Deutsche Bank Trust Company Americas v Motor Vessel Sertao, Owners of

This is an application by the Claimant mortgagee for an order for sale pendente lite of the MV SERTAO. If the court orders such a sale the Claimant mortgagee seeks an order that the Admiralty Marshal appoint as his broker, not the broker he and his predecessors have used for over 150 years, C.W. Kellock & Co., but a broker appointed and paid for by the Claimant mortgagee. The Marshal has provided a helpful statement expressing concerns about the appointment of such a broker.

MV SERTAO is a sixth generation ultra deep water drillship, 227.81 m. in length and of 61.619 dwt. She is registered in the Marshall Islands. She was built in South Korea by Samsung in 2011. A drillship is a self-propelled vessel in a traditional hull form, but equipped for drilling operations in midwater to ultra deepwater areas. Such drillships are held in position using dynamic positioning systems and are generally preferred for exploration drilling as they are self-propelled. There are thought to be some 137 sixth generation drillships worldwide of which 78 are operating and 59 are in lay up. The large number in layup is the result of the significant fall in oil prices that occurred in mid-2014.

The owner of the vessel is Dleif Drilling LLC, a Delaware company, which was an affiliate of Grupo Schahin, a Brazilian engineering conglomerate. The owner time chartered the vessel to Petroleo Brasileiro SA, the Brazilian national oil company.

The Claimant mortgagee is a US financial institution and a wholly owned subsidiary of Deutsche Bank AG which lent some US$750,000,000 to Grupo Schahin. The debt was secured by, inter alia, a mortgage on the vessel dated 28 March 2012. Some of that debt was repaid but payments ceased on 17 April 2015 following the fall in oil prices. In late 2015 the vessel was sailed from offshore Brazil to England in order to lay her up in a place where she might later be conveniently be sold. In November 2015 the claim in rem in this action was issued and the vessel was served and arrested in Teesport. There has been no acknowledgment of service, which is not surprising because the vessel’s managers have been replaced by independent managers appointed by or on behalf of the Claimant mortgagee.

The sum presently said to be due and payable, including interest, and secured by the mortgage, is US$808,108,836.81. Numerous events of default are said to have occurred.

The present day value of the vessel, now in a layup berth in Tilbury, has been assessed or appraised on behalf of the Claimant mortgagee by a specialist broker in a sum well below the outstanding debt. I have not set out the appraised value because, if there is to be a sale, such figure should not be published. The appraised value is low because of the collapse in the market for drillships.

The Claimant mortgagee has been funding the costs of maintaining the vessel under arrest. The costs are said in the witness statement of Mr. Buss to amount to some $750,000 per month. However, I was informed by counsel that that sum included certain financing costs. But whatever the precise figure it is clear, subject to a matter to which I shall return, that the vessel is a wasting asset. The costs of maintaining her include the costs of keeping her “warm-stacked”, which will assist the prospects of selling her. It is because the vessel is a wasting asset that a sale pendente lite is sought. It has long been established that where the value of the vessel, which stands as security for the loan, will be diminished by the continuing costs of maintaining the vessel under arrest, to the disadvantage of those interested in her, the court may order a sale pendente lite; see The Myrto [1977] 2 Lloyd’s reports 243 at p.260.

The Claimant mortgagee has not yet sought a judgment because it is shortly to run out of funds to maintain the vessel and if the vessel is not sold it will require to raise further funds (sanctioned by way of a scheme of arrangement to be approved by the court in the Cayman Islands) and it wishes to ensure that it has security for those further sums. It may not have such security if judgment is given now.

The other known claimant on the fund, STX Service Americas LLC, has a claim in the sum of some US$320,643 in respect of the supply of main engine spare parts and has filed a Caution against release. It does not oppose a sale pendente lite.

The only matter which causes the court concern in acceding to the request for a sale pendente lite is this. The Claimant mortgagee is content for the vessel to be sold at the appraised value. However, if the vessel cannot be sold at the appraised value then the Claimant mortgagee would prefer that the vessel is not sold (and seeks an order to that effect) because the market may improve and so the vessel may be sold at a higher value at a later date. There is an expectation that the market will improve somewhat over the next 6-24 months. Thus it appears to be the case that in the event that a bid at least equal to the appraised value is not received the Claimant mortgagee is content for the vessel to remain under arrest in the hope that, as a result of a change in the market, her value will increase. That gives the court reason (a) to doubt whether the vessel is in fact properly to be regarded as a diminishing asset and (b) to believe that the Claimant mortgagee’s true reason for seeking a sale pendente lite is that it wishes to uses the court’s processes to test the market. Indeed, Mr. Buss, the solicitor acting on behalf of the Claimant mortgagee, has said in terms in his witness statement that “the best and probably only way for the Mortgagee to test whether there is interest at or above the Appraised Value is for the Admiralty Marshal to conduct a sealed tender process in the usual way (but based upon the Appraised Value), which may seek to flush out such interest.”

When I put these concerns to counsel for the Claimant mortgagee he accepted that the Claimant mortgagee did want to use the court’s services to test the market but submitted that the vessel was nevertheless properly to be regarded as a diminishing asset by reason of the continuing costs of maintaining her under arrest. He also submitted that all that the Claimant mortgagee is doing was seeking to receive the best return for the Claimant mortgagee. There was nothing improper about that.

One consequence of the Claimant mortgagee’s approach is that whereas the Marshal would, in accordance with the standard form of order for sale, be ordered to sell the vessel “for the highest price that can be obtained for it, but not for less than the certified value without an order of the court” the Claimant mortgagee requests an order that the Marshal be ordered to sell the vessel “for the highest price that can be obtained for it, but not for less than the appraised value”. Thus it is possible that the Marshal may do all that is necessary to sell the vessel but, having obtained a bid, for example, 5% below the appraised value, will not be required to sell the vessel. The Claimant mortgagee will have had the benefit of the market being tested but the Marshal will not be able to recover the court’s fee for his work. The statutory fee, effectively 0.5% of the sale price, appears to assume that there has been a sale; see CPR Volume 2 2D-113 and the Civil Proceedings Fees (Amendment) Order 2011 Schedule 1 paragraph 11.2, SI 2011/586. The answer to this concern is probably to be found in the Claimant mortgagee’s solicitor’s undertaking to pay on demand the fees and expenses of the Marshal incurred by him or on his behalf in respect of the appraisement and sale of the property or of his endeavours to appraise and sell the property” (emphasis added). The assessment of his expenses will pose no difficulty in a case where endeavours have been made to sell the vessel. However, it is not clear to me what the Marshal’s fees are for endeavouring to sell a vessel. It would be unrealistic and unfair to assume there were none. If, as I think must be the case, the Marshal is entitled to charge a reasonable fee for that service the Claimant mortgagee’s solicitor’s undertaking provides a solution to this particular concern. This matter was not discussed during the oral hearing. If the Claimant mortgagee disagrees with this approach the matter will have to addressed when, or strictly just before, this judgment is formally delivered. For the present I assume there is no objection to my approach. I note from The Law of Ship Mortgages 2^nd ed. by Osborne, Bowtle and Buss at paragraph 14.5.10 fn. 226 that in Singapore the Sheriff’s fee of 2.5% is payable whether or not the vessel is sold.

I return to the court’s principle concern; see paragraph 10 above. Having considered the matter I accept that the vessel is a diminishing asset. The appraised value is well below the outstanding debt and so every pound or dollar spent on maintaining her under arrest diminishes her value to the detriment of the Claimant mortgagee. It is true that the market for drillships may rise but when and how quickly cannot be known and is speculative. That possibility, if it occurs, will go some way to restoring the value of the vessel but I am persuaded that the vessel remains at present a diminishing asset. I do not understand precisely why the Claimant mortgagee is willing to accept the Appraised Value and not, say, 5% less than the Appraised Value and I remain troubled that the Claimant mortgagee is not determined to sell the vessel. But it is to be expected that the Claimant mortgagee is doing that which it perceives to be in its best interests and it must be the best judge of that. Since it does not appear that any other person interested in the vessel will be prejudiced by the Claimant mortgagee’s intentions I am satisfied that in the present case there is nothing improper or wrong in principle about the Claimant mortgagee’s approach. What the court must be satisfied of before ordering a sale pendent lite is that there is good reason for doing so. I consider that there is, namely, that the vessel is a diminishing asset. I am therefore content to order a sale pendente lite.

When this application was issued the Claimant mortgagee sought an order that its specialist broker be appointed by the Marshal to appraise and sell the vessel. That broker is Pareto Offshore A/S who has been advising the Claimant mortgagee since shortly after the vessel was arrested. Pareto is a specialist broker of offshore oil and gas drilling rigs and has the largest market share. Since 2004 Pareto has concluded more than 220 rig transactions, including 95 rig sale and purchase transactions of which 14 were drillships. Since 2012 it has brokered around 50% of the sales worldwide of semi-submersible rigs and drillships. It is submitted that given their involvement to date and their “unique” position in the market Pareto are more likely to be able to generate interest in the vessel than the Admiralty Marshal’s usual brokers CW Kellock & Co.

Pareto has appraised the vessel notwithstanding that she is particularly difficult to value in the present market. Mr. Hauerberg of Pareto has described his efforts to find buyers since December 2015 and the interest which has been expressed to date. There are few if any comparable sales, there are a large number of similar vessels laid up waiting for the market to recover, and it is difficult to predict accurately when the market will recover. Despite these difficulties Pareto has formed a view as to the vessel’s market value based upon such information as there is. Account has been taken of the fact that the vessel has been “warm stacked” for two years and also that the sale by the Marshal will give a clean title; cf The Union Gold [2013] EWHC 1898 (Admlty) and [2014] 1 Lloyd’s Reports 53 at paragraph 17.

The Admiralty Marshal has provided the court with a helpful statement commenting upon the suggestion that he appoint Pareto. He is concerned at the suggestion for several reasons. First, the Marshal places enormous value on the long relationship between the Marshal and Kellocks. Not only do Kellocks have knowledge, experience and contacts in the shipping markets but they also have experience of operating with the court and its processes. This is of particular importance to the Marshal in circumstances where, unlike in the past, he does not devote all of his time to the role of Marshal but has other responsibilities within the court system and so there is not the same level of experience within the Marshal’s office as there once was. Second, the Marshal believes that there is a need to have a broker independent of the parties so that all parties may have confidence in him. Third, the Marshal fears that if another broker is appointed Kellocks might cease to be willing to act as the Marshal’s broker in the future on those sales of vessels of modest value the sales of which generate a modest commission. He might then have to conduct a tender process in the future to find a willing broker which would delay the sale process. With regard to the suggestion that Kellocks could not effect a sale as well as Pareto in this particular case the Marshal was informed by Kellocks that whilst they do not have specialism in drillships they do not anticipate difficulty in marketing the vessel.

These appear to me to be sound reasons for questioning whether Pareto should be appointed the Marshal’s broker. In response counsel for the Claimant mortgagee has submitted that the facts of the present case are so special that if the Marshal were required by the court to appoint Pareto it would hardly set a precedent and given Pareto’s expertise in this specialist market which at present is very depressed Kellocks could not reasonably expect to be appointed in place of Pareto. That submission appears to me to have merit in the unusual circumstances of the present case. It does not appear that this type of question has been considered before. It may however be observed that in The Union Gold (at paragraph 14) Kellocks themselves recognised that they had little experience of a particular area of the shipping market. It is also to be noted that in Admiralty Matters by Derrington and Turner 2^nd ed. at paragraph 7.63 fn.133 there is reference to an unreported decision in New Zealand in support of the proposition that the Marshal is required to have the vessel appraised by an experienced broker.

Fortunately, I do not have to resolve this question. Counsel has informed me that the Claimant mortgagee is willing to have Pareto and Kellocks appointed as joint brokers. This is acceptable to the Marshal who has also indicated that he is content to accept Pareto’s Appraised value. In circumstances where (i) there is very little market information on which to base an appraisement, (ii) Pareto has been involved in this matter for two years, (iii) Pareto has undoubted experience of the relevant market whereas Kellocks does not claim to specialise in it, (iv) the largest creditor by far is content with the Appraised Value at valuation and (v) the only other known creditor does not oppose the Appraised Value it is understandable that in this particular, somewhat special, case the Marshal is content to accept Pareto’s Appraised Value.

The appointment of joint brokers to sell the vessel appears to me to be an acceptable solution in the present case. The vessel is not a conventional vessel and in the present depressed market conditions where there are very few comparable sales and so many laid up drillships it is appropriate that the Marshal has the benefit of Pareto’s specialist knowledge of the drillship market. At the same time the presence of Kellocks as joint brokers enables the Marshal to have the benefit of their long experience in working with the court and managing a court sale.

The remaining question is the level of commission payable to the two brokers. Kellocks’ commission appears to have been fixed either by agreement or by practice since 25 May 1998 in the sums set out in the CPR Volume 2 at PD 61 paragraph 2D-140,namely:

6% on the first £5000

5% on the next £10,000 up to £15,000

3% on the next £15,000 up to £30,000

1% on the balance over £30,000.

The Appraised Value is very substantial and accordingly the level of commission is effectively 1%. Pareto, when first instructed, accepted 0.25% but, having worked on the matter for 2 years with no reward, has sought 0.5% which has been agreed by the Claimant mortgagee. Compared with Pareto’s agreed commission the 1% commission payable to Kellocks appears high. But it has to be borne in mind that Kellocks accepts instructions from the Marshal in all cases and in many of them the value of the vessels and hence the commission payable will be very modest. The occasional high value sale and hence high level commission may be regarded as an incentive to ensure that Kellocks remains willing to act for the Marshal in all cases.

There have been discussions between the Claimant mortgagee, Pareto and Kellocks about which I have been told by counsel. It has been suggested that the 1% commission be split 50/50 between Pareto and Kellocks, which would mean that Pareto would receive the level of commission it has agreed with the Claimant mortgagee and that Kellocks would receive half of their usual commission. It is however fair to observe that if the vessel were sold at its Appraised Value 0.5% would still produce a substantial sum. I am told by counsel that Kellocks have suggested that Pareto receive 0.25% commission and that Kellocks receive 0.75%.

I am grateful that Kellocks have considered giving up part of their commission. That seems appropriate in circumstances where the vessel has already been appraised and where the vessel will be marketed and hopefully sold by two brokers rather than one. Indeed, there appears to be considerable sense in the proposal that the 1% commission be split 50/50 between the two brokers. Whereas the one brings its experience of the drillship market the other brings its experience of effecting sales on behalf of the Marshal through the court. I would very much hope that that split could be agreed. If agreement cannot be agreed so that the joint broker solution is not viable then the court would have to resolve the question as to which broker to appoint. As to that there are, as I have already said, cogent arguments either way.

Subject to (i) there being no objection from the Claimant Mortgagee that the Marshal is entitled to charge a reasonable fee if a sale does not take place and (ii) there being agreement between the Claimant mortgagee, Pareto and Kellocks as to the split of the 1% broker’s commission I shall make the order which has been sought, amended to take account of this judgment.