Frazer Hunt, Partner, Mills Oakley, Australia
Okay, we have yet another transport business collapse. What can I do to minimize the pain?
In the space of one month in the first quarter of 2023, we have seen the collapse of Focus Container Line and Scott’s Refrigerated Logistics.
Scott’s Refrigerated Logistics was Australia’s largest dedicated national temperature-controlled supply chain network with about 750 vehicles, 550 rail containers,200,000 pallets and 24 cold storage facilities across Australia before its collapse in the first week of March. Scott’s collapse resulted in suppliers scrambling to retrieve about half a billion dollars worth of frozen and chilled food stuck in limbo in its warehouses before it went off, with not enough capacity for warehouses elsewhere to take the food, at least in the short term.
The company’s directors blamed the business failure on the high cost of maintaining an ageing fleet, the ongoing operational impact of COVID-19 on Australia’s supply chain, sustained flooding, and derailments. However, it is telling that Scott’s also relied on some very large customers for its business, including the big supermarket chains, and whether the freight rates demanded by those large customers were sustainable in the medium to longer term is another issue. Further, increases in both fuel and electricity prices over the past year would have eroded the bottom line of the company.
The collapse of Scott’s Refrigerated Logistics came hot on the heels of the Australian start-up, Focus Container Line, which entered administration in February, only 3 months after it launched its service between Ningbo (China’s second busiest container port), Auckland and Australia with 2 chartered ships and 3,000 branded containers. It’s collapse, reminiscent of Hanjin Shipping, left containers in limbo, mostly sitting in east Australian depots and in New Zealand. Focus’ collapse forced the owner of the containers to locate and retrieve them from the container depots and anybody who was unfortunate enough to have cargo in them to locate the container, arrange for it to be devanned from the Focus container, reload it into a new container and pay the extra costs of shipping the cargo to its intended destination.
Focus Container Lines started up late in the pandemic, at a time when capacity on established ocean carriers was tight and customers were willing to pay top dollar for expedited service. However, Focus experience fierce competition from more established shipping lines, plunging cargo volumes and freight rates, before calling time.
There are always lessons to be learned when large businesses collapse, but the cyclical nature of our economy, both locally and globally, leads to booms and busts which cause businesses to collapse with an immediate fallout to everybody in their wake, including households who may experience short term shortages on the supermarket shelves.
So what do you do if your business happens to get caught out by one of these business collapses? Rest assured, you will get little joy from the administrators appointed after the collapse to sort out the mess. They generally have bigger fish to fry than sorting out your issues.
If your goods are being held by the administrators of the collapsed business, they may exercise a particular lien over the goods for any outstanding sums owed by your business to the collapsed company in respect of those goods. If the company had a right in its terms and conditions to exercise a ‘general lien’ over the goods for all outstanding amounts (not just in relation to the goods over which the lien is asserted), then provided that the amount claimed is actually owing and is due and payable, then you will be required to pay the outstanding sums to have the goods released.
However, liens can only be exercised if the owner of the goods owes money to the company exercising the lien. The case of Australian Tallow & Agri Commodities Pty Ltd v Malaysia International Shipping Corporation [No 2] [2001] NSWCA 16 held that it is commercially unacceptable for a company to attempt to exercise a lien over goods to secure amounts payable by persons who have no interest, actual or potential, in those goods. Accordingly, if your goods are stowed in the containers not owned by you, there is no right of that party to exercise a lien over those goods for outstanding container leasing fees, nor can the subcontracted carrier or warehouse exercise such a lien.
Further, most cargo policies do not cover loss of or damage to goods caused by delay, so you are unlikely to be covered if your goods are perishable and do not reach their destination in time before they spoil, unless damaged by some other cause e.g. the reefer is left unplugged. However, if the voyage or transit is not completed as a result of the carrier’s business failing, you will be entitled to be reimbursed for the extra costs of getting your goods to their intended destination.
If there is anything to be learned from the recent business collapses, the circumstances that led to their collapses are ongoing and that there will be further business failures as fuel prices and interest rates continue to rise, and inconvenience to those directly impacted by the fallout, so be vigilant in choosing reliable service providers and if you caught out by such a collapse, act quickly, because being an unsecured creditor of the collapsed business, you stand to recover only a few cents in the dollar from the liquidation, even if you are lucky.