Bankruptcy, China

All Aboard -- For A Major Maritime Bankruptcy

How will China respond to the Hanjin Shipping bankruptcy?

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A Hanjin container ship (by Ingrid Taylar via Flickr).

A Hanjin container ship (by Ingrid Taylar via Flickr).

Hanjin Shipping has filed for bankruptcy in South Korea, and indications are this will lead to liquidation of Hanjin assets, with creditors getting the proverbial “pennies on the dollar.” The Korean Court is requiring all creditors to file their claims against Hanjin by October 4, 2016 (Korea time!), and a failure to get your claim in by that date will almost certainly mean you will get nothing at all from the Hanjin liquidation.

Recognizing the likelihood of its claims being severely reduced in the Korean bankruptcy, many large or just aggressive creditors are looking to avoid this situation by seeking to seize Hanjin assets, including Hanjin vessels, all around the world. There is word of Hanjin vessels having been arrested in China, in Singapore, and in the United States. At this point, most companies are not initiating any vessel arrests themselves, but choosing instead to monitor the arrests and getting ready to join in on them if — and most especially — when that makes sense. Just as is true of the Korean bankruptcy action, vessel-arrest actions all around the world have their own deadlines, and a failure to file a timely claim in those vessel-arrest actions can lead to the vessel being sold without your getting anything at all from the sale proceeds.

It is probably only a matter of time, though, before Hanjin secures bankruptcy protection in additional countries, and then it will be able to use that protection to block vessel arrests and sales. It is a waste of money to arrest a vessel (or even to join in a vessel arrest) if the bankruptcy court of the country in which the vessel is under arrest will soon order the arrested vessel to be released. The key is to have a good idea of those countries that will honor Hanjin’s bankruptcy filing by giving Hanjin bankruptcy protections in their country as well.

US china flagsBut some countries are notoriously unfriendly to foreign or just Korean bankruptcies and are not likely to provide Hanjin Shipping with any respite from asset seizures and vessel arrests via bankruptcy court protections. It remains to be seen exactly which countries will fill out this list, but if past performance is any gauge of future performance (and we all know that it is), we can expect China to figure prominently at the top of this list. For this reason, we can expect many Hanjin creditors to eventually pile in on Hanjin vessel arrests within China. If — as expected — China does not provide any bankruptcy protection to Hanjin vessels arrested in China’s ports, the most likely outcome is that those vessels will be sold at auction, and the proceeds from those sales will be divided (based on claim priority) among those who filed claims against the specific vessels in China’s courts. What will be interesting is whether the Korean court will bar those that engage in arrest actions outside Korea from collecting at all from Hanjin proceeds in the Korea court action.

Many years ago, my firm represented a massive Korean chaebol in an action against a large American vessel owning company that had declared bankruptcy. Our plan was to arrest the American vessels in Russia and/or Korea and/or China and/or Japan and not worry about collecting the small amounts that might be available to our client in the American bankruptcy action. But when our plan went up the flagpole at the Korean company, one of its U.S. subsidiaries successfully lobbied against it, fearing our foreign-vessel-arrest actions would harm its reputation with both the U.S. courts and the U.S. public. I mention this case to show how complicated these international maritime bankruptcies can be and how one must think and act strategically at all times, and not just jump in at what looks to be a potential collection opportunity.

That is especially likely to be true with respect to collecting on debts from Hanjin, for the additional reason that many vessels bearing the Hanjin name are not owned by Hanjin at all; some are merely chartered by Hanjin, and some are said to no longer have any connection with Hanjin at all. This means anyone who arrests a “Hanjin” vessel not owned by Hanjin could conceivably be subjecting themselves to a damage claim for wrongful arrest. Those whose cargoes are delayed by such a wrongful arrest may even have their own damages claims to bring against the party that initiated the ill-fated vessel arrest.

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In addition to those owed money by Hanjin are those with cargo tied up on Hanjin vessels. The situations for these companies are so situation-specific and so fluid, about the only advice one can give them is to stay on top of the situation involving Hanjin, their own cargo, and the specific vessels carrying their cargo.

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Portland, San Francisco, Barcelona, and Beijing. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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