re-proceeding ship arrest in China for obtaining security

On 22^ndSep. 2016, Company G, a BVI company,filed an application to Qingdao Maritime Court for arresting ship B(the “vessel”)owned by Company S, a company registered in South Korea, claimingfor unpaid bunkerclaims plus interest and costs around USD 450,000supplied to vesselsof Company S.  Qingdao Maritime Court(the “QMC”) approved the ship arrest application and arrested MV B during her repair at Longyan Port of Shandong province. In order to release vessel from arrest, Company S providedcash security around USD 450,000 to QMC, the vessel was released accordingly.

Owner Company S under Rehabilitation in Korea

Then, Company S(the “Client”) entrusted HiHonor law firm to handle this matter. Through investigation, we learned that, the Client is under debts rehabilitation procedure in Republic of Korea due to serious financial hardship. Busan District Courtapproved the rehabilitation plan of the Client on 8^th June 2016, with immediate legal effect, so all the 137 creditors of the Client, including 5 secured creditors and 132 non-secured general creditors, should be bound by the Korean court decision. According to the debts rehabilitation plan approved by the Korean court , Company G(the “Claimant”), as one of the 132 general creditors, the unpaidcredit/ unpaid bunker claim should be paid in the following way:

1) 69% of principal and pre-commencement interest should be converted into equity, and 31% thereof should be paid by spread payments in cash from 2017 to 2026.  2) Post-commencement interest is exempted.

In accordance with Korean law, during the debtor rehabilitation procedure, any creditor is prohibited from taking any action against the debtor and/or its assets in Korea.

It’s easy to understand from the above rehabilitation plan, the Claimantcould only recover 31% of its principal claims, and cash payment should be spread in 10 years from 2017 to 2026.

The Claimant was NOT satisfied with the above rehabilitation plan, so they tried to seek for paymentin full of their unpaid bunker claim throughforum-shopping in China,where the debtor rehabilitation procedure of Korean court would not be recognized.

Bankruptcy protection/Rehabilitation will NOT be recognized in China

Considering that there is no bilateral or multilateral treaty regarding the bankruptcy procedure between China and South Korea, and as per Korean lawyer’s kind research that no Korean court caseeverhas ever recognized the bankruptcy procedure of PR China court yet, thus principle of reciprocity cannot be invoked either, hence it is NOT possible for the Chinese court to recognize the Client’s on-going debtor rehabilitation procedure in Korea.  We think this may be one of the main reasons why the Claimantapplied to Chinese court for ship arrest, and filed lawsuit in order to achieve full recovery of debts.

Forum Shopping in Chinese court will prejudice other 136 creditors’ interests
As expected, the Claimant filed lawsuit in QMC before expiry of 30-days’time limit provided by PRC Special Maritime Procedure Law. Since QMC has seized jurisdiction over this case by pre-proceeding arrest of the Vessel,thus the lawsuit was accepted smoothly.Obviously, if QMC exercise jurisdiction on this case and hear the case in substance, thepotentialjudgment would probably be in favor of the Claimant, including the appeal procedure, and thenthey could apply for enforcement and get payment in full from cash security provided by the Client, which will prejudice the interests of the other 136 creditors, and to the worse, even destroy the rehabilitation of the Client.

Forum Non Convenience –good defense for the Client

Through analysis and research in detail, in light of that both parties involved in this case are foreign companies and no interests of any Chinese party were involved, we think the forum-non-convenience doctrineis possible to apply in this case.

The forum-non-convenience doctrineis provided by Art. 532 of the PRC Supreme Court Juridical Opinions on Application of Civil Procedure Law, as follows:

If a case meets simultaneously of all the following conditions, people’s court can order to dismiss the case filed by plaintiff, notifying the plaintiff to file lawsuit to more convenient foreign court.

a) The defendant requested the case should be tried by more convenient foreign court or have raised Objection on Jurisdiction;

b) There is no jurisdiction agreement between the parties;

c) This case does not subject to the exclusive jurisdiction of PR China court;

d) This case does NOT involve any interests of the state of China, any Chinese citizen, company or organization;

e) The main facts in disputes were NOT incurred within the territory of China, and Chinese law does not apply to this case; it would be of great difficulty for PRC court to find out facts and to apply governing law;

f) Foreign court has Jurisdiction to entertain this case, and is more convenient to handle this case.

We opine thatthere is possibility that the court would recognize that this case meets all the conditions stipulated by the above Article, so we submitted theObjection on Jurisdiction within the statutory 30 days’ period for making defense to QMC, and viewed that Korean court should be more convenient forumfor unpaid bunker disputes.  Based on Objection raised by Company S, QMC held public hearing on whether forum non convenience doctrine should be applicable to this case. Both parties expressed their opinions in detail during the public hearing.

After examination, QMC viewed that,

Although this court by pre-proceeding arrest of vessel MV B, seized jurisdiction of this case, due to this case meets the conditions/circumstances described in Art. 532 of the Judicial interpretations on Civil Procedure Law, hence, this court can order to dismiss the case of plaintiff, notifying plaintiff to file the case in more convenient foreign court. Therefore, QMC dismissed the action filed by the Claimant.

The Claimantappealed against the QMC civil order to Shandong High People’s Court.

On 25^th April 2017, Shandong High People’s Court issued final effective order, rejected the appeal of the Claimant, and the order of the first instance court was Maintained/Upheld.

This case is a remarkable positive sign for Chinese court to declinelawsuit filed by foreign party against another foreign partyunder bankruptcy protection of the foreign court. AlthoughChinese court would NOT recognize and enforce the foreign bankruptcy procedure, howsoever, if no Chinese interests are involved in such lawsuit, and ifall the six conditions for application of theforum-non-convenience doctrineare met with, the defendant/respondent could invoke the forum-non-convenience doctrine as good defense point, applying to Chinese court to dismiss the lawsuit filed by foreign party.

It is worth to mention that, although lawsuit for unpaid bunker claims were rejected by PRC court, the pre-preceding ship arrest for obtaining security is NOT wrongful in this case, thus the defendant owner S Company cannot claim for losses arising from ship arrest including costs incurred for furnishing cash security to Chinese court, and legal costs incurred for defending the case, main reasons as following:

It is clear view of both 1^st instance court and the appeal court that, the Claimant is entitled to apply for arrest of the vessel to obtain security under Special Maritime Procedure Law of PRC (the “SMPL”), as ship supply/unpaid bunker claim is one of the maritime claims stipulated under Article 21.

By pre-proceeding attachment/provisional attachment/arrest of ship by PRC court, QMC accordingly seized jurisdiction to entertain this claim in accordance with SMPL.

According to Art.532 of the Supreme Court Judicial Note on conditions to apply Forum Non Convenience doctrine, even if owner’s case met with all 6 conditions, the PRC court MAY either reject claim of the claimants, or MAY NOT reject claim of claimants, and in the past over decades’ PRC maritime trial practice, it is very rare for foreign owner under debts rehabilitation procedure won such a case based on Forum Non Convenience doctrine.  In other words, PRC court can simply handle /entertain the unpaid-bunker claims filed by the claimant/plaintiffCompanyG, and may continue to hear and uphold unpaid bunker claims in favor ofCompany Gand to enforce unpaid Judgment amount from the cash deposit provided by owner S. That aforementioned scenario should NOT be a surprise. While in this case, the 1^st instance court and its appeal court both showed sympathy to Korean owner under financial difficulty of debts rehabilitation and global downturn shipping market, issued court order in owner’s favor by setting aside the claims of Company G, aiming to ensure fairness and justice to all parties and interests concerned, in particular it is good to the other 136 creditors of the owner company, as approved by Korean court order .

n summary,as ship arrest in this matter does NOT amount to wrongful arrest under PRC Special Maritime Procedure law, the Claimant has had no fault/negligence, hence, it is lack of legal basis for the owner S company to claim for wrongful arrest losses, including for expenses, costs incurred since 22/09/2016 when vessel was arrested till early May 2017 when the owner deposit money was fully released by the 1^st instance court.