HANJIN’s Rehabilitation Proceedings – Overview and Review

E‐ Bulletin –October 2016

1 Re: Hanjin’s rehabilitation proceedings – Analysis and global overview

Background

On 1st September 2016, Hanjin, one of South Korea’s largest shipowners, with a total of 141 vessels (83 chartered), including 97 container ships, faced a financial crisis of such magnitude that led to it obtain a rehabilitation order in Korea protecting its assets from creditors. Such a move has had and is likely to result in serious repercussions across the markets as Hanjin ceases operations and restructures its business. It is estimated that at the time that the rehabilitation was announced, Hanjin ships were carrying up to 400,000 containers filled with USD 14 billion worth of cargo. The crisis has resulted in displaced containers worldwide, Hanjin vessels being arrested short of or at destination, vessels being moored up or remaining outside port limits to avoid arrest, or being stuck at a port short of destination as a result of the port authority being unwilling to provide port services, absent payment in advance. What is a Korean Court Rehabilitation? The Korean Court Rehabilitation is a process analogous to Chapter 11 in the USA, where the purpose is to rehabilitate the insolvent debtor company by restructuring its debts. The debts are restructured according to the rehabilitation plan approved by the creditors and the Rehabilitation Court of Korea, in accordance with the Debtor Rehabilitation Bankruptcy Act of Korea (DRBA). The aim is, therefore, to protect Hanjin whilst it trades out of its debt.

Status of the Rehabilitation

(1) Current status

Mr Tae‐Su Seok has been appointed as the receiver, and he will now conduct Hanjin’ business and the rehabilitation process under the supervision of the Court. (2) Registration of claims in the Court against Hanjin (A) Submission of a list of creditors and claims by the receiver The receiver will prepare and submit a list of known general rehabilitation creditors, secured rehabilitation creditors, and other interested parties of Hanjin (e.g. shareholders, etc.) and their claims.

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(B) Registration of claims by creditors All creditors of Hanjin were to register their claims with the receiver between 20 September 2016 and 4 October 2016. (3) Adjudication of claims The Court has specified that the receiver will adjudicate all claims, whether secured or not, between 5 October 2016 and 18 October 2016. It is during this period that the receiver will investigate the claims registered by the creditors and submit his statement to the Court on the same, i.e. whether such claim is accepted or denied. The receiver is currently scheduled to report his decisions to the court on 11 November 2016. (4) Submission of the draft rehabilitation plan Creditors who registered their claims during the registration period, will have to draft and submit their proposed rehabilitation plan to the Court on or before 25 November 2016. The order suggests that any creditor, whose claim value exceeds half of Hanjin’s total debt, needs to submit the plan by 18 October 2016. Claims need to be registered and sent to, Seoul Central District Court, Bankruptcy Department (Bankruptcy Registration Centre, 1st Floor, Annex 3 Building, Seoul Court Complex, South Korea). Additional information to be aware of (1) If a creditor misses the deadline to file its claim or does not comply with the necessary formalities then that party may lose its right to claim against Hanjin. (2) Existing contracts and legal relationships with Hanjin are not automatically terminated by the commencement of the rehabilitation proceedings. It may be that parties have other rights that can be exercised, and a lawyer should be consulted to ensure you understand your position. (3) Upon commencement of the rehabilitation proceedings, Hanjin are only likely to be permitted to pay any debts with Court approval, including debts incurred after the commencement of the rehabilitation. (4) Our experience of the previous rehabilitation proceedings of, inter alia, STX Pan Ocean and Korea Line Corporation, suggests that Hanjin’s rehabilitation plan will result in a considerable reduction in the debt actually repaid to the creditors, i.e. only a certain percentage of debts will be repaid over a period of months or years, with the remainder being repaid by way of equity in the debtor company. Other jurisdictions To date, Hanjin has obtained recognition orders extending the protection afforded by the Korean rehabilitation proceedings in a number of jurisdictions including the UK, Japan, Singapore, the US and Canada. The UK recognition order will have particular impact on existing or future litigation or arbitration proceedings against Hanjin in the UK, and a broad impact internationally. 3 Secured claims might nevertheless still proceed in the UK despite the order, because it is the security which responds and not Hanjin’s assets. Most recently, on 3 October 2016, the Supreme Court of British Columbia recognised, in large part, the Korean rehabilitation proceedings, although this recognition did not take effect retroactively. Also, the recognition order does not apply to the in rem proceedings currently pending before the Federal Court of Canada, regarding the Hanjin Vienna, the Hanjin Marine and the Hanjin Scarlett, nor the parties to those proceedings, unless the Federal Court, in its discretion, determines otherwise. It is reported that Hanjin is taking similar steps across the globe where Hanjin assets, particularly owned or chartered vessels, are vulnerable to arrest and where proceedings will be commenced. It is presently estimated that Hanjin will be seeking relief in up to 40 countries.

Despite limited exposure for Middle East business to Hanjin, it should be noted that a lack of recognition of foreign bankruptcy orders in the area means there is a potential for arrests of Hanjin vessels if calling into ports in the region, because they will not benefit from court protection. Likewise, in China, the Maritime Courts are not obliged to recognise and/or enforce foreign courts’ orders, therefore Hanjin’s creditors could still arrest Hanjin‐related vessels in China if they have maritime claims (recognised under Chinese law) against the registered owners and/or bareboat charterers of the said vessels.

Hanjin – the global impact on container trade On a micro‐level, the disruption caused by Hanjin’s collapse has impacted numerous industry participants, including alliance partners, ship lessors, crew, port and terminal operators, freight forwarders, bunker suppliers, mortgage holders, insurers, cargo owners and shippers, many of whom have struggled to have their cargo released as the cargo held on Hanjin‐owned vessels will be subject to lengthy legal proceedings between Hanjin and its creditors. As of 6 October 2016, 2 two vessels remain arrested in China, one in Singapore and four in North America. Notice of re‐delivery has been given in some 50 plus vessels, whilst others are underway or awaiting instructions. A full update on the status of Hanjn’s vessels can be obtained on Hanjin’s website, which is updated regularly. On a macro‐level, the global container trade has been impacted by the withdrawal of Hanjin vessels from international trade, with some observers commenting that Hanjin is unlikely to come back in its current capacity as a global deep‐sea container carrier, and may possibly turn into a local/Asian operator. Whatever the precise outcome for Hanjin, the fact remains that the Korean carrier’s collapse is an important factor in the transformation of the sector, which of late has seen a move towards greater consolidation of its main players. The sudden withdrawal of Hanjin tonnage from global trade has naturally resulted in a reduction in trade capacity, however, a number of carriers have promptly moved in to replace some of Hanjin’s vessels, while others have launched new services, also partly in response to the collapse. Financially stronger carriers have also benefitted from

4 shippers’ renewed prudence as these are now more inclined to use their services, rather than those of more “fragile” competitors. And despite the withdrawal of Hanjin tonnage, the significant overcapacity of the container sector continues to grow, with various carriers recently taking delivery of new cellular vessels. According to Lloyd’s List Intelligence, as of October 2016, the total world container fleet stood at 19.9m TEU, with some predicting that this figure could surpass 20m TEU by the end of the year. Against this background, freight rates continue to be low, putting increased pressure on shipowners wishing to operate safe ships, maintained properly with experienced crew. In view of the over‐supplied state of the container ship market, and to avoid adding tothe unemployed and underemployed tonnage, some shipping groups still seeking to expand their business have indicated that they are more likely to consider doing so via mergers and/or acquisitions, rather than by purchasing additional tonnage, a strategy which will lead to increased consolidation in the sector. The impact of such shift will  probably be felt by struggling shipyards which will no doubt witness a reduction in numbers of containership orders from their books. Hanjin and cargo insurance With Hanjin protected with rehabilitation proceedings, and with the grim prospects of recovering losses directly from Hanjin, exposed parties are looking to recover from their cargo insurance. However, whether losses arising out of Hanjin’s bankruptcy are covered by cargo insurance policies is yet another uncertainty, at least under the Institute Cargo Clauses. What to expect of the future It seems clear that Hanjin will never be the container giant it once was if anything, it is expected Hanjin might reposition itself as an intra‐Asia liner operator, where the reputational damage might have a lesser impact. In relation to affected parties, this is a rapidly evolving situation with an uncertain outcome. Affected parties are advised to monitor developments closely, ensure they protect their position vis‐à‐vis Hanjin in the rehabilitation, consider the possibility of securing their claims in the jurisdictions where the rehabilitation has not yet been recognised and keep in close touch with their insurers.

We are grateful to Elizabeth Turnbull (Elizabeth.Turnbull@clydeco.com), a partner in Clyde & Co’s Marine and International Trade department, for her contribution to this bulletin. Assureds are invited to contact the claims department in London or Shanghai if they have any queries concerning this Bulletin.

Michael Else and Company Limited, as Managers E. & O.E.

Dated London 13 October 2016

Read the update now: E-bulletin October 2016 – HANJIN (pdf)