Flags of convenience offer no protection in insolvency law

In the recent case of Greece v Stroumpoulis on 25 February 2016, the European Court of Justice (ECJ) decided that EU protections under the Insolvency Directive apply to EU residents working in the EU, regardless of whether their employer is an EU company. The ECJ reached this decision based on the social objective of the Insolvency Directive, irrespective of the maritime waters on which the vessel sailed.

By this judgment, the ECJ demonstrated the extended reach of EU protections. It found that the Insolvency Protection Directive applied to Member State employees, hired in a Member State by a non-EU company with a head office in a Member State and working on a non-EU flagged vessel.

Background

In July 1994, seven Greek crew, including Mr Stefanos Stroumpoulis, were hired by Panagia Malta Ltd (Panagia Malta), a Maltese registered company, to work on a Maltese flagged cruise ship. In 1994 Malta was not a member of the European Union. Their employment contracts were governed by Maltese law. Unfortunately the vessel’s charter was cancelled and the crew went unpaid between 14 July 1994 (the date when they were first engaged by Panagia Malta) and 15 December 1994 when the crew terminated their contracts as a result of non-payment.

The Court of First Instance in Piraeus ordered Panagia Malta to pay the crew outstanding wages, interest, expenses, holiday pay and compensation. Unfortunately, Panagia Malta was declared insolvent due to a lack of realisable assets and the crew did not receive any payment in the insolvency. The crew applied to the Greek Employment Agency under Directive 80/987, the Insolvency Protection Directive (the Directive) for protection available to employees in the event of their employer’s insolvency. Their application was refused on the grounds that they fell outside the scope of the Directive and were covered by other forms of guarantee.

The crew brought further proceedings in the Athens Administrative Court of First Instance and then the Athens Administrative Appeal Court arguing that the Greek State was liable to provide access to a guarantee institution, as required under the Directive, or provide equivalent protection. The Appeal Court found the head office of Panagia Malta was actually in Greece, that the flag flown by the cruise ship was a flag of convenience and that accordingly the Directive applied and that the crew were entitled to the protection provided by the Directive.

Rather than pay the sums due, the Greek Government appealed the decision to the Greek Council of State. The Greek Council of State asked the ECJ whether Directive 80/987 should be interpreted to provide protection to crew living in a Member State but working on a non-EU flagged vessel for a company with their registered office outside the EU but actual head office in the EU.

Judgment

The ECJ held that the crew were entitled to the protection of the Directive and that the sums guaranteed by the Directive must be paid. Crew living in a Member State, hired in that state by a company whose actual head office is in that State are afforded the protection of the Directive on their employer being declared insolvent by a court in that Member State, regardless of their employment on board a vessel registered outside of the EU by a company incorporated in a non-Member State under an employment contract governed by non-Member State law.

The ECJ came to this decision based on a number of factors including:

• The Directive has a social objective (to guarantee minimum levels of protection).
• The waters on which the vessel sails are immaterial.
• The employer’s registered office and the flag of the vessel are not relevant, just that the employment relationship retains a sufficiently close link with the territory of the EU.

It is important to note that the ECJ considered it irrelevant that the Greek State had failed to provide in its legislation that non-EU companies also had to contribute to the financing of the required insolvency guarantee scheme. As a result cruise lines that have previously escaped having to pay a contribution to Member States towards such schemes by employing crew through non-EU entities on board vessels flagged outside of the EU, may now have to contribute to such schemes as Member States realise that they are liable to guarantee crew wages and expenses.