Cosmotrade SA v Kairos Shipping Ltd & Ors

A limitation fund under the 1976 Limitation Convention may be constituted by a guarantee in England only where English legislation makes such a guarantee acceptable. Merchant Shipping Act 1995 and CPR Part 61 did not provide the necessary statutory basis, so the established requirement of payment into court remained.

A freezing injunction may be maintained where there is a real risk that enforcement will be frustrated by dissipation or disposal of assets outside the ordinary course of business. A dormant or effectively assetless one-ship company, with no proper business purpose for dealing with its assets, may satisfy that test.

The applications arose from the loss of the bulk carrier Atlantic Confidence and anticipated arbitration claims by cargo interests and a charterer. Earlier judges granted worldwide freezing injunctions against the owners in different sums.

The owners sought an interim declaration that they could constitute a limitation fund by providing a P&I Club guarantee under CPR Part 61 and the 1976 Limitation Convention. They also sought discharge of the freezing injunctions, arguing that the relevant insurance proceeds were assigned and that there was no sufficient risk of dissipation. The court also considered the appropriate security for costs and interest.

1. The application for an interim declaration permitting constitution of the limitation fund by P&I Club guarantee was refused. Article 11(2) of the 1976 Limitation Convention permits constitution by guarantee only where the guarantee is acceptable under the legislation of the state in which the fund is constituted and is adequate in the court’s view.

2. Section 185(1) of the Merchant Shipping Act 1995 gave the Convention force of law but did not itself constitute legislation specifically making guarantees acceptable. Article 14 left procedural matters to English law only subject to the Convention. CPR Part 61 and the Practice Direction contemplated constitution by payment into court and supplied no clear authority for constitution by guarantee.

3. The court rejected attempts to derive the necessary statutory acceptance from the general law affecting guarantees. A change from the established practice required clear words. The limitation fund therefore had to be constituted by payment into court. Permission to appeal was granted because the issue was important and capable of more than one view.

4. The freezing injunctions were not discharged. The relevant test was whether there was a real risk that a judgment or award would go unsatisfied because assets might be dissipated or disposed of otherwise than in the ordinary course of business, or dealt with so as to make enforcement more difficult without proper business justification.

5. The owners were a one-ship company which had become a no-ship company, was no longer trading, had minimal corporate capital and had no convincing explanation of dealings for normal business purposes. The possible balance of insurance proceeds was doubtful as an asset, but the owners’ claim for hire was accepted as an asset. The ex parte application had been sufficiently justified and explained.

6. The injunctions were continued but reduced. Arbitration costs were limited to £250,000 for each of the three cargo interests. The question of interest was reserved for further argument.