Judicial managers of Ocean Tankers and Xihe Holdings in legal tussle over priority of charter claims

THE judicial managers of Ocean Tankers and Xihe Holdings could not agree on whether some US$150 million in charter-hiring fees claimed by Xihe should be ranked on a par with the remuneration and expenses of Ocean Tankers' judicial managers and in priority to Ocean Tankers' unsecured debts.

Both Ocean Tankers and Xihe Holdings were incorporated by the beleaguered oil trader Hin Leong Trading's founder Lim Oon Kuin, and a large part of Ocean Tankers' fleet was chartered from vessel-owning subsidiaries of the Xihe group.

Ocean Tankers, a ship chartering and ship management company, would sub-charter vessels to or enter into contracts of carriage with Hin Leong Trading, one of Singapore's largest oil and related commodities traders before oil prices tanked in 2020 when the pandemic started to unfold.

Ocean Tankers derived one-third of its turnover from Hin Leong Trading prior to April 2020, when the latter applied for judicial management.

Ocean Tankers, which went into interim judicial management as well in May 2020, soon received notices from Xihe on the termination of charter for several vessels. While Ocean Tankers agreed to re-deliver the vessels, this was subject to the consent of the vessels' mortgagees and approval by the court.

Xihe and 4 of its vessel-owning subsidiaries were subsequently placed under interim judicial management in August 2020, upon the application of OCBC Bank.

Xihe's judicial managers notified Ocean Tankers about their right to lodge proofs of debt in the latter's judicial management or winding up for charter claims amounting to some US$156 million.

Specifically, they said their priority claims ranked on a par with the remuneration and expenses of Ocean Tankers' judicial managers and asked that sufficient funds be preserved for these claims.

Ocean Tankers' judicial managers argued that the claims should be treated as ordinary unsecured debts and thus enjoyed no priority. They contended that they did not choose to retain the vessels and had intended to redeliver the vessels to the owners as soon as possible.

The judicial managers of Xihe, however, pointed out that the return of vessels was subject to Ocean Tankers' conditions, including asking for the finalisation of ship management agreements in order to preserve Ocean Tankers' business.

Xihe's judicial managers argued that these were beneficial to Ocean Tankers' judicial management, and the claims Xihe was seeking should thus be a judicial management expense.

Singapore's High Court ruled that the judicial management expenses principle would generally not apply to the claims arising out of Ocean Tankers use of Xihe's vessels because the company had been compelled to retain the vessels - at first due to extraneous circumstances, and later due to the actions of Xihe's judicial managers.

Xihe's judicial managers retracted the termination notices issued by Xihe's management before it went into judicial management, and also issued notices to Ocean Tankers affirming the bareboat charters in response to the latter's notices of non-adoption that indicated their wish to not retain the vessels.

Justice Kannan Ramesh, hence, ruled that Ocean Tankers had in general retained the vessels not for the benefit of the company.

The judge observed that Xihe's judicial managers refused to take redelivery because they wanted to stall until they themselves were ready to do so. By keeping the vessels with Ocean Tankers, the operational costs of the vessels fell on Ocean Tankers and not the insolvent Xihe group.

"This cash burn was consuming the cash flow of an insolvent estate, a clearly unsatisfactory state of affairs from the point of view of (Ocean Tankers), its creditors, and the (Ocean Tankers judicial managers)," wrote the judge in the grounds of decision published on Monday (Mar 14).

"There was an impasse between on the one hand an insolvent charterer which did not want the vessels, and an insolvent owner, who, despite the insolvency of its charterers, declined to take redelivery of the vessels," he noted.

While he ruled the judicial management expenses principle did not apply in general to the charters after the appointment of the Xihe judicial managers and the issuance of the notices of non-adoption, hiring expenses between May and December 2020 for vessels used to store and transport cargo contracted before insolvency did have claim priority.

Retention of the vessels to complete the contract could be said to be in the interest of Ocean Tankers.

Similarly, deployment of vessels by Ocean Tankers' judicial managers on sub-charters and for in-house services such as transportation of bunkers, provisions or crew was for the benefit of the estate and such hiring expenses have claim priority.

Xihe's judicial managers have appealed against the judgement.