Owners of Cargo Lately Laden on Board the "Golden Bear" (U.S.A. Flag) v. The Owners of the Ships or Vessels "Golden Bear", "Pacific Bear", "Japan Bear" and "Thomas E. Cuffe" (All Usa Flag)

HCAJ000058/1978

IN THE SUPREME COURT OF HONG KONG

ADMIRALTY JURISDICTION

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ACTION NO. 17 OF 1978

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ACTION NO. 19 OF 1978

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ACTION NO. 53 OF 1978

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ACTION NO. 54 OF 1978

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ACTION NO. 57 OF 1978

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ACTION NO. 58 OF 1978

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ACTION NO. 60 OF 1978

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ACTION NO. 62 OF 1978

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Coram: Cons, J.

Date of Judgment: 24th May, 1978

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JUDGMENT

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1. Pacific Far East Lines Inc. is a company incorporated in Delaware. It is shown in Lloyd's Register of Ships to be the owner of four ships - the Golden Bear, the Pacific Bear, the Japan Bear and the Thomas E. Cuffe. They are all registered under the flag of the United States of America, port of San Francisco and are operated as a regular cargo service between the United States of America and the Far East. They are said to constitute one of the major carries on that run. The Pacific Far East Lines Inc., which I will refer to for convenience as "the company", has run into financial difficulties. On the 31st January this year it filed a petition in the North California District Court under Cap. 11 of the National Bankruptcy Act of the United States. Proceedings under that chapter have no counterpart in the law of Hong Kong. Their object is to rehabilitate, not to liquidate. The debtor files a "Plan of Arrangement" whereby the claims of the creditors should be ultimately satisfied. The court will sanction that arrangement if it thinks it feasible and if it is consented to by a majority of the creditors. That arrangement will then become binding also on non-consenting creditors. On the other hand if no suitable arrangement can be found the court will dismiss the proceedings. In that case there may be an adjudication of bankruptcy as we know it. Of course, it may take some time for the debtor to formulate his plan of arrangement. He may need, as in the present instance, time to test the effect of operational changes. There must also be time for the creditors to file their claims. While all this is going on the debtor is not obliged to close down his business. That would defeat the whole object of the exercise. He will usually be allowed to continue his business as before, but subject to the close supervision and control of the court and a creditors' committee. He is said to be a "debtor in possession". An order making the company "debtor in possession" in this way was made immediately its petition was filed and the ships continue to ply the Pacific run, calling from time to time in Hong Kong.

2. An essential feature of the Cap. 11 proceedings is that from the moment the debtor files his petition there is an automatic stay throughout the whole of United States against the commencement or continuation of any other proceedings of whatever kind against the debtor. Any person having a claim against the debtor at that time is expected to join in the Cap. 11 proceedings. However, eight parties with claims against the company do not wish to do that. Instead they have taken action in this court and each has issued a writ in rem against one, two or all four of the ships I have just mentioned. Two of the writs have been served. The Japan Bear was arrested and subsequently released as part of continuing negotiations. Security against further arrest has been given in respect of five of the other writs. Conditional appearance has been entered to them all. Proceedings in Action 62 of 1978 have by consent been stood down because of the negotiations I have just referred to. In the remainder the defendants now ask to set aside the writs and all subsequent proceedings on the ground that this court lacks jurisdiction. Alternatively they ask for a stay in view of the American insolvency proceedings. As a final and third possibility they ask for a stay until the plaintiffs have put right what are said to be procedural defects. Mr. Lincoln appears for the defendants and Mr. Philips for all the plaintiffs. I am very much indebted to their clear and skilful guidance in waters otherwise unfamiliar to me.

Jurisdiction

3. The jurisdiction of this court in admiralty in ...(illegible) through Order in Council 1457 of 1962. That extends to Hong Kong the provisions of the Administration of Justice Act 1956 (hereafter referred to as "the Act"). It may be conveniently found in paragraphs 3546 et seq of Vol. 2 of the Supreme Court Practice. Section 1 sets out the various questions or claims over which jurisdiction is granted. Section 3 is headed "Mode of exercise of Admiralty jurisdiction". The first four subsections read as follows:

It will be seen that subsection (4) provides that the jurisdiction in rem may in certain circumstances be invoked against a sister ship of the offending ship. This was in practical terms a new remedy introduced in 1956. However, it is an alternative and not an additional remedy. The plaintiff may not continue proceedings against more than one ship: The Banco⁽¹⁾. After the Act was passed it became the practice to issue a writ at once against all the ships owned by a defendant and to serve it on and to arrest the one considered most suitable. A majority of the Court of Appeal commented favourably on the practice in The Banco. Some years later Brandon J. confirmed it to be correct: The Berny⁽²⁾. The learned judge however went further and concluded that if, contrary to his own view the practice were indeed incorrect, then a plaintiff who had issued a writ against more than one ship should be put to his election as against which particular ship he wished to continue. Should this apply in the present instance the plaintiffs have, through their counsel, indicated that they would elect to proceed against the particular offending ship in each action.

4. The defendants argue that it is now too late to make that election. It is said that the plaintiffs have already made their election, in April; at that time the Japan Bear had been arrested here at the instance of the plaintiffs in Action 62 of 1978 - the action with which I am not concerned at the moment; the other plaintiffs threatened to move against the Japan Bear, thus forcing the defendants to put up security in respect of each of the other writs; this is equivalent to service and arrest and therefore election. I think there is force in this argument. The peculiar feature of proceedings in rem is that plaintiffs have a right to obtain security for their claims from the very beginning. It is a powerful advantage. It seems to me that no distinction should be drawn between a plaintiff who may obtain that advantage by the actual arrest of a ship and one who does so by the threat of an arrest which he might very properly carry out. The plaintiffs are entitled under subsection (4) to arrest only one ship of the defendants' line. To my mind they are likewise only entitled to obtain one security in place of that arrest. I appreciate that on the facts of The Berny my conclusion runs counter to the final part of the second conclusion. In that case the plaintiffs, by threat of arrest, obtained security in respect of a sister ship. Later they served the offending ship and conditional appearance was entered. Brandon J. held that the plaintiffs had in effect elected to continue against the offending ship. However, it does not appear that the same argument was put to that learned judge. All that was suggested was that the plaintiffs were bound by the order in which the writ against each ship was issued, even though they had been issued on the same day.

5. I should notice here an argument put forward by the plaintiffs. A writ is deemed to be served if appearance is entered before service is actually effected; in the present instance the defendants entered conditional appearances before any move was made against any ship except in Action 17 of 1978; therefore all the other writs are deemed to have been served and the plaintiffs may continue against all or any ship as they choose. This argument is in principle at variance with the "one ship" doctrine laid down in The Banco. For that reason alone I think it cannot have validity. Furthermore by judicious choice of ships a defendant might be able to emasculate the new found remedy of the plaintiffs. Only one ship may be arrested. The defendant would enter appearance for that one of his ships least likely to call within the jurisdiction, and the others could then continue to call with impunity. To my mind that cannot be right. The act gives the choice to the plaintiff. It must be the fact of arrest, or similar action, and not the fact of service, which demonstrates the exercise of that choice.

6. The next question is whether the plaintiffs are proceeding under subsection (3) or subsection (4), or perhaps both. The defendants argue that it must be subsection (4) alone, either upon the proper construction of section 3 as a whole, or by deliberate choice.

7. The construction argument is this. Section 1(1) of the Act sets out the Admiralty jurisdiction; the individual matters are listed in paragraphs (a) to (s) together with a general sweeping up clause; section 3 then sets out the pattern in which that jurisdiction may be exercised; subsection (1) allows actions in personam in all cases, subject to certain limitations set out later on; subsection (2) deals with particular paragraphs of section 1(1); subsection (3) deals with maritime liens, but it must be read subject to subsection (4) because this latter deals with all the other heads of jurisdiction that are not dealt with by subsection (2); alternatively the words in brackets have the same effect. The possibility of this construction was noticed by the learned editors of Dicey and Morris' The Conflict of Laws 9th Ed. at p. 204. The solution they suggest is criticised in that it requires the words in brackets to be moved from the body of the subsection to qualify paragraph (b) alone. To my mind a more satisfactory approach may be made in this way. A maritime lien has always been enforceable against the offending ship regardless of any subsequent change in ownership. To restrict the holder by reference to ownership at the time of the offence would deprive him of a valuable part of his rights. Statutes are presumed not to take away established rights except by clear words. Paragraphs (d) to (r) cover more than one claim to which a maritime lien attaches e.g. crew's wages and bottomry. A pattern of arrangement or words in brackets do not seem to me sufficiently clear. For this reason the sections should be read independently.

8. The deliberate choice argument is based yet again upon the multiplicity of ships named. As it is only under subsection (4) that there is any right at all to proceed against more than one ship it must follow, it is said, that the writ is issued under that subsection. I am not prepared to go so far as to say that a plaintiff may not issue a writ under both subsections. So far as I am aware the endorsement is not required to set out the specific head of jurisdiction. And even if it were, I do not see why it should not be put in the alternative. However, once the writ has been issued the position would, I think on principle, then be the same as has already been discussed. The plaintiffs could only arrest one ship.

9. I turn now to the words "maritime lien" in subsection (3). What do they include? There is no problem if the case is purely domestic. Claims in respect of which maritime liens exist are well settled. The only doubt is in regard to pilotage. But what if the right on which the plaintiffs seek to rely arises from a foreign law? Counsel for the plaintiffs argues that the court will first enquire into the nature of that right under the foreign law; if it finds that the incidents of the right are the same as or closely resemble those of an English maritime lien it will then enforce that right as such. He relies upon The Colorado⁽³⁾; The "Ioannis Daskalelis"⁽⁴⁾ and The Halcyon Isle⁽⁵⁾; and the commentary in Cheshire's Private International Law 8th Ed. at p. 876. Counsel for the defendants argues that these authorities are of no assistance. In each case the ship had already been arrested and sold; the court was therefore faced with a fait accompli and was concerned only with the question of priority; that is different from the present question which is one of jurisdiction. He says that at this stage the court will only recognise rights similar to the old established common law maritime liens. He relies upon The Acrux⁽⁶⁾, and a passage from the judgment of Atkin, L.J. in The Colorado at p. 10:

"Nevertheless, in determining whether there exists a maritime lien the court will apply the lex fori, and will give effect to the lien as it exists by English law."

10. The Acrux concerned an Italian ship arrested and sold in England. Mortgagees obtained judgment for monies due to them. The plaintiffs then issued a writ in rem against the proceeds of sale. The plaintiffs were a statutory corporation in Italy charged with receiving insurance contributions from ship owners in respect of seamen aboard their ships. By Italian law the plaintiffs had a maritime lien for the amount of contributions due. The mortgagees applied, in effect, to set aside the plaintiffs' claim for lack of jurisdiction. Hewson, J., upheld the application. He found (1) that the plaintiffs' claim was not within any of the provisions of section 1 (1) of the Act; (2) that whether it carried a maritime lien was a matter to be decided solely by English domestic law; and (3) that by that law the plaintiffs' claim did not.

11. If it had not been for this case I would, I think, have come to the conclusion that as an English court will look to foreign law to see if the plaintiffs have any right upon which the remedy of payment out might be based (The Colorado), so would it look to the foreign law to see if the plaintiffs have any right upon which the remedy of arrest may be based. I would have taken the remark of Atkin, L.J., that "in determining whether there exists a maritime lien the court will apply the lex fori" to mean that the court will apply the criteria of the lex fori, that is in particular whether the right of arrest continues despite a subsequent change in ownership. Once the criteria were satisfied then, provided the court had general jurisdiction, as it does in this case, the court would, as a matter of principle and of comity, give effect to that foreign right. Nevertheless on consideration it must be conceded that at no stage does Atkin, L.J. actually say that the foreign right is a maritime lien. He uses the words "a right closely resembling a maritime lien". Bankes, L.J. likewise says "it had attributes which entitled it to rank as a maritime lien". Scrutton, L.J. uses what are perhaps neutral words, "such a right is the same as a maritime lien". In The Acrux Hewson J. took the view that the categories of maritime lien are restricted to wages, damage, salvage and bottomry. I am not sufficiently persuaded to differ. I am happy to realise, however, that in view of the next conclusion to which I have come, the decision is only academic as far as I am concerned.

12. I should first interject in passing that a further argument was raised by the defendants; that as the plaintiffs are seeking to rely upon American law, they should take the whole of the American law that applies in the particular circumstances, that is, they should abide by the stay already imposed by the American court. With respect I do not think this argument has validity. The plaintiffs do not ask this court to enforce American law as such. They merely ask this court to enforce one particular right granted by that law and which they contend to be recognized internationally. The American stay is a domestic matter for that jurisdiction alone.

13. The other individual words which require consideration are "beneficially owned as respects all the shares (in a ship)". These words are not defined in the Act. They first became subject to scrutiny, so far as I am aware, in The St. Merriel⁽⁷⁾. There Hewson, J. concluded (at p. 258) that their inclusion in the subsection was "to indicate the true owner, that is, the person with a right to sell all the shares". Then in The Andrea Ursula⁽⁸⁾Brandon, J. extended the meaning to a person having "lawful possession and control with the use and benefit which are derived from them". He was satisfied that this included a demise charterer. In The I. Congreso⁽⁹⁾Robert Goff, J. (at p. 560) reconsidered the matter and decided that the words "refer only to cases of equitable ownership, whether or not accompanied by legal ownership and are not wide enough to include cases of possession and control without ownership, however full and complete such possession and control may be". He would not have included a demise charterer. I am most diffident to enter this discussion but I must adopt some standard against which to judge the particular facts of this present case. I would respectfully adopt most nearly the view advanced by Robert Goff, J. However, bearing in mind the general context of the words and the Act in which they appear I do not think I should delve too deeply into the finer niceties of Chancery law.

14. The defendants put forward for consideration three propositions which they say will show that the company is no longer "beneficial owner" of the ships. They are

15. I have received conflicting affidavits from American lawyers experienced in insolvency law. The defendants' expert supports the first proposition. The plaintiffs' expert on the other hand denies that the debtor in possession is a separate entity; its separate existence is no more than a legal fiction. American law is, of course, a question of fact and if necessary I would prefer the evidence of the defendants' expert. It seems to me to be supported by the decision in The Shopmen's case⁽¹⁰⁾. The judgment is exhibited to one of the affidavits. I am told that this decision is not technically binding upon the court which is actually dealing with the company's proceedings, but I assume that as the Bankruptcy Act is federal law then a federal court in one division would follow the ruling of a higher federal court in another division unless there were strong and compelling reason to do otherwise. Having said that, I do not think that in fact it matters very much whether legally speaking the debtor in possession is fact or fiction. I have to decide not what it is but whether it has taken over the beneficial ownership that the company undoubtedly enjoyed before the American order was made. I am concerned with the identity of the beneficial owner, not its juristic character.

16. The affidavits again conflict with regard to the second proposition. However, section 342 of the Bankruptcy Act appears to support some notion of a trust and there are comments to this effect in at least one state authority: Weiss v. Fleetwood Bank⁽¹¹⁾. Nevertheless when considering the matter I think I should bear in mind

17. As to the third proposition all I wish to say is that even if beneficial ownership depends to some extent on possession and control, temporary deprivation of that possession and control will not usually effect the true position.

18. I have eventually come to the conclusion that the company is still the beneficial owner of the four ships within the meaning of the Act. When one looks at the matter as a whole it is the company which still has the benefit of those ships. It is to help the company that the American court granted the moratorium. It is the company which to my mind is still really interested in the ships and which should not be able, under the cloak of a trust, to avoid their arrest: see the comment of Robert Goff, J., The I. Congreso at p. 563.

Stay

19. I turn now to the question of whether I should in the exercise of my discretion and in view of the American proceedings stay all the proceedings here. Were it just a matter of simple litigation, and were the appropriate test then which is the more suitable forum, I would have no hesitation. These are American ships. The cargo claims will have to be tried according to American law. Only one has the slightest connection with Hong Kong. And so far as I am aware no plaintiff resides or is domiciled here. But neither supposition is correct. Dealing with the second one first, the true rule is now to be found in the speeches of their Lordships in Rockware Glass Ltd. v. MacShannon⁽¹²⁾. Put at its most favourable to the defendants it is this: Where the action is competently brought in England, even though the natural forum would be elsewhere, the defendants must, in order to obtain a stay, show that justice with good reason demands it. The defendants say that justice does so demand; if the plaintiffs are permitted to seize the ships then the flood-gates will be opened and other creditors will pour in; this would completely disrupt the rehabilitation proceedings; the creditors and shareholders would lose financially; several thousand employees of the company would lose their jobs; and the effect would be felt by hundreds if not thousands of related businesses and perhaps the American and even the Hong Kong economies generally. The evidence that this will necessarily follow if the present plaintiffs are allowed to continue their particular actions is meagre. But I do appreciate that confidence must be a prime issue for the company at the moment. On the other hand the evidence that it can successfully weather the storm is also meagre. At best I am told by the company's attorney in California that "While (it) currently loses money on an accrual profit and loss basis, (it) has a realistic and feasible chance of turning round those losses to at least break even point, and possibly better, by July." It is not easy on that alone to decide whether or not the American judge is "speculating with the (defendant's) security on a 'return to prosperity' ": The Alabama⁽¹³⁾.

20. The defendants further say that the only disadvantage which the plaintiffs would suffer by proving in the American bankruptcy rather than litigating here would be one of delay; due priority would be given to the plaintiffs' lien in the American proceedings: The Robert and Edwin⁽¹⁴⁾. But I have no idea how the plaintiffs would rank in the American proceedings. The total debts of the company seem to be about US$160,000,000. The only substantial assets appear to be the four ships and they together carry secured obligations of US$14,000,000. The suggestion that the plaintiffs' priorities are low in American law has not been met by contrary evidence. And security is a matter to which their Lordships obviously attached great importance in The Atlantic Star⁽¹⁵⁾.

21. I turn back to the first supposition. This is not simple litigation. It involves bankruptcy. And in that respect the law is well settled. It is laid down in Galbraith v. Grimshaw⁽¹⁶⁾ where at p.513 Lord Dunedin says:

"Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the Court finds that there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution; and that I take to be the doctrine at the bottom of the cases of which Goetze v. Aders 2 R. 150 is only one example."

But that does not seem to be the position here. The defendants have not yet been made bankrupt and what seems to be taking place at the moment is not a process of universal distribution but a process of deliberately preferential distribution. Large sums have already been paid out to other creditors. If a stay is now granted and the defendants should ultimately become insolvent those creditors may have gained substantial advantages over the present plaintiffs. I have every sympathy with those who are struggling to keep the company alive but I am not persuaded that they have sufficient reason for the plaintiffs' actions in this court to be stayed.

22. I turn finally to the procedural defects. The plaintiffs have indicated that they do not oppose a stay until these are put right. Accordingly I order that the plaintiffs' actions shall be stayed until they have furnished to the plaintiffs' solicitors the particulars mentioned in paragraphs 2 and 3 of the summonses issued on the 1st of May this year. I make no other order except, subject to any comments by counsel, that the plaintiffs shall have their costs of these proceedings with certificate for two counsel.

Representation:

Mr. N. Philips, Q.C., and Mr. W. Wuang (Deacons) for the plaintiffs in all actions.

Mr. A. Lincoln, Q.C., and Mr. A. Dicks (Johnson, Stokes & Master) for the defendants in all actions.

(1) [1971] P. 137

(2) [1977] 2 L1. L.R. 533

(3) 1923 P.102

(4) [1974] 1 L1. L.R. 174

(5) 1978 American Maritime Cases 1

(6) 1965 P.391

(7) 1963 P.247

(8) [1971] 1 L1. L.R. 145

(9) [1977] 1 L1. L.R. 536

(10) U.S. Court of Appeal Second Circuit 24th June 1975

(11) New York Court of Appeal 7th April 1941

(12) [1978] 2 W.L.R. 362

(13) (1932) 53 Federal Reporter, Second Series, 973 at 975

(14) (1929) 32 Federal Reporter, Second Series, 390

(15) 1974 A.C. 436

(16) 1910 A.C. 508