Interaction Between Admiralty Courts And Company Courts: A Critical Analysis Of Raj Shipping Case

On 19th May, 2020, a single judge bench of Bombay High Court delivered a judgment in the case of Raj Shipping Agencies v. Barge Madhwa ["Raj Shipping case"] . The court through this judgment answered two major questions of law with respect to interaction of Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 ["Admiralty Act, 2017"] with Companies Act, 1956 and Insolvency and Bankruptcy Code, 2016 ["IBC, 2016"].

The questions answered were:

[1] Is there a conflict between Action-in-rem filed under the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 and the provisions of Insolvency and Bankruptcy Code, 2016 and if so, how is the conflict to be resolved?

[2] Whether leave under section 446(1) of the Companies Act, 1956 [Now, Section 279 of Companies Act, 2013] is required for the commencement or continuation of an Admiralty Action-in-rem where a winding up order has been made or the Official Liquidator has been appointed as Provisional Liquidator of the company that owned the ship?

In a nutshell, the Court held that there is no need for obtaining leave under Section 446(1) of Companies Act, 1956 for commencing or continuation of an Admiralty Action-in-rem where a winding up order has been made or the Official Liquidator has been appointed to discharge the assets of the company that owned the ship. Also, the Court held that, there is no conflict between Insolvency and Bankruptcy Code, 2016 and Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 and observed that, the latter will compliment to achieve the objective of the former by facilitating the Corporate Insolvency Resolution Process ["CIRP"].

Even though, Question [2] was previously answered by a Division bench of Madras High Court in Pratibha Shipping Co Ltd v. Praxis Energy Agents S.A ["Prathiba shipping case"] in 2019 and this court also reached the same conclusion, both can be distinguished by way of its reasoning.

Action-in-rem by the Admiralty Courts: Background and Procedure:

Globally, neither resolution process nor winding up proceedings hinder a claimant from pursuing an Action-in-rem directly against the vessel-a res. For understanding the interplay between Admiralty Act, 2017 with Companies Act, 1956 and IBC, 2016, it is essential for us to understand about Action-in-rem proceedings by the Admiralty Courts. Action-in-rem against vessel is an age old tradition in shipping industry where actions will be taken by a Creditor against the vessel – a res and not the owner of the vessel. This is made possible through the Legal personality conferred on vessel. Also, a vessel can be sued without reference to its owners. The owners are neither a proper or necessary party in the eyes of law in an Action-in-rem against the vessel.

Usually, the vessel is sued for the claims such as payment of wages, Maritime lien, for loss of lives, personal injury, damages and other claims as mentioned in Section 4 of Admiralty Act, 2017. Also, if the owner does not appear to bail out the vessel during the course of the proceedings, the designated high courts [Section 3] has powers to arrest the vessel [Section 5], sell the vessel [Section 8] and distribute the sales proceeds in the order of priority [Section 10]. The owner or any interested party may interfere in the proceedings and shall provide security to the satisfaction of the Court for releasing the vessel from arrest. Till that time the proceedings will continue as an action-in-rem.

Important issues addressed in Raj shipping case:

On initiation of Action-in-rem proceedings:

Bombay High Court concluded that, Action-in-rem can be initiated during and before the moratorium is imposed and also when corporate debtor was ordered to be liquidated.

[1] If the security was provided by the Corporate Debtor [Owner] before the commencement of Moratorium, the proceedings will be considered as Action-in-personam and the Maritime Claimants will be treated as secured creditors to the limit of value of the asset and decided in accordance to Admiralty Act, 2017 by the appropriate High Courts within whose jurisdiction the vessel lies in.

[2] If the security was not provided by the Corporate Debtor [Owner] and if the Moratorium has commenced, the Resolution Professional will be obligated to maintain the vessel from deterioration in the interest of the secured creditors. But, the vessel will still remain within the purview of Admiralty Court and the expenses incurred for the maintenance will be treated as sheriff's expenses in Admiralty and Resolution Process costs under the IBC and paid out in priority from the sale proceeds of the ship or on a priority basis in the resolution plan as resolution process costs.

[3] If the Resolution fails and corporate debtor was ordered to be liquidated, the plaintiff still shall raise Action-in-Rem proceedings, since it is against the vessel-a res and not the corporate debtor [Owner]. Also, the Action-in-rem proceedings are not barred even when the corporate debtor [Owner] gets liquidated. Only factor distinguishing decision reached in Raj Shipping case from Pratibha shipping case is that, in Raj Shipping the Court necessitated the giving of notice to the Official Liquidator prior to the sale of the ship in an Action-in-rem under the Admiralty Act, unless the Official Liquidator has already entered appearance.

On determination of priorities:

Section 9 and 10 of Admiralty Act, 2017 deals with order of priority inter se parties in an Admiralty proceeding. This provision is in accordance to International Convention on Maritime Liens and Mortgages, 1993. Admiralty legislation has overriding effect over Insolvency legislation to determine priorities over sale proceeds of a vessel in most countries which have ratified this convention.

In Prathiba Shipping case it was said that Admiralty Act, 2017 will be dealing with determination of priorities and not Companies Act, 1956. But, Raj Shipping delved into the reason behind why determination has to be done in accordance with Admiralty Act, 2017 for Action-in-rem proceedings. Also, the Court answered a specific question pertaining to the treatment of workmen in the priority in the context of conflict between Section 529 and 529-A of Companies Act, 1956 and Section 10 of Admiralty Act, 2017.

Precisely, the reason given by the court was that, provisions such as Section 53 of IBC and Section 529 and 529-A of Companies Act, 1956 are general law and gives access to all the assets of the Corporate Debtor. But, the Admiralty Act, 2017 is a special law dealing with Maritime claims against the vessel, which has separate legal personality.

In International Coach Builders Ltd. v. Karnataka State Financial Corporation , the Supreme Court held that in spite of Companies Act, 1956 being a general law, the special treatment given to workmen under Section 529 and 529-A was considered as a special law, since it was introduced through an amendment by parliament in the year 1985. In this context, there arose a conflict as to which will prevail to address the plight of the workmen. The Bombay High Court in Raj Shipping said that, the application of Admiralty Act, 2017 is restricted only to maritime claims against ships/vessels of the corporate debtor [Owner], unlike Companies Act which gives the workmen access to general assets of the Corporate Debtor. Hence, the Admiralty Act, 2017 is considered as a special law to determine priorities in Maritime claims, especially for the claims from workmen. Also, crew members are given high priority and are ranked higher under Admiralty Act, 2017 inter se other claimants in the list.

On Non-Obstante provision and bar on civil court jurisdiction provision of IBC, 2016 in the context of Admiralty Act, 2017:

This is an important aspect of this judgment which compliments almost all the questions answered in this judgment.

It was argued that in spite of IBC, 2016 and Admiralty Act, 2017, both being special enactments, IBC, 2016 will override Admiralty, 2017 for the sole reason of there being a non-obstante provision [Section 238] and barring of civil courts jurisdiction provision [Section 231] in IBC, 2016 and unlike Admiralty Act, 2017. This was in spite of Admiralty Act, 2017 being a special law introduced post the introduction of IBC, 2016.

This was addressed by the court in totally three limbs:

Firstly, the court asserted that,

"the later special act prevails over the earlier special or general act especially in the context of the Admiralty Court exercising in rem jurisdiction. Even though there is no express provision in the Admiralty Act which overrides the jurisdiction of other Courts or statutes, impliedly it has an overriding effect. It is not necessary that there must be an express provision to override an earlier statute such as the Companies Act and the IBC."

This in turn also answers the question with respect to obtaining leave for having Action-in-rem proceedings under Section 446(1) of Companies Act, 1956, in negative. This comes as an addition to what was answered by the Madras High Court in Pratibha Shipping case, where the reasoning was restricted to the analogy around special law and general law.

Secondly, the court held that there has to be Harmonious Construction of provisions of the two special enactments i.e., IBC, 2016 and Admiralty Act, 2016. To substantiate this conclusion the Court quoted the following paragraph from Ashoka Marketing Ltd. & Anr. v. Punjab National Bank :

"The principle that emerges from these decisions is that in the case of inconsistency between the provisions of two enactments both of which can be regarded as special in nature, the conflict has to be resolved by reference to the purpose and policy underlying the two enactments and the clear intendment conveyed by the language of the relevant provisions therein."

Since, Action-in-rem proceedings are against the vessel-a res and not the Corporate Debtor [Owner], the statutes can co-exist within their respective ambit, i.e. to achieve their respective objective.

Thirdly, contrary to the above two limbs, the Court also noted that the Plaintiff in an Admiralty Action-in-rem proceedings will be considered as a secured creditor. So, as per Section 52(4) of the IBC

"A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it."

The law applicable for such creditors will be Admiralty Act and the designated High Court within whose jurisdiction the vessel lies will be the sole authority to entertain claims against the vessel of the Corporate Debtor [Owner].

Also, if the plaintiffs are not satisfied from the claim out of the sale proceeds in accordance with the priorities of their inter se claims as stipulated under the Admiralty Act, 2017, they are at the liberty to claim it through Action-in-personam from the Corporate Debtor as under IBC, 2016 or Companies Act, 1956 and will be treated as creditor by the Insolvency Professional or Official Liquidator [as the case maybe].

Concluding remarks:

Introduction of Insolvency and Bankruptcy Code, 2016 instilled a sense of confidence amidst the creditors, since it created a framework to claim debts from corporate debtor by parri passu rule. It is to be noted that there is no compromise of parri passu rule by Admiralty Action-in-rem proceedings, since in the first place it protects Maritime claimants by considering them as secured creditors and it is primarily against the vessel-a res, which is conferred with legal personality. This makes the Maritime claimants no different from other secured creditors under IBC, 2016. Bombay High Court through Raj Shipping thoroughly analyzed aspects of interaction of Admiralty Act, 2017 with Companies Act, 1956 and Insolvency and Bankruptcy Code, 2016. This timely decision will benefit the creditors since it answers the fundamental question of law in this regard and protects age-old tradition of treating vessel as a legal person to satisfy the claims through vessels instead of opting for Action-in-personam proceedings.

Views are personal only.

(Author is a final year B.A LL.B [Hons.] Student at School of Law, Christ [Deemed to be University], Bangalore)