In the recent case of Dr Ann Fenech as mandatory for and on behalf of Clearlake Shipping Pte Ltd v Global LNG Limited, the creditor obtained a Section 37 order on a provisional basis from the Maltese courts as security for a claim arising from a dispute under a charterparty concluded between the parties regarding the MV Portovyy (for further details please see “Court orders extension of effects of flag injunction to security deposited by debtor“). The purpose of the order was to prohibit the vessel’s sale, transfer or deregistration while the merits of the case were being determined in the appropriate fora – in this case, arbitration in London.
On 18 March 2020 the Maltese courts granted the Section 37 order on a provisional basis. This ex parte application seeking an immediate provisional order was filed, as is customary, together with the statutory sworn application containing the same demands. Such an application is then served on the other party which has 20 days to defend the application. The object of an ex parte application leading to an interim provisional order is to protect the status quo until the request is decided in due course. In this case, the owners eventually opted to file a cash deposit in the amount claimed by the charterers in the court registry, together with a request for the court to order that the Section 37 order be revoked.
By means of a 26 November 2020 decree, which was delivered in open court with the agreement of both parties, the court held that rather than ordering the revocation of the Section 37 injunction, it was, in terms of the law regulating the procedure (ie, Section 37 of the Merchant Shipping Act), ordering that the effects of said order would cease to exist insofar as the vessel itself was concerned, but would continue to apply exclusively to the cash deposit provided by way of security by the owners pending the final determination of the merits or settlement being reached by the parties.
The charterers subsequently filed an application before the Maltese courts requesting that the effects of the order be extended for a further year. This would align with the law, which envisages that any order of this nature granted by the courts expires within one year, unless a request for an extension is made by the creditor on the basis that such order was still required. The court granted this request by means of a decree of 8 February 2021.
Challenge to decrees
Given the above, it was of considerable surprise to the charterers when the owners subsequently filed a further application before the Maltese courts requesting revocation of both the 26 November 2020 and 8 February 2021 decrees.
The owners based their request for the revocation of the 26 November 2020 decree on the argument that, following the cash deposit made by the owners, the courts had never granted a final order and therefore procedures had effectively been extinguished. They further argued that when the law refers to the effects of the order applying to any amount deposited as security by the owners, reference is being made to a final order as opposed to a provisional order as had been granted in this case. The owners argued that there was no legal basis for revocation of either the 26 November 2020 or 8 February 2021 decree. In fact, there was every reason, given the purpose of the procedure provided by Section 37 of the Merchant Shipping Act, to extend:
- the validity of the decrees by one year; and
- the effects of the order to the cash deposit.
The charterers responded that it was indeed necessary for the court to extend the effects of the 18 March 2020 order to the security deposited by the owners pending the determination of the merits of the case. The charterers noted that when dealing with the extension of the effects of the order to the security deposited by the owners, the law makes no distinction between provisional and final orders. Further, if an order extending the effects of a prohibition from the transfer of the vessel to the free circulation of the security deposited instead of the vessel is not granted when an owner opts to deposit security, not only would such security remain unregulated, but the owners could effectively proceed with the withdrawal of the deposited sum pending the determination of the merits. The charterers argued that this interpretation contravened the scope of the Section 37 injunction, which provides a creditor with the possibility of obtaining security, pending the determination of the merits of the case, for the entire duration of the case.
By means of a 17 March 2021 decree, the court denied the owners’ requests and agreed with the charterers’ arguments in their entirety. The court held that the law made no distinction between provisional and final orders in allowing the effects of the Section 37 injunction to be extended to security deposited by the owners in the context of a Section 37 action. The court held that any differing interpretation would render Section 37 totally redundant, leading to circumstances where, if an owner deposited a cash security instead of leaving the attachment on the transfer of the vessel, the owners could freely withdraw the cash deposit irrespective of the fact that the action on the merits is ongoing and the security is still required. The court further denied the request for the revocation of the decree, extending the order for one year for the same reasons.
This case confirms what is already stated clearly in Article 37(4) of the law, which reads as follows:
Where the respondent either deposits in court the amount of the claim… or gives security… where the court has issued the order, it shall revoke the same with respect to the ship or the share therein, and the provisions of this article shall thereupon be applicable with respect to the amount so deposited or the security so given as the case may be.
This decision illustrates the effectiveness of the Section 37 injunction as a tool available to creditors seeking to obtain security for a claim pending the determination of the merits of the case. While the law allows owners to opt to deposit security, thereby removing the effects of the injunction from the vessel itself, the legislature has catered for these instances to ensure that creditors’ rights are not prejudiced.
by Dr Ann Fenech and Dr Alison Vassallo, Fenech & Fenech Advocates