Asian shipping lines hit by crisis are looking to file for bankruptcy in jurisdictions outside the region, finds Sergio Held

On February 12, 2016, the Baltic Dry Index, which measures the price of the cargo moved by 23 shipping lines around the world, hit an all-time-low of 291 points. That same day, Winland Ocean Shipping, a Hong Kong-based shipping company, filed for Chapter 11 in a federal court in Texas. Hard times have hit the global maritime industry. With each passing month, more shipping lines are filing for restructuring or bankruptcy protection in jurisdictions around the world, but choosing the right place to file to save a company and pay creditors is not easy.

Many Asian companies hit by the shipping crisis, such as as Winland Ocean, try to bring their cases to Western courts, while creditors also seek to find the best jurisdictions to get paid.

“The actions taken by shipping companies facing financial difficulties depends on the remedies available to them in their country of incorporation,” says Andrew Rigden Green, a partner with Stephenson Harwood in Hong Kong. “If restructuring under a bankruptcy protection regime is available to them, they will take advantage of that.”

But there is not always a protection scheme available for companies looking for a rescue. Moreover, if one is available, it might be closely related to the one of the flags that their ships are flying. “Most shipping companies own their principal assets – the ships – through special purpose vehicles largely incorporated in the countries of their flag,” says Rigden Green.

Establishing their legal vehicles abroad is a common practice among many shipping companies. As Rigden Green says, many of them are related to the country of the flags of the ships. However, while flagging a ship in an offshore jurisdiction might make it easier for companies to reduce operational costs and to take advantage of less strict regulations, the decision can be a double-edge sword when hard times force them to file for bankruptcy or restructuring.

“It is not generally open to shipping companies to ‘forum shop’ in relation to bankruptcy proceedings, as the United Nations’ model law on cross-border insolvency would let the country where the insolvent company’s Centre of Main Interest is take the lead in the overall insolvency of the group,” says Rigden Green.

Following the United Nations Commission on International Trade Law (UNCITRAL), 41 countries spanning 43 jurisdictions have adopted the Model Law on Cross-Border Insolvency since 1997. However, there are a lot of countries and jurisdictions that are not covered by this. “There are a number of countries and territories that are not signatories to the UN model law, including Hong Kong, and the considerations would be made on a case-by-case basis by the relevant bankruptcy court,” explains Rigden Green.

Shipping companies with vessels flying flags from Hong Kong, Singapore, Indonesia or other jurisdictions that don’t fall under the UNCITRAL model often look to courts in the UK and the U.S. to settle bankruptcy issues, much as Winland did. “The bankruptcy protection is designed to give an insolvent company a ‘breathing space’ to allow it to restructure and emerge from the administration or Chapter 11 as a viable company,” observes Rigden Green. “There are other ways of achieving such a result in other jurisdictions in Asia and specialist advice can be sought in relation to individual situations to try to see how companies can be rescued.”

However, creditors might have a different idea. They might be happier if the processes are filed in a jurisdiction like Hong Kong, which as of 2010 had 1,644 vessels flying its flag. “Creditors are generally looking to be paid. Where there is an insolvency procedure the creditors will want to have some involvement in the process in order to protect their rights and to control the actions of the insolvency practitioners to ensure that as much value is preserved for distribution as possible,” points out Rigden Green. “In terms of jurisdictions they would be happier with jurisdictions such as Hong Kong where there is a strong emphasis on providing value to creditors over saving a failing company.”

Amid analysts’ forecast of a wave of shipping bankruptcies in the near future, law firms such as Stephenson Harwood are preparing their teams to respond to their clients’ needs.

“We have an active programme of ensuring lawyers across the different practice groups have a strong grounding in insolvency as well as their specialist areas,” says Rigden Green. “We work together as teams integrating insolvency specialists from across the globe into our sectoral teams so that we can provide a service that responds to the needs of clients.”