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PROTECTING THE NECESSARIES MAN – JEREMY PRAIN

Much has been said and written lately about the credit-crunch which has gripped the world economy and sparked fears of a global recession. Whilst the shipping industry seems far removed from US sub-prime mortgages, this crisis has undoubtedly sent shockwaves throughout the financial sector and has played its part in stopping the rampant shipping boom dead in its tracks.

In South Africa the signs of the shipping slowdown are beginning to show if one has regard to the growing number of ships being arrested and auctioned off in our jurisdiction as creditors seek to recover their debts from insolvent ship owners.

In times like these, it is important for necessaries men - those in the business of providing goods and services to ships - to be reminded of their rights and how they ought to go about protecting themselves from bad debt.

First, one needs to bear in mind that South African admiralty law creates an effective procedure for selling a ship and setting up a fund from the sale proceeds. Creditors are then entitled to submit claims against the fund, which are examined by a court appointed referee. The Referee reports to the Court on the validity, amount and ranking of the claim.

Section 11 of the Admiralty Act creates pecking order of claims which is not without its controversy. But happily for the necessaries man - or more specifically – a creditor with a claim “in respect of the supply of goods or the rendering of services to or in relation to a ship for the employment, maintenance, protection or preservation thereof”, his claim enjoys a higher ranking than a bank with a mortgage claim over the ship. This is good news for local and foreign suppliers because the bank normally weighs in with the largest claim leaving little, if anything, for those ranking behind it.

The ranking enjoyed by the necessaries man is, however, subject to a proviso: the claimant must commence proceedings to enforce the claim or submit proof of the claim to the Referee within one year in which the claim arose. Our courts have held that a claim “arises” not when the debt becomes enforceable, but when claim comes into existence. In other words, the clock starts from the date on which the services were rendered, or the goods were delivered, to the ship.

If the supplier fails to act quickly and does not enforce his rights within the one year period, his claim may still hold good against the fund, but he will not enjoy a ranking ahead of the bank. In practice, therefore, it often happens that a creditor who is slow to act finds that the bank soaks up all of the available funds and leaves nothing for the creditors ranking below it.

Here are a few tips which necessaries men ought to observe when doing business with ship owners:       

• Know your client: the reality of international shipping is that ownership, management and chartering structures are often complex and opaque. A supplier’s claim against a fund must be founded upon the underlying liability of the ship owner and, when in doubt, it is best to cast communications, invoices and delivery notes in wide terms by addressing these documents to “The owners of the mv XYZ”;

• Exercise good credit control: monitor your debtors carefully and if you have fears regarding payment, it is best to buy yourself piece of mind by arresting the ship to enforce a claim;

• Vigilance is all-important: if you have a claim against a ship languishing under arrest in a South African port waiting to be sold, rather secure your claim by arresting the ship than waiting for the fund to be established – before you know it, you may find that more than a year has passed since supplying the goods or services.

A final point, which should be of particular interest to companies providing agency services, is that the person who pays the claim of another (e.g. an agent settling a disbursement account on behalf of the owner) is entitled to “all the rights, privileges and preferences” to which the third party would have been entitled if its claim has not been paid. This entitlement is set out in section 11(8) of the Admiralty Act and was the subject of a recent decision of the Supreme Court of Appeal in the case of the Olympic Countess. After examining the facts of the case, the Court clarified the meaning and effect of this provision and came to the following findings:

• The claimant who pays the third party supplier cannot acquire a better right, privilege or preference than the third party would have had against the fund. If, for some reason, the third party would not have had a valid claim against the fund, then the claimant’s claim for reimbursement will fail;

• Therefore, if the third party’s claim arose outside the one year period mentioned above, the claimant cannot be placed in any better position when settling the third party claim;

• It follows that a third party cannot defeat the one year limitation by the simple expedient of “selling” the claim to another and thereby confer on the claim an elevated ranking.

Vigilance and pro-active debt control remains the key. Those who supply goods and services to ships would do well to remember that, as with most things in life, the early bird catches the worm!

Jeremy Prain is a senior associate at Bowman Gilfillan.

Monday, March 17, 2008