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NEWS FLASH: Hanjin makes Chapter 15 filing in U.S. bankruptcy court

The South Korean ocean carrier filed for recognition of its Korean insolvency proceeding in the United States Friday in the U.S. Bankruptcy Court for the District of New Jersey and the court ordered a hearing on the request for Tuesday.

   Hanjin Shipping has filed for recognition of its Korean insolvency proceeding in the United States under Chapter 15 of the U.S. Bankruptcy Code.
   Korea’s largest container carrier made the request Friday, Sept. 2 in the U.S. Bankruptcy Court for the District of New Jersey (in regards to Hanjin Shipping Co. Ltd. No. 16-27041) and the court ordered a hearing on the request for Tuesday, Sept. 6 in Newark, N.J. at 2:00 p.m.
   The filing was anticipated and caps a busy week of legal maneuvering. After Hanjin Shipping failed to reach an agreement for additional support from its major creditors on Tuesday, Aug. 30, the company filed for insolvency Wednesday, Aug. 31, and on Thursday, Sept. 1, the Seoul Central District Court approved a filing for the company to be put under a court-led rehabilitation.
   The Chapter 15 ancillary proceeding could extend the effect of the Korean filing and result in a stay from U.S. bankruptcy courts from creditors seizing Hanjin assets in the U.S.
    In a declaration filed at the bankruptcy court with the in support of the Chapter 15 petition, Tai-Soo Suk, chief executive officer of Hanjin Shipping, said, “With the commencement of the rehabilitation procedures, it is highly likely that the potential creditors of the debtor (Hanjin Shiping) will proceed to seizure or provisional seizure and seek to exercise their liens on vessels and containers which constitute the debtor’s principal business assets.”
   He added, “Such behavior already has been observed in some ports. Facing the potential inability to assure the company’s regular line services, a mass of transport contracts might be cancelled and clients might leave, which necessarily would result in a rapid decrease of the company’s sales and decrease in the value of its assets.”
    While he said he was advised that, “upon commencement of the Korean proceeding and entry of the Korean commencement order, all of the debtor’s creditors were stayed from taking any enforcement actions against the debtor and its assets, wherever located,” he believes “there is a risk that certain of the debtor’s creditors will assert that they are not subject to the jurisdiction of the Korean court and may attempt
to take enforcement actions in the United States.”
   He said, “It is my understanding that a fuel provider, World Fuel Services, obtained an order for arrest from a court in California for one of debtor’s vessel. In another matter in California, two other firms, Hastay Marine and Montemp Marine, applied on Aug. 31, 2016 to seize debtor’s assets as a result of alleged outstanding rental payment on two vessels.”
   “There are innumerable parties that can arrest and levy on the debtor’s property in the United States,” Tai-Soo Suk said. “These parties include, but are not limited to, fuel providers, ship owners (where the debtor is a charterer), terminals, port pilots, trucking companies, repair vendors, rail companies and container lessors. The assets include, but are not limited to, large container vessels, shipping containers (both empty and loaded with customers’ goods), chassis (the platform on which the containers are mounted and transported on trucks), generator sets for refrigerated containers, and bunker fuel. An arrest of these assets would prevent their further movement, which is critical to the debtor’s ongoing business.”
   Tai-Soo Suk, identified in the court documents as Hanjin’s “inside director and the duly appointed foreign representative,” also said he has “been advised that the entry of the final order granting the requested relief would, among other things, extend the protections of the stay to Hanjin’s assets located in the United States and prevent contract counterparties from modifying or terminating United States-based contracts.
   “On a final basis, Hanjin must have certainty that contract counterparties will not terminate or exercise remedies under their agreements, will continue performing there under, and will be subject to and bound by any decision by the debtor to affirm or disclaim such agreements.”
   This seems to raise the question of whether shippers with Hanjin service contracts or the company’s alliance partners – COSCO, “K” Line, Yang Ming and Evergreen – would be compelled to continue doing business with Hanjin.
   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.
   A number of other countries have their own versions of Chapter 15, though 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 translation of an order issued Thursday by the Seoul Central District Court shows that on June 30, Hanjin Shipping had total assets of 6.6 trillion won (U.S. $5.9 billion) and liabilities of 6 trillion won, a sharp decline from assets of over 10 trillion won and liabilities of 9.4 trillion won at the end of 2013.
   While the company’s assets slightly exceed its liabilities, the court noted Hanjin Shipping has “been incurring a net-loss each term during the past three years.” The company experienced a net loss of 463 billion won in the first half of this year, and losses of about 22 billion won in 2015, 463 billion won in 2014 and 712 billion won in 2013.
   The order noted the shipping industry has deteriorated since the 2008 global financial crisis because of a contracting global economy, lack of demand, reduced cargo volume, excessive supply of ships and drop in freight charges.
   As of June 30, Hanjin Shipping had loans totaling 3.1 trillion won that will mature within one year and the order said the company’s “current financial state renders it impossible to repay the loans.”
   After a creditor financial institution committee that included the Korea Development Bank decided on Aug, 30, 2015 it would not support Hanjin, the company “was led to financial ruin due to a severe lack of liquidity,” the Seoul court said.
   Hanjin “is in a situation where it is unable to repay its payable debts without causing a substantial hindrance to the continuance of its business. Furthermore, there are some concerns about the occurrence of events that may lead to Debtor’s bankruptcy.” Consequently, the Korean court agreed to commence a rehabilitation procedure.
   Meanwhile, on Friday, Maersk Line said in a customer announcement that it expects minimal impact on its customers’ cargo and that it is continuing to monitor the situation closely.
   The Danish carrier said it has told its global operations centers to not load any cargo onto Hanjin owned vessels. “We are aware of our customers who have cargo on board two of Hanjin’s operated vessels, Maersk Sebarok and Maersk Senang, sailing on the Chennai Express service between Far East Asia and South East India,” Maersk said. “While we expect minimal disruption, we are proactively working on reducing impact on cargo delivery.”
   Maersk noted that it has received queries related to two ships it charters, the Hanjin New Jersey and Hanjin Florida, which sail on what it calls the Mashariki service between Far East Asia and East Africa.
   “We would like to stress that, despite their names, neither of these vessels are 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,” the company said.

Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.