A hearing will be held Tuesday in a U.S. bankruptcy court in Newark, N.J. to consider the South Korean ocean carrier’s request to have its rehabilitation proceeding in bankruptcy court in Korea recognized under Chapter 15 of the U.S. bankruptcy code.
UPDATED Sept. 6, 2016 8:00 p.m.: 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.”
A hearing will be held Tuesday afternoon at a U.S. bankruptcy court in Newark, N.J. to consider Hanjin Shipping’s request to have its rehabilitation proceeding in bankruptcy court in Korea recognized under Chapter 15 of the U.S. bankruptcy code.
Jeremy Ryan, a partner who specializes in bankruptcy at the law firm Potter Anderson & Corroon in Wilmington, Del. said that if approved, Chapter 15 recognition of the Korean proceeding could allow Hanjin entities operating in America to gain the benefit of certain provisions of the bankruptcy code.
He said these include Section 362 of the bankruptcy code, which is a stay to prevent taking action against the debtor to collect the debt or the debtors assets, and Section 365 to prevent the cancellation of contracts.
In a declaration filed last week supporting the Chapter 15 petition, Tai-Soo Suk, the president and chief executive officer of Hanjin Shipping, explained the need for the protection saying with the commencement of the rehabilitation procedures in Korea, “it is highly likely that the potential creditors of the Debtor 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. Such behavior already has been observed in some ports.”
Suk said although he was advised that, upon commencement of the Korean proceeding and entry of the Korean commencement order, all of Hanjin Shippings’s creditors were stayed from taking any enforcement actions against the debtor and its assets. He said 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.”
Suk also said an order from the U.S. court applying sections 362 and 365 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.”
That could affect service contracts that shippers have with Hanjin.
Ryan said service contracts generally have penalties if shippers do not comply with volume commitments but some shippers may choose to ship goods with another shipping line and take the contract penalties between itself and Hanjin to avoid the risk of disruption to cargo that has not yet been loaded.
Of course the terms of service contracts are confidential and vary from one shipper to another, but an executive at another carrier told American Shipper they often amount to a “slap on the wrist.”
Meanwhile, the Hanjin Group will reportedly provide financial assistance to Hanjin Shipping in an effort to assist the company, which now has many ships stranded after filing for rehabilitation in Korean Bankruptcy Court.
The Yonhap News Agency reported 100 billion Korean won (U.S. $91 million) will be provided from Hanjin Group to help Korea’s largest shipping company. A total of 40 billion won will reportedly come from the private assets of Cho Yang-ho, the chairman of the Hanjin chaebol.
“The conglomerate said it will provide its stakes in overseas terminals, including the one in Long Beach, Calif., as collateral,” Yonhap said.
Meanwhile, Korea’s Financial Services Commission (FSC) and Financial Supervisory Service (FSS) said they will seek to “minimize spill-over effects of Hanjin’s bankruptcy filing into small local contractors” in Korea by providing emergency financial assistance for subcontractors and small-to-mid sized shippers.
Overall, 457 subcontractors have receivables from Hanjin Shipping, which amounted to approximately 64 billion won at the end-of June.
The FSC said in press release issued Monday that the “Korea Development Bank (KDB), Industrial Bank of Korea (IBK), Korea Credit Guarantee Fund (KODIT) and Korea Technology Finance Corporation (KOTEC) will extend maturity for principal repayment of outstanding loans and guarantees by one year. The FSS will encourage commercial banks to grant a grace period and extend maturity as well.
“KODIT and KOTEC will provide special guarantees for subcontractors and small-to-mid sized shippers suffering from cargo delay. Up to 90 percent guarantee will be provided for debts of such companies and guarantee fees will be reduced by 0.2 percent. The guarantee will be provided by using the 800 billion won restructuring fund allocated in the supplementary budget.
The financial institutions also plan to set up special teams in cities hard hit by the Hanjin bankruptcy – Busan, Ulsan, Changwon, Geoje and Mokpo – to “more closely examine local contractors” with receivables from Hanjin.
The Chapter 15 hearing is scheduled for 2:00 p.m. in Room 3D of the U.S. Bankruptcy Court in Newark N.J. before Judge John K. Sherwood according to the docket for the case, No. 16-27041.
A translation of an order issued on Sept.1 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.
Ryan said it is not unusual for a company seeking protection in a bankruptcy court to have assets that exceed liabilities.
“Insolvent doesn’t necessarily mean your liabilities exceed your assets but if you can’t pay your debts as they come due – that’s another definition of insolvency,” he explained.
Indeed, the order from the Seoul court said as of June 30, Hanjin Shipping had loans totaling 3.1 trillion won that will mature within one year and that the company’s “current financial state renders it impossible to repay the loans.”
Ryan also noted that when a company lists assets and liabilities in a petition to a bankruptcy court, generally the book value of assets are listed, which may not reflect the market value of assets.
The Seoul 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.
On Monday, Fitch Ratings issued a commentary that said “Hanjin Shipping’s filing for receivership reflects an unsustainable supply-demand imbalance in container shipping.” Fitch Ratings also said it expects more defaults and merger and acquisition activity in the short and medium term, which will only restore equilibrium and boost freight rates if they prompt capacity reduction.
Hanjin Shipping is the seventh largest container liner company and its “filing for receivership may therefore have far-reaching ramifications,” Fitch Ratings said. “In particular, creditors’ withdrawal of support may indicate a re-assessment of the financing landscape, where secured bank funding for new vessels has remained relatively accessible even as market conditions have deteriorated. Such a change would pave the way for more restructurings.”
UPDATED 8 p.m. Tuesday, Sept. 6: A federal bankruptcy judge on Tuesday granted Hanjin Shipping’s request that 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, New Jersey 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 that suppliers and service providers are not raising Hanjin’s bankruptcy as the sole reason for terminating contracts.
That’s needed, she said, so that cargo can be unloaded from Hanjin ships and for ships to be resupplied so they can 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 said recognition of the proceeding in the Korean bankruptcy court had been granted in Japan and the United Kingdom.
But she said he company realized that they could not require companies that have contracts with Hanjin to provide services if Hanjin is not going to pay them going forward.
Judge Sherwood noted that a number of companies had raised questions such as “are you guys 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 of Hanjin and Terminal Investment Limited 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.”
But 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.
TTI explained in its filing that “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 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 Volkov said Hanjin Shipping recognized it would have to pay TTI or other service providers for those services.
Robert Feinstein, an attorney Pachulski Stang Ziehl & Jones representing HP Inc., formerly known as Hewlett Packard Co., said Hanjin has possession of 500 containers of HP cargo—314 within the Americas and 142 destined for or in transit to the U.S. That cargo is valued at tens of millions of dollars, he added.
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 of it and other beneficial cargo owners “will cause such 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).
HP said 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. 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.”