Paul Ho Head of Greater China, Partner & Chief Representative, Shanghai
China: new judicial interpretation on the arrest and judicial sale of ships
On 28 February 2015, the Chinese Supreme People’s Court (“SPC”) enacted a new judicial interpretation (“the Interpretation”) on ship arrest and judicial sale of ships. This took effect as of 1 March 2015.
The Interpretation aims to clarify and streamline the rules and court practice on Chinese ship arrest and judicial sale of ships. This article highlights the main changes that may be of particular interest to owners, charterers (in particular bareboat charterers) and other interested parties whose ships may call at ports in China.
Previously, Chinese Civil Procedural Rules did not allow double or multiple attachments against the same property. This meant in practice that if a ship was already under arrest, a party other than the first arresting party had to wait until the first arrest was officially lifted by the Chinese Court before a second warrant of arrest could be served on the same ship.
Pursuant to the new Interpretation, multiple applicants are now able to arrest the same ship simultaneously as security for their respective claims. Further, if an applicant arrests a ship, but does not apply for a judicial sale, subsequent applicants are not prevented from applying for a judicial sale themselves. It is not, however, clear whether and how, in the event of multiple arrests, each applicant should provide the required counter-security, but a prudent view would be that the current provisions/requirements in respect of counter-security (discussed below) would equally apply to all applicants.
Judicial sale of bareboat chartered ships
Arrest for claims against a bareboat charterer was already permitted under Chinese law. However, it was not clear whether, in such circumstances, the arresting party could also apply for the sale of the ship if no security was offered. This often left parties who had arrested a ship for claims against the bareboat charterers with an asset against which they could not recover their claim, unless the owners put up security.
The Interpretation now clarifies that an applicant is entitled to apply for judicial sale of a bareboat chartered ship under arrest in order to satisfy a maritime claim for which the bareboat charterer is liable.
As a result, innocent head-owners may find themselves in a vulnerable position if their ship is arrested for claims against the bareboat charterer. When entering into a bareboat charterparty, therefore, owners may wish to ask for sufficient security from the bareboat charterers and/or ensure that adequate insurance arrangements are in place to cover such risks.
Provision of counter-security
One of the main hurdles associated with ship arrest in China is that the Chinese maritime courts almost invariably require counter-security to be posted by the applicant. This remains the case under the Interpretation. The purpose of counter-security is to secure any potential wrongful arrest claims. The level of the counter-security that must be given is within the Court’s discretion and must be confirmed with the Court before any arresting party can lodge a successful application. There has in the past been no standardised practice regarding counter-security amounts. The Interpretation still allows the Court a wide discretion but provides that the amount of counter-security should cover:
- the maintenance costs of the ship during the arrest period;
- the loss of use of the ship as a result of the arrest; and
- the cost incurred by the respondent (i.e. the party against whom the ship was arrested) in relation to provision of security in exchange for release of the ship.
Furthermore, once counter-security has been provided, the owners of the arrested ship may apply for additional counter-security to be posted if they can demonstrate that the initial counter-security is insufficient to cover their likely losses in the event the arrest is subsequently held to be wrongful.
Return of counter-security
The practice of the Chinese maritime courts relating to the return of counter-security has always been a concern for many arresting parties and quite often deters claimants looking to arrest in China. In some cases, counter-security could be held by the Court for up to two years following settlement of the relevant claims, partly due to concerns that the owners may subsequently bring a claim for wrongful arrest. Therefore, most parties make the prompt return of the counter-security an express term of their settlement.
The Interpretation now provides that following conclusion of a claim, a claimant can apply for return of their counter-security. The respondent is notified of this and must bring any wrongful arrest claim within 30 days, failing which the counter-security will be returned to the claimant. Furthermore, the claimant may apply for their counter-security to be returned immediately in the following cases:
- where the respondent agrees to this; or
- where the claimant has obtained a judgment in its favour in the substantive proceedings and has been awarded an amount that is approximately equivalent to the amount of security provided by the respondent.
Clarifications/simplifications of judicial sale procedures
The Interpretation also contains several provisions aiming to streamline the practice of the judicial sale of ships. For example, any judicial sale will be organised by an official ship auction committee rather than by a third party. If an auction proves unsuccessful twice, the Court may sell the vessel by alternative means at a reduced price but the reduced price must not be less than 50% of its assessed value (although the price may subsequently be reduced further if still no sale takes place and if the majority of the creditors agree). Furthermore, creditors must register their claims within 60 days after the Court’s announcement of the first judicial auction, failing which they may lose the right to get paid from the sale proceeds.
China has not traditionally been considered as one of the most arrest-friendly jurisdictions in the world but, given the amount of ships trading in and out of China, the need to arrest and the risk of being arrested in China can arise. Shipowners, charterers, cargo interests, insurers and indeed any party involved in the shipping industry and trading to China should, therefore, be aware of the Interpretation, which makes Chinese ship arrest rules and practice more predictable and transparent.
A more detailed article is available on request.
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