is not required to commence or continue an admiralty action in rem. However, notice will be required to be given to the Official Liquidator prior to the sale of the ship in an action in rem, unless the Official Liquidator has already entered appearance before the Court.

Importantly, the Court also observed that a maritime claimant would be a secured creditor only to the extent of the value of the ship and not in respect of the other assets of the company in liquidation. Since the Admiralty Act is a special act and prevails upon the Companies Act, sale proceeds of the ship sold by the Admiralty Court will be distributed in accordance with Section 10 of the Admiralty Act and not as per Section 529A of the Companies Act.

Conclusion

A harmonious construction of the provisions of the IBC and the Admiralty Act has kept the sui generis features of the Admiralty Act intact. It is now settled that an admiralty action in rem can be initiated before and after the moratorium is declared and even after an order of liquidation has been passed against the corporate debtor. In case of winding up of a company, the leave of the winding up court under Section 446(1) of the Companies Act is not required to commence or continue an admiralty action in rem. This judgment fills the void which existed when the admiralty and the insolvency domain overlapped with each other. In the coming time, it will be interesting to see if this judgment withstands the test of the Supreme Court.


*Saurish Shetye is an Advocate practicing at the Bombay High Court.


[1] 2020 SCC OnLine Bom 651

[2] (2009) 4 SCC 94

[3] Damji Valji Shah vs. LIC, AIR 1966 SC 135.

1 thought on “Bombay High Court Resolves the Conflict Between Admiralty and Insolvency Law

  1. Advocate Prem Kumar R. Pandey 16th Jun 2020 — 9:13 pm

    An eye opener article. Thanks to adv. Saurish shetye.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Create your website at WordPress.com
Get started
%d bloggers like this:
search previous next tag category expand menu location phone mail time cart zoom edit close