As economic pressures continue to build globally, Lester Aldridge’s specialist and market-leading marine team, LA Marine, is seeing a notable increase in insolvency-related matters. The high-profile collapse of the luxury yacht builder Fairline, which sent ripples across the industry, is just one recent example.

The marine sector is broad and complex, spanning both “dry” (contractual) and “wet” (incident-based) issues across shipbuilding, offshore industries, ship finance, maritime services (such as marinas, ports and harbours), marine leisure, and more.

To help clients navigate the legal challenges that arise when a marine business becomes insolvent, LA Marine regularly works in close collaboration with our Restructuring & Insolvency team. Below, we outline some of the key issues we’re encountering in practice.

Staying Afloat: Advising Creditors

We regularly act for creditors or other stakeholders affected by an insolvency in the marine sector.

An important consideration will always be who owns the underlying marine asset, as that will inevitably determine the likely recovery for that creditor. This may not always be as straightforward as it sounds.

In a recent matter, we acted for a purchaser who had contracted with a shipyard for the construction of a bespoke vessel, which was half-complete at the time the shipyard entered liquidation. The client was obliged under the contractual documentation to pay the shipyard in instalments, with some (but not all) instalments having been paid at the date of liquidation. In this matter, the contract provided for title to the vessel to transfer progressively with each instalment payment, meaning the purchaser was the owner of the half-built craft at the date of liquidation.

However, even where the passing of title favours the purchaser, in practical terms, the prospect of an individual completing a half-built vessel to an original bespoke design and required standards and moving it elsewhere is often a challenging task, and the value of a half-built hull may not, in reality, represent the value of the payments made for it.

In cases where ownership of a vessel lies with the insolvent party, there are two key remedies that we commonly advise on, namely maritime lien and vessel arrest.

Maritime Liens

Maritime liens offer specific creditors a priority status over unsecured claims during insolvency proceedings. In England, maritime liens commonly arise from obligations such as seafarer’s wages, salvage, damage by a ship, and port or harbour dues.

A maritime lien differs from a conventional lien, as the creditor does not need to have possession of the vessel for the remedy to exist. Lienholders can still enforce claims against a vessel even after a change in ownership, through arrest and sale under the jurisdiction of the Admiralty Court. So an unpaid crew member may arrest the vessel they previously worked on, even after the vessel has been sold to a third party.

Other types of lien can also be of assistance to creditors, though they may carry less weight and rank lower in priority in an insolvency situation. For example, possessory liens give a creditor who is in possession of the vessel the right to hold onto the vessel until the debt is settled. Depending on any applicable contractual terms, there may also be a right to sell the vessel to cover the debt.

Vessel Arrest

Vessel arrest serves as another useful remedy for creditors where a debtor is unwilling or unable to pay. The creditor can, amongst other things, apply to the Admiralty Court for a Warrant of Arrest. If successful, the Admiralty Marshal will execute the warrant and ensure the documents are served on the vessel, placing it under arrest.

When a vessel is arrested, it cannot leave port until the creditor’s claim is satisfied or security, such as a bank guarantee or a letter of undertaking from the vessel’s insurer, is provided. Alternatively, if the debtor is unable to settle its debts, the vessel may be sold by court order and the proceeds applied to all debts in order of priority. All creditors can register their interest in the arrest, and secured debts such as registered mortgages will take priority over unsecured debts such as simple monetary claims.

This is a powerful mechanism that prevents the dissipation of valuable assets, forces negotiations with stakeholders and, ultimately, produces funds to cover the debts. However, if there are numerous creditors and the value of the vessel is not sufficient to cover them all (bearing in mind a court sale may not achieve the highest price), then this may not be a particularly fruitful outcome for lower-ranking creditors once costs of arrest are taken into account. When considering whether or not to make an arrest, there are various complex factors to consider, including timing and whether arrest may be prevented by an automatic stay or moratorium as a result of an insolvency process.

Making Waves: Advising Insolvency Practitioners

We are increasingly acting for the liquidators of insolvent companies that have taken on the operation of vessels on behalf of the insolvent owner.

For example, we recently acted for the administrators and, later, liquidators of a maritime towing company with an impressive fleet of vessels. However, a number of the vessels were subject to long-term charters. The insolvency practitioners had to consider a raft of issues to ascertain how best to maximise return to creditors, including the location of the vessels and whether a higher return to creditors would be achieved by the vessels being maintained or sold.

As with most complex insolvencies, a review of each situation (vessel and corresponding arrangement) was required, allowing us to secure innovative outcomes, which ultimately benefitted the company’s creditors. LA Marine represented the liquidators in renegotiating charters and selling vessels in order to further the interests of the liquidation.

Through the Spyglass: Predictions for the Year Ahead

Insolvencies in the marine sector are likely to continue to rise and bring with them a host of complex challenges.

It is anticipated that the boat building market will continue to struggle as boat builders face increased supply chain issues and a diminishing demand for the private ownership of vessels.

The Marine and Restructuring & Insolvency teams at Lester Aldridge are highly experienced in advising insolvency professionals, businesses in distress, and also creditors and other stakeholders who are exposed to and affected by these business failures.

If you are faced with a marine-related insolvency challenge, do not hesitate to get in touch at online.enquiries@LA-law.com.