Written by Shiv Singh and Rohan Gosh

Introduction

The enactment of the Insolvency and Bankruptcy Code, 2016, (“IBC”) represents a pivotal development in the legal framework of India by consolidating and standardizing insolvency regulations across the country. This legislation seeks to establish a systematic framework that guarantees equitable treatment for creditors while clearly delineating priorities via the waterfall mechanism. This mechanism creates a hierarchy among creditors for debt repayment according to their respective claims. Conversely, The Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017  addresses separate maritime legal issues, particularly focusing on maritime liens and facilitating the enforcement of claimants’ rights through actions such as vessel arrest and sale in instances of unpaid debts.

However, complications emerge when a company that owns a vessel becomes insolvent, thereby triggering a moratorium under Section 14  of the IBC. This legal dilemma pertains to the intersection of insolvency and maritime law, where conflicting priorities may arise between creditors pursuing repayment under the IBC and those seeking recourse under the Admiralty Act for unresolved maritime claims. The challenge lies in reconciling these competing interests and ensuring equitable treatment for all stakeholders amidst the intricacies of insolvency proceedings and maritime liabilities.

Harmonising the Scheme of the IBC with the Admiralty Act

The maritime claims under the Admiralty Act are classified as action in rem proceedings, meaning they are claims against the vessel as a distinct legal entity, rather than against the vessel’s owner. Given that this is an in rem proceeding, it may proceed, and an arrest order for the vessel can be issued in favor of the claimant or the individual holding the maritime lien, even while the moratorium under section 14 of the IBC 2016 is in effect, which will not serve as a barrier to such actions. However, the claimant is not permitted to advance further with the claim beyond the arrest while the Corporate Insolvency Resolution Process (“CIRP”) is underway; for instance, the sale of the vessel would negate the statutory objectives of the IBC.

In the case of Angre Port, the court elucidated the position regarding the liquidation of the corporate debtor, asserting that proceedings can be initiated against the vessel under the Admiralty Act after a liquidation order has been issued under the IBC. Such a suit will not be obstructed by the provisions of  Section 33(5) of the IBC, as this section prohibits the initiation of a suit ‘against a corporate debtor,’ not against a vessel considered a “separate juristic person” independent of its owner, even during the CIRP or liquidation process. Consequently, an in-rem action may be initiated even after a liquidation order has been issued because the plaintiff’s claim will be directed at the vessel rather than the owner. However, this condition remains valid only until the owner provides any form of security or submits to the jurisdiction of the admiralty court regarding the in rem proceedings; in such a case, the nature of the proceedings would shift to ‘in personam’.

Upon the commencement of the Corporate Insolvency Resolution Process against a ship-owning company, a statutory moratorium comes into effect, restraining enforcement actions against the assets of the corporate debtor, including vessels. Although maritime claims are conventionally enforced in rem against the ship, the arrest or judicial sale of a vessel during the subsistence of the moratorium is, in substance, an impermissible enforcement action against the debtor’s property. This position has been unequivocally affirmed by the Supreme Court in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd., wherein the Court held that proceedings initiated or continued in violation of the moratorium are void in law. Consequently, a maritime claimant is compelled to submit its claim within the insolvency framework rather than pursue individual recovery through admiralty remedies.

Where the resolution process fails and liquidation is ordered, the vessel, together with all other assets of the corporate debtor, vests in the liquidator, thereby excluding the possibility of independent arrest or sale under admiralty jurisdiction. The claimant’s rights against the vessel are thus converted into a claim against the liquidation estate, to be addressed in accordance with insolvency priorities. This approach is consistent with the Supreme Court’s reasoning in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, which underscored the overriding character of insolvency proceedings over parallel actions that threaten the integrity of collective resolution. Accordingly, insolvency law operates as a significant constraint upon traditional admiralty enforcement, subordinating claims against the vessel to the overarching objectives of orderly resolution and equitable distribution and thus, the stipulations set forth in Section 14 concerning the CIRP and Section 33 relating to liquidation would apply, necessitating compliance from the owner.

Although it appears that judicial precedents have harmonized both statutes and established a well-defined balance, certain ambiguous areas still lack clarity regarding their legal status within the current statutory framework.

The Problem with the Current Legal Position of Maritime and Insolvency Law

Following the judgment concerning the maritime lien holder in Barge Madhwa, it has been established that once an arrest order has been issued during the pendency of the insolvency proceedings, the plaintiff shall be recognised as a secured creditor and accorded such status for the purposes of the resolution plan. for the charge held by them under the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017.

However, this legal position does not align with the definition of a secured creditor under Section 3(30) of the IBC, as merely obtaining an arrest order without any contractual arrangement does not constitute a security interest. Furthermore, additional proceedings cannot be pursued due to the moratorium in effect, as the order only indicates that the ship cannot be moved until the claim is resolved. This arrangement also confers an unwarranted advantage upon maritime lien holders who have succeeded in obtaining an arrest order, as such claimants are able to crystallise their claim into a secured interest over the vessel, secure priority recognition within the resolution plan, and exert enhanced leverage within the insolvency process. Conversely, other maritime lien holders, despite holding claims of an identical juridical character, are denied comparable protection solely on account of the absence of an arrest order, thereby introducing an inequitable distinction within the same class of creditors.

The inconsistency extends beyond recognizing the lien holder as a secured creditor in the CIRP process and also impacts the liquidation process when the shipping company undergoes liquidation immediately following the failure of the CIRP. According to the IBC, Section 53,   which commences with an overriding clause, outlines the order of distribution for the proceeds from the sale of liquidation assets. Meanwhile, Sections 9 and 10 of the Admiralty Act address the ranking of claims, often conflicting with one another. For instance, Section 9 of the Admiralty Act prioritizes the wages of seamen working on a vessel as the highest priority for maritime liens. This prioritization ensures that seamen’s wages are fully paid first from the proceeds of the vessel’s sale, thereby granting precedence to workers in different categories who are similarly situated. Such preferential treatment could potentially contravene the principles of natural justice. For example, prioritizing the wages of seamen over those of other workers, despite both groups facing significant personal risks, could be challenging to reconcile with the objectives of the IBC. These conflicting priority issues must be addressed to ensure clarity and facilitate effective restructuring.

Another argument made in favor of maritime claimants is that they possess a hold or charge limited exclusively to that particular vessel, which does not extend to other assets of the corporate debtor, thereby not adversely impacting other creditors. However, the inherent flaw in this argument is that the vessel, which should constitute part of the asset pool of the corporate debtor for liquidation purposes, is now regarded as an independent asset for the recovery of the maritime claim, without any reduction in value at the behest of such a claimant or plaintiff. This situation contradicts the objectives of the IBC, as if all creditors are experiencing haircuts, a distinct class of claimants should not be allowed full or complete recovery of their dues while being classified as secured creditors under the IBC.

Way Forward

In the United States, Section 362(a)(5) of The US Code stipulates that where a lien secures a claim arising before the initiation of the case, an automatic stay applies to any actions intended to create, perfect, or enforce that lien on the debtor’s property. Nonetheless, secured creditors may seek relief from this automatic stay on two specific grounds. Firstly, they may assert that their interests in collateral are inadequately protected, potentially due to a decline in the Debtor’s Property value caused by delays in proposing a reorganization plan. Secondly, they may argue that the property’s value does not exceed the total amount of debts secured by liens on the property.

Furthermore, secured creditors must demonstrate that an effective reorganization can proceed without the inclusion of the property in question. This principle is equally relevant within the context of the Indian insolvency regime. Claimants seeking the status of secured creditors must provide compelling evidence that the reorganization or subsequent liquidation of the debtor’s assets can be effectively conducted without the vessel being part of the corporate debtor’s asset pool. This requirement is crucial to prevent any disruption or delay in the insolvency proceedings.

By imposing the burden of proof on the claimant, such an insolvency framework ensures that these parties must clearly substantiate their claims to the asset in question. This requirement is designed to safeguard the interests of all creditors involved and to avert any single creditor from gaining an undue advantage at the expense of others. It maintains a balanced approach, ensuring that the asset distribution process remains fair and just.

Conclusion

The intersection of maritime liens under the Admiralty Act and insolvency proceedings under the IBC creates a complex legal landscape that necessitates careful navigation to ensure fairness and clarity. While judicial precedents have made attempts to harmonize the two statutes, challenges remain, particularly concerning the treatment of maritime lien holders as secured creditors and the conflicting priorities in asset distribution. The current legal framework permits maritime claimants to initiate in rem proceedings and secure vessel arrest orders, even during the moratorium period under the IBC. However, this situation generates inconsistencies in the definitions and treatment of secured creditors, which can lead to potential inequities among similarly situated creditors. The conflict between the IBC’s waterfall mechanism for asset distribution and the Admiralty Act’s prioritization of maritime liens further complicates matters, particularly regarding the prioritization of seamen’s wages.

One potential solution lies in adopting principles similar to those in the USA, where secured creditors are required to demonstrate that effective reorganization can occur without the asset in question. Implementing this approach within the Indian insolvency regime would help ensure that maritime claims do not unduly disrupt insolvency proceedings, and that all creditors are treated equitably. Ultimately, addressing these legal ambiguities and ensuring a coherent integration of maritime and insolvency laws is vital for fostering a balanced and effective insolvency system. Such reforms would protect the interests of all stakeholders, promote fair asset distribution, and support the overarching goals of the IBC in revitalizing distressed entities and maintaining economic stability.

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