Faced with a maritime-related claim (an ownership dispute, damage to cargo or a crew payment dispute for example), ship arrest is often the remedy of choice for creditors. But flag injunctions are a useful alternative, particularly where a creditor is concerned about a debtor’s financial status or the possibility that a debtor may attempt to reduce assets to avoid discharging a debt. ParrisWhittaker has successfully applied for such injunctions. IN this article, we examine flag injunctions and consider in some detail when they might be a more effective legal remedy than ship arrest.
Why Get A Flag Injunction Instead Of Arresting A Ship?
Undoubtedly ship arrest procedures in the Bahamas and elsewhere are clearly established through legislation and case law. And of course arrest is a globally recognised process that has proven to be an effective mechanism to recover debt or satisfy other claims against a ship owner. There are however several disadvantages to ship arrest. These include the following:
Ship arrest prevents the vessel from moving or trading while the case is ongoing. A debtor already in financial difficulty will be denied the ability to generate income for a considerable period of time, making enforcement of any judgment more difficult.
Arrest is only available when a vessel is physically in the waters of the jurisdiction in which it’s intended to carry out the arrest so availability of the remedy is limited.
When seeking an interim injunction ahead of arrest the creditor will sometimes be required to provide an undertaking that he or she will compensate the debtor if ultimately the courts decide against arrest. On occasion (where the court suspects a case for arrest is weak) the creditor will also be required to provide security. The potential financial loss to the vessel owner following an arrest is great, and the security provided must reflect this. Actually providing the security could therefore be prohibitive preventing an individual from pursuing a legitimate claim.
These practical drawbacks to arrest mean that our shipping litigation team will sometimes advise clients seeking to recover ship-related debt to explore the possibility of a flag injunction instead of instigating the ship arrest process.
What Is A Flag Injunction?
Under Section 32 of the Bahamas Merchant Shipping Act, the Supreme Court has the power to issue an injunction to prohibit any dealing with a ship or any share of the ship for a specified time. This is the legal basis for flag injunctions in the Bahamas.
The flag injunction is not as severe in its effects as an arrest (it does not freeze assets of the ship owner) so the procedure has been described as a ‘middle ground approach’. However in our experience a flag injunction can still be a highly effective method of recovering a debt, not least because the injunction will normally prevent a ship owner from disposing of any assets above a certain value without first notifying the person with the benefit of the injunction.
What Criteria Do The Courts Use When Deciding To Grant A Flag Injunction?
Flag Injunctions are unique to the maritime community. Perhaps understandably there is little settled case law on precisely how they are decided. That said they are remarkably similar in application to ‘notification injunctions’ so for our purposes cases in that area provide useful guidance.
In the notification injunction case of Holyoake & Anr v Candy & Ors [2016] EWHC 970 (Ch) the Court held that the test for granting such an injunction was the same as the test for a freezing injunction. An applicant must prove:
A good arguable case – one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50% chance of success; and
The order would be just and convenient.
In flag injunction applications the applicant must demonstrate a risk that the debtor might dissipate assets before a judgment can be ultimately enforced. However the Holyoake case makes clear that the potential risk does not have to be as clearly made out by the applicant as in cases where assets might be frozen (in a ship arrest case for example). That’s because the obligation on the defendant to merely inform the creditor of disposal of assets above a certain value (rather than having assets frozen) is unlikely to put them to any significant expense.
How To Get A Flag Injunction
Procedurally the first step is to obtain a provisional injunction. If the application is approved the courts will usually issue the injunction on the same day. The injunction will prohibit any transfer or sale of the vessel pending the outcome of the final order. This means the applicant gets protection immediately. In addition because the hearing is on an ex parte basis (there’s no need to inform the defendant) the defendant will remain unaware of the applicant’s attempt to recover a debt until the injunction is served on him or her. This avoids the possibility that the defendant may attempt to thwart any judgment by moving assets beyond reach.
There follows a hearing involving both parties after which the injunction is made final or is lifted. If a final injunction is granted the shipping registry will not enable any sale of the relevant ship and the owner will not be permitted to de register the vessel so long as the injunction remains in force.
Contact ParrisWhittaker
If you would like more information about flag injunctions or any other aspect of shipping litigation contact us via email.
