The anatomy of a bankruptcy

By: | Issue #647 | at 08:00 AM | Channel(s): Liner Shipping  

The Hanjin bankruptcy shook the shipping world like no other. While it might not have directly been responsible for the realignment in ocean carrier alliances, it was certainly on every shipping executive’s mind, a reminder of what could go wrong. Matt Miller examines the anatomy of the Hanjin bankruptcy and the wide legacy it leaves.

Late last August, the Korean Development Bank (KDB) refused to provide additional financial support to beleaguered Hanjin Shipping, forcing the line into a South Korean court-ordered receivership. Bedlam ensued. Some ships were arrested and seized. Others bobbed aimlessly offshore, or were stuck in ports far from where they needed to be. Billions of dollars of cargo in thousands and thousands of containers were stranded. Freight forwarders, ports, trucking companies, NVOCCs and railroads all scrambled to figure out how to move goods and get paid, while angry creditors grappled with desperate shippers.

“That first month or two was chaos,” said Asa Markel, a Los Angeles-based attorney with Masuda Funai.

Once the world’s seventh largest container line, Hanjin was declared bankrupt in February by a South Korean court and liquidated; its ships sold for scrap. Some $5 billion in loans were pretty much wiped out, much of it held by KDB.

Hanjin’s collapse in a battered global shipping market is still being assessed. So, too, is its impact on ship financing, which is already in turmoil and racked with enormous debt, huge uncertainty and danger. (See related story, page 8)

“The shipping business is so interrelated,” said Arthur Rosenberg, a New York-based lawyer with Holland & Knight, with wide experience in maritime bankruptcies. “All it takes is one domino to fall and you have a bunch of teetering dominos.”

Tentacles of Bankruptcy

The Hanjin disaster revealed deep fissures within the various legal regimes that govern vessels, shipping, commerce, transportation and bankruptcies. It graphically illustrates the inherent difficulties in a tangle of laws and jurisdictions that oversees bankruptcies in general and ships in particular.

“The tentacles of a maritime bankruptcy are far reaching,” said Marilyn Raia, a San Francisco-based specialist in admiralty and maritime law with the firm Bullivant Houser Baily.

Those throughout the global supply chain assume a well-ordered legal system, so vital for commerce, always works smoothly. But a bankruptcy can throw multiple spanners into that chain.

Just one example: It’s common practice now for freight forwarders and NVOCCs to issue what are called house bills of lading to the actual cargo owners. The intermediaries become the parties on a vessel’s bill of lading. The intermediaries become contractually responsible for delivering the goods to their owners, not the vessels.

While more ships-related bankruptcies are pretty much inevitable, nobody wants a repeat of Hanjin, even on a much smaller scale. THE Alliance, a newly formed service network of five large shipping companies, announced last month it would establish an independently managed fund to protect beneficial cargo owners if a member goes bust.

To better understand the Hanjin case, it helps to fathom how bankruptcy and insolvency work globally. Laws and jurisdictions governing bankruptcy are anything but equal. That was perhaps Hanjin’s biggest lesson.

Hanjin filed for receivership in Seoul, and then filed supporting cases elsewhere. That may seem logical. After all, the company is Korean. Its biggest creditor was KDB. Its biggest shareholder was Korean Airlines.

But assets tell a different story. Hanjin ships and containers were scattered all over the world. Many ships that carried the Hanjin name were chartered from other owners. Tens of thousands of containers were leased.

The goods being carried were owned by a who’s who of global companies and destined for ports, warehouses and, eventually, stores everywhere.

Were the containers carrying those goods part of the bankruptcy estate? Who had the right to hold them? Those are difficult questions in the best of circumstances.

Korean insolvency law, however, isn’t nearly as developed, or as far-reaching as it is in the US, UK or some other western countries. Even one of Hanjin’s lawyers in the US during a hearing termed aspects of Korean bankruptcy law ambiguous and unsettled.

Every Jurisdiction for Itself

While Korean lawyers sparred in that Seoul district court, the real battles took place in Singapore, China, the Panama Canal, Canada and the US. The Korean judge couldn’t impose his will outside the country and it was pretty much every jurisdiction for itself.

Because Hanjin had an office and assets in the US, it could have voluntarily filed for reorganization in a US bankruptcy court under Chapter 11 of the bankruptcy code, several US bankruptcy lawyers believe.

“There was a sufficient jurisdiction nexus for Hanjin to file in the US. I don’t believe that would have been issue,” said Peter Goodman, a New York-based restructuring and insolvency lawyer with Baker McKenzie.

That would have changed the complexion of the case entirely. First, the filing of a Chapter 11 itself triggers an automatic stay, which prevents any creditor from foreclosing on, grabbing or seizing assets. It stops cold any lawsuits. It prohibits contracts from being summarily ended or providers to refuse service because of prior debts. The fundamental underpinning of a Chapter 11 is to preserve the value of the estate while everyone attempts to get the company up and running again. The basic precept of Chapter 11 is to treat everyone equitably.

In addition, Hanjin would have continued to be in charge of its operations. It would have attempted to gain what’s called “debtor-in-possession” or DIP financing. While it’s unlikely the shipping line would have survived, operations would have wound down in a much more orderly fashion.

A US bankruptcy court has more clout and reach than any other in the world. “US bankruptcy law applies globally to property of the estate wherever it is located. So that, when combined with the economic might of the United States, gives a debtor, and indirectly the bankruptcy court, a lot of power over foreign companies, even when it relates to transactions that have nothing to do with the US as long as it involves property of the estate”, explained Goodman

Most other courts around the world recognize that automatic stay and any other orders a US bankruptcy judge issues. (China is an exception and it’s questionable whether a Chapter 11 filing would have prevented the six Hanjin ships arrested and seized in Chinese ports.)

Examples of foreign companies filing for Chapter 11 court-administered relief in the US are commonplace. In February, for example, a joint venture between Singapore-based Ezra Holdings and Japan’s Chiyoda Corp. and NYK Lines in offshore energy called Emas Chiyoda Subsea, whose major creditors are in Singapore, Norway and Britain, filed for Chapter 11 in Houston.

Christmas & Chapter 15

Instead, Hanjin requested a Chapter 15 filing. This ancillary filing merely acknowledges an overseas insolvency case and asserts bankruptcy jurisdiction in the US. As the Hanjin case demonstrated, a stay isn’t automatic under a Chapter 15 filing and is subject to hearings and a judge’s recognition of a foreign court and its viability. Hanjin’s bankruptcy lawyers in the US took several days to get their act together, argue why a stay was necessary and seek proper court relief.

John Sherwood, a judge in the US Bankruptcy Court in New Jersey, had no experience in big maritime cases and struggled at first to balance competing interests and extremely loud voices. Those included cargo owners such as Samsung and Hewlett-Packard who faced the prospect of a calamitous Christmas season. (At one point, shippers estimated as much as $14 billion worth of goods were trapped by the bankruptcy and lawyers in his court joked that Judge Sherwood would have been the judge who killed Christmas had he not issued the necessary directives to untangle the mess.)

It took Judge Sherwood almost two weeks to issue a stay and the necessary orders that allowed goods to be moved. The first important order was called a protocol. It devised a kind of offset arrangement that enabled beneficial cargo owners or their 3PLs to pay necessary fees directly to ports, workers, warehouses, shippers and other transport companies such as rail and trucking, without involving or going through Hanjin. This allowed goods to get to where they needed to go.

Meanwhile, Korean Air, whose intransigence and lack of support had angered KDB, promised funds to keep Hanjin going, but dithered over terms and collateral. The money never materialized.

The Hanjin case was further complicated by certain maritime laws, laws unique to shipping. A kind of global maritime regime may be necessary for keeping ships, their owners, crew and cargo all safe, but can sometimes be at odds with efforts.

When Everybody is Owed Money…

“What happens when everyone is owed money? Whose rules are paramount? Bankruptcy court has to figure out a way to marry all these different sets of rules and it’s really difficult,” said Barbra Parlin, also a bankruptcy lawyer with Holland & Knight.

Examples abound. The notion of a ship arrest is unique, while laws governing liens are both complex and jurisdiction-specific. Judge Sherwood ruled that Hanjin ships could enter and leave US ports, without being arrested. That angered providers such as pilots and fuel suppliers who use the arrest mechanism to insure payment for services.

That raised the question among some whether bankruptcy law automatically trumps admiralty law. Everyone is bracing for the next case that tests these competing interests and no one is looking forward to it.

While any number of US bankruptcy and maritime lawyers maintain Hanjin’s disastrous free-for-all could have been avoided had the shipping line filed for Chapter 11, some admit that course of action might not have been as easy to take as it sounds. As Hanjin’s finances spiraled downward, the company kept looking and looking to the KDB for a lifeline, in effect, ignoring all other avenues, including a Chapter 11. That’s the way Korean business has operated in the past and it’s the way the country continues to function.

American Journal of Transportation