UFL Charters Ltd v The Ship "Malakhov Kurgan" (No 2)

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
CIV 2006-409-001370

BETWEEN UFL CHARTERS LIMITED
Plaintiff

AND THE SHIP "MALAKHOV KURGAN"
Defendant

Hearing: 7 September 2007

Counsel: T W Evatt for Plaintiff
G M Brodie for Owners of the Defendant Ship
V Donaghy for a caveator (Lyttelton Port Company Limited)

Judgment: 10 September 2007

JUDGMENT OF PANCKHURST J

A release from arrest

[1] The Registrar, having had the “Malakhov Kurgan” appraised (valued), offered the vessel for sale by tender. The highest tender is less than the appraised value. Therefore, the Registrar seeks the approval of the Court to sell the vessel for this lesser sum.

[2] The Ukranian owners, Ukrrybflot, are opposed to a sale at what they consider to be an undervalue. The company filed an application for the release of the “Malakhov Kurgan” from arrest, subject to its payment of a sum into court equal to the highest tender. The application for release is opposed by the plaintiff, UFL Charters Limited, being the former charterer of the vessel. It has initiated a claim against UFL for a sum in excess of $2m.

[3] The application for release raises two issues. The first is whether in principle it is appropriate to allow a ship owner to secure the release of a vessel under arrest by matching the highest tender obtained in a process of tender? If the first question is answered in the affirmative, the second issue is whether it is appropriate to extend to Ukrrybflot the opportunity to obtain a release upon payment, given defaults of that company which have occurred at earlier stages of this proceeding? Looked at another way, is there a basis for confidence that Ukrrybflot will make the payment required to secure the release of the “Malakhov Kurgan”, or is the safer and more appropriate course to authorise acceptance of the highest tender?

Some further background

[4] Two earlier judgments of this Court fully set out the background to this case. Therefore I need not repeat these details.

[5] Ronald Young J on 17 October 2006 declined an application for appraisement and sale of the “Malakhov Kurgan” pendente lite (pending suit). Instead, he adjourned the application upon conditions that the owners of the vessel undertake to ensure that a classification inspection was completed by 20 November 2006 at the latest and that they pay the costs arising from the arrest of the vessel (ie wages, berthage etc) pending resolution of the underlying dispute. The Judge also reserved leave for UFL to bring the application for appraisement and sale back before the Court, if necessary.

[6] UFL did so in June 2007. By then Ukrrybflot had failed both to have the “Malakhov Kurgan” reclassified and to pay the arrest costs from month to month. Payments were made until about the end of November 2006, but thereafter Ukrrybflot was in default. The renewed application for appraisement and sale was heard by Chisholm J on 27 June 2007. Unsurprisingly, Ukrrybflot was unable to effectively oppose the application, given its default. An order for appraisement and sale was made.

[7] A subsequent appraisement of the vessel indicated a value of approximately US$285,000. The Registrar offered the “Malakhov Kurgan” for sale by tender. The closing date for tenders was 28 August 2007. In the event the best tender obtained by the broker retained by the Registrar was US$112,500 plus GST. In terms of the tender conditions tenderers were required to pay a 10 per cent deposit.

[8] Because the best tender was somewhat less than half of the appraised value, the Registrar was unable to accept it without the Court’s approval (see r784(5) and form 81 of the High Court Rules). Accordingly, the Registrar sought authority to sell, relying in part upon the advice of the broker, Mr Geoff Fraser, that:

4. This vessel was offered for sale to many of the serious ship demolition companies operating in Asia and Europe, the closest being Australia & Papua New Guinea. Most have rejected it because of the large cost of getting it to their demolition facility. I am comfortable that we have reached the market for this vessel, and I do not believe that we will achieve any more, should we continue with this sale. The vessel has already taken on water into one of the fuel tanks, and we should do all we can to ensure that it leaves New Zealand as soon as possible, or it never will.

[9] Appropriately the Registrar advised UFL and Ukrrybflot of his intention to seek approval for the sale to proceed. On 3 September I heard brief submissions from counsel in chambers as to whether the highest tender should be accepted. UFL supported acceptance. Ukrrybflot, however, was adamantly opposed. Mr Brodie indicated that Ukrrybflot wished to consider its position, particularly with regard to filing an application for release of the “Malakhov Kurgan” from arrest, upon payment of a sum which matched the highest tender.

[10] In these circumstances I adjourned the Registrar’s request for approval of a sale below the appraised value to 7 October so that Ukrrybflot could file an application for release, if appropriate, and to enable counsel to be heard with reference to both issues. An application for release of the vessel from arrest was filed. In addition the Lyttelton Port Company requested that a caveat be entered against the release of the “Malakhov Kurgan”, or in the alternative against payment out of court of the proceeds of sale (if approval of the sale was granted). In principle is release from arrest appropriate at this stage?

[11] Rule 778 provides for the release of property under arrest:

(4) A release may be issued at the instance of a party interested in the property under arrest if the Court so orders or, unless the Court orders otherwise, if all the other parties to the action in which the warrant of arrest was issued consent.

Ukrrybflot invokes this rule.

[12] Ordinarily release from arrest follows the provision of security by the ship owners. The provision of security is an alternative to, or in substitution for, arrest. Previously, a bail bond was commonly provided in order to secure the ship’s release. Suitable sureties entered into a bond by which they submitted to the relevant jurisdiction and consented to pay the amount found to be due by the ship owner, should the owner not make payment.

[13] But the provision of a bail bond has largely been overtaken by payment of security into court. Often, security is not paid in cash, but rather a guarantee or a letter of undertaking from a bank or an insurer is provided. Regardless of form, the normal amount paid, or otherwise secured, is a figure assessed on the basis of the claimant’s reasonably arguable best case. As to the fixing of security on this basis, see the judgment of the Court of Appeal in Det Norski [sic] Vertas [sic] AS v The Ship “Clarabelle” [2002] 3 NZLR 52 (CA).

[14] Ordinarily a ship owner will pay, or provide, such security soon after the arrest of the vessel. Thereby the vessel will be released from arrest and the arresting party will have prospective rights over a fund or the security provided, as opposed to rights against the ship itself. Pending determination of the dispute the ship will be back in gainful service in the meantime.

[15] Of course, this did not occur in the present case. Rather, UFL, as claimant, assumed the initiative and sought an order for immediate appraisal and sale because of concern that the vessel was near the end of its working life and that it would deteriorate while under arrest for any appreciable period of time. Initially at least, immediate appraisal and sale was averted, subject to performance of the conditions laid down by Ronald Young J.

[16] It is only now, at the eleventh hour, that release of the vessel is sought by Ukrrybflot. And, the company does not seek a release upon provision of security assessed on a reasonably arguable best case basis. Rather, Ukrrybflot contends that because the highest tender is so low it ought to be able to secure the release of the vessel upon matching the tender.

[17] Is there precedent for this? Is it just and appropriate that a ship owner should be able to gazump the tender process by matching the best offer at this late stage? The Registrar has 21 days from the date of closure in which to accept a tender, subject to my approval of a figure beneath the appraised value. Hence, the last day for acceptance is 18 September.

[18] Counsel could not point to a precedent which supported granting a release from arrest in circumstances such as the present. I must say that I am uneasy about countenancing a course of action whereby the tender process concludes on the note that a tender is not accepted, instead the ship owner obtains a release from arrest by simply matching the highest tender. Mr Brodie submitted that it should be a matter of “complete indifference” to the Court, and for that matter to UFL, whether the “Malakhov Kurgan” was sold to the highest tenderer or released back to Ukrrybflot.

[19] I very much doubt this proposition. To my mind to grant a release from arrest on the basis proposed may impact adversely with reference to the future sale of vessels in the admiralty jurisdiction. Tenderers need to inspect the vessel and assess its value, as well as its seaworthiness and (in this case) the costs involved in towing the vessel to a demolition yard. The inconvenience and expense of doing so is undertaken in good faith and, no doubt, in the expectation that the highest tenderer will secure the ship (although the conditions of tender reserve to the Registrar the right to reject all tenders). Nonetheless, the plea to allow Ukrrybflot’s initiative to prevail is not something I can contemplate with anything approaching indifference.

[20] But Mr Brodie also argued it was just for Ukrrybflot to have the opportunity to salvage as much as possible from its asset. He reminded me that a forced sale is a “final blunt instrument”, the more so when the sale occurs prior to resolution of the underlying dispute. Without seeking to enter into the merits of that dispute (which is to be the subject of an arbitration), Mr Brodie pointed out that there were aspects of the $2m claim which were seriously contestable. His argument continued that the ship was thought to be worth something of the order of US$850,000 at a breaker’s yard in Asia or India and that accordingly the broker appraised the value of the vessel at US$285,000. The owners of Ukrrybflot consider that even on a break-up basis the “Malakhov Kurgan” is worth considerably more than the best tender figure. Apparently they are confident that the ship remains seaworthy, that a temporary reclassification will be obtainable and that she can be sailed under her own steam to her final destination. However, there was no affidavit evidence provided to substantiate these aspects (although the time gap between the filing of the application for release and its hearing made the task of obtaining evidence very difficult).

[21] Counsel also relied upon an observation in Enforcement of Maritime Claims (2nd ed) by D C Jackson at p 342:

The security provided cannot be ordered to exceed the value of the ship but, subject to that limit, a party is entitled to “sufficient security to cover the amount of his claim with interests and costs on the basis of his reasonably best argued case”.

This sentence is found in chapter 15 entitled “Arrest and Alternative Security”. The discussion concerns the provision of security in substitution for arrest. The quoted sentence appears in relation to the provision of bail by way of an alternative security to arrest. The effect of the sentence is to confirm that a ship owner need not provide guarantees above the value of the ship, but otherwise the security must match an amount calculated on a reasonably arguable best case basis.

[22] To my mind the present argument takes the sentence out of context. The words “value of the ship” are used to describe a ship’s value at the time of arrest, that is as a working vessel. That is entirely different to the value established by the tender process when the ship is unclassified, has been unused for a considerable period and is already the subject of a court order for appraisement and sale. Inevitably, these developments have had a fundamental adverse impact on the value of the “Malakhov Kurgan”.

[23] For these reasons, I do not regard the quoted sentence as providing support for the owner’s argument. In my view a release from arrest would be appropriate upon provision of security assessed in the conventional reasonably arguable best case manner, not upon payment of a figure which is reflective of the ship’s present predicament, a predicament significantly of Ukrrybflot’s making.

[24] This conclusion is necessarily fatal to the application for release. Nevertheless, I shall briefly consider the more pragmatic arguments concerning whether Ukrrybflot should be permitted an opportunity to match the best tender figure.

Should Ukrrybflot be given an opportunity to match the highest tender?

[25] The gist of Mr Brodie’s argument was that the owners should be given until 4.00 pm on 18 September to pay into court the necessary sum. If Ukrrybflot did so, the release from arrest would proceed, but if the payment was not made the Registrar would be authorised to accept the best tender.

[26] Mr Evatt for UFL submitted that I should have no confidence in Ukrrybflot’s ability to perform its side of the bargain. Counsel pointed to the breaches of the undertakings to the Court, to which I have already referred. In addition, submissions were made to the effect that it must be highly questionable whether the owners will be able to make ready the “Malakhov Kurgan” for a voyage to Asia or India.

[27] Mr Brodie countered that the owners were best placed to make the relevant assessments. Ukrrybflot has owned the ship for about 30 years, had a skeleton crew aboard her until comparatively recently and the owners are confident that it will be feasible to bring a crew to New Zealand and sail the ship out of New Zealand waters.

[28] Had it been necessary to decide this question, I would have been of the view that acceptance of the highest tender is clearly the safest and most appropriate course. I note in particular the advice of the broker, Mr Fraser, set out at para [8]. Even if Ukrrybflot could secure the funds required to match the highest tender and obtain a clearance to remit that sum to New Zealand, I am far from confident that the owner’s intention to sail the “Malakhov Kurgan” under its own steam to its final destination is a realistic aspiration.

Result

[29] The application for release of the ship from arrest is refused. Approval to sell the “Malakhov Kurgan” to the highest tenderer and for less than the appraised value is granted. Costs are reserved. If UFL seeks an order, memoranda may be filed.

Solicitors:
White Fox & Jones, Christchurch for Plaintiff
Anthony Harper Lawyers, Christchurch for Owners of the Defendant Ship
Chapman Tripp, Christchurch for a caveator (Lyttelton Port Company Limited)