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In 2013, Dafune Offshore signed an order worth 13 billion yuan with Norwegian Zall for the construction of eight deepwater semi-submersible drilling platforms. This is the largest single order in the history of China's shipbuilding industry, and it also sets a record for the world's largest rig order. However, a few years later, Zall unexpectedly cancelled orders for six rigs, leaving only the contracts for "Zall 1" and "Zall 2". This decision was like a thunderbolt for the big ship offshore workers, and it also caused shock and doubt in the entire industry.
Part I: The deep pit dug by Zall Company
Dafunang Offshore is one of the most important offshore equipment manufacturers in China and one of the world's most powerful offshore drilling platform builders. Zall is an international oil services company headquartered in Norway, focusing on the leasing and operation of offshore drilling platforms. In 2013, against the backdrop of global oil demand growth and rising oil prices, Zall reached an "installment + lease" cooperation model with Big Ship Offshore to pay for the construction of eight drilling platforms in installments and lease them after delivery. This partnership model allows Zall to acquire new rigs while flexibly adjusting lease terms and rents to market conditions.
However, in the second half of 2014, international oil prices fell sharply, from more than $100 per barrel to more than $30 per barrel. This market change has had a huge impact on the offshore rig market. Zall announced the cancellation of orders for six rigs, claiming that this was due to "force majeure". Zall classified factors such as falling oil prices, shrinking markets and environmental controls as "force majeure", and used them as grounds to terminate the contract and demand that Bigship Offshore return part of the money paid. This decision not only caused huge economic losses to the large ship offshore industry, but also affected its reputation and market position.
Dafunang Offshore resolutely refused Zall Company's cancellation request, saying that it would defend its rights and interests through legal channels in accordance with the terms of the contract and international practices.
Part II: The Dilemma and Bankruptcy Reorganization of Big Ship Offshore Engineering
Zall cancelled orders brought unprecedented challenges to Big Ship & Offshore Engineering. Zall refused to pay the remaining amount and demanded a refund of part of the amount paid, which made it impossible for Shipbuilding & Marine to recover the funds invested, resulting in tight cash flow and an increase in its gearing ratio. At the same time, large ships and offshore workers were unable to repay the principal and interest of loans from banks and other financial institutions on time, increasing the risk of default and degrading their credit ratings. By the end of 2019, the total assets of Dafune Offshore Engineering were 26.75 billion yuan, the total liabilities were 22.29 billion yuan, and the asset-liability ratio was as high as 83.3%. Short-term borrowings amounted to RMB7.65 billion, non-current liabilities due within one year amounted to RMB3.87 billion, and long-term borrowings amounted to RMB6.49 billion, while cash and cash equivalents were only RMB680 million.
Large offshore workers face huge inventory backlogs and depreciation losses. Due to order cancellations, rigs under construction or already built are stranded in docks or dry docks, occupying significant site and equipment resources. Sluggish market demand and fierce competition have made it difficult for these rigs to find new buyers or tenants, and the value is declining. As of the end of 2019, the total inventory of Dafune Offshore was RMB15.27 billion, including completed and unfinished drilling platforms. With this comes huge litigation costs and the risk of compensation. Legal disputes and arbitration proceedings with Zall consume a lot of time and effort, increasing litigation and attorney costs. The legal and arbitration outcome is uncertain, and large ship offshore is at risk of not being able to obtain reasonable compensation or assume some liability.
In this dilemma, Dafune Offshore took a series of countermeasures, including filing for bankruptcy reorganization. In November 2019, Dafune Marine submitted an application for bankruptcy reorganization to the Shanghai No. 1 Intermediate People's Court, requesting the court to reorganize it and appoint a reorganization administrator. In January 2020, the Shanghai No. 1 Intermediate People's Court accepted the bankruptcy reorganization application of Dafune Offshore and designated the Shanghai Financial Court as the trial court. In February 2020, the Shanghai Municipal Financial Court formally accepted the bankruptcy reorganization case of Dafune Offshore and appointed Shanghai State-owned Assets Operation Co., Ltd., a subsidiary of the Shanghai State-owned Assets Supervision and Administration Commission, as the restructuring manager. Through bankruptcy reorganization, Dafune Offshore hopes to restore debt repayment and profitability by adjusting debts, selling assets, introducing investment and optimizing management under the supervision of courts and administrators, so as to repay the debts of creditors as much as possible.
If the restructuring plan is approved by creditors and the court and successfully implemented, Bigship & Marine will be able to emerge from the bankruptcy crisis and continue to operate.
Part III: The Road to Rights Protection for Big Ship and Offshore Workers
Despite filing for bankruptcy reorganization, Dafune Offshore did not give up its legal struggle and rights protection actions with Zall Company. The legal disputes between the parties involve the legal systems and arbitration institutions of multiple countries and regions. Since April 2018, the parties have conducted several rounds of litigation or arbitration in courts or arbitration institutions in Singapore, China, Norway, the United Kingdom, the United States and other countries and regions. Among them, the arbitration case of the Singapore International Arbitration Centre is the most important. The arbitral tribunal found that Zall did not cancel the order due to "force majeure", which constituted a breach of contract, and should pay the remaining amount and compensation to Big Ship Offshore Engineering. At the same time, the arbitral tribunal found that Shipbuilding & Offshore had not breached the contract in the process of constructing and delivering the drilling platform, and had the right to retain the completed or under construction drilling platform, and to recover the due amount and compensation from Zall Company. According to the arbitration result, Zall should pay about RMB 7.08 billion to Dafung Offshore and allow Dafunang Offshore to retain part of the drilling platform and continue to lease other platforms.
While protecting legal rights, Dafune Offshore actively carries out its own transformation and upgrading, and expands the offshore engineering equipment manufacturing and service business in other types and fields to adapt to changes in market demand. Dafune Offshore has also strengthened its technological innovation and research and development capabilities, and through cooperation with universities and scientific research institutions, applied for patents and certifications, developed new technologies and products, and improved the quality and efficiency of products and services. These measures not only increase revenue and profits, but also improve market competitiveness and brand influence.
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