Judge John Sherwood of the U.S. Bankruptcy Court for the District of New Jersey moved to recognize receivership proceedings in South Korea for the now insolvent ocean carrier Hanjin Shipping.
A federal bankruptcy judge on Tuesday granted Hanjin Shipping’s request to have its rehabilitation in bankruptcy court in Korea be recognized under the U.S. bankruptcy code.
Judge John K. Sherwood of the U.S. Bankruptcy Court in Newark, N.J. granted the order on an interim basis and will hear arguments Friday to ensure creditors receive adequate protection.
He also ordered Hanjin to keep vessels in the U.S. once they’ve been allowed to discharge cargo to protect the interests of maritime lien holders.
Ilana Volkov of Cole Schotz, an attorney representing Hanjin Shipping, told the court that U.S. Chapter 15 recognition of the Korean insolvency proceedings was needed so that the company’s operations could continue free of concern that ships or other property would be arrested, and suppliers and service providers are not able to terminate contracts for the sole reason of the proceedings.
It’s necessary, she said, so that cargo can be unloaded from Hanjin ships and those ships to be resupplied and return to their countries of origin.
Volkov said the company and its parent were “working around the clock to secure funds” for Hanjin Shipping to continue operations. She said Korean Air, Hanjin Shipping’s largest shareholder, had agreed to provide $100 million to the liner company.
She also noted that recognition of the proceeding in the Korean bankruptcy court had been granted earlier today in Japan and the United Kingdom.
Even so, Volkov was clear that the company realizes it cannot require service providers such as terminal operators, stevedores, and railway companies, that have contracts with Hanjin to provide those services if Hanjin is not going to pay them going forward.
Judge Sherwood noted that a number of companies had raised objections to the order, many of which boiled down to a simple question: “are you guys (Hanjin) going to have enough money to pay all the post-petition obligations that are accruing every day” such as labor and port costs.
Total Terminal International (TTI), a joint venture between Hanjin and Terminal Investment Ltd. had raised a “limited objection” to a motion proposed to the court, noting that there are several Hanjin ships located near its facilities in Long Beach and Seattle that are expected to seek to berth and discharge cargo at TTI’s terminals.
In a court filing, TTI said it was generally supportive of Hanjin’s desire to continue to operate, explaining “TTI’s largest customer (and majority owner) is Hanjin and, as such, TTI has an interest in Hanjin’s success in its efforts to reorganize.”
However, TTI said “the Korean proceeding has the attributes of a de facto liquidation. There is no plan and there is no financing.”
In a footnote in its court filing, TTI said, “Prior to the filing of the proceeding in Korea, it was reported that Hanjin was likely to liquidate. At this time, it does not appear that Hanjin has any bankruptcy financing. Accordingly, it seems very possible that Hanjin is or will be administratively insolvent and that the legal equivalent of U.S. ‘administrative claims’ will not be paid in the Korean proceeding. Hanjin is already indebted to TTI in respect of pre-petition services in excess of $50 million (over four months past due).”
Douglas Deutsche, an attorney at Clifford Chance representing TTI, told the court that the cost for unloading and fueling a Hanjin ship was between about $1 million and $2 million. “This isn’t parking a car or pulling up to the gas station. You need tugs, tugboat operators, union cooperation, our cooperation, you need fuel services.”
As TTI explained in its filing, “The process associated with berthing and unloading cargo involves a complex orchestration of multiple steps involving numerous counterparties (including TTI), all of whom must agree to act. The motion will not ensure these parties act. In fact, TTI is not aware of any provision having been made to date for how the process will be implemented or how the debtor proposes to pay for these services.
“This lack of a short-term plan for these vessels will lead to mayhem,” the firm added. “The vessels will have no means to berth (as the tugs and tug operators will not service them) and no ability to unload (as the unions and port operators will not serve them).
“And even if these tasks are somehow accomplished, Hanjin must provide fuel and supplies for its ships, but they do not appear to be able to pay these bills. The result could be that the vessels remain at TTI’s berths indefinitely without the ability to depart, leaving TTI with no ability to free up these berths. This would be disastrous for Hanjin and TTI.”
Sherwood wanted to know if he signed the order if that would mean tomorrow that “the TTIs of the world are going to have to put their machinery and manpower to work for the debtor without any assurance of payment?” Hanjin’s attorney, however, assured the court it understands service providers would have to be paid for any and all services going forward.
Robert Feinstein, an attorney at Pachulski Stang Ziehl & Jones representing HP Inc., formerly known as Hewlett Packard Co., said Hanjin is in possession of 500 containers of HP cargo—314 within the Americas and 142 destined for or in transit to the U.S.—valued at tens of millions of dollars.
He said HP supported recognition of the Korean rehabilitation as a critical first step in getting cargo unloaded from ships. In its filing with the court, HP said failure to turn over cargo belonging to it and other beneficial cargo owners would cause those parties “irreparable harm.”
“It’s a tremendous logistical problem that needs to be unwound as quickly as possible, and money is the fuel to get that done,” said Feinstein.
HP said the ongoing disruption to its supply chain caused by Hanjin’s bankruptcy filings “is material, costly, and worsening on a daily basis. For example, if HP does not meet its delivery obligations, its customers, including local, state and U.S. federal government agencies, can cancel purchase orders or their contract with HP. In some cases, HP may be required to pay up to $100 per day in liquidated damages until delivery is complete, or suffer deductions to its invoices (e.g., 5 percent per week from the total invoice).
“Without a prompt resolution to the shipping standstill, national and international commerce, inclusive of local, state, and federal agencies that are customers of HP, will be adversely affected given the sheer quantity of goods and other products on the vessels controlled by the foreign debtor,” it added. “For example, the products in the containers include printing supplies that customers need to continue printing and operating their business, especially when stock on hand is subject to rapid depletion.”
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