UFL Charters Ltd v The Ship "Malakhov Kurgan"

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
CIV 2006 409 1370

BETWEEN UFL CHARTERS LIMITED
Plaintiff

AND THE SHIP "MALAKHOV KURGAN"
Defendant

Hearing: 10 October 2006

Appearances: B M Nathan and T W Evatt for Plaintiff
G M Brodie for Defendant

Judgment: 17 October 2006 at 3.40 p.m.

RESERVED JUDGMENT OF RONALD YOUNG J

[1] In June 2006 the Registrar of the High Court issued a warrant to arrest the ship Malakhov Kurgan in Lyttelton Harbour. The plaintiff in various guises has chartered the ship a fishing vessel owned by SSE Ukrrybflot a company incorporated in the Ukrane for a number of years.

[2] The plaintiff says pursuant to the charter agreement it has provided; crew expenses including wages and other expenses relating to the operation of the ship of which approximately $US2.9 million remains owing by the ship owners. The plaintiff has issued an admiralty action in rem with respect to the unpaid monies. The owners have filed a notice of appearance.

[3] In these proceedings currently before the Court the plaintiff seeks an order for appraisement and sale of the vessel alleging the costs of maintaining the vessel and its deteriorating value requires an immediate sale. The ship owners oppose the sale and seek a stay of proceedings alleging the charter agreement between the plaintiff and owners require arbitration of any dispute between them.

Stay of execution

[4] The owners seek, and the plaintiff does not oppose, an order for stay of the in personam action (now the owners have entered an appearance) by the charterers against the owners for what are essentially monies owing arising from the charter agreement. The owners do not seek a stay of the in rem proceedings which relate to questions of security. The owners accept whatever rights the charterers have in rem continue irrespective of the stay.

[5] I therefore make an order staying the in personam part of these proceedings until the arbitration is completed or until further order of the Court.

Appraisement and sale

[6] Rule 784 of the High Court Rules provides as follows:

784 Appraisement and sale of property

(1) The Court may either before or after final judgment, order that any property under the arrest of the Court—

(a) Be appraised; or

(b) Be sold with or without appraisement, and either by public auction or by private contract.

(2) If the property is deteriorating in value, the Court may order that it be sold immediately.

(3) If the property sold is of small value, the Court may, if it thinks fit, order that it be sold without a commission of sale being issued.

(4) A commission for the appraisement and sale of any property under an order of the Court must not be issued until the party applying for it has filed a request in form 80.

(5) The commission for the appraisement must be in form 81 and must, unless the Court otherwise orders, be executed by the Registrar or the Registrar’s duly appointed officer or agent.

(6) A commission for appraisement and sale may not be executed until an undertaking in writing, satisfactory to the Registrar, to pay the Registrar’s fees and expenses on demand has been lodged in the Registrar’s office.

(7) The Registrar must pay into Court the gross proceeds of the sale of any property sold by the Registrar under a commission for sale, and must bring into Court the account relating to the sale (with vouchers in support).

Counsel’s submissions

[7] The plaintiff says that this is an appropriate case for the appraisement and sale of the vessel immediately before any final judgment because the vessel is deteriorating in value. The deterioration, it says, manifests itself in two ways:

[8] Firstly, the plaintiff is continuing to pay the costs of keeping the vessel at berth. These costs include the crew’s wages, their food and expenses in running the ship are currently approximately $NZ5,825.00 per week. It says the value of the security (the vessel) is effectively deteriorating each week by virtue of the expenses they pay to keep the boat functioning. The plaintiff says it is entitled to reimbursement by the owners for this sum, and currently the only security is the vessel itself. Given the amount of their claim ($US2.9 million) vastly exceeds the most optimistic value of the vessel, each week the vessel is not sold leaves the plaintiff potentially $NZ5,825.00 worse off. The plaintiff accepts that as a prejudgment application for sale the Courts will

examine more critically than it would normally do in a default action the question whether good reason for the making of an order exists or not (see The “Mytro” [1977] 2 Lloyd’s Rep 243).

[9] It points out in The “Mytro” and in The “Gulf Venture” [1985] 1 Lloyd’s Rep 131 and in New Zealand in Bank of Nakhodka v The Ship “Abruka” (1996) 10 PRNZ 326 the cost of keeping the vessel under arrest may by itself be sufficient to reduce the value of the security and thereby loss of value of the vessel.

[10] Secondly, the plaintiff points out the ship’s classification certificate is due for renewal on 23 December 2006. A survey of the ship will be required to identify what if any work is needed to renew the classification certificate. If the ship has no classification certificate it cannot leave the port on its own steam. If a reclassification certificate cannot be obtained or a one journey certificate obtained the only choice for the owner would be to tow the vessel to India for scrap. This would consume a significant portion, if not all, of the value of the vessel. They say there is no way of knowing today what might be required to bring the vessel up to classification certificate standard. However, they point out that this is an old vessel (constructed in 1972) and it is likely to be considerable.

[11] The plaintiff submits, therefore, that an immediate sale is the only way of avoiding a substantial deterioration in value when 23 December comes and the vessel is without a certificate. It submits the evidence, provided by its appraisers and the appraisers of the owners, values the vessel at about $US785,000. This valuation is based on a scrap value of the vessel. To assess value in New Zealand, however, there must be deducted from the plaintiff’s value either:

(a) $400,000, being the cost of getting the vessel to the scrap yards in India (a net value $US385,000) or;

(b) if the vessel is unable to get to India under its own steam then the cost of towing it to India which would reduce its value to effectively zero.

[12] The plaintiff stresses it should not have to wait until the possibility is realised that the boat cannot obtain a renewal certificate when the value of the vessel will deteriorate from approximately $US385,000 (see [11](a)) to zero.

[13] The defendant says that the owners of the vessel will undertake to pay the monthly expenses of the boat which they estimate at $NZ20,000 per month (approximately $5,000 per week). However, before the currency regulations in the Ukraine allow them to do so they must have an invoice from the plaintiffs or other appropriate persons for costs incurred. Thus it says there need be no concern as to deterioration in the value of the security that the ship will provide once these payments commence.

[14] As to the classification certificate, the owners of the ship and their Chief of Fleet Management, say they are confident the ship has been well looked after and that the certificate will be renewed at modest cost. At worse, the owners say they will be able to obtain, at modest cost, a certificate for one voyage which would enable the ship to go to India under its own steam (saving the substantial cost of towing the ship) and therefore should be the basis for any assessment of value of the ship in New Zealand. The owners stress that an order for sale pre-judgment should only be made after careful consideration of the facts keeping in mind that such a sale is a significant infringement of rights of ownership of the ship.

[15] The owners stress they have arranged for a survey to be completed as speedily as possible with the surveyors arriving in Lyttelton on 25 October and up to three weeks required with the survey due to be completed mid November. They say they are committed to completing the survey and are confident only minor repairs will be required for a new certificate. The owners point out that there is no evidence that in fact there will be any difficulty in obtaining re-certification. They point to the yearly assessment and to the presence of the captain, engineer and electrical engineer on the vessel who have been maintaining the condition of the ship since arrest.

[16] The owners say that the following matters should also influence my discretion against ordering a sale; there is a genuine dispute that any monies are owed by the owners to the plaintiff; an in rem action may not be available where there is a binding arbitration agreement (see The Andria [1984] 1 All ER 1126; The Rena K [1979] 1 All ER 397) and; the owners are solvent and have assets of at least $US2 million and so can meet the cost of repairs if needed.

Discussion

[17] I take into account that this is a pre-judgment application for sale where the plaintiff has yet to establish it is owed anything. In such circumstances there must, in my view, be strong reasons to order sale thereby depriving an owner of their property rights. Evidence of loss of value of the vessel if sale is refused must therefore be clear and such evidence needs to be balanced against any prejudice to the owners of such a sale. This case reveals difficult balances between the parties interests.

[18] Firstly, I am satisfied that I can make an order with respect to the monthly expenses of the ship which will ensure that costs fall where they properly appear to lie, on the owners. That will remove the plaintiff’s first concern; that the value of the security is being reduced each week by the amount of the expenses paid by the plaintiff to cover the expense of keeping the ship under arrest. I will return to the quantum of these expenses and a system of payment at the end of this judgment.

[19] The second concern of the plaintiff, as to serious diminution of value of the vessel if sale is left beyond December 2006, is more problematic.

[20] There is real uncertainty about the condition of the vessel and what repairs might be required for certification due in December 2006 and their cost. The vessel is over 30 years of age. It has not been to sea since its arrest in June. On the other hand it has been the subject of yearly certificate inspection and therefore it is only 12 months since the last inspection. While the Ukrainian owners express confidence in the condition of the vessel that must be tempered by the fact that they have not personally inspected the vessel apparently since its last classification. I accept the presence of a crew consisting of the master, chief engineer and the electrical engineer is likely to have ensured regular maintenance on the ship has been maintained. However, what major repairs may now be required are speculative.

[21] On the other hand any sale price in New Zealand now seems virtually certain to be heavily discounted because of the impending need for a certificate and the unknown cost of repairs necessary to obtain such a certificate. In other words, diminution in value may have already occurred. There is also considerable dispute between the parties as to the value of the vessel in New Zealand. It seems common ground that a valuation would have to be based on a “scrap” value. Such a valuation, therefore, entails the “value” of the vessel for scrap less the theoretical costs of getting the ship to India, the closest place where such a task could be undertaken. It seems common ground the value of the ship for scrap is approximately $US785,000. The plaintiff says the cost of getting the ship to India under its own steam would be approximately $US400,000 leaving a net value in New Zealand of $385,000. However, it says the real possibility is that the vessel will not be reclassified. Its value then will be close to zero given the theoretical cost of getting the vessel to India will be near its $785,000 scrap price.

[22] The owners say the cost of getting the ship to India under its own steam would be in a range of between $US65,000 and $US100,000. The major difference between the two figures is fuel together with significant differences concerning the time the voyage might take and the cost of the crew. The owners say there are 200 tonnes of fuel on board (value approximately $US140,000) which the plaintiff has ignored in its calculations and that this should be deducted from its $400,000 figure. The owners deny there is any real chance the vessel will get a reclassification. They say at worse they would get a one journey classification.

[23] The other relevant factor is the question of timing. If I made an order for appraisement and sale immediately, it seems highly unlikely any sale would be completed inside two months given; the sale of the vessel would need to be advertised internationally; an appraisement would need to be undertaken; advertising for sale, close of tenders and a decision on acceptance. Within two months we will know whether the ship will be re-certified and if not what the cost of doing so will be. In those circumstances, therefore, before any possible sale can realistically take place it will be clear whether in fact there will be a significant deterioration in the value of the asset because it will be clear whether or not the ship is going to obtain a reclassification, or indeed even a one journey certificate.

[24] Balancing these various factors, therefore, I consider the appropriate course is to adjourn the application for appraisal and sale until after the completion of the classification inspection in mid November 2006 upon conditions. That will enable a clearer view of the question of whether there will be a deterioration of value pending resolution of the plaintiff’s claim. It will then be clear whether the certificate is to be granted or if not the extent of the work required to bring it up to certificate level. This in turn will inform the value of the vessel and therefore identify any future diminution in value. While any delay is unattractive, it is in my view the least potentially damaging to the plaintiff and recognises the defendant’s ownership rights.

[25] The conditions on which I adjourn the application are:

(1) The owners, or through the owners their solicitor, will file in Court within 14 days of this judgment an undertaking that they will do all within their power to ensure the classification inspection is completed by 20 November 2006 at the latest. This includes the prompt payment of any inspection fees or other similar fees required and the facilitation of access to the vessel and the facilitation of any documentation required by those inspecting the vessel.

(2) Bond. The plaintiff submits, should I decide to adjourn this matter, that there be a posting of a bond by the ship owners, held by the Court, as an illustration of goodfaith and a way of supporting the claimed intention of the owners to repair the vessel if at all possible. I agree, the posting of a bond could be a tangible sign that if the repairs required to the vessel to bring it up to classification are no more than within a reasonable range, the owners will carry out the repairs. I do not think such a bond is required given the adjournment. If at any resumed hearing the repairs required for certification are within a reasonable range, then in the absence of an undertaking by the owner to undertake the repairs with all haste an order for sale could be immediately made.

(3) Monthly outgoings. I accept the plaintiff’s evidence that the monthly outgoings are $5825 per week (or $23,300 (NZD) per four weeks). The owners must pay these outgoings commencing immediately. It will be for the owners to devise an appropriate system to ensure this happens. No doubt the plaintiff will co-operate in providing appropriate invoices. The first of such payment of four weeks expenses of $NZ23,300 should be made by Friday 27 October into the trust account of the owner’s solicitors. They in turn will disburse the monies to those who incur expenses arising directly from the arrest of the vessel (e.g. crew, wages, berthage, food etc).

[26] I therefore adjourn these proceedings for a telephone conference, 9.00 a.m., 20 November 2006. Should the inspection be completed and a result known of the inspection prior to that date then either party may apply for an earlier telephone conference with me. I give leave to either party to return to Court on 24 hours notice should circumstances require.

Solicitors:
White Fox and Jones, Christchurch, for Plaintiff
Anthony Harper Lawyers, Christchurch, for Owner