Interplay between maritime lien and insolvency: Collision or co-existence?

Maritime liens and insolvency proceedings in India are governed by a convergence of statutes, namely, the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (Admiralty Act), Merchant Shipping Act, 1958, (Merchant Shipping Act) and the Insolvency and Bankruptcy Code, 2016 (IBC).

These statutes constitute vital lifelines of Indian trade and commerce. While IBC focuses on corporate debt resolution, the remaining two address maritime claim enforcement. In common parlance, maritime liens are security interest recognized under maritime law, attaching to a vessel, certain types of claims such as seafarers’ wages, salvage, or damages from collision. These rights exist independent of possession, travel with the ship, and are enforceable through in rem actions - that is, claims directed against the vessel itself rather than its owner - whereas IBC proceedings are in personam in nature, targeting the corporate debtor.

The primary point of dilemma arises in this way. Section 14 of IBC provides for moratorium, which stays all proceedings and enforcements against the corporate debtor and its assets during insolvency resolution, whereas the Admiralty Act gives special recognition to maritime lien holders. Adding to the issue, the Merchant Shipping Act also gives recognition to the rights of mortgagees and lienholders. Thus, the conflict lies in whether the moratorium under IBC, which is otherwise applicable during the insolvency resolution proceedings, also applies to admiralty claims, i.e., whether admiralty claims can be enforced even during the moratorium period in insolvency proceedings of shipping companies? Adding to the confusion is a secondary issue that arises in connection with the discharge of claims, since IBC provides for a different order of priority for payment of claims of creditors of the company undergoing insolvency or liquidation.  

The Bombay High Court, in Raj Shipping Agencies v. Barge Madhwa & Anr. (2020 SCC OnLine Bom 651) is heralded as the guiding light settling the conflict in applicability by holding that no leave of Court is required to commence or continue an admiralty action in respect of a vessel. even if corporate insolvency resolution proceedings (“CIRP”) have commenced or a winding-up order has been passed against the company/ owner of the vessel. Admiralty actions are in rem proceedings directed against the vessel itself and are not barred by moratorium under Section 14 of the IBC or during liquidation. The vessel is treated as a separate juridical entity, and the Court maintained that maritime claimants can proceed with ship arrests or sales to crystallize maritime claims, even if insolvency proceedings are ongoing against the ship's owner, i.e., the corporate debtor.

This principle was further reaffirmed in subsequent decisions, including Angre Port Pvt. Ltd. v. TAG 15 (IMO. 9705550) (2022 SCC OnLine Bom 56) where the Hon’ble Bombay High Court further explained that a vessel is a distinct juridical entity and the action proceeds without reference to the owner, who is not a party to the admiralty suit when filed. The action in rem can be entertained even at the stage of liquidation of the corporate debtor, as the claim is against the res (property) and not against the corporate debtor. Liquidation of the corporate debtor does not affect the ownership of the res so as to defeat a maritime claim in respect of the vessel. The res continues to be in the ownership of the corporate debtor and the liquidator merely acts as a custodian.

Having settled that a maritime lien is superior and survives insolvency, another apparent friction is the order of distribution of proceeds under both the conflicting Statutes. Section 9 of the Admiralty Act provides for inter se priority on maritime lien, while Section 51 of the Merchant Shipping Act makes a specific provision for recovery of the mortgage money by the mortgagee by sale of the vessel, which is mortgaged. On the other hand, Section 53 of the IBC provides for the “waterfall” mechanism, listing the order of priority for distribution of proceeds from the sale of the liquidated assets of the company.

The Merchant Shipping Act and Admiralty Act give top priority to maritime liens—especially crew wages, salvage, damage claims, and certain statutory dues. These claims are enforceable against the vessel in rem and typically have higher priority than mortgages or general secured creditors. In the interplay between the Admiralty Act and the IBC, the Courts usually resort to the well-established principle of special legislation having an overriding effect on general legislation. In Raj Shipping (supra), the Bombay High Court reasoned that admiralty law, being a specific code for maritime assets, prevails over the general insolvency process for those assets. While dealing with the conflict between Admiralty Act and Companies Act, 1956 (“Companies Act”) on issues relating the liquidation, the court relied on Commercial Tax Officer, Rajasthan vs. Binani Cements Limited (2014) 8 SCC 319 which held that a “subject-specific provision relating to a specific, defined and descriptable subject is regarded as an exception to and would prevail over a general provision relating to a broad subject.”.

Confirming such view, the Court concluded that that Admiralty Act, having been enacted as a comprehensive Code in relation to the Admiralty jurisdiction of High Court, arrest of ships, maritime claims and determination of priorities, is a subject specific provision relating to specific, defined and describable subject and is therefore regarded as an exception to and would prevail over a general provision relating to a broad subject as found in the Companies Act. However, the friction arises by reason of balance cuts faced by other creditors under insolvency since the same are not imposed on maritime lien holders, enabling them to recover in full from the vessel’s proceeds—potentially eroding the asset pool for distribution under IBC to other creditors. Creditors under IBC may feel disadvantaged when vessel sales prioritize lien holders. Irrespective of the said friction, the nature of maritime lien and legislative intent has been upheld by courts. Such practice also aligns with that of international jurisdictions like the UK and Singapore, which strengthens global confidence in maritime enforcement in India.

The interplay between maritime lien and insolvency law in India is at an equilibrium – a well-balanced and harmonious approach has been maintained by the Judiciary, enabling both statutes to co-exist, albeit with its own set of limitations. Maritime lien holders can proceed with in rem claims and secure ship arrests, even during insolvency moratoriums, provided no security is furnished by the owner. Distribution of proceeds from the vessel’s sale is governed not by the IBC waterfall, but by the statutory priorities in the Admiralty Act and Merchant Shipping Act — ensuring full recovery for maritime lien holders.

Thus, it can be safely understood that, while the moratorium under Section 14 of the IBC is robust, and Section 33 (5) of the IBC also bars institution of a suit after a liquidation order has been passed, it does not, however, present an “express bar” against in rem admiralty proceedings. Both statutes co-exist parallelly and do not intersect each other.

About the authors: Amit Meharia is the Managing Partner of MCO Legals (Meharia & Company). Paramita Banerjee is an Associate Partner at the Firm.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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