By Marc de Man
Let me tell you a true story.
A few summers ago, the Ship KOSEI MARU entered Canadian waters and berthed at the Port of Hamilton, Ontario, Canada, to load a cargo of coke, a derivative of coal. The ship was Japanese, registered in Japan, owned by a Japanese company with a Japanese Master and crew, burdened with a Japanese Company mortgage contracted in Japan.
The Japanese mortgage creditor instituted in rem proceedings, arresting the vessel on grounds that the Japanese Shipowner defaulted on its mortgage payments.
Immediately the lawyers for the Owners claimed abuse of process and the Federal Court of Canada, the Admiralty Court, held that the arrest should be quashed based on the doctrine of forum non conveniens.
The lawyers for the mortgage creditor immediately subsequent to this judgment requested a stay of proceedings and on Appeal, the Federal Court of Appeal reinstated the arrest as it decided that the action be allowed to go to trial since it was a “fairly arguable case” and the Court in which a mortgage against a ship should be enforced was the Court having geographical jurisdiction where the ship was found.
The vessel, during the time between the first decision and the Court of Appeal decision moved from Hamilton, Ontario to the Port of Montreal, Quebec.
The vessel was not reinforced to cope with ice formations which arise during the month of December on the St. Lawrence River in Montreal, Canada. Therefore, both the shipowner and the mortgage creditor scrambled to obtain expert affidavits and prepare the case for trial.
The trial took place from October 16 to October 19 and a further hearing on November 10.
There were seven expert witnesses, four acting for the Mortgage creditor, or Plaintiff, and three for the Defendant Shipowner. All the witnesses were eminent jurists. Each side had one retired judge, a law professor, and at least one lawyer. All Japanese. The Japanese law had to be proved.
The situation that arose, and this is very important, was that the Shipowner, after the default on the mortgage, had applied for reorganization under the Corporate Reorganization Law of Japan, which is similar to a bankruptcy proposal. Pursuant to this law, the Court in Kobe, Japan forbade the making of payments by the Shipowner on debts including those owing to the mortgage creditor (the Plaintiff) for a certain period of time.
The mortgage creditor disregarded this prohibition by the Kobe Court and decided to arrest the vessel in Canada.
The issue then was the following:
Did the Corporate Reorganization Law of Japan, or its Bankruptcy Law, have extraterritorial effect, or was it restricted exclusively to the territory of Japan?
The mortgage creditor argued that the order of the Kobe Court judge only applied in the territory of Japan and therefore, it did not extend to the ship arrested in Canada.
The Shipowner claimed that the Corporate Reorganization Law of Japan and its Bankruptcy Law had extraterritorial effect, and particularly in relation to a shipping company which necessarily had assets all over the world, namely, the ships it owned and therefore, the Order of the Court of Kobe extended to the ship KOSEI MARU in Canada.
The learned trial judge, after analyzing the law of Japan which was proved by the seven experts, with whom he was greatly impressed, decided that the experts for the Plaintiff (the mortgage creditor) set out the law as it existed in Japan, but the experts for the Shipowner, although they analyzed the law as it was in Japan, were attempting by extension to explain how the law of Japan should be applied in the future.
The issue boiled down to the interpretation of Article 4 of the 1952 Japanese Corporate Reorganization Law which states:
Reorganization proceedings commenced in Japan shall be effective with respect to only those properties of the company which exist in Japan
This article repeats verbatim article 3 of the Bankruptcy Law of Japan of 1922.
The Bankruptcy Act of Japan was a direct copy of the German Bankruptcy Law enacted at the end of the 19th century which at the time had NO EXTRA TERRITORIAL EFFECT.
The learned judge concluded that he could only restrict himself to the plain meaning of the Japanese statute and therefore the Kobe Order had no extra territorial effect. The ship was in fact in Canada, despite the fact that she was registered in Japan.
Thus, the mortgage creditor was allowed to arrest the KOSEI MARU and obtained a favorable judgment of close to $7 million dollars.
The decision was immediately appealed, but the parties reached a private closed door settlement, which allowed the vessel to sail from Montreal before the ice could creep in.
Thus in Canada, if the foreign reorganization or bankruptcy law does not have extra territorial effect, this does not bar the mortgage creditor or a maritime lien creditor of the vessel from exercising its rights in the Canadian jurisdiction. The converse of this applies. Foreign reorganizations which involve debtors domiciled in the foreign jurisdictions are recognized where they purport to have extra territorial effect or where the creditor has submitted to the foreign court’s jurisdiction.
There are many details I could tell you about this case.
First, it got considerable coverage in the media as you may see from this newspaper clipping.
Once the first instance judgment was rendered, the Captain, Mr. Furukawa, called me to tell me that he was proceeding to load the cargo of coke. Of course, I told him not to do so, as I had a hunch that the Federal Court of Canada would reverse the first instance decision. The Captain was confident that we would succeed in appeal, and decided to load the cargo and sail from Hamilton to Montreal, where the arrest was reinstated.
This meant that the Captain and the complete crew remained in Montreal and I can assure you, they were restless.
One morning, prior to the trial date, Captain Furukawa called me stating that he and his crew needed a “Canadian wife”. I got the message and the next evening, I chartered a school bus. The crew and the Captain and I, on the school bus, went that evening to one of the most celebrated night clubs in Montreal. They all thoroughly enjoyed that evening.
On the way back to the ship, the Captain offered me a case of SUNTORI scotch, which was confiscated by the National Harbors Board police, but subsequently reinstated to me after Captain Furukawa found out what happened.
Another experience was the attendance at the Court Room. Every person in the Court was Japanese, with the exception of the Judge, the lawyers on each side and the Court Clerk. Otherwise, the whole crew attended the five days of hearing, accompanied by the expert witnesses and interpreters, all of whom were Japanese.
Finally, the preparation for the hearing was very difficult. All the texts of Japanese law were written in Japanese, which made it difficult to understand. There were many late night sessions spent with the experts who enjoyed Japanese food and drink. Of course, we, the lawyers, always had to keep up with them.
The citation for the case is Orient Leasing Co. Ltd. v. The Ship KOSEI MARU  1 F.C. 670.
To conclude, bankruptcy in Canada falls within the competence of the Federal Parliament, and the appropriate court is the local provincial court where the bankruptcy proceedings are instituted. The substantive law applicable is the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B3.
This Act states that all proceedings are stayed upon the filing of a proposal in bankruptcy or upon the bankruptcy of the debtor. However, proceedings in admiralty in front of the Federal Court of Canada (the Admiralty Court) which has jurisdiction over shipping matters, are not automatically stayed by bankruptcy but only upon motion in the Federal Court of Canada.
A secured creditor is defined by the Bankruptcy and Insolvency Act as a person holding a mortgage, hypothec, pledge, charge, lien or privilege on or against the property of a debtor.
This Act permits a secured creditor to realize on his security in the Admiralty Court (Federal Court of Canada) and therefore avoid the stay of proceedings. The secured creditor therefore deals with his security as if there was no bankruptcy and may commence or continue proceedings in the Admiralty Court or Federal Court. This means that the secured creditor is entitled to realize his security before any amount is distributed to the mass of creditors. Therefore mortgagees or those having maritime liens can enforce their claims against the Shipowner in the Admiralty Court despite the bankruptcy.
However, claimants that have statutory rights in rem do not have the status of a secured creditor, and are therefore only ordinary or chirographic creditors and must follow the procedures set out by the Bankruptcy and Insolvency Act and are thus generally paid pari passu with the other ordinary creditors.