Court refuses to pierce corporate veil and overturns arrest of vessel

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March 12 2014

Facts Decision

In a recent case concerning the arrest of the vessel MT Hartati,(1) the Bombay High Court directed that the security amount furnished by the owners of the vessel should be refunded with interest, arguing that the order of arrest or retention of the security of the vessel could not be sustained.

Facts

The plaintiff obtained an ex parte order of arrest for the first defendant vessel (MT Hartati). The owner of the vessel (ie, the second defendant) applied for vacation of the order of arrest by furnishing security, without prejudice to its rights and defences.

Through an application made during proceedings (ie, after obtaining the order of arrest), the plaintiff sought to amend its pleadings to include an averment that the second defendant – along with its holding company, PT Berlian Laji Tanker, TBK (BLT) – was the owner, entity or beneficial owner allegedly in de facto control of the various vessels, including the first defendant vessel. The case centred on amounts that were due to the plaintiff for unpaid invoices for the supply and delivery of ship stores and goods to the first defendant vessel and various sister vessels.

The plaintiff had annexed a list of the outstanding invoices to its claim, out of which only three pertained to the first defendant vessel. The owner of the first defendant vessel argued that although the vessel belonged to the BLT group, the group could not be made liable in respect of claims against the vessels owned by other subsidiaries of BLT. Furthermore, it was argued that the invoices pertaining to the other vessels were not invoices of sister vessels of the first defendant vessel, and therefore no liability could fall on the owner of the first defendant vessel. The counsel for the first defendant vessel further argued that for a vessel to be called a sister vessel, it must be owned by the same person as that liable for the maritime claim, and such person must have been the owner of the ship in respect of which the claim arose when the claim arose (as under Article 3(2) of the International Convention on Arrest of Ships 1999).

In regard to lifting the corporate veil, the defendants argued that the plaintiff first had to show that the vessel was owned in the name of different companies for the purpose of covering up a fraud. Such fraud cannot be merely alleged; there must be a connection to show that ownership of the vessels under the names of different companies was done with an intent to defraud. It was further noted that the plaintiff had first obtained the order of arrest on the basis that all of the vessels were owned by the second defendant, although this averment was later belied by way of an amendment made by the plaintiff.

Various judgments were cited on behalf of the first defendant vessel stating that to bring a claim against the vessel, the person liable to the plaintiff in personam must be the registered owner; if the action is brought against another vessel, the plaintiff must show that the company liable in personam also owned shares in the vessel against which the interim action was commenced.

In response, the plaintiff argued that where a common holding company exists, a claim against one subsidiary of that holding company can be enforced against the asset of another subsidiary company or holding company. It also submitted that if two independent companies are both 100% subsidiaries of a common holding company, the beneficial owner of the companies is the holding company – hence, no fraud need be alleged (or proved) and the court can order the arrest of the vessel belonging to a subsidiary company for a claim against the vessel owned by another company.

Decision

After considering both the relevant case law and the International Convention on Arrest of Ships, the court held that Article 3(1) of the convention relates to the arrest of a ship in respect of which a maritime claim is asserted. Article 3(2) relates to the arrest of any ship(s) other than that in respect of which the maritime claim is asserted. The court expressed that such ships are those that, when the arrest is effected, are owned by the person liable for the maritime claim, provided that such person was the owner of the ship in respect of which the claim arose when the claim arose. It further held that the word 'owner' in the convention should be taken to mean a registered owner, since the only person that could be held liable for a claim against the ship is the person that owns all shares in the ship and would be liable for an action in personam.

The court further held that in such cases, words should be given their normal, plain and natural meaning. The court observed that an 'owner' naturally means a person in whose name the ship is registered. A beneficial owner owns only the shares in the company in whose name the ship is registered. The court argued that the word 'owner' in the convention means registered owner, because if the beneficial owner is wound up or if individual assets are attached, one of the assets of the company or the individual will be the shareholding in the company in whose name the ship is registered. The ship will not be the asset of the beneficial owner company or individual.

Referring to the binding precedents, the court observed that Indian law does not permit the independent corporate identity of a limited company to be ignored and the corporate veil to be lifted to identify the shareholder as owner of the property of the limited company in the absence of fraud. In the case at hand, the court observed that the plaintiff's submission that the concept of beneficial owner requires the lifting of the corporate veil was unsustainable.

Considering the judgments on which the plaintiff relied, the court disagreed with the plaintiff's submissions that an order of arrest can be obtained for a vessel that is owned by a different entity and not by the entity that owned the vessel against which the maritime claim arose merely because both entities are owned by a common holding entity.

The court held that a court could lift the corporate veil, but the necessary ingredient for doing so was that the independent companies were simply a sham to defraud creditors. The court also observed that for two or more ships to be called 'sister ships', they must be registered under the same ownership; for two ships owned by different entities to be called sister ships, the corporate veil must be pierced. In order for the corporate veil to be pierced, fraud must be established prima facie at the time of obtaining the order of arrest; a mere averment is not enough.

The court further noted that there is nothing wrong with ships being owned by companies that are subsidiaries of a common entity, unless this is done with an intention to defraud creditors. Furthermore, the court noted that the plaintiff had not pleaded that BLT had created all companies to own the individual vessels with the intention of defrauding the plaintiff.

The court argued that the fact that BLT owned various entities and incorporated companies, each of which owned different ships, did not make all the ships sister ships. Nor did it entitle a claimant to seek arrest of a ship owned by a particular entity for a claim against a ship owned by another entity merely because both the entities were subsidiaries of a third entity, unless the plaintiff could prove that the companies were formed with an intent to defraud the plaintiff or the creditors.

In view of the above observations, the court held that there is nothing wrong with a person owning different ships in the names of different companies, unless it is a sham. The court therefore ordered that the security furnished by the owners of the vessel for its release be refunded.

For further information on this topic please contact Shardul Thacker at Mulla & Mulla & Craigie Blunt & Caroe by telephone (+91 22 2204 4960), fax (+91 22 2204 0246) or email ( This email address is being protected from spambots. You need JavaScript enabled to view it. ). The Mulla & Mulla & Craigie Blunt & Caroe website can be accessed at www.mullaandmulla.com.

Endnotes

(1) M/s Universal Marine v MT Hartati, Bombay High Court, Justice Shriram, February 11 2014.


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