The shipping industry is being roiled by Hanjin’s decision to file receivership, with spot rates surging, cargo being stranded on vessels, and now lawsuits are being filed by shipowners.
The shipping industry is being roiled by Hanjin Shipping’s decision to file for receivership this week, with spot freight rates surging and cargo stranded on the company’s ships.
On Friday, the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index indicated that in the past week, spot inbound transpacific freight rates rose 51 percent to U.S. West Coast ports and 45 percent to U.S. East Coast ports.
Meanwhile, Korea’s Yonhap news agency reported Friday that Hanjin said that 45 of its ships, including 41 container carriers, “have been stranded at sea worldwide due to port entry denials in many nations” and some have been arrested.
“Since late last month, some of Hanjin Shipping’s fleet have been denied access to ports in China, Japan, Singapore, India and other nations as workers demand that the shipper has to pay fees in arrears and in cash in advance” Yonhap said, adding that one of Hanjin’s vessels was denied passage through the Suez Canal.
After failing to reach an agreement with its major creditors on Tuesday for additional support, Hanjin Shipping filed for insolvency Wednesday, while on Thursday, the Seoul Central District Court approved a filing for the company to be put under a court-led restructuring.
After the creditors “pulled the plug, so to speak, it didn’t really leave Hanjin with a lot of options,” said Esben Christensen, managing director and co-head of the maritime practice at AlixPartners in an interview with American Shipper. “It seems in this situation, the spread between what was acceptable to the creditors or maybe even feasible and what Hanjin wanted was too big.”
What brought on Hanjin’s problem?
“At a macro level? Too many ships, too little demand and low rates. That’s something that all of the carriers have been dealing with for years,” he said. “I think Hanjin, along with a subset of the big carriers, have had balance sheets that are worse than the average…and with big balance sheet problems, you’re more sensitive to a bad market situation.
“Hanjin has been dealing with this for years, and they’ve been trying to address this thorough renegotiating charters,” Christensen added. “They’ve had some success in this but clearly not enough.”
According to industry analyst Alphaliner, 61 of the 98 ships in Hanjin’s fleet are chartered; and 55 percent of its fleet capacity is on chartered ships.
Yonhap reported Hanjin is required to come up with a rehabilitation plan by Nov. 25, and a local accounting firm will submit a report on the carrier’s status by Sept. 28.
However, it is unclear whether Hanjin will have any more success finding a way forward under court protection than it did in the months of negotiations with creditors and the shipowners who charter more than half of its fleet.
The insolvency of the Korean carrier is demonstrating that for all the advantages that carrier shipping alliances offer their customers, such as more frequent service, more port calls, and economies of scale from the ability to use larger ships, they are also vulnerable if one of the alliance partners run into trouble. Nearly all large container carriers are part of four global alliances today, and they are being consolidated into three alliances next spring.
“In this era of vessel sharing agreements and widespread use of slot charters, an insolvency filing by a major player like Hanjin has far wider consequences and affects a much larger number of players than what would have been true in 1986 when U.S. Lines filed its Chapter 11 bankruptcy,” said Keith Heard, an attorney with Burke & Parsons in New York.
Sources close to the company, told American Shipper that Hanjin is not accepting bookings from customers, and that the company has, for all intents and purposes, been pushed out of the CKYHE Alliance, the vessel sharing agreement that it is a part of with COSCO, “K” Line, Yang Ming and Evergreen Line.
While no official document has been issued by the CKYHE Alliance, the Port of Virginia said in a document that in a response to a request from the four other members of the alliance, it would not load cargo from COSCO, “K” Line, Yang Ming and Evergreen Line onto a Hanjin vessel; and no Hanjin cargo would be loaded onto the fellow alliance members’ vessels.
The individual members of the alliance also issued their own statements about the Hanjin bankruptcy. In some cases, they explicitly said they will neither load boxes on Hanjin ships or accept Hanjin cargo on their vessels.
COSCO said that all COSCON (COSCO Container Lines) cargo will not be booked on Hanjin operated vessels, and with respect to cargo already booked on Hanjin operated ships, the carrier will arrange smooth transfer to other services lines operated by COSCON or other alliance members. The carrier said it will make sure cargo is delivered safely and the situation of customers’ containers will be continuously updated through the company’s website (www.coscon.com) and the official wechat account (consolines). In addition, COSCON said it will closely monitor the situation to ensure cargo is always protected with quick and safe delivery.
Evergreen said, ” No Evergreen Line cargo will be loaded on the vessels operated by Hanjin Shipping. Hanjin Shipping cargo will not be allowed to load on the vessels operated by Evergreen Line.”
Meanwhile, “K” Line said, “1.) No “K” Line container will be loaded on any Hanjin operated vessel. 2.) Hanjin containers will not be permitted to be loaded aboard any “K” Line operated vessel.”
Yang Ming said, “We have taken all measures to protect your cargo from being affected by Hanjin.”
In addition, Hayes Howard, president and chief executive officer of BlueWater Reporting, which uses an advanced business intelligence platform to build applications for analyzing the ocean shipping market, said, “Can Hanjin survive? While Hanjin Shipping has indicated its intent to reorganize while under court protection, it faces a more daunting task than any other ocean carrier seeking to reorganize after filing for bankruptcy protection. No major container carrier ever succeeded in doing so unless there was another carrier in the wings ready to come in and purchase them. Even with services spanning the globe and intertwined with other carriers, there does not appear to be any carrier that would benefit from stepping in to perform a rescue.
“My other message would be ‘I told you so.’ Not specifically about Hanjin, but I have warned several times that I do not believe shippers pay enough attention to the health of carriers they book with,” he added. “For eight months, there have been serious warnings about Hanjin Shipping but how many shippers actually took the threat into their risk assessment? They certainly will now! Fortunately, major collapses like this are a rarity in liner shipping but it is a threat that should be taken seriously.”
Shippers who are not Hanjin customers, but find their cargo stranded are besides themselves.
“Customers are screaming,” said one NVOCC, who expressed frustration over the ability to obtain information from Hanjin.
One Hanjin customer told American Shipper the ocean carrier wants shippers to “buy the container and pay the pier charges directly.”
World Insurance, an insurance broker based in Sunrise, Florida and the exclusive risk management provider to World Cargo Alliance, which consists of 7,000 forwarder and brokers around the world, told customers they “should brace for situations where containers are laid at ports that are not their intended destinations.”
On whether the cost of forwarding cargo to the correct destination or damage to cargo because of a prolonged delay would be covered by cargo insurance, World Insurance recommended shippers and intermediaries double check with their insurance provider, but added, “Most cargo insurance policies specifically exclude ‘loss damage and expense arising from insolvency of owners, etc.’”
World Insurance said that with liability policies, checking with the insurance provider is also recommended, but added that “this also seems unlikely. With liability policies there has to be a physical loss, and quite simply, there has been no physical damage/loss.”
Some shippers were wary of doing business with Hanjin. Charles Brennan, executive chairman of Vanguard Logistics Services, the largest neutral NVOCC, said that his company has not booked cargo with Hanjin for months.
Some Hanjin ships have been arrested overseas and in the U.S. and at least two lawsuits have been filed by shipowners to use Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture under the Rules of Civil Procedure and Local Admiralty.
“Rule B attachments have been allowed under federal maritime procedure since at least 1829,” Heard explained. “They can be used to attach bank accounts, letter of credit proceeds, and they can be used to garnish debts owed by third parties to a defendant such as Hanjin.”
In the U.S. District Court for the Central District of California, a complaint was filed by Hastay Marine Ltd. against Hanjin Shipping over past due charter payments for the Hanjin New Jersey. Hastay is the registered owner of the Hanjin New Jersey, while London-based Zodiac Maritime is the beneficial owner, according to the shipping database Equasis.
The complaint said, “In direct breach of the requirements of the Time Charter, and despite repeated demands, Hanjin wrongfully failed, neglected or otherwise refused to pay the charter hire in the present amount of $1,380,375, which is past due and owing as of the date of the filing of this Verified Complaint, exclusive of interest and costs.”
The complaint asked, “If Hanjin cannot be found in this District, that all of its respective property within this district up to an amount of $1,380,375 be attached and seized pursuant to Supplemental Admiralty Rule B.”
(In a press release issued on Friday, Maersk Line said “We have also received queries related to our two chartered vessels, Hanjin New Jersey and Hanjin Florida, sailing on the Mashariki service between Far East Asia and East Africa. We would like to stress that, despite their names, neither of these vessels is owned nor operated by Hanjin Shipping; these vessels are fully operated by Maersk Line, and, as such, customers can continue to book shipments with peace of mind.”)
Two other lawsuits, which were filed in both the federal district courts for the Central District of California and the District of Maryland, seek to used Rule B to garnish charter hire of at least $1,688,345 for the Hanjin Louisiana, owned by Montemp Marine and listed in on Zodiac’s fleet list.
It wants to garnish funds from companies that owe funds to Hanjin, including shippers, NVOCCs, and carriers that charter slots on Hanjin ships.
J. Stephen Simms, the Baltimore attorney who filed the Hanjin Louisiana lawsuits, said the owner of the Hanjin Louisiana “is unpaid quite a bit of charter hire and the only thing unusual about it is that it has moved forward to try to get security for the charter hire it’s not paid.”
If a maritime contract is breached by a shipowner, then a company such as a charterer can garnish money being paid to the owner from a supplier such as an NVOCC, and Simms said, “Maritime garnishment is a very effective way to recover in a situation like this or any other situation of a maritime contract breach. You have to be able to move quickly to secure your payment.”
In such cases, Heard explained the creditor files an attachment using Rule B and when it garnishes the debt, secures its claim.
“It does not give you an immediate right to receive those funds,” he explained.
“Virtually all time charters around the world have arbitration clauses in them,” he explained. The shipowner must pursue their claim in arbitration, usually in New York or London, and obtain an award against Hanjin and “reduce” the award to a judgment in order to recover the money they have attached using Rule B.
Hanjin’s creditors could also seek to arrest Hanjin-owned ships if they have a maritime lien, said Heard, using Rule C of the special admiralty rules, though he noted not all maritime claims give rise to a maritime lien.
The fact that Hanjin has filed to restructure in Korea will protect it from creditors, but that receivership filing only is effective in Korea and in foreign countries that choose to respect the Korean proceedings, said Heard.
“What Hanjin can do and probably will do is file a Chapter 15 ancillary bankruptcy proceeding in the U.S. to extend the effect of the Korean filing,” he said. That would result in an automatic stay from U.S. bankruptcy courts and prevent creditors of Hanjin from seizing any Hanjin assets in the U.S.
Chapter 15 is the U.S. adoption of the “Model Law on Cross-Border Insolvency,” promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997. It was added to the U.S. Bankruptcy Code in 2005 and Simms said a number of countries have their own versions of Chapter 15, though he said others do not.
According to UNCITRAL’s website, only 41 states in 43 jurisdictions have enacted the model law. Countries that have not include some very important to world trade, including China. Neither Panama nor Egypt are listed as enactors, which presents problems for Hanjin ships wanting to use the Panama or Suez Canal.
A number of Hanjin ships are drifting offshore from the U.S. or slowly steaming between ports, and a number of sources told American Shipper that they believe this is happening because the company is waiting until Chapter 15 motions can be filed. When that is accomplished, they believe the Hanjin ships will seek to discharge their cargo.
Friday, American Shipper was told Hanjin Shipping is planning a Chapter 15 proceeding and that once it is granted, Hanjin believes this will provide it protection from its creditors so vessels can’t be seized. Ships would then proceed to berth and cargo would be discharged.
J. Kip Louttit, executive director of the Marine Exchange of Southern California, said for example that the Hanjin Greece is drifting 50 miles south of the ports of Los Angeles and Long Beach, while the Hanjin Montevideo and Hanjin Boston are anchored in the harbor. Another ship, the Hanjin Constanza, departed for Oakland this morning, but he noted that ship is leased from Hanjin and being operated by NYK. Hanjin ships were reported to be unable to pass through the Panama and Suez Canal.
Legal proceedings related to the Hanjin insolvency could take a very long time to be resolved.
Simms noted the U.S. Lines bankruptcy in 1986 went on for about a decade and he estimated, “Hanjin’s is 10 times the magnitude.”
The Federal Maritime Commission (FMC) on Friday issued a press release saying it had “established a protocol for communicating requests for assistance to the agency concerning developments related to the status of Hanjin Shipping.”
The FMC said allegations of Shipping Act violations or requests for assistance related to retrieving or receiving cargo in transit should be communicated in writing via email to [email protected] and include the words “URGENT—HANJIN SHIPPING” in the subject line.
On Thursday, the FMC noted the Hanjin receivership “is a legal matter and as such, it is important that affected parties, including shippers, consult with their attorneys on what remedies are available to them” and that it “has no jurisdiction when it comes to resolving bankruptcy claims and does not intercede in legal actions between third parties that will be heard by the courts.”
However, the FMC did say it would be “vigilant in watching for, and quick to act on, any improper behavior by other carriers and regulated parties (such as marine terminal operators, non-vessel-operating-common-carriers and freight forwarders) that would constitute violations of the Shipping Act.”
NEWS FLASH: Hanjin insolvency roils the shipping industry
