BAKRI BUNKER TRADING COMPANY LIMITED v. THE OWNERS OF AND OTHER PERSONS INTERESTED IN THE SHIP "NEPTUNE"

HEADNOTE

                Admiralty jurisdiction. Section 3(4) Administration of Justice Act 1956. Court invited to lift veil of incorporation to establish sister-ship relationship on ground of fraud. Order for existence of fraud to be tried as preliminary issue refused. One-ship companies in the particular circumstances accepted as equally consistent with legitimate limitation of liability.

                Per curiam, that:-

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

------------------

        Admiralty Action in Rem against the ship "NEPTUNE" (Cyprus Flag)

BETWEEN

___________

JUDGMENT

___________

1. The Neptune was arrested on 11th September 1985 on the application of the Plaintiffs. The Plaintiffs' claim is for US$87,922.05 in respect of the supply of bunkers to 2 vessels, the Teviotban and the Dumbaia, which it is claimed are sister ships of the Neptune. The Defendants now apply for an order that the writ of summons and the warrant of arrest and all subsequent proceedings be set aside or dismissed. They rely upon the 3 following grounds:-

2. First that the Neptune at all material times was not in common beneficial ownership with the Teviotban and the Dumbaia as respects all the shares therein.

3. Second that having already obtained security for the debt pursuant to the arrest of the m.v. Dynasty in Sri Lanka, the Plaintiffs are barred from arresting the Neptune for the same claim.

4. And third, that there has been material non-disclosure on the part of the Plaintiffs.

5. To begin with the first ground, the underlying statutory provisions are sections 1 and 3(4) of the Administration of Justice Act 1956 which applies to Hong Kong by virtue of the Admiralty Jurisdiction (Hong Kong) Order in Council, 1962. (see Societe Anonyme des Petroles Mory and The Owners of the ship or vessel "Union Darwin" (Panamanian Flag)(1983) HKLR 248)

6. Section 1(1) for present purposes provides -

Section 3(4) provides -

7. As to section 1, it is abundantly clear and in any case, common ground that the bunkers supplied fall within subsection (1)(m).

8. Section 3(4) can conveniently be dealt with in the 3 steps adopted by Slynn J. in The Aventicum (1978 Lloyd's Rep. 184). First the claim for the costs of supply of bunkers to the alleged sister ships must be a claim "arising in connection with a ship". That it is, is abundantly clear and not disputed.

9. The second matter that has to be shown is that the person who would be liable on the claim for supply of bunkers was, when the cause of action arose, the owner or charterer of, or in possession or in control of the ships bunkered.

10. The third matter to be established is that the ship arrested is beneficially owned as respects all the shares therein by that person.

11. The onus of showing that the person against whom it is sought to invoke the admiralty jurisdiction by arresting his ship is the person who beneficially owns all the shares in that ship and that he is the person who is liable in an action in personam lies upon the Plaintiff (The Aventicum 1978 Lloyds Rep. 184 at 186; The Maritime Trader 1981 Lloyds Rep. 154 at 157).

12. Proceeding then to the facts, the cost of the bunkers supplied by the Plaintiffs at Jeddah in February 1984 to the Teviotban and the Dumbaia was US$87,922.05.

13. The Teviotban was owned by Alexander Properties Ltd., a company registered in the Isle of Man, with only 2 issued shares, one held by a Captain Vazeous and the other by his wife. They are also shown by the register as the directors. The Teviotban is said now to be detained by one of the warring parties in the Persian Gulf.

14. The Dumbaia was owned by Tara Maritime Services Ltd as agents for Questworth Ltd. whose shareholders are Tara Maritime Services Ltd an Isle of Man company which holds one share, the remaining 1,999 shares being held by Dafnoussa Co. Naviera S.A. of Panama.  A Questworth resolution of February 1985 shows that the single Tara Maritime share was transferred "back to the beneficial owner Captain Vazeous". The Panamanian register does not disclose the shareholders, but Captain Vazeous, his wife and one Fotini Dexana are shown as directors. The Dumbaia is said to have since been sold for scrap.

15. The Neptune is owned by Molars Shipping Co. Ltd., a Cyprus Co. of which Captain Vazeous holds 99 shares and Specova Co. Naviera S.A. of Panama one share.

16. The Teviotban and Dumbaia were managed by Specova Co. Naviera S.A. Two brothers of Captain Vazeous en behalf of Specova ordered the bunkers supplied to those vessels through Specova's bunker brokers. As in the case of Dafnoussa, the directors of Specova are Captain Vazeous, his wife and Fotini Dexana.

17. The Plaintiffs claim that Captain Vazeous is the alter ego of all the companies concerned, controls the operation of all the vessels, and is the beneficial owner of all the shares in them. In his affidavit in support of the Plaintiffs, the manager of Specova's bunker brokers, who have acted for Specova for six years and have offices very close to the Suecova and Vazeous offices in Piraeus, deposes that Captain Vazeous is the alter ego and principal shareholder of the various companies. He adds that throughout the bunker brokers' meetings with Captain Vazeous, the vessels were spoken of and treated as though they were owned by Captain Vazeous personally. Although his brothers and various employees assisted with management of the vessels, all decisions of importance were taken by Captain Vazeous.

18. Assuming that Captain Vazecus was indeed the person in control of the Teviotban and Dumbaia when the bunkers in question were supplied, unless the corporate veils of Dafnoussa and Specova are lifted, the beneficial ownership of the Neptune and Dumbaia cannot be established.

19. The principle of corporate identity is now trite law, well established since Salomon v. Salomon, (1897) AC 22, notwithstanding that there are certain situations in which the courts are willing to lift the veil of incorporation. For instance, the courts will not permit corporate form to be used for the purpose of fraud (Re Darby (1911) 1KB 95).

20. Furthermore section 3(4) of the Administration of Justice Act 1956 obviously contemplates, not nominal or other ownership of that sort, but beneficial ownership where it is of the nature described. As Slynn J. observed in The Aventicum -

"It is plain that section 3(4) of the Act intends that the court shall not be limited to a consideration of who is the registered owner or who is the person having legal ownership of the shares in the ship; the directions are to look at the beneficial ownership. Certainly where there is a suggestion of a trusteeship or a nominee holding, there is no doubt that the court can investigate it. I think that it may well be ..... that the court has the power and should in some cases look even further."

21. But it is not clear if section 3(4) extends to the lifting of corporate veils, nor do I consider it necessary to decide that question for the Plaintiffs have chosen to rely upon fraud. The onus is therefore upon them to show fraud and to do so, in my view, to such degree as would warrant the courts' intervention by lifting the veil of incorporation. That seems to me to be implicit in the following passage in the judgment of Sheen J.   in The Maritime Trader (1981) 2 Lloyd's Rep. 153 at 157 -

"I would not hesitate to lift that veil if the evidence suggested that it obscured from view a mask of fraud rather than the true face of incorporation."

I apprehend that the standard of proof required of the Plaintiff would be the usual balance of probability though it is not inconceivable that grave suspicion of fraud may prompt a court to intervene.

22. I proceed then to Mr. Sussex's submission on fraud. On the strength of Derry v. Peak (1889) 14 App. Cas. 337 he submits that to establish fraud it is not necessary for the Plaintiffs to show that there was an intention not to pay for the bunkers, but that it is sufficient to show that:

Mr. Sussex submits that the evidence shows Captain Vazeous to be the alter ego of the owning corporations, and the person who controlled them; that therefor his knowledge and intentions must be theirs.  Upon the foregoing basis he asks the court to infer fraud from the following matters:-

23. First, the fact that the Dumbaia has in the relatively short period since she was bunkered been sold for scrap. From that he argues that the vessel's non-availability must have been known at the time bunkers were ordered and supplied.  It is not disclosed when The Teviotban was sold for scrap, nor, in my view, does it necessarily follow that her non-availability must have been known, and even if that were so, that it indicates an absence of intention to pay.

24. Second, the corporate structure. It is not disputed that all the ships concerned were owned by one-ship companies and that they were managed by Specova of which we have already heard. Again that by itself does not suggest fraud. Counsel in the Maritime Trader asked the rhetorical question "What is wrong with using the company structure to limit liability?" and said the answer must be "Nothing, unless it is a sham". Sheen J. agreed. I share his view. One-ship companies, I was informed by counsel, are by no means uncommon, and as a legitimate means of limiting liability, in my opinion, do not of themselves raise any inference of fraud.

25. Third, the consistent refusal to pay. The evidence in fact does not establish any refusal to pay, but rather an inability to do so.  I do not accept that in the circumstances it occurred the refusal or inability to pay supports an inference of fraud, any more than I accept that the payment only in respect of the Neptune, being the only vessel of the three available, also does so.  Moreover non-payment in respect of the Teviotban was contemporaneous with that in respect of the Dumbaia, and commenced when the subsequent detention of the former could hardly have been forseen.

26. Equally I do not think the cumulative effect of the foregoing matters and of the other matters adduced suggests fraud. And among these matters I particularly bear in mind the affidavit evidence that Captain Vazeous was in control, that all major decisions were referred to him and that he treated and referred to the vessels as though he owned them; also I bear in mind that he has not made any affidavit and has chosen instead to have his evidence presented through his solicitor's affidavit. The foregoing matters are not positive evidence of fraud and are all equally consistent with legitimate limitation of liability through one-ship company structuring. Finally as Mr. Smith has pointed out, the many years during which the owning corporations and Specova have done business with the Plaintiff, presumably all along securing satisfactory payment, strongly counter any suggestion of fraud.

27. In the light of the foregoing it is not necessary for me to deal with Mr. Smith's very persuasive submission that the fraud must relate to the actual incorporation behind which it is sought to look, and not to some disassociated act like the failure to pay bunkering costs.

28. In my finding there is no positive evidence that suggests fraud; what has been put forward falls more within the realms of speculation and suspicion. It follows that I would not be justified in attempting to lift the veils of incorporation of the corporations in question. Nor would it, I believe, be right or appropriate, for essentially the same reason, to order the existence of fraud to be tried as a preliminary issue, as I am urged to do by Mr. Sussex. Even if it were, it is difficult to see what additional evidence the Plaintiffs could procure or indeed what such a preliminary trial would achieve.

29. The Defendants are therefor entitled to succeed upon their first ground.  There are however 2 aspects of it, which I should briefly mention. First in relation to the Plaintiffs' failure to mention fraud in any of their affidavits, Mr. Smith referred me to the following passage in the judgment of Barker J.A. in Scales v. Wong (1983) HKLR 110 at p.115 -

30. I have not felt it necessary to rely upon the Plaintiffs' failure to expressly allege fraud as they did allege all the facts upon which they sought to found the inference of fraud.

31. Second although the judgment of Sheen J. in the Maritime Trader was referred to by both parties in other respects no mention was made of his conclusion in the context of section 3(4) of the 1956 Act that a corporation does not have any property in the assets of its wholly owned subsidiary. If that is the position in regard to a corporation, why it should not apply equally to an individual who similarly owns all the shares of a company which is the registered owner of a vessel is difficult to see. However since the point was not taken by either party I do not seek to rely upon it.

32. The Defendants are therefore entitled to succeed upon their motion and it is not necessary to deal with their remaining grounds, but I consider it desirable to do so in case this matter should be considered by a higher court.

33. I proceed then to the Defendants' second ground. Upon the basis that the m. v. Dynasty was in the same common ownership and control of Captain Vazeous as the Teviotban and Dumbaia, the Plaintiff arrested the Dynasty in Sri Lanka in respect of the same claim for the cost of the bunkers. The owners' solicitors reacted strongly. They offered a bank guarantee in the amount of US$50,000 to facilitate the release of the Dynasty, but kept the offer open for a very limited time and made it pain that if the offer was not accepted, the crew would be signed off, the vessel laid up and full damages sought. They also strongly denied that the Dynasty was in common beneficial ownership with the Teviotban and the Dumbaia.   Mr. Sussex concedes that the Dynasty might indeed not be in such ownership. The upshot was that the offer was accepted and the ship released.

34. The Defendants originally took the point that the Plaintiffs having arrested the Dynasty were barred from arresting the Neptune. In the event that did not pursue it but instead proceeded upon the associated point also pleaded that having taken security the Plaintiffs were likewise barred. In support Mr. Smith relied upon the following passage in paragraph 320 Vol. 1 of Halsburys Laws and the authorities cited in support -

"If, however, the plaintiff has obtained security in respect of the same claim by arrest in the foreign proceedings, the English courts generally regard the proceedings brought in this country as oppressive and will dismiss the proceedings, even though the foreign proceedings are discontinued and the security released."

In the Christiansborg (1885) 10 P.D. 141 where the material facts were not significantly dissimilar to those in this case, Lord Fry said:

35. In the Marinero (1955) P68 at p.47 Willmer J. said -

36. Finally in The Golaa (1926) P103 upon an action in rem in America the ship was arrested and released on bail. The action proceeded in America but a fresh writ was issued in rem in England, and the vessel re-arrested there. On the same day the plaintiff's representatives cabled America for the proceedings there to be discontinued.  Bateson J. held that "having obtained bail and so released the ship from any further claim in respect of the particular damage alleged, the plaintiffs' subsequent discontinuance of the action in America after the re-arrest here did not cure their breach of good faith in instituting proceedings in England and causing the ship to be arrested again; and that the writ and all subsequent proceedings must be set aside." He quoted with approval the following passage from the judgment of Gorell Barnes J. in The Mannheim (1897) P13, 17 -

"It is therefore said that if bail is put in the suit, you have by doing that procured and purchased the release of your ship, so that she cannot be arrested again."

37. Mr. Smith accordingly submits that the arrest of the Neptune is a breach of faith and ought not to be permitted.

38. In response Mr. Sussex makes 2 submissions. First he says the basis of the dicta in The Christiansborg, Marinero and Golaa is lis alibi pendens and they apply only where the parties are the same. He submits that the Dynasty is not in the same common ownership as the Neptune, that even the Defendants so contend and he concedes that a mistake might have been made in arresting the Dynasty. However that may be, the affidavits exhibited in support of the Plaintiffs' case clearly set out the identical claim in the Sri Lanka proceedings as that in the present proceedings. Furthermore, in my view, in proceeding upon the basis that the Dynasty is a sister ship of the Teviotban and Dumbaia, it is implicit that the Dynasty must also be a sister ship of the Neptune for it is on the basis of common ownership with the Teviotban and Dumbaia that the Neptune was arrested. If Plaintiffs can rely upon Defendants' denials or non-admission of common ownership, the way would be open to harrassment of Defendants' ships in all the ports of the world. It would also conflict with the principle in The Banco (1971 P137) that only one vessel may be arrested. Mr. Sussex's first submission must therefore fail.

39. That brings me to his second submission which is that where the wrong ship has been arrested by mistake, a second ship may be arrested upon an action in rem for the same claim.

40. In support Mr. Sussex has referred me to a report in Lloyd's Maritime Law Newsletter of 11th April 1985 of Sheen J.'s decision in the Stephan J. The plaintiffs in that action were owners of cargo that had been laden on the Stenhan J. They were informed by Lloyds Intelligence Services the Herm J was a sister ship and issued a writ naming both vessels. The Herm J was arrested but it then became clear that the Herm J was not a sister ship and that ship was immediately released, before the writ was served. Later the Stephan J arrived in England. The Herm J having already been arrested, the question arose as to whether the Stephan J could be arrested, having regard to section 21(8) of the Supreme Court Act 1981 which provides that where one ship has been arrested in respect of an action in rem no other ship may be arrested in respect of that same claim. Sheen J. held that it was then clear that the Herm J was not a ship in the same common ownership; accordingly she was not a ship in respect of which an action in rem could be brought.   It followed that the Stephen J might be arrested in an action in rem brought to enforce the claim.

41. This somewhat cryptic report does not reveal with any clarity Sheen J.'s reasons. Nonetheless a clear distinction can be drawn between that case, where it was clear that the Herm J was not in the same common ownership, and the present case in which the like issue in regard to the Dynasty is not only unsettled but in which the Plaintiff on the record still claims common ownership. I accordingly have no hesitation in rejecting Mr. Sussex's second submission and in concluding that the Defendant succeeds on their second ground, too.

42. To proceed to the Defendants' final ground, Mr. Smith contends that the Plaintiffs' failure to disclose that they had obtained security for US$50,000 in the Sri Lanka proceedings constitutes material non-disclosure which warrants the setting aside of the ex parte arrest of the Neptune. In fact at the time the Plaintiffs' affidavits were filed on 23rd August, the Dynasty was under arrest, as disclosed in the affidavits, but the security had not yet been furnished. Mr. Smith submits that since the security was relevant and material to the arrest, it should have been disclosed when it was actually furnished. He has referred me to the unreported judgment of Clough J. in the Cynthia G (1984 Folio No. 367). Having examined the matter thoroughly in the same context i.e. of section 3(4) of the 1956 Act, that arises in this case, Cough J. held that affidavits under Order 75 rule 5 are made on the footing that the rule of the court that requires uberrima fides on the part of an applicant for an ex parte injunction applies. He went on to find that the non-disclosure in that case was material as the Registrar should consider matters such as that not disclosed. In the absence of circumstances justifying the exercise of discretion in the Plaintiffs' favour, he declined to allow the Plaintiffs to retain the advantage of the bail bond they obtained ex pare. I fully accept the approach Clough J. adopted, but in the present case I believe that there are circumstances that do justify the exercise of the court's discretion in the Plaintiffs' favour.  I have in mind the fact that at the time the affidavits were sworn and filed, there was no failure to make disclosure. Furthermore having already applied for the arrest of the Neptune, there was no further step required of the Plaintiffs which would have afforded them the occasion to make disclosure of the altered circumstances. Finally having disclosed the arrest of the Dynasty, I do not see that the failure to disclose the substitution of security was significant in the circumstances.

43. Be that as it may, it is my conclusion that the Defendants must succeed in their application and I order that the Writ of Summons and Warrant of Arrest be set aside. Unless counsel wish to be heard on the matter I will order that the costs be the Defendants.