Arnold Van Steenderen, Van Steenderen Mainport Lawyers, Rotterdam
On 1 September 2016 the Seoul Central District Court (6th Bench of Bankruptcy Division) decided on the request of Hanjin of 31 August 2016 to commence a rehabilitation procedure for the company since Hanjin is in a situation where it is unable to repay its payable debts without causing a substantial hindrance to the continuance of its business. The application of Hanjin was granted on a provisional basis following a preliminary hearing on September 6, 2016, and the provisional order was affirmed on September 9, 2016 subject to a protocol on cargo transfers and continuing challenges from creditors, including holders of maritime liens that have asserted that their interests are not sufficiently protected. Furthermore in its Order the court held that there are some concerns about the occurrence of events that may lead to the Debtor’s bankruptcy. Mr Tai-Soo Suk was appointed as the Debtor’s Custodian. The Custodian shall submit the Rehabilitation Plan until 25 November 2016. Briefly, the grounds given by Hanjin to the court for landing in this situation were:
“The performance of the maritime transportation business, which the Debtor is engaged in, deteriorated since the 2008 global financial crisis after a lack of demand resulting from the ongoing contraction of the global economy which led to a reduction in cargo volume and drop in freight charges over a long period of time. Due to the European financial crisis and downturn of the Chinese economy in 2012, cargo volumes had, with increasing speed, fallen short of the long-term average in the period before the financial crisis. In particular, cargo volume in the European lines had decreased compared to that of the previous year. As the delivery of previously ordered ships continued, the supply of ships greatly exceeded the rate of increase of cargo volume from 2012 and further aggravated the imbalance between supply and demand. Adjustments to the inelastic supply (bottom ) of the shipping industry led to the widening of the fluctuation range of freight charges in response to the fluctuation of maritime cargo volume, and ultimately led to an all -out freight rate war within the shipping industry.
In such market conditions, a decline in Debtor’s business performance following a drop in shipping demand and excessive supply of ships further aggravated Debtor Company’s lack of liquidity. As of June 30, 2016, Debtor’s loans totaling KRW 3,140,500,000,000 will mature within one year but Debtor’s current financial state renders it impossible to repay the loans.”
Rehabilitation proceedings are a statutory insolvency process under the Korean Debtor Rehabilitation and Bankruptcy Act aimed at rehabilitating financially distressed debtors. There is historic precedent for the use of the rehabilitation procedure for large corporate entities, as the cases of Samsung Logix, Korea Line and STX Pan Ocean in recent years demonstrate.
U.S. Chapter 15 Petition for Recognition of a Foreign Proceeding
Immediately after obtaining the decision in Seoul Mr Suk, the Custodian, applied to the US Bankruptcy Court for the District of New Jersey to request relief in accordance with Chapter 15 of Title 11, United States Code. The purpose of Chapter 15, and the Model Law on which it is based, is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants, and other parties of interest involving more than one country. Generally, a chapter 15 case is ancillary to a primary proceeding brought in another country, typically the debtor’s home country. An ancillary case is commenced under chapter 15 by a “foreign representative” filing a petition for recognition of a “foreign proceeding.” (1) 11 U.S.C. § 1504. Chapter 15 gives the foreign representative the right of direct access to U.S. courts for this purpose. 11 U.S.C. § 1509. The petition must be accompanied by documents showing the existence of the foreign proceeding and the appointment and authority of the foreign representative. 11 U.S.C. § 1515. After notice and a hearing, the court is authorized to issue an order recognizing the foreign proceeding as either a “foreign main proceeding” (a proceeding pending in a country where the debtor’s center of main interests are located) or a “foreign non-main proceeding” (a proceeding pending in a country where the debtor has an establishment, (2) but not its center of main interests). 11 U.S.C. § 1517. Immediately upon the recognition of a foreign main proceeding, the automatic stay and selected other provisions of the Bankruptcy Code take effect within the United States. 11 U.S.C. § 1520. The foreign representative is also authorized to operate the debtor’s business in the ordinary course. Id. The U.S. court is authorized to issue preliminary relief as soon as the petition for recognition is filed. 11 U.S.C. § 1519.
Through the recognition process, chapter 15 operates as the principal door of a foreign representative to the federal and state courts of the United States. 11 U.S.C. § 1509. Once recognized, a foreign representative may seek additional relief from the bankruptcy court or from other state and federal courts and is authorized to bring a full (as opposed to ancillary) bankruptcy case. 11 U.S.C. §§ 1509, 1511. In addition, the representative is authorized to participate as a party of interest in a pending U.S. insolvency case and to intervene in any other U.S. case where the debtor is a party. 11 U.S.C. §§ 1512, 1524. Hanjin’s principal place of business or assets in the US are in the district of New Jersey. The US Bankruptcy Judge John Sherwood approved the motion that sought to extend to the US the protection from creditors that it has under the decision of the court in Seoul. This protection prevents US creditors from taking actions against the companies’ ships and other assets.
Situation in the Netherlands
Hanjin vessels are being loaded and discharged in the Netherlands by terminal operator ECT. Already on 31 August 2016 ECT sent a notice out to all known Hanjin shippers/consignees/notify parties that it had developed a protocol setting out how the terminal would deal with the import and export Hanjin containers at its Dutch terminals. Next to having to meet the usual formalities (container release by Hanjin plus pin code, customs documentation complete, etc.) ECT demanded from cargo interests handling charges of EUR 1,000 for a dry container and EUR 2,500 for reefer and tank containers. In addition cargo interests were requested to put up a security by paying to ECT EUR 2,500 for a dry container and EUR 5,000 for special containers. These securities were to be credited by ECT if stripped containers were returned to the terminal within 5 business days.
In response to this notice, Dutch shipper organizations EVO, TLN, Fenex and Fenedex challenged the charges levied by ECT in the Rotterdam court in Interim Relief Proceedings of 2 September 2016, which ruled that ECT could charge a maximum EUR 25 for administration costs, as well as the actual handling charge for moving the container to the terminal gate. During the hearing the Interim Relief Judge asked ECT to specify the amounts requested to be paid by cargo interests and it transpired that ECT could not sufficiently prove that the extra costs associated with handling the Hanjin containers were anywhere near the amounts it claimed. The court therefore considered the demand for this extra payment and the demand for securities unlawful. By way of a measure in the interim he court found it reasonable for the time being that ECT would charge EUR 25 per container extra in addition to the THC.
As a result of the court’s decision on 6 September 2016 ECT and the shippers’ representatives have agreed to revise the procedure which took effect from 7 September 2016. This procedure was as follows:
For import containers:
EUR 500 for a dry container
EUR 600 for special containers (reefer and tank containers)
Security for return of stripped containers:
EUR 1,000 for a dry container
EUR 5,000 for special containers
Security will be credited if containers are returned within 5 working days
For export containers:
EUR 250 for a dry container
EUR 300 for special containers
Security for return of stripped containers:
EUR 1,000 for a dry container
EUR 5,000 for special containers
Security will be credited if containers are returned within 5 working days
Part of the agreement was that ECT will not accept payment under protest.
After promulgation of this revised protocol to shippers and logistics companies one of the Rotterdam based logistics companies started fresh proceedings against Hanjin Shipping Co. Ltd. and Hanjin Shipping Europe GmbH & Co. KG (a.k.a Hanjin Shipping Netherlands). In these Interim Relief Proceedings before the Rotterdam District Court Hanjin Shipping, although summoned correctly, defaulted to appear. The Interim Relief Judge accepted jurisdiction and decided that the rehabilitation proceedings opened in South Korea are not enforceable in the Netherlands. Release of containers by ECT Terminals is subject to Hanjin giving a release with pin code and this release will only be given after payment of the Terminal Handling Charges (THC) by the logistics provider to Hanjin. The difficulty with this procedure, however, is that Hanjin on its turn has not paid the earmarked THC to ECT Terminals and this has led to the situation where ECT invokes a right of retention( possessory lien) over the containers before receiving the amount for THC. A right of retention under Dutch law is the right of a creditor, granted to him in situations specified by law, to withhold the performance of his obligation to return a movable or immovable thing to his debtor until his debt-claim has been fully satisfied.
According to the claimant logistics provider the cargo interests were now in fact paying twice for THC, since THC was supposed to be also included in the tariffs promulgated by ECT in the protocol to be effective as from 7 September 2016. Contractually ECT is charging THC to the carrier (Hanjin) with whom it has a Terminal Agreement, whereas the carrier is subsequently charging the THC from the shipper or consignee of the container. During the hearing it transpired that ECT was not receiving any payment for THC from Hanjin whereby ECT did not have a contractual relationship with the cargo interests. The claimant also invoked the statutory provision granting a right of action (legal claim) of one of the parties to an agreement, to request the court to change the legal effects of that agreement or dissolve this agreement in full or in part on account of unforeseen circumstances of such a nature that the opposite party, according to standards of reasonableness and fairness, may not expect an unchanged continuation of the agreement. The court may change or dissolve the agreement with retroactive effect. Under the circumstances of the case the court held that there was indeed room to apply the standards of reasonableness and fairness to arrive at the result that double-charging of THC would be avoided. In its judgment of 19 September 2016 the court ordered Hanjin to give a release and pin code for all containers already located in the Netherlands or on their way to a port in the Netherlands without charging THC on the forfeiture of a penalty of EUR 250 for each container should Hanjin not comply with the Order with a maximum of EUR 3,000 per container.
A very practical approach solving the unfortunate situation of those interested in cargo entrusted to Hanjin.