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India – M.V. Rainbow AC, A Case On beneficial Ownership.

23 May, 2013

The Bombay High Court was recently faced with a case which questioned the applicability of the International Convention on Arrest of Ships, 1999 (Arrest Convention, 1999), and whether it was permissible to arrest a beneficially owned ship relying on the said Arrest Convention, 1999.

 

Facts of the case

 

The Plaintiff who was the owner of a vessel entered into a Voyage Charterparty for the said vessel with Defendant No. 2 as charterers. Defendant No. 2 failed to pay detention charges to the Plaintiff under the said voyage charterparty and the Plaintiff sought to arrest the Defendant Vessel m. v. RAINBOW ACE on the ground that the vessel was in the same beneficial ownership as the voyage charterer i.e. Defendant No. 2

 

The Plaintiff argued that it had a maritime claim being a claim arising out of an agreement relating to the use and hire of a ship and sought to arrest the Defendant Vessel relying on Article 3(2) of the Arrest Convention, 1999. The Bombay High Court granted an ex-parte order of arrest following which the owners of the vessel entered appearance and filed an application for vacating the ex-parte arrest on the following grounds:

 

1. Whether the International Convention on the Arrest of Ships 1999, can be applied to the present dispute?

2. If yes, whether by virtue of Article 3(2) thereof, arrest of a ship beneficially owned by the person against

whom there is a maritime claim in respect of another ship, is permissible?

3. Whether the Defendant is in the beneficial ownership of Defendant No. 2?

 

Arguments of the Plaintiff and the Applicant

 

The Plaintiff argued its case on the Arrest Convention, 1999. The Applicant argued that the Arrest Convention, 1999, would apply only to cases for enforcing a contract involving public law character. The Applicant sought to rely on an abstract statement contained in a Supreme Court judgment in support of its argument.

 

On the issue of whether the arrest of a ship beneficially owned was permissible or not, the Plaintiff relied on Article 3 (2) of the Arrest Convention 1999 and argued that the words “Owned” and “Owner” contained therein included “beneficially owned” and “beneficial owner”.

 

The Applicant argued that the Arrest Convention 1999 itself is not applicable and hence neither would Article 3 (2) and further that Article 3(2) only means registered owner and not beneficial owner.

 

On the third issue which was whether the Defendant Vessel was in the beneficial ownership of Defendant No. 2, the Plaintiff argued that the Defendant Vessel and Defendant No. 2 are beneficially owned by a common beneficial owner and hence the Plaintiff was entitled to arrest the Defendant Vessel for its claim against Defendant No. 2. The Plaintiff relied on Article 3(2) of the Arrest Convention 1999 and on certain documents which according to the Plaintiff showed interlia common address and common directors as evidence of beneficial ownership.

 

Decision of the Court

 

The Bombay High Court disagreed with the Applicant on the applicability of the Arrest Convention, 1999, to enforcing contracts involving a public law character and held that the Arrest Convention, 1999, was applicable in India and could not be restricted to the enforcement of contracts involving public law character.

 

The Bombay High Court also held that the Court can arrest a vessel under beneficial ownership for a maritime claim under Article 3 (2) of the 1999 Arrest Convention and that it is permissible to arrest a ship beneficially owned by the person against whom there is a maritime claim in respect of another ship. The Court considered several Supreme Court judgments and judgments passed by various other High Courts in India and also several English Judgments including the Aventicum and Evpo Agnic and held that arrest of ships beneficially owned was permissible.

 

On the issue whether the vessel was in the beneficial ownership of Defendant No. 2, the Court held that on the basis of the evidence and documents before it, the Plaintiff failed to show that the Defendant Vessel was in the beneficial ownership of Defendant No. 2 and hence vacated the order of arrest.

 

Significance of the judgment

 

In the writer’s opinion, even prior to the present judgment, it was possible to arrest ships beneficially owned under Indian law provided the necessary link between the beneficial owner and the ship beneficially owned could be established. Further, the Arrest Convention, 1999, has been regularly relied upon by the Bombay High Court, other High Courts in India and the Supreme Court of India. Indeed the Bombay High Court has previously held that it is possible to arrest a ship for security in aid of foreign arbitration under the Court’s Admiralty jurisdiction relying on the Arrest Convention, 1999. To that effect, the recent judgment does not alter the position but the judgment nevertheless assumes significance in as much as it supports the above position and categorically holds that the Arrest Convention, 1999, applies and further that arrest of ships beneficially owned is permitted.

 

Turning to the issue whether in the present case, the necessary link between the beneficial owner and the ship beneficially owned was established, pertinently, although the Defendant relied on Article 3 (2) of the Arrest Convention, 1999, it was not the Plaintiff’s case that Defendant No. 2 beneficially owned the Defendant Vessel which is what its case ought to have been but instead that both Defendant No. 1 and Defendant No. 2 were beneficially owned by a common beneficial owner and hence the Plaintiff was entitled to arrest the Defendant Vessel for a claim against Defendant No. 2. In the writers opinion Article 3 (2) does not support such a proposition.

 

The Court recognised that the Plaintiff’s case was not that Defendant No. 2 beneficially owned the Defendant vessel and that the Plaintiff’s case involved lifting of the corporate veil to determine who is the real person liable in an action in personam or to determine the real person against whom the Plaintiff has a maritime claim.

 

The Court observed that such an enquiry was completely different from an enquiry as to whether a ship beneficially owned can be arrested and held that Indian as well as English cases were against lifting the corporate veil as suggested by the Plaintiff, absent a case of fraud. The Court held that fraud has to be alleged to lift the corporate veil and simply alleging beneficial ownership through common address, common signatures and common directors without supporting evidence is not enough to lift the corporate veil to ascertain the real owner.

 

Conclusion

 

This judgment clarifies the position with regards to applicability of the International Convention on Arrest of Ship, 1999. Further, the judgment also allows arrest of ship under beneficial ownership for a maritime claim. What is important is that the claim should be on the premise that the party liable for the maritime claim is the beneficial

owner of the vessel sough to be arrested. If the necessary link between the beneficial owner and the ship beneficially owned is established prima facie, there is every reason to believe that the Courts will allow the arrest.

 

This article was supplied by Clasis Law

 

For further information, please contact:

 

Harsh Pratap, Partner, Clasis Law
harsh.pratap@clasislaw.com
 

Shipping Maritime & Aviation Law Firms in India

 

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