HONG KONG SAR, CHINA Law and Practice Contributed by: Christopher Andrew Potts, Crump & Co
5.9 Releasing an Arrested Vessel P&I club letters of undertaking (LOUs) are commonly accepted by the court as security for releasing an arrested vessel, but acceptance is subject to the claimant’s consent. While the court facilitates release, it will not compel acceptance if the claimant objects as the LOU remains a private agreement instead of a direct court bond. If the claimant does not accept the P&I LOU, the defendant can offer alternative security, such as depositing funds directly with the court, obtaining the claimant’s agreement on alternative security or apply - ing to set aside an improper arrest. Security must usu - ally cover the claim, interest and estimated costs. Foreign bank guarantees are also acceptable if uncon - ditional, irrevocable, payable on demand, issued by a reputable bank and enforceable in Hong Kong. 5.10 Procedure for the Judicial Sale of Arrested Ships The judicial sale process in Hong Kong generally involves the following steps. • After a vessel is arrested in rem, any interested party (often the arresting party or mortgagee) may apply to the High Court for an order for the ves - sel’s appraisement and sale. This is often done if circumstances warrant – eg, the ship is a “wasting asset”, with its value diminishing due to ongoing maintenance costs. • Once the court grants the order, the claimant must file a praecipe for a commission of appraise - ment and sale. The court’s bailiff determines the appraised value, and executes the selling by public auction or inviting sealed bids (private tender). • The gross proceeds from the sale are paid into court and held in a deposit account pending the resolution of all claims and the determination of their priority. • The court determines the order of priority for all claims against the proceeds. Once priorities are agreed upon or determined by the court, the funds are paid out to the relevant parties. The buyer will be granted a clean title, free from all prior claims, liens and encumbrances.
Private Sale A private sale is only permitted if it is conducted under the authority and supervision of the court, and when it is clearly in the best interest of all claimants, with a credible offer that likely exceeds auction value. Liability for Maintenance The arresting party is liable for funding the expenses of maintaining the vessel from the moment of arrest until its sale by the court. The arresting party’s solici - tors must provide an undertaking to the court’s bail - iff to cover all such costs (eg security, port charges, insurance, crew, bunkers). These expenses are given the highest priority and are reimbursed first from the proceeds of the judicial sale. Priority Ranking of Claims Hong Kong follows traditional English Admiralty pri - orities: • bailiff’s costs for arrest, preservation and sale of the vessel (including a 1% commission on the gross sale proceeds); • recoverable legal costs of the arresting party up to and including the arrest; • maritime liens; • mortgages; • statutory liens; and • unsecured claims (non-maritime debts). Priority of the Mortgage Maritime liens outrank mortgages. This means that claims for crew wages, salvage and collision dam - age will be satisfied from the sale proceeds before a registered mortgagee. The mortgage claim instead outranks most non-lien maritime claims. 5.11 Insolvency Laws Applied by Maritime Courts Hong Kong has no statutory corporate rescue regime equivalent to Chapter 11 of the US Bankruptcy Code. Its corporate insolvency framework primarily compris - es schemes of arrangement and provisional liquida - tion. A scheme of arrangement is a court-supervised com - promise between a company and its creditors, and requires approval by a specific majority of creditors.
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