16 December, 2017
The vast majority of charter parties will include in their terms a lien clause which confers on the owner a lien over sub-freight (and sometimes sub-hire), for any amounts due to the owner under the head charter party. If the owner exercises his lien, sums which would otherwise be payable by the sub-charterer to the charterer under the sub-charter party, should instead become directly payable to the owner.
The right to exercise a lien over sub-freight is a right which the charterer grants to the owner in their charter party and it is therefore a contractual right. If the lien over sub-freight were not granted in the charter party, it would not exist.
It is not to be confused with a "maritime lien" which may arise in relation to certain types of claims[1]and which attach to the ship or cargo, and which in an insolvency situation should confer priority on the claimant who has a maritime lien over unsecured creditors.
The purpose of a contractual lien over sub-freight is to provide security for any amounts due to the owner under the charter party. If the charterer makes full and timely payments then the lien clause is not needed. It is only when the charterer fails to pay freight or hire that the owner will look to exercise their lien.
If the owner has fixed his vessel to a charterer who is unable to pay, perhaps because he is insolvent then, the owner will want to rely on the security afforded by the lien clause and, ideally, the owner will want his right of lien to give him priority over unsecured creditors.
It is when faced with the insolvency of the charterer that the right to lien sub-freight should be most valuable to an owner. However, unless the lien has been registered as a charge against the charterer, then it may not give the owner priority over other creditors; the owner will rank pari passu with all other unsecured creditors and the lien clause is effectively worthless.
Under English law, if the charterer is a company to which the Companies Act 2006 applies, the lien will be invalid as against other creditors of the charterer unless it has been registered as a charge. This is because a contractual lien over sub-freight is considered, under English law, to be an assignment of the charterer's book debts by way of security[2] and it is therefore registerable as a charge under the Companies Act s.859A. If it has not been registered then it is not valid as against other creditors.
The recent case of Duncan, Cameron Lindsay & Anr. V. Diablo Fortune Inc. and another matter [2017] SGHC 172, confirmed that the law in Singapore is the same, which should be so given the similarity between the English and Singapore Companies Act legislation. However, it is worth noting that the case highlights that the position in Hong Kong is different. This is because the Hong Kong Companies Ordinance has been amended to expressly provide that a ship owner's lien on sub-freight is not to be regarded as a charge on a company's book debts or as a floating charge on its undertaking or property. One of the stated reasons for this change to the legislation is that registration of a lien is said to be, "inconvenient from a commercial perspective since charter parties are usually negotiated by shipbrokers and not by lawyers and are normally of a relatively short duration."[3]
While it may be correct that it is commercially inconvenient to register a lien over sub-freight as a charge, if a ship owner wants its lien to be recognised by a liquidator and other creditors then, as the law stands in England and Singapore it must be registered.
So how does a ship owner register his right of lien over sub-freight?
Identify the correct jurisdiction.
The first point to consider is in which jurisdiction does the ship owner register their lien. In the Diablo Fortune case, the Singapore court gave consideration to the law that governs the registration of charges and priority in insolvency matters. In this case the charter party was subject to English law, but the charterer who had agreed the lien was a Singapore incorporated entity. A distinction had to be drawn between:
- the law governing the initial validity and/or creation of the lien – which in this case was English law being the governing law of the charter party; and
- the law governing the priority of interests and the distribution of assets in the event of the charterers' insolvency – which in this case was Singapore law as the charterer was a Singapore incorporated entity.
The question of priority of the different creditors in the event of the charterers' insolvency will be governed by the law of the country where the bankruptcy takes place and where the assets of the charterer are administered, which should be the jurisdiction in which the charterer is incorporated.
So the first step is to determine in which jurisdiction the charterer is incorporated and then check to see whether it is necessary to register the lien as a charge. If the charterer is incorporated in Singapore or England, for example, then it is necessary (but apparently not in Hong Kong).
How do you register the lien?
If the charterer (as the chargor) were a Singapore incorporated entity, then the charge would need to be registered in Singapore. In Singapore, a charge (which based on the Diablo Fortune case, also extends to contractual liens at the present time) created by a Singapore incorporated charterer in favour of an owner must be registered with the Accounting and Corporate Regulatory Authority of Singapore (the "ACRA") as either a floating charge or a charge on book debts, within 30 days of its creation. Generally, if a registrable charge is not registered with the ACRA within the 30-day period (or any further extension of time granted by the Singapore courts), then the security created pursuant to such a charge will be void as against the liquidator and any creditor of the Singapore incorporated charterer, i.e. the person relying on the charge would not have priority over other creditors, and he will rank pari passu with all other unsecured creditors.
Registration of a charge in Singapore with the ACRA is typically done by a registered filing agent (for example a law firm, an accounting firm or a corporate secretarial firm) on behalf of the entity seeking to register the charge, and is required to be done online.
The charge can be registered with the ACRA by the chargor (i.e. the charterer) and/or the chargee (i.e. the owner), although it is more likely to be the chargee, as the party who stands to benefit from the charge , who engages the registered filing agent to register the charge.
To register the charge the filing agent must provide certain information including, for example, a statement containing the prescribed particulars of the charge. ACRA will review the documentation lodged, and if there are no issues, it will send an email notification confirming the registration of the charge. The email notification will serve as conclusive evidence that the charge has been registered in compliance with the relevant statutory charge registration requirements.
Is it worth the inconvenience?
Ultimately, this will be a commercial decision based on the particular circumstances of each charter party. Of particular relevance will be the financial standing of the charterer and, the duration and value of the contract.
However, for the relatively modest investment of management time and a small fixed fee, it is our view that, for longer term charter parties such as time charters, bare boat charters and COAs, if there is any risk that the charterer may become insolvent during the term of the charter, it would be worth taking the step of registering the lien.
[1] E.g. salvage, collision damage, crew wages and master's disbursements
[2] The "Ugland Trailer" [1985] 2 Lloyd's Rep. 372
[3] "Second Public Consultation on Companies Ordinance R, dated 2 April 2008ewrite
For further information, please contact:
Chris Metcalf, Partner, Clyde & Co
chris.metcalf@clydeco.com
