CHINA OCEAN SHIPPING CO. v. MITRANS SHIPPING CO. LTD.

1995, No. 71
(Civil)

H E A D N O T E

Using a corporate structure to evade legal obligations is objectionable. The courts' power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations. But using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable. And the courts' power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create legal obligations.

IN THE COURT OF APPEAL

1995, No. 71
(Civil)

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J U D G M E N T

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Bokhary, J.A.:

1. This is an appeal by the defendant company which asks us to reverse an Order of Leong J made on February 13 this year refusing to strike out the Statement of Claim and dismiss the action.

2. Two charterparties made in Hong Kong, one dated September 18, 1990, and the other dated October 10, 1990, are involved.

3. Under each charterparty, the plaintiff, a Chinese company, chartered its vessel the Gao Yang for the carriage of bulk cargo from China to North Korea.

4. A Panamanian company by the name of Mitrans Maritime Panama SA (which I will call "Mitrans Panama") was named in each charterparty as the charterers.

5. Each charterparty contained an arbitration clause providing that any dispute arising thereunder be referred to arbitration in Hong Kong.

6. Paragraph 3 of the Statement of Claim reads:-

"Pursuant to the charterparties, differences between the parties were duly referred to arbitration in Hong Kong in accordance with the charterparties and the laws governing the conduct of arbitrations in Hong Kong."

7. The next four paragraphs in the Statement of Claim plead as follows. The arbitrators awarded that Mitrans Panama pay the plaintiff: US$126,556.58; two lots of interest totalling US$28,660.03; and HK$24,050.70 costs. Such award is valid and final here. And Mitrans Panama has failed to pay anything thereunder.

8. Then comes paragraph 8, which is crucial since it contains the basis on which payment was sought from the defendant, a Hong Kong company. Together with its particulars, paragraph 8 reads as follows:-

"The Defendants are liable to satisfy the Award as they are in fact and in law the true entity with which the rights and obligations of Mitrans Panama rest in particular those under the charterparties and the Award. The veil of incorporation between Mitrans Panama and its controllers, the Defendants ought to be lifted in particular since at all material times Mitrans Panama acted as a facade for the Defendants so as to enable the Defendants to evade their legal obligations to the Plaintiffs.

(a) Mitrans Panama is a company incorporated in Panama of which nothing is known save that it has an office at the Defendants' place of business in Hong Kong and that Mitrans Panama's President, Joseph Cheung Ming Kwan is a director and shareholder of the Defendants.

(b) Further, the Treasurer of Mitrans Panama, Nelson Mak Ying Kit is the secretary of the Defendants and the Secretary of Mitrans Panama, Adih Wong Wing Cheung is an employee of the Defendants.

(c) Mitrans Panama is not registered with the Registry of Companies and Businesses in Hong Kong as a foreign company.

(d) All correspondence addressed to Mitrans Panama in this matter have been replied to without qualification, by the Defendants.

(e) The Defendants have, in a previous charterparty, admitted that they were the charterers even though the named charterers in the charterparty were Mitrans Panama.

(f) All fixtures made by Mitrans Panama have accrued for the benefit of the Defendants. The Defendants have been using Mitrans Panama as a nominal vehicle in an effort to evade their legal obligations.

(g) The Plaintiffs also claim the costs awarded on an indemnity basis to be taxed if not agreed in the Supreme Court of Hong Kong Action No.MP3033 of 1993 occasioned by the Mitrans Panama's failure to appoint an arbitrator in the Hong Kong reference referred to in paragraphs 3 to 6 hereof, further and better particulars of which will be supplied upon discovery or at the trial of the action herein."

9. Following that, one finds the prayer under which the plaintiff claims against the defendant:-

" (a) The sums of US$155,216.10 and HK$24,050.70;

(b) Pursuant to paragraph 8(g) above the costs awarded on an indemnity basis in Action MP No.3033 of 1993;

(c) Interest pursuant to section 48 of the Supreme Court Ordinance;

(d) Costs; and

(e) Such further or other relief as the Court deems fit."

10. One of the plaintiff's arguments is that the defendant treated itself and Mitrans Panama as a single economic unit with interchangeable names. However, as was said by Robert Goff LJ in Bank of Tokyo Ltd v. Karoon (Note) [1987] AC 45 at p.64 and adopted in the judgment of the Court of Appeal in England delivered by Slade LJ in Adams v. Cape Industries Plc. [1990]1 Ch. 433 at p.538G-H:-

"[Counsel] suggested beguilingly that it would be technical for us to distinguish between parent and subsidiary company in this context; economically, he said, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged."

11. Later on in the judgment in Admas v. Cape Industries Plc. (supra) this was said (at p.544D-F):-

"... we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law."

12. Is that not the situation here? Going back to paragraph 8 of the Statement of Claim, the pleaded reason why Mitrans Panama was used as a facade for the defendant was to enable the defendant to evade its legal obligations to the plaintiff.

13. "What legal obligations?" asks Mr Barlow for the defendant. As I see it, no liability or obligation had to be evaded since no liability or obligation had arisen. By not entering into the charterparties, the defendant had avoided any liability or obligation thereunder.

14. Mr Kat for the plaintiff cites the decision of Mr Richard Southwell QC sitting as a Deputy Judge in the Queen's Bench Division in Creasey v. Breachwood Motors Ltd [1993] BCLC 480. There the Deputy Judge considered Woolfson v. Strathclyde Regional Council [1978] SC(HL) 90 and Adams v. Cape Industries Plc. (supra) and then said this (at p.492E-493A):-

" The facts of the present case are very different from those in Woolfson, and Adams; and I do not read the judgment in Adams based on Lord Keith's statement of principle in Woolfson as barring the piercing of the corporate veil in this case, in which the transfer of assets from Welwyn to Motors would otherwise enable the Breachwood group owned by Mr Ford and Mr Seaman to evade responsibility for the contingent liabilities to Mr Creasey for breach of his contract of employment.

The most important factor in this case is that Mr Ford and Mr Seaman, and through them Motors, themselves deliberately ignored the separate corporate personalities of Welwyn and Motors, and did so with the benefit of the advice of the solicitors acting for Welwyn and Motors.

Nothing I have seen in the evidence could justify their conduct in deliberately shifting Welwyn's assets and business into Motors in total disregard of their duties as directors and shareholders, not least the duties created by Parliament as a protection to all creditors of a company.

Welwyn was not put into liquidation. As a subsisting company it was entitled to retain its business and assets, so that they be available to pay a dividend however small to such of Welwyn's creditors as Motors decided not to pay.

Mr Ford and Mr Seaman decided instead to remove the business and assets of Welwyn to Motors, and, realising that the business could not be carried on satisfactorily unless Welwyn's trade creditors were paid, paid all their then actual creditors, but left Mr Creasey facing a defendant without assets. They did so in full knowledge of Mr Creasey's claim.

On the state of the evidence before me the inference could readily be drawn that one of the reasons why Mr Ford and Mr Seaman acted in the way they did was in order to ensure that Mr Creasey if he succeeded in his claim would not be able to recover anything. But I consider that it would be wrong to draw so strongly adverse an inference at this stage on only the affidavit evidence.

In all the circumstances, however, this is a case in which the court would be justified in lifting the veil and treating Motors as liable for this remaining liability of Welwyn."

15. Again the corporate veil was lifted to prevent the "evasion" of liability. In that case, it was a contingent liability but a liability nevertheless and one which would have been effectively evaded but for the lifting of the corporate veil.

16. In the present case, there was no evasion of any obligation or liability by the defendant. There was no liability or obligation on the defendant's part to evade. No liability or obligation on anybody's part existed until the charterparties were entered into. And it was Mitrans Panama who entered into the charterparties and who assumed liabilities or obligations to the plaintiff thereunder. The plaintiff chose to deal with Mitrans Panama without insisting on a guarantee.

17. Using a corporate structure to evade legal obligations is objectionable. The courts' power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations. But using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable. And the courts' power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create legal obligations.

18. It is no use for the plaintiff to say in argument that it relies on the award as opposed to the charterparties. The award is not against the defendant either. It is against Mitrans Panama. The plaintiff has not pleaded that the defendant had sent Mitrans Panama in as a facade for the purposes of the arbitration. Rather, the plaintiff's pleaded case is that the defendant had sent Mitrans Panama in right from the start as a facade for the purposes of the charterparties.

19. In my judgment, there is no need to proceed to the second limb of Mr Barlow's argument, namely the "otherwise an abuse of process" limb.

20. This appeal must, in my judgment, be allowed on the first basis relied upon by Mr Barlow, namely that the Statement of Claim discloses no reasonable cause of action.

21. I would allow this appeal so as to order the striking out of Statement of Claim and the dismissal of the action.

Liu, J.A.:

22. It is quite unnecessary to consider the question of abuse of process. If I had to, I would hold it against the defendant. For the reasons given by my Lord, Bokhary JA, I would also allow the appeal and make the order he proposes.

Nazareth, V.-P.:

23. I agree with my Lord, Bokhary JA and would only add the following.

24. Mr Kat submits, inter alia, that the plaintiff should be allowed to proceed to trial on the facts. He does so by reliance upon the following passage in the judgment of Mr Richard Southwell QC, sitting as a Deputy Judge of the High Court, in Creasey v Breachwood Motors Ltd and others [1993] BCLC 480 at 491 D, E:-

"The power of the court to lift the corporate veil exists. The problem for a judge of first instance is to decide whether the particular case before the court is one in which that power should be exercised, recognising that this is a strong power which can be exercised to achieve justice where its exercise is necessary for that purpose, but which, misused, would be likely to cause not inconsiderable injustice. The authorities which are collected in Gore-Browne and also in Gower's Principles of Modern Company Law (5th edn, 1992) provide only limited guidance as to the circumstances in which this power is to be exercised."

Plainly if the criteria by which the power to lift the corporate veil arises is simply that it will achieve justice and its exercise is necessary for that purpose, as Mr Kat suggests, then a quantum widening of what the Court of Appeal held in Adams v Cape Industries Plc [1990] 1 Ch 443 at 544 would be involved. But I do not read Mr Southwell as saying anything more than that in deciding whether the power should be exercised, the court should recognise that it is one that can be exercised to achieve justice where its exercise is necessary for that purpose but which, if misused, will be likely to cause not inconsiderable injustice. He was not seeking to remove altogether the very narrow confines within which the courts have placed the power to lift the corporate veil. Reference to Gore-Browne and Gower's Principles of Modern Company Law (5th edn) demonstrate that. Indeed, the latter states at p.133: "The court cannot lift the veil merely because it considers that justice so requires", adding in reference to that statement, in the relevant footnote: "See Cape[1990] Ch at p.537. English judges (apart from Lord Denning) have shown a marked reluctance to operate any such formula ...". That footnote must refer to the following passage in Adams v Cape Industries Plc:-

"Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A. Salomon & Co. Ltd [1897] AC 22 merely because it considers it just so to do."

I would also make the order proposed by Bokhary JA.