The pitfalls of Arrest in the UK - A "Cautionary" tale

We are all familiar with arrest of vessels in the UK and there are some very good references setting out the criteria for doing so. What is of particular interest to our clients is - will they get paid or will they obtain security for their claim?

As we are also aware, arrest in the UK is quite straightforward. It does not require a hearing, the documents have been made simpler and the arrest can be put in place quickly. The vessel can be secured at short notice and it is simple for other parties to lodge a Caution Against Release or subsequently take over conduct of the arrest. There are standard court fees, including a standard undertaking to pay the Admiralty Marshal's fees.

By way of reminder the order of priorities is governed by the Supreme Court Act 1981 as:

1.    Admiralty Marshal’s costs, fees and expenses.
2.    Court fees and expenses
3.    Costs of the arrest of the arresting parties

The other claims are then settled in the order:

4.    Any claim with a maritime lien;
5.    Any claim of a mortgagee or any other party with a charge;
6.    Any claims of others entitled to proceed in rem will rank equally.
7.    Any other claims of in personam creditors.

If the arresting party has no priority, in that he has no registered charge, his claim will fall into category 3 above and he will recover with the other unsecured creditors. The arrest does not give the arresting party’s claim priority over other creditors and if, after distribution, there is any remaining funds, these are returned to the owners.

The "Cautionary" part

The Scenario below is fiction but is based on actual circumstances. The names, nationalities and claimed sums have been changed to protect the innocent from innuendo.

MV "Alex" is a small vessel of around 3000 tonnes. She is entered on a foreign register and arrived in a busy UK port for grain loading, some repair work and crew changes. The owning company has cashflow problems, cannot pay its bills and has significant overdue invoices for outstanding supplies, including bunker suppliers.

The vessel owes several firms in respect of bunkers, one of which locates its whereabouts and arrests it for a claim of around $150,000 plus interest. The arresting lawyers do not yet know if there are other claims or if the vessel is charged to a bank.

Two days pass. The owners have not put the managers in funds and the ship remains under arrest. At this point it would be fair to say that the window of opportunity for its release is very quickly closing

The crew are unpaid and unhappy and consult English lawyers. They submit claims and join the arrest. As maritime lien holders they sit at the top of the pile of claimants. Other bunker suppliers quickly surface. Various other suppliers file Cautions but do not file claims because they are not sure whether it is worth incurring the expense of proceeding to judgment. At this stage all claims amount to around $300,000 and is would not be unreasonable to conclude that there is a good prospect that everyone will get paid.

Two weeks pass. No bank appears to take over the arrest and investigations indicate that the vessel may be mortgage free. Various cautioners decide that there is a good prospect of complete recovery and prepare to file their claims.
 
In the meantime we are into the holiday period. Negotiations are ongoing as to security or payment. Whilst more than willing to talk, the owners and managers are unable to comply with the demands. Claims continue to come in.

The vessel remains at the berth, under the control of the Admiralty Marshal. He has to supply diesel, shore power, food, fresh produce and cigarettes for the crew. The crew begin to file their claims and go home. They are assisted in this by their English lawyers, who have the cash from the safe and have booked tickets home.

Port State Control visit the vessel and list a number of deficiencies that render it unseaworthy.

Three months after the arrest the vessel remains at the berth and is virtually derelict. Proceedings have been progressed for its appraisement and sale and it is to be auctioned. It is valued at around $800,000. At this point one of the caution holders asks where the vessel is. He is informed that it remains at the loading berth. The standard port charges and terms and conditions of the load port are looked up and make bad reading.  The daily rate is $4000 and we are now 120 days into the arrest. $4500 x 120 = $540,000!

Why were we not told this before? Can we do anything about these excessive fees? Why was the vessel not moved? The answer is that the Admiralty Marshal is not required to inform the parties of the fees being incurred and is certainly not in a position to challenge invoices properly raised under a contract between the vessel and the port. He is simply there to take custody of a ship and to maintain it until such time as it is released or sold. He simply protects the res and pays the bills.  

Even if the Marshal had been asked to move the vessel, this would have been expensive and difficult because once it had been under arrest for more than a few days the crew had started to leave, little or no maintenance had been carried out and Port State Control had been on board. It was not immediately seaworthy and certainly not legal to move without significant expense.

There were alternative and considerably cheaper, non commercial berths nearby. 

Sealed bids are received from buyers and one is accepted - $920,000 plus $50,000 for the bunkers. The vessel is sold as seen and taken away by its new owners. The proceeds are paid into court and the parties are free to discuss priorities or to proceed to a hearing.

At this point it is very clear that there are not sufficient funds to pay all the non priority creditors.  The crew wages claim amounts to around $60,000 and the remaining in rem claims are now in excess of $400,000. Legal costs amount to $160,000 of which $40,000 have priority.

The Admiralty Marshal pays all outstanding invoices, amounting to $600,000. The priority creditors and their costs are paid ($100,000), leaving about $270,000 for the non lien holders, who now stand to recover around 54%.

At this point and appreciating that everyone should close this off before further legal fees eat into the recovery, other more dubious small creditors join in the litigation. They are capable of holding up a distribution by the Admiralty Marshal and forcing him into a position whereby a priorities hearing would be the only solution.

The unsecured creditors now begin to look closely at each other's claims and there is some animated correspondence regarding them. Eventually the unsecured creditors, agree claims without the need for a priorities hearing. For reasons of costs they agree the small claims in full. A consent Order is finalised whereby the unsecured creditors, including the arresting party recover around 50%.  The Admiralty Marshal's costs have been met, the maritime lien holders have been fully paid and the small claims agreed. There is nothing left to return to the owners!

The question arises - what if (in a volatile market) the vessel was sold for $500,000? The answer is that the Admiralty Marshal would still be liable to discharge the port fees and he is entitled to look to the arresting party for the shortfall!

The moral of this tale is clear - no matter how attractive the prospects look, if you are the arresting party look to minimise the costs at a very early stage. If you are a cautioner ask what fees are being incurred - nobody is obliged to tell you about them. In this scenario, the maritime lien holders were never in danger of not being paid. If the arresting party is also a maritime lien holder it is of no significant concern that the vessel in incurring charges. However, in this scenario the arresting party was not a maritime lien holder.

If you are the port, in this scenario it is in your interests to remain silent. I am sure that if there are not sufficient funds, the port would have made this known to the Admiralty Marshal and demanded removal of the vessel from the berth.  

As I have said, these facts are cautionary!

For further information, please contact Brian Taylor, a Solicitor in our Marine and Transport Team on +44 (0)1752 526032 or b.taylor@ashfords.co.uk.

Ashfords LLP is regulated by the Solicitors Regulation Authority.  The information in this note is intended to be general information about English law only and not comprehensive.  It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.