The most international kind of insolvency
There is arguably no line of business in which insolvencies are as international as in shipping. By their nature, ships are destined to be mobile and travel the seven seas. At the same time, ships are fictionally immobilised in the country of registration, often in an offshore open registry with faint connections to the shipowner’s country of origin, but with a favourable fiscal and regulatory regime. The choice of this registry is often pushed by ship financiers, who hold strong bargaining powers against the shipowner and enable the building and purchase of ships.
For its operation, shipowners typically resort to charterers, who sometimes may decide to register the ship in yet another country. Seafarers, the most vital links to the daily operation of the ship, are often recruited through shipping agencies in low-wages countries overseas. Along its voyages, the ship can be the object of various commercial and operational dealings in the different countries in which it calls port, e.g. with cargo interests, service providers and suppliers active in the port, pilotage and towage services, and shipyards. In addition, the ship can be faced with more inadvertent creditors, such as salvors, general average contributors, and creditors in tort following a collision or another maritime casualty.
When the shipowner becomes insolvent, all these sundry interests from different parts of the world suddenly face each other off. Against this highly international background, it is somewhat ironic that the administration of insolvencies of shipping companies or maritime insolvencies has proven to be challenging under existing cross-border insolvency instruments, such as the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI) and the European Insolvency Regulation, recast (EIR). Given the pivotal role of shipping to global trade, the resulting chaos to the world economy can be enormous, as was illustrated most strikingly in the insolvency of the South Korean container shipping giant, Hanjin Shipping, now about ten years ago.
Challenges in the administration of maritime insolvencies
In essence, the challenges in administering maritime insolvencies follow from the opposing starting point taken in modern cross-border insolvency instruments, on the one hand, and in long-standing creditor recovery mechanisms developed in maritime law, on the other. While the former start from the pooling together of all assets of the debtor under a single regime in universalist fashion, the latter are focused on immobilising the ship and enabling creditors to extract the ship’s collateral value in the jurisdictions where it calls port. This territorial starting point in maritime law takes effect most poignantly in the form of maritime security interests, which are powerful claims on the ship accorded to certain creditors critical to its financing and operation.
Within the broad category of maritime security interests, maritime liens should be distinguished from ship hypothecs and mortgages. While ship hypothecs and mortgages are a derivative of traditional land-based conventional security instruments, maritime liens have no land-based equivalent. Maritime liens arise by operation of law in relation to certain claims essential to the operation of the ship and are not burdened with any publicity requirements. By using the ship as collateral, maritime lienholders receive strong safeguards that their claim will be met, which allows them to provide short-term credit to ship operators without having to immobilise the ship. In this way, it can be ensured that the ship proceeds swiftly on its voyages and generates revenue.
If the need arises to enforce a claim secured by a maritime lien, lienholders can arrest the ship and enjoy strong proprietary claims on this asset. Not only does a maritime lien typically rank with paramount priority, even over ship hypothecs and mortgages, but the droit de suite encapsulated in maritime liens also allows for the security interest to follow the ship, even in the hands of a bona fide third-party purchaser. In addition, maritime liens typically attach to the ship, irrespective of whether the shipowner is the debtor to the underlying claim. As long as the secured claim originated in the operation of the ship, the maritime lien attaches to that ship.
Despite the wide international acceptance of the concept and operation of maritime lien security, notable international differences exist, primarily with respect to the claims which the law accords maritime lien security to. English law takes the most minimal approach by currently only offering maritime lien security to three categories of claims, i.e. claims for seafarer wages, for salvage, and for damage done to the ship. Furthermore, English courts do not recognize other, foreign maritime liens, as the lex fori governs the recognition of foreign maritime liens. In civil law legal systems, more maritime liens are typically accepted beyond the core of maritime liens recognised under English law, also including other claims for supplies or services to the ship. However, also among civil law legal systems, strong international differences exist as regards which exact claims are accorded maritime lien security and how they rank between each other and in relation to ship hypothecs and mortgages. Also the position of foreign maritime liens differs as a wide variety of conflict rules are in place between domestic legal systems, including lex fori, lex causae, lex registrationis, and combined approaches.
In insolvency proceedings, the uncertainty following from this international patchwork of maritime lien regimes is exacerbated, as all lienholders and other creditors will try to recover their claims on the scarce resources available. To complicate matters further, the status of maritime liens under modern cross-border insolvency instruments is highly uncertain. Under the EIR, for instance, it is uncertain whether maritime liens may be able to escape the reach of the universalist main insolvency proceedings by way of protection as a right in rem under Article 8 EIR. Given the sui generis nature of maritime liens, diverging decisions have been reached on the classification of maritime liens as rights in rem. Moreover, even when maritime liens are classified as rights in rem, there is debate over whether the protection provided allows lienholders to arrest the ship unhindered or whether a more restricted kind of protection is offered.
Cooperative territoriality under existing cross-border insolvency frameworks
To reduce the existing uncertainty and ensure an optimal administration of maritime insolvencies, maritime liens should unequivocally receive right in rem protection, just like the other category of (lower-ranked) maritime security interests, i.e. ship hypothecs and mortgages, already does. Given their strong proprietary claims to the ship – paramount priority ranking, extensive droit de suite, and connection to the ship despite the shipowner not being the debtor to the underlying claim – there should be little doubt on the proprietary or in rem nature of maritime liens. And when accorded, right in rem protection of maritime liens should lead to a carve-out from the main insolvency proceedings to allow lienholders to arrest the ship and enforce their claim unhindered. Only in this way can it be ensured that lienholders gain access to the ship to effectively extract the collateral value to which they are entitled.
Furthermore, the resulting swift enforcement of maritime liens would also benefit the insolvency estate. Given their paramount priority, chances are high that, even in insolvency proceedings, maritime liens would be paid out with priority, but only in less timely fashion and without the ship as collateral available in that jurisdiction. Moreover, a ship arrest typically triggers the insurance coverage of claims secured by a maritime lien. As a result, the maritime lien claim can be paid out through a different finance stream, which allows the ship to return unencumbered to the insolvency proceedings. It follows that the body of creditors would not need to compete with higher-ranked maritime liens anymore, thereby resulting in a higher recovery rate for all. Also restructuring efforts can benefit from the swift release of highly encumbering maritime liens, especially if that results in a deleveraged shipping company following the payment of maritime lien claims by insurers.
Pursuant to the strong protection of maritime security interests, the conceptual starting point in the administration of maritime insolvencies shifts from the prevalent universalist approach to a more territorial one. Maritime security interests would be administered first and directly on the ship in the jurisdiction in which they are found, after which the residual value, if any, can be administered in a more universalist manner. This shift in starting point does not require a separate maritime insolvency instrument. Existing protection grounds, such as Article 8 EIR, advance and should be equipped to achieve similar objectives.
To streamline the entire process and avoid over- or undercompensating certain creditors, international cooperation between courts and insolvency practitioners active in the same insolvency remains important. Such cooperation mechanisms are already provided for in existing cross-border insolvency instruments – another confirmation that these instruments remain best-suited to administer maritime insolvencies. Thus, combined with a territorial starting point, the paradigm under which maritime insolvencies would be administered becomes cooperative territoriality rather than the prevalent modified universalism.
As recent as last year, the Judicial Insolvency Network championed a similar approach in its Admiralty Guidelines, by primarily calling for international cooperation in the administration of maritime cross-border insolvencies, but with territorial safeguards for holders of a security on the ship. It is recommended that this yardstick of cooperative territoriality is followed when maritime insolvencies are discussed in the revision of the EIR, forthcoming in 2027, as well as in the ongoing UNCITRAL projects on applicable law in insolvency proceedings and on the revision of the MLCBI Guide to Enactment. As to the latter, it is to be commended that UNCITRAL included the challenges arising in maritime insolvencies as a possible topic for future work in the area of insolvency law. In view of unfolding geopolitical developments, which seriously impact the shipping industry and global maritime trade, other lawmaking bodies are advised to follow suit.
This blogpost summarizes the main ideas of the PhD dissertation: Maritime Insolvency. The administration of maritime security interests in cross-border insolvencies, defended successfully on 5 December 2025 at Erasmus University Rotterdam.
Dr. Warren de Waegh
Senior Lecturer
University of Cape Town
Corporate Finance Lab 