The "Posidon" and another matter

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 07 June 2017
• Neutral Citation: [2017] SGHC 138
• Docket Number: Admiralty in Rem No 170 of 2014 (Summons No 4072 of 2015), Admiralty in Rem No 171 of 2014 (Summons No 4073 of 2015)
• Date: 07 June 2017
• Published date: 31 January 2018
• Plaintiff Counsel: K Murali Pany and Ng Lip Kai (Joseph Tan Jude Benny LLP)
• Defendant Counsel: Kendall Tan Chuan Bing, Yip Li Ming and Tay Jia En (Rajah & Tann Singapore LLP)
• Court: High Court (Singapore)
• Hearing Date: 30 November 2016,20 February 2017
• Subject Matter: Priorities,Admiralty and shipping,Practice and procedure of action in rem

Belinda Ang Saw Ean J: Introduction

The plaintiff, Piraeus Bank SA (“the bank”), filed both Summons No 4072 of 2015 (“SUM 4072”) in Admiralty in Rem No 170 of 2014 (“ADM 170”) and Summons No 4073 of 2015 (“SUM 4073”) in Admiralty in Rem No 171 of 2014 (“ADM 171”) on 20 August 2015. The summonses are routine applications that are made to, inter alia, determine the order of priorities of various in rem claims against the proceeds paid into court following the judicial sale of two vessels, the Posidon and the Pegasus. The bank also seeks payment out of the balance sale proceeds in partial satisfaction of in rem judgments in its favour. World Fuel Services (Singapore) Pte Ltd, World Fuel Services Europe Ltd and World Fuel Services Trading DMCC (hereafter collectively referred to as “the interveners”) intervened in ADM 170 and ADM 171 to oppose the summonses. It is not disputed that the interveners, who are necessaries providers with a statutory right of action in rem under the High Court (Admiralty Jurisdiction) Act (Cap 123, 2001 Rev Ed) (“HCAJA”), had over a considerable period of time, supplied bunkers to the Posidon and the Pegasus. It is common ground that after deducting Sheriff’s commission and expenses in and about the arrest, appraisement and sale of the vessels and her bunkers, as well as the bank’s legal costs and disbursements incurred in and about the arrest, appraisement and sale of the vessels, the entire collective net funds in court are insufficient to meet the in rem judgments obtained by both the bank and the interveners respectively unless the interveners’ necessaries claims have priority over the bank’s mortgage claims.

The question before this court is whether, in the distribution of the sale proceeds of the vessels, the bank’s claims as second preferred mortgagee of the vessels should take priority over the interveners’ claims for bunkers supplied given the particular circumstances of the present case. The interveners’ position is that the bank’s claims should be subordinated to theirs. The interveners’ contentions, based on the circumstances of the case as they see it, are that firstly, the bank was in de facto control and management of the finances for the operational needs of the vessels from June/July 2014,¹ or from 11 July 2014 at least,² and had authorised and approved of the bunker purchases.³ In making this contention, the interveners went so far as to boldly allege that the bank had been “disguising its involvement by ordering… bunker supplies for the [vessels], through the [shipowners], so as to circumvent any responsibility for [those] trade debts”.⁴ Secondly and in the alternative, the interveners contend that the bank had, with knowledge of the shipowners’ insolvency, acquiesced in the procurement of bunkers supplied, knowing that the bank and/or its security interest would “benefit” from the bunkers supplied. The basic premise of the interveners’ argument on “benefit” is that the bunkers supplied provided motive power to the vessels, thereby ensuring the physical safety of the bank’s security whilst the vessels were operational and enabling the vessels to trade and generate income to the benefit of the bank (“the benefit argument”).⁵

To evaluate the interveners’ contentions, this judgment will discuss the central question of when and in what circumstances will the court permit a departure from the recognised order of priorities so that necessaries claims take precedence over mortgage claims.

Background

On 16 February 2012, the bank entered into a loan facility agreement (the “2012 LFA”) with the registered owners of the Posidon and the Pegasus as joint and several borrowers (“the borrowers”). The loan facility was for a sum of US$17.1 million, and it was secured by way of second preferred Liberian Ship Mortgages over the two vessels (“the Mortgages”).

The loan amount was drawn down on 21 February 2012 (“the Drawdown Date”). Subsequently, the 2012 LFA was amended by a supplemental agreement dated 21 August 2013. On the borrowers’ request, the loan interest margin was lowered by one percentage point for the period until and including 31 December 2013.

Under cl 6.1 of the 2012 LFA, the loan was to be repaid in one bullet repayment on the final maturity date, 31 December 2015. Interest payments under the 2012 LFA were due in 6-month intervals for the first 24 months beginning from the Drawdown Date, and every 3 months thereafter, subject to the parties’ agreement (see cl 1.2). However, during the 24-month period after the Drawdown Date (“the Grace Period”), any non-payment of interest in whole or part would not be considered as an Event of Default; instead, any unpaid interest would be capitalised and added to the principal amount of the loan (see cl 7.4). Contractually, the Grace Period would cover four six-monthly interest payments that would fall due in the 24-month period beginning 21 February 2012 and ending 21 February 2014.

It transpired that all instalments of interest that fell due prior to February 2014 and during the Grace Period were not paid but capitalised instead. The subsequent interest for the period from 21 March to 21 August 2014 was not paid. By then, the Grace Period was over and, the bank treated the unpaid interest due and owing on 21 August 2014 as an “Event of Default” under the 2012 LFA which entitled the bank to terminate the 2012 LFA and enforce the Mortgages. On 11 September 2014, the bank communicated its decision to enforce the Mortgages and the borrowers agreed to sail the vessels to Singapore for their arrests. A Notice of Default and Acceleration of Loan was issued on 29 September 2014. On 3 October 2014, in rem writs were issued against the Posidon and the Pegasus in Singapore where they were arrested: the Posidon on 4 October 2014 and the Pegasus on 5 October 2014. No appearance was entered by the borrowers to the in rem writs.

On 5 December 2014, the bank obtained default judgments in the sum of US$19,366,909.97. In the subsequent judicial sale of the Posidon, she was sold for S$8,000,000 and her bunkers were sold for S$70,060. In the case of the Pegasus, she was sold for S$5,350,000 and her bunkers were sold for S$75,500.

The interveners obtained judgment in default of appearance against the Posidon in Admiralty in Rem No 188 of 2014 on 9 March 2015. Judgment in default of appearance against the Pegasus in Admiralty in Rem No 189 of 2014 was obtained on 9 March 2015.

The interveners obtained leave to intervene in ADM 170 and ADM 171 on 18 September 2015. In addition to an order for the discovery and/or inspection of documents on 10 December 2015 and answers to Interrogatories on 31 July 2016, the interveners also obtained an order to cross-examine Mr Konstantinos Petropoulos (“Mr Petropoulos”), who was the deponent of affidavits filed on behalf of the bank on 17 November 2015. Mr Petropoulos was the person in charge of the bank’s claim against the borrowers. At all material times, Mr Petropoulos was the bank’s Director of Shipping Finance and Wholesale Financial Solution. Cross-examination of Mr Petropoulos via video conferencing took place on 30 November 2016.

I pause here to note that at no time did the interveners attempt to set aside the bank’s default judgments that were for the principal sum and interest due under the 2012 LFA and the supplemental agreement, and secured by the Mortgages. It is therefore too late, at this stage, to seek to undermine the bank’s default judgments by questioning the registration of the Mortgages and the bank’s computation of the due date of interest payment.

The law on priorities in relation to in rem claims Order of priorities are determined by the lex fori

The order of priorities and the distribution of the sale proceeds of a vessel in an action in rem between competing claimants against the same fund is a question governed by the law of the forum. The Court of Appeal in The “Andres Bonifacio” [1993] 3 SLR(R) 71 at [35] approved the majority’s observations at [26]-[27] in The “Halcyon Isle” [1979-1980] SLR(R) 538, a decision of the Privy Council on an appeal from Singapore, that the question as to the right to proceed in rem against a ship as well as the question of priorities in the distribution of the sale proceeds are to be determined by the lex fori as if the events that gave rise to the claim had occurred in Singapore.

The present case does not concern the characterisation of the nature of the claims of the bank and that of the interveners as there was no contest that both claims fell within the provisions of the HCAJA. That is to say, the parties did not dispute the bank’s status as mortgagee of the vessels in respect of the loan principal and interest owed by the borrowers, nor did they dispute the interveners’ status as necessaries men who had supplied bunkers to the vessels.

The question of priority as between the parties in the present case starts with the established position that the mortgagee bank’s mortgage claim has priority over the interveners’ necessaries claim for bunkers supplied. That a mortgage claim takes precedence over a claim for necessaries supplied is an established priority ranking that is usually adhered to, but the interveners’ point here is that the order of priorities is not immutable since distribution of the sale proceeds of the vessels by the court is a matter of procedure and practice that takes into account considerations of equity. The interveners’ main contention is that the equities of the case (derived from the particular features of the case) justify an alteration of the order of priorities such that their various necessaries claims would rank ahead of the bank’s mortgage claims.

Discretion to alter the order of priorities between different classes of claims

I begin with the proposition that the established order of priorities is well-recognised, and that the ranking of different classes of...