Case: Great Pacific Navigation (Holdings) Corporation Limited Vs. M.V. Tongli Yantai

2. The appellants claim arose from an agreement entered into by the appellant with one Tongli Shipping Company Ltd. Samoa (hereinafter referred to as Tongli Samoa) under aagreement with the appellant in respect of a ship, Nasco Diamond. The appellant had chartered the ship from one Da Sin Co. Ltd. (hereafter referred to as Da Sin). The ship sank. Da Sin raised the claim upon the appellant who in turn raised the claim upon its charterer, Tongli Samoa. The appellant has sought recourse to arbitration under the arbitration agreement between the appellant and Tongli Samoa. We are not concerned with the respective cases of the parties therein under the saidTo secure the award which may be passed in the arbitration proceeding, the appellant has sued the respondent for arrest of its ship and other incidental reliefs. It is the case of the appellant that Tongli Samoa, against whom the appellant has raised a claim is the sister concern of one Tongli Shipping Co. Ltd., China (hereinafter referred to as Tongli China) who beneficially owned Nasco Diamond as also the respondent ship, Tongli Yantai. Tongli China incorporated a number of shell companies including Tongli Samoa which is a sham and a facade for Tongli China. The arrested ship is of the registered ownership of one Halcyon Ocean Shipping Companies Ltd.(hereinafter referred to as Halcyon). It came to be initially arrested upon which the respondent sought to have the ship released from arrest. The impugned order came to be passed releasing the ship which has been challenged by the appellant.3. The appellant has shown that the Tongli China entered into a Memorandum of Agreement (MOA) on 17th March, 2010 with one Quing Shan Shipyard for purchase of Tongli Yantai at a price of US $31.8mn. Tongli China made payment of only 10% of the purchase price. 60% of the purchase price was financed by one Far East Horizon Ltd. (FEHL). Halcyon is the subsidiary of the subsidiary of FEHL. FEHL, however, is only the financer of the ship. Hence even pursuant to its holding in Halcyon, Halcyon would not become the beneficial owner of the ship by payment of the purchase price. Halcyon entered into aagreement with one Eastshine Ltd. (hereinafter referred to as Eastshine) who paid the remainder 30% of the cost of the ship as advance charter hire. For the appellant to be lawfully entitled to keep arrested the respondent vessel, the appellant would have to show that the beneficial owner of Tongli Yantai is not Halcyon but Tongli China, the sister concern of Tongli Samoa in the Tongli Group of Companies who also beneficially owned and controlled Nasco Diamond. The appellant has produced documents relating to the purchase of the ship contained in the MOA, theagreement between Halcyon and Eastshine as also the prospectus of FEHL showing its share holding and its consequent control and interest in Halcyon, the registered owner of Tongli Yantai.4. It is the claim of the respondent that the registered holder is the real and the only owner of the respondent ship as held in various Judgments referred by the respondent which shall be considered presently. The appellant has relied upon several Judgments showing that the beneficial owner of the respondent ship has to be seen and appreciated by the Court and once it is seen that the Tongli China is the beneficial owner and the appellant shows that Tongli Samoa is its sister concern, the arrest of the ship Tongli Yantai would have to be maintained. The appellant would, therefore, have to show the group of companies that the appellant claims is the Tongli Group of Companies, their share holdings, their addresses and other particulars as also the persons in management and control of both the companies within the group and their acts of management. This, the respondents claim, is not within the ambit of the admiralty court upon a maritime claim. Their contention is based upon the fact that the beneficial ownership has not to be seen. If it has to be seen by virtue of making inquiries into the various documents of the two companies showing the share holdings as also the control and management of the two companies, it would tantamount to lifting of the corporate veil which is not permitted.5. The appellant sought disclosure and inspection of various facts and documents some of which have been offered and some of which yet refused. The appellant has relied upon and shown the Court the evidence produced by the respondent itself and the respondent has taken exception to produce any further evidence or documents or to show any further facts as not within the realm of the inquiry in the suit and which could be directed by the Court only upon lifting the veil of incorporation of the respondent as also Tongli Samoa which the respondent claimed cannot be ordered.6. The learned Single Judge has seen and considered each of the above mentioned documents with regard to the ownership of Tongli Yantai, but has preferred not to raise the veil. That is the seminal grievance of the appellant in this appeal. The learned Judge has refused to lift the veil of incorporation of Halcyon on the ground that Halcyon is not claimed to be theof Tongli China and the relief of arrest is made only against Halcyon. The learned Judge has refused to lift the veil of incorporation of Tongli China or Eastshine on the premise that they are not sued. It may be mentioned that the aspect of raising the corporate veil in this case would have be considered as a whole upon the interwoven facts relating to each of these parties and not separately between the appellant and one of them.

Reasoning: 15. After seeing the evidence produced by the appellant to demonstrate the beneficial ownership of Tongli Yantai by Tongli China and the relationship between Tongli China and Tongli Samoa the learned Judge has concluded that Tongli China and Tongli Samoa cannot be taken to be sister companies and that the beneficial ownership of Tongli China has not been established. Consequently the learned Judge has also negatived the contention that the Tongli China was the real charterer of Nasco Diamond through itsTongli Samoa but has chosen not to raise the veil of incorporation as urged by the appellant. It is appreciation of such evidence, which would demonstrate the specific fact situation in this case, which would require reconsideration.It is the appellants case that Tongli Yantai is beneficially owned and controlled by Tongli China who incorporated a number of Shell companies including Tongli Samoa, Halcyon as also Eastshine and one Rainbow Success Ltd. (which shall be referred to presently). These companies are a mere facade and Tongli China was the real charterer of the appellants vessel Nasco Diamond so that the title/ownership of Nasco Diamond itself vested in Tongli China making Tongli Yantai its sister ship.FEHL global offering prospectus showing the companys structural and financial position inter alia sets out the direct financial leasing terms of its business. It underscores the fact that although FEHL as the lessor would have the legal ownership of the asset underlining the lease in the direct financial leasing transaction, the risk and rewards of ownership are transferred to the lessees so that those lessees are not recorded in the balance sheet of FEHL or its group companies. This shows that BBC is, therefore, in fact only the security for recovery of loan, the risk and rewards of ownership having been transferred to Eastshine thereunder, it reflecting only a financial arrangement between the parties thereto. This also explains clause 51 of the BBC showing how the risk and rewards would be transferred to Eastshine by payment of the difference at the time of the net sale upon the termination sum beingfrom the fact that under the BBC, Eastshine had to pay Halcyon 30% of the value of the ship as advance charter by way of upfront payment, Tongli China guaranteed the payment by Eastshine to the shipyard. The rider clauses in the BBC show the personal guarantee of WWD, the 80% share holder of Tonglithough Tongli China was shown earlier it has ceased to be shown after the arrest of the ship. There is, therefore, a change in the insurance certificate by which Tongli China is no longer shown with regard to Tongli Yantai just as WWD was sought not to be shown as the President of Tongli China in later Lloyds list.Despite the fact that under thepayments were to be made each month of specified amounts mentioned in the payment table schedule I to the BBC, under Clause 38.1 Eastshine was to pay US $ 10.8mn. as upfront payment which amount came to be paid on 23.04.2010 itself. This included the amount paid as deposit by Tongli China under the MOA to the shipyard being 10% of the value of the share in a sum of US $3.18mn. It is argued that 10% of the total value of the ship was paid by Tongli China and 30% by Eastshine. However US $ 10.8m repaying 30% of the value is shown to include the initial payment of 10% for which credit is stated to have given by Halcyon tothough claiming to be the real and beneficial owner of the ship, who could not mortgage or transfer its title to the ship without the permission of its charterer Eastshine and who had indemnified the charterer against any loss caused by a claim made upon it and had undertaken to release the ship from arrest has sought to terminate the BBC because it could not get the ship released from arrest itself! The charterer Eastshine seems to be wholly unconcerned; it has neither applied to be a party nor applied to release the ship from arrest nor sought to make any claim upon Halcyon for the indemnity given.45. A reading of theunmistakably shows that the only relationship between the two contracting parties is of Halcyon having been nominated by Tongli China under its corporate guarantee along with guarantee of Rainbow Success, its sister concern and the personal guarantee of WWD, the 80% share holder of Tongli China to recover specified amount and then call it a day. Once that is through, Eastshine, the other sister concern of Tongli China as reflected in the aforesaid evidence, would be entitled to the rights of ownership as also the difference of amount keeping intact its position free from encumbrances such as transfer by mortgage or otherwise by Halcyon to any other party.It would have to be seen whether the facts of our case show sufficient documentary evidence thus far produced to see whether the owners of Nasco Diamond, the ship that sunk whilst under thebetween the appellant and Tongli Samoa were essentially the same as the beneficial owner of Tongli Yantai the ship of Halcyon and whether the documentary evidence is sufficient to show the beneficial ownershipthere was only one ship which came to be arrested the ownership was different. The Defendant in that case was the charterer of the Plaintiff. The Defendant itself owned the ship. The Defendant itself was sued as the owner of the ship. But the Defendant contended that another person was the owner. The Defendant however owned 80% share in that company much like WWD held 80% in Tongli China whilst the ship of Tongli Samoa, Nasco Diamond came to be arrested. The Court saw the evidence that aside from the Defendant holding 80% of the shares in the other company, the Defendants son and daughter owned the remainder 20% of the share as the Defendants nominees and hence concluded that the Defendant was the beneficial owner at all material times as was the conclusion in Aventicum[1978] 1 Lloyds Report 184 QB (Admiralty Division).The Singapore Court of Appeal considered each of the facts of EvpoAgnic [1988] 2 Lloyds Report 411 = [1988] 1 W.L.R. 1090 (CA)showing how the two ships of two sister companies amongst a fleet managed by one President and Vice President were involved in the suit in which a claim was made in respect of one ship which sank. The claim was not allowed by way of arrest of another ship. In EvpoAgnicit was observed that that was not the sister ship of the owner of the ship which sank but the ship of a sister company of that company which was not the owner of the ship which sank. However the Singapore Court observed:Both companies wereshipowning companies and both had the same officers and shareholders.After dealing with this fact situation the Singapore Court of Appeal rejected the ratio decidendi in EvpoAgnicwhich was set out in its last para thus:The above passage (coming at the end of his judgment), in our respectful view, was the ratio decidendi of that decision, and, with respect, it was unnecessary for his Lordship to say that the word owner in S. 21(4)(b) of the Supreme Court Act 1981 in relation to a registered ship means theowner. In our opinion,Evpo Agnic is not an authority for the proposition that the wordin S.21 (4) (b) (which is the equivalent of S.4(4) of our Act) means theowner.Consequently EvpoAgnic [1988] 2 Lloyds Report 411 = [1988] 1 W.L.R. 1090 (CA)of the Court of Appeal of UK has been dissented from by the Court of Appeal of Singapore several years later thus:We are unable to accept the construction that the wordin S.4(4) means theowner. First, registration of a ship does not determine and is not conclusive as to the true ownership of the ship. It is prima facie evidence that the registered owner is the owner of the ship. Secondly, although the wordin S.4(4) can be contrasted with the wordsowned in paras (a) and (b), there is nothing to suggest that the wordshould be restricted only toowner. It can be validly read and construed more widely thanowner. Thirdly, it is significant to note that the person who would be liable in personam and against whose ship an action in rem may be brought is not confined merely to theof the ship in question but extends to other categories of person, namely, charterer or person in possession or control of the ship. Each of these categories has a substantive, and not merely a formal or nominal, role in relation to the ship in question. In the context of these words, the wordcannot be construed to mean only theowner. If this narrow construction is adopted, the consequence would be that no action in rem would lie against an offending ship whose owner having bought it fails or refuses to register it in histhe contention raised and the answer to the contention in EvpoAgnic [1988] 2 Lloyds Report 411 = [1988] 1 W.L.R. 1090 (CA)relating to the companies being under the same President/Director and considering the ambit of the term beneficial owners respectively and the conclusion that only the registered owner was the owner under Section 21(4)(b) of the Supreme Court Act, 1981 and also considering the concept of beneficial ownership in The Maritime Trader 1989 (2) Lloyds Report 153 QB (Admiralty Division)(supra), the Court held that it was not proved that the two ships were sister ships and the corporate veil need not be lifted.78. In the case of LiverpoolLondon S. P.I Association Ltd. Vs. M. V. Sea Success I (2004) 9 SCC 512the Supreme Court of India, Per Justice S.B. Sinha considered the insurance claim under the protection and indemnity cover of the PI Club in respect of sister vessels. In that case the first Defendant vessel was owned and/or controlled by Defendant No.2 company through its wholly owned subsidiary. The second Defendant was the owner of the vessel and accordingly held to be the party liable in personam in respect of Plaintiffs claim. The Plaintiff claimed Defendant No.2 to be the beneficial owner and hence entitled to proceed against it by way of arrest for recovery of its outstanding insurance premium. In paragraph 144 of the Judgment it was held that the beneficial ownership of a ship is a mixed question of fact and law. It accepted the dictum laid down in the earliest case of Aventicum[1978] 1 Lloyds Report 184 QB (Admiralty Division)giving the Court the right to investigate the beneficial ownership and for which to be able to pierce the corporate veil. Referring to the Judgment of Justice Brandon in Andrea Ursula [1971] 1 Lloyds Report 145 = [1973] 1 QB 265,in Aventicumand Justice Goff in I Congreso [1978] 1 AER 1169 QB (Admiralty Division)the Court held that:the Court has the power and should in some cases look even further.The Supreme Court again accepted the dictum in Andrea Ursularegarding the legal and equitable title of the person owning the ship being the legal or equitable owner or the person in full possession and control and having all benefit and use of the ship which a legal and equitable owner would ordinarily have. Since the Court was deciding only the aspect of rejection of Plaint under Order 7 Rule 11 of the Code of Civil Procedure in that case, the Court left the matter of ascertaining the ownership of the ships as sister ships or otherwise to the trial Court at appropriateit was pointed out to the Court that veil could be lifted only when the fraud was pleaded, it observed in para 25 of the Judgment that the principle behind the doctrine was a changing concept and expanded its horizons. Hence it was held that if any corporate entity was abused for an unjust or inequitable purpose, the Court would not hesitate to lift its veil to look into the realities so as to identify the person who was guilty and liable therefor. In the facts of that case however the Court saw that the company in whose name the ship was registered was already registered prior to the contract having been entered into by the Plaintiff with the company whose ship was concerned in the maritime claim. The Court, therefore, concluded that it could not be said that with a view defraud the Plaintiff company, the other company was formed or that it purchased that ship. Though the Court accepted the ratio in the case of KapilaHingorani Vs. State of Bihar (2003) 6 SCC 1that when the corporate entity is found to be opposed to justice, convenience and interest of the revenue or workmen or against the public interest the veil could be lifted, it observed that in that case since the company was already formed and the ship arrested was already owned by that company prior to the date of the contract it would not defraud the Plaintiff in its capacity as a creditor. In that case it was alleged that the company owning the vessel was a single dollar company registered in Marshal Islands and, therefore, should be treated as a dummy company. That contention was not accepted as no evidence in that regard was produced. Similarly there was nothing to show that the company owning the ship was the subsidiary of the company against whom the claim was made. Since the conditions requiring lifting of the veil of incorporation were not satisfied, no relief was granted.A reading of the jurisprudence with regard to the doctrine of the lifting of the veil of incorporation more specially in maritime contracts from the earliest case of Aventicum[1978] 1 Lloyds Report 184 QB (Admiralty Division) considered in the later Judgments, the legal situation that arises is that if it is prima facie shown by the appellant that there is a concerted effect in incorporating a company either as a sister company or as a subsidiary company which are under the management and control of a single company or a single person so that the assets of these companies are not distinguishable and cannot even be applied differently for the satisfaction of the claims of the creditors of those companies and if an arrangement engineered to keep several companies within the group and hold of a single company or an individual is established which would result in an illegality or inequity, the veil of incorporation would be lifted to see the reality. Sincecompanies can be legitimately incorporated by a single individual to limit the liabilities, it would have to be shown that the incorporation ofcompanies is not only to limit liabilities but goes much further either to create a sham entity to avoid a contractual liability or to have a one dollar company which would be incapable of discharging its own liability thus limited by its incorporation.companies would, therefore, be permitted to operate as separate companies having separate individual distinct legal entity if they would be able to discharge and capable of discharging their own separate liabilities. In such an event, the company having a larger capital base in the group of companies would not be held liable for their claims. However it is impossible to accept that the law would permit a dollar company to be incorporated to limit the liability of a million dollar company by its incorporation since the dollar company would be incapable of discharging its own liability for its single ship. Hence though such companies are allowed to function, they are expected to have resources and reserves enough for them to so function. In other words they should be capable of standing on their own feet as juristic persons and not have to lean upon the shoulder of any other companies in their group. Consequently they would require to be separately incorporated, to have their individual separate management, (though that management may be the same as other companies of the same group), they would maintain their separate accounts and would be amenable to making the disclosure of their statutory documents accounts and management structure. Consequently when that is not the case and the dollar companies are incorporated more specially in the incorporation havens where statutory disclosure is neither made nor permitted and where it is shown that they are not indeed separate legal entities, they having been governed and controlled by a single individual or a company and are even sought to be brought within protective umbrella of such individual company for the very transaction that is the subject matter of the dispute, the permissive statute enabling them separate incorporation would be to play mischief and take advantage of their incorporation.In the facts of our case, upon the material brought on record by the partial disclosure made by the respondent upon the persistent querries of the appellant after the filing of the Suit and making their initial claim, WWD is shown to be the person calling the shots. Halcyon is ther company in whose name the arrested vessel is got registered. Tongli Samoa is incapable of managing its affairs independently of Tongli China. In fact, Tongli Samoa has been under the protective umbrella of the WWD, the 80% shareholder of Tongli China in the Tongli Group of Companies. The documents reveal Tongli China having proposed an insurance cover for various ships including Nasco Diamond and WWD having written a letter for settlement of the claims of Tongli Samoa for the liability of Nasco Diamond. The documents show a further labyrinth involving therein Halcyon, the company which obtained the guarantee from Tongli China and the personal guarantee of WWD including the corporate guarantee of Rainbow Success for the charter hire of Eastshine though claiming to be aof FEHL. The registered records indeed show the issue and paid up share capital to be HK $1. Consequently WWD would fit the place of Mr. Orri enumerated in The Able Lieutenant [2003] Part 3 Case 4 [HCM]referring to The Saudi Prince [1982] 2 Lloyds Report 255 QB (Admiralty Division)and NWD being seen to be his nominee as the children of Mr. Orri. The documents produced in this case either through the efforts of the appellant or upon the disclosure by the respondent are diametrically opposite of the documents produced in Kim Dong [2001] 1 Calcutta Law Times 367 (DB) and show the pyramidal structure raised with WWD of Tongli China who protected Tongli Samoa and who sought to give a personal guarantee to Halcyon for the charter of Tongli Yantai upon awhich has been terminated not on account of the breach of the charterer or the arrest on account of such breach by the charterer, but strangely upon the arrest on account of the corporate position of Halcyon in the web of Tongli China, Tongli Samoa, EastshineRainbow Success all controlled ultimately by WWD. In The Kapitan Temkin [1998] 2 SLR(R) 537 = [1998] SGHC 427though on the facts of the case, the beneficial owner was not seen to be another individual who owned the other ship arrested and corporate veil was not required to be lifted, it was held that if the situation permitted it would be. It would be a wholly different situation in this case upon Tongli Samoa being seen to be the puppet of the puppeteer WWD as in Antonio Gramsci Shipping [2011] EWHC 333 (Comm) QB (Commercial Court).Consequently under the presently expanding scope of the doctrine of the lifting veil of the incorporation, as in Renusagar1991 (70) CC 127 SCit is seen that this is a fit case unlike all the above, deserving of that equitable judicial exercise. It would, therefore, be myopic to turn a Nelsons eye to the gross facts on record showing the outlandish reach of WWD and the egregious sweep of his control by way of his own actions to constitute only one dollar company which cannot be taken to becompany capable of discharging its financial liabilities. Such being the respondents vessel Tongli Yantai, the Court would be failing in its duty if it let go Tongli Yantai from arrest legitimately made as fortified by the evidence at least later brought on record upon partial disclosure made by the respondent.The argument of Mr. Dwarkadas that all the shares of the ship were to be in a single person who would be entitled to sell, alienate or dispose of the ship, which is not shown in this case, is shown by Mr. DVitre not to apply to this case. The expression all the shares in Section 21(4) finds no parallel in any law in India. Section 4(4) of the High Court (Admiralty Jurisdiction) Act has its parallel in Singapore. Mr. Dvitre rationally contended that in the absence of any statute analogous to the Supreme Court Act, 1981 in India only the Geneva Convention, 1999, upon which the appellants case is founded, is applicable. Common law applies in India as one of the commonwealth nations. That is the law of justice, equity and good conscience. It is only to the extent to which there is a specific legislation in a given area that that statute would apply in India. In England the Supreme Court Act, 1981 would apply for considering the definition of ownership of a ship under Section 21(4) thereof. The common law would continue to apply in India for want of any otherthough the registration was effected later, they could sell or dispose off the ship and hence were held to be the owners as respects all the shares in the vessel. The emphasis of Mr. Dwarkadas upon the contention all in British Statutes and various judgments would not apply with the same force in India. The capability of sale of the ship is the yardstick. In this case that capacity is shown to be upon WWD who is the 80% shareholder of Tongli China acting through Tongli China, his admittedly registered company which sought to insure Nasco Diamond and he personally seeking to settle the claim of Tongli Samoa in the Tongli Group of companies and NWD his obvious nominee shown as the Secretary/Director of Halcyon acting in consort. The name of the Defendant vessel itself betrays its antecedents in the Tongli Group of companies which are in maritime business.88. It is contended on behalf of the Defendant in the cross Appeal filed by them that the acceptance by the learned Single Judge of beneficial ownership under Article 3(2) of the Arrest Convention of 1999 is erroneous. In view of the Judgments showing the scope of its applicability to maritime transactions between private parties cited above and above discussion by explaining the scope of the doctrine of piercing the corporate veil upon the exigencies of modern commercial and maritime trade, we do not find the learned Judge in error upon the acceptance of the beneficial ownership.89. Similarly it is argued that since the appellant can pursue arbitration only against Tongli Samoa in respect of their claim against Nasco Diamond, the involvement of Tongli China even as the beneficial owner of the Defendants ship would be out of the scope of arbitration and hence must not lead to the arrest of the ship. This argument is whollythe learned Judges view in that regard is correct and requires no interference except for the observation that the appellants Suit is akin to an application under Section 9 of the Arbitration and Conciliation Act. The sum total of these two aspects is that the Arbitration would be only in respect of the loss alleged by the appellant to have been caused to the cargo and the crew which the appellant may prove against Tongli Samoa, who was the subcharterer, but award, if any, obtained by the appellant against Tongli Samoa may be satisfied by the sale of the arrested ship Tongli Yantai, which is beneficially owned by Tongli China the sister concern of Tongli Samoa.