Vessel arrest rules bring risks for leasing companies

The vessel arrest system is a particular risk faced in the vessel financial leasing business. In our column in the previous issue of China Business Law Journal, the author analyzed the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Law in the Arrest and Auctioning of Vessels and looked at the risks of vessel arrest and auctioning under the vessel arrest provisions that financial leasing companies need to pay attention to, and guard against. In this column, the author provides some advice on how financial leasing companies can respond to new risks.

Risk of sister vessels of leased vessels being arrested and auctioned off under the vessel arrest provisions

The second paragraph of article 23 of the Maritime Procedure Law specifies that the maritime court may arrest another vessel in the possession, at the time of the arrest of the vessel in question, of the vessel owner, bare boat charterer, time charterer or trip charterer liable for the maritime claims, i.e., arrest a sister vessel of the vessel in question. However, article 111 of the same law additionally specifies that registration of claims may only be carried out for claims that relate to the vessel that is to be auctioned off, so as to participate in the distribution of the proceeds derived from the auction.

This is to say that a maritime claimant applying for the arrest of a sister vessel will not be entitled to receive payment from the proceeds derived from the auction of such vessel because its claim is unrelated to the vessel being auctioned off. For this reason, prior to the implementation of the vessel arrest provisions, certain maritime claimants were usually reluctant to apply for the arrest and auctioning of sister vessels.

Author: Grace Zheng and Tony Zhang are senior partners at Co-effort Law Firm