Admiralty Act reigns over Insolvency Laws: Bombay High Court rules

Gautam BhatikarSenior Partner, Legasis Partners

The Indian Admiralty/ and Insolvency regime have been effectively revamped over the last couple of years. Prior to 2016, there were a multitude of convoluted legislations dealing with the insolvency process which failed to provide an efficient and time bound resolution to stakeholders. In 2016, following an exhaustive public consultation and recommendations process, the India Legislature introduced the Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”). The Code established a separate Adjudicating Authority i.e. the National Company Law Tribunal for dealing with the Insolvency process. The IBC brought about a revival mechanism for Companies such that in case a company is unable to pay its debts, it would first have to undergo a resolution process, through which best efforts would be made to get the Company afloat and running by way of maximum asset utilization and restructuring the Company. This was a welcome change brought about by the IBC as there was no mechanism for reviving the Company under the earlier regime.

In 2017, the Legislature also promulgated and passed the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (“Admiralty Act”). The Admiralty Act was a first codified legislation post-independence, concerning to the admiralty jurisdiction in India. It brought about some significant changes to the manner in which adjudication of maritime disputes would take place. The Act not only modernized the Admiralty laws from the colonial era and incorporated the principals laid down by the Indian Admiralty courts over the years with consistency with the International Conventions.

Although originally it was believed that both the legislations are in no way germane to one another, the promulgation of the IBC and the Admiralty Act bought with it a great dichotomy which remained unresolved. Since the inception of the Admiralty Act, 2017 in various in rem actions under the admiralty jurisdiction of the High Courts, a question arose of the likely overlap with provisions of the IBC and/ or the Companies Act. Particularly issues with respect to the effect and consequences of the proceedings under IBC and issues relating to the need to seek leave of the Company Court, arose. Finally, the Bombay High Court in the case of Raj Shipping Agencies and Ors. v. Barge Madhwa and Anr.,[1] with a view to put an end to the conflict between the two statutes, listed the issues / questions of law and involving complex questions pertaining to the applicability of the IBC and/or the Companies Act while in rem proceedings were also instituted.

Questions before the court:

After considering the complex issues in various proceedings / matters before it, the court framed the following questions, thereby summing up issues arising out of the conflict between the statutes:

Question No. 1

Is there a conflict between actions 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?

Question No. 2

Whether leave under Section 446(1) of the Companies Act, 1956 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?

Findings:

After an extensive discussion on the principles of harmonious construction of both the statutes, the fundamental principles of in rem proceedings and exploring all the possible scenarios, the court consideration and efforts was to protect the interest of both the legislations, which would not defeat the purpose of either legislation. The Court however concluded that an action in rem can be filed and the ship can be arrested before the moratorium under Section 14 of the IBC comes into force or during the moratorium period or even when the corporate debtor is ordered to be liquidated.

A person having a maritime claim (as provided in the Admiralty Act) ought to be permitted to enforce his right in rem and obtain an order of arrest of the ship in question. This will enable him to crystallize his maritime lien or maritime claim as available to him under the Admiralty Act. However, such an action in rem will not proceed till the moratorium period as provided under the IBC is in place. The said conclusion of the Court has ensured that the rights under the Admiralty Act are not defeated and at the same time, the exercise of such rights does not create any conflict with the provisions of the IBC. Further, the action in rem will proceed if the corporate debtor is ordered to be liquidated.

The court also clarified and ordered that an action in rem shall proceed in accordance with the Admiralty Act, the priorities for payment out of the sale proceeds shall also be determined as prescribed under the Admiralty Act and not as per Section 53 of the IBC.

It can be safely observed that the Court whilst coming to the aforesaid findings in the process of interpretation of the provisions of the IBC and the Admiralty Act, has laid down great emphasis on the harmonious construction of both the statues. These interpretations would also serve the interests of all stakeholders under both statutes and are consistent with the objectives of both acts.

The Court also took note of the state of affairs in a number of cases wherein the Resolution Professional/ Liquidator was appointed but failed to take any steps to man, preserve and maintain the vessel during the insolvency resolution process/liquidation process. The crew members were left stranded on board the ship and for all practical purposes were abandoned by the Owners. The Court observed that irrespective of the non-obstinate clause in the IBC, Admiralty Act being a special Legislation takes into account all such relevant factors and therefore exercise of Admiralty jurisdiction would in such cases will be beneficial and assist, rather than hinder, insolvency proceedings / process. It would protect the ship and in turn the security of a mortgagee who is a financial creditor as per the provisions of the IBC. Further, this would also indicate to the mortgagee that they must take steps to protect and preserve their security and if they do not then the Admiralty Court will step in.

A connected question law that arose in the aforesaid matters was whether leave of court under Section 446(1) of the Companies Act, 1956 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?

Section 446 of the Companies Act deals with the staying of the suits while the Company is in the process of winding up. The Court held that Admiralty Law is a special enactment while the Companies Act is rather a general enactment. Admiralty law deals with actions in rem and it was enacted for a special purpose. Thereby it will override the general law. The court further asserted that under the admiralty jurisdiction, the action is against the ship and not the company nor the owner of the company. Section 3 of the Admiralty law confers admiralty jurisdiction exclusively to the High Courts and no other court of jurisdiction. Thus, the Court concluded that section 446 of the Companies Act 1956 will not apply to Admiralty suits.

Conclusion

The Court has thus amply analyzed and explained the scope of the Admiralty Act and the IBC, after an extensive assessment on the principles of harmonious construction and the fundamentals of in rem proceedings.  Given the great dichotomy having arisen due to the overlap of the Admiralty Act with provisions of the IBC and/ or the Companies Act, Hon’ble Court in the said judgment has taken note of the intention of the legislature behind the Admiralty Act and the IBC and has sought to harmoniously interpret and construct their provisions. This in turn will ensure that the sanctity of the provisions remains intact and the rights of the person having a maritime claim as well as the corporate debtor remain unaffected. While taking into consideration the special nature of Admiralty Jurisdiction, the court has distinguished a ship/vessel from any other asset and emphasized on the legal personality of the vessel as distinct from its owner. This is move is highly appreciated and is a step forward in protecting the interest of the parties having a bonafide maritime claim to prosecute its claim through an action in rem.

Gautam Bhatikar | Senior Partner

Legasis Partners, Advocates & Solicitors

[1] CHS No. 66 of 2018 in ADMS 6 of 2015