On the waterfront: Restructuring international shipping companies

Video | July 2016 | 00:05:52


Charlotte Winter: The shipping industry have seen unprecedented levels of stress in the years since the financial crisis, so it is no surprise that it has seen a significant amount of restructuring, but Mark why might restructuring in the shipping industry be more complex than other industries?

Mark Craggs: Really it is a question of the interaction between the maritime law and restructuring and insolvency laws and as well as, I suppose, the multi-jurisdictional nature of the work and really there are two aspects there. Principally shipowners have the valuable assets, the ships themselves by nature move from jurisdiction to jurisdiction in the ordinary course and as well the way the international shipping companies are set up, they normally have companies in a number of jurisdictions for financing, tax, organisation registration purposes so at any time you are contending with a number of different jurisdictions and the challenges posed in each.

Charlotte Winter: And of course as is often seen as a creditor friendly industry with creditors often being able to establish maritime claims against shipowners and being able to arrest ships or even associated or sister-ships in multiple jurisdictions around the globe. So if a shipowner is struggling to pay its creditors, what options are available?

Mark Craggs: In all cases I would recommend early engagement with financial and other creditors. Normally the sooner you catch a problem the more options you have available and I mean normally a consensual solution will be in the best interests of all parties. One thing you need to be careful of in entering into discussions with creditors is triggering events of default or disclosure obligations that the company might have and if it’s got to a point where individual creditors are threatening or taking unilateral action in different jurisdictions then the company will have to sit down with its advisers and pinpoint the relevant jurisdictions in which maybe an insolvency filing or some other protection is necessary and devise a strategy which will help avoid the risk of those proceedings and also help maximise value and help deliver an environment for a successful turnaround.

Charlotte Winter: And we often hear a lot about Chapter 11 being used by both US and non-US shipping companies. What are the advantages of it?

Mark Craggs: Principally the advantage is the worldwide effect of the automatic stay that applies when you get Chapter 11 protection. Because it’s a debtor in possession proceeding, the existing management stay in place which has obvious advantages and they’re not replaced by an insolvency office order and in terms of devising a restructuring plan you have an ability in certain circumstances under Chapter 11 to cram down dissenting creditors which I mean can, if you’ve got hold-outs or people that are making life difficult, can be a very valuable tool. I think as far as non-US debtors are concerned it’s worth mentioning that the ease with which they can Chapter 11 protection is very much in favour of doing that because the jurisdictional hurdles are actually comparatively low.

Charlotte Winter: So why might a shipowner look to a different insolvency regime?

Mark Craggs: Principally it’s a question of the jurisdictional reach of the courts in a particular jurisdiction, both in terms of whether particular creditors who are of concern are bound or subject to the jurisdiction of that court but also in terms of whether assets of the debtor in those jurisdictions are adequately protected. It’s a question of cost and you find that a lot of more court intensive proceedings can be a lot more costly. Also in terms of flexibility, so it may be that you seek protection in a court in a particular jurisdiction in order to deliver a local solution that’s tailored to your particular circumstances, rather than seeking one kind of broad brush approach if you like and I mean in that connection one potential strategy for the debtor to take would be to have, to open main proceedings in the key, the main jurisdiction and then seek to open other proceedings by way of recognition of those proceedings and you can perhaps do that under the uncitral model law as enacted in relevant jurisdictions. A final point is that increasingly a lot of non-UK debtors have been using English schemes of arrangement in order to deliver restructurings and schemes have the benefit really of being very flexible, you can tailor them to the relief that you need and also because the court involvement is minimal you can deliver the solution at a comparatively low cost which has obvious benefits for the debtor and indeed the creditors.