Shrikant Hathi (managing partner) and Dorothea König (visiting associate), Brus Chambers
A successful appeal in India on 14 October 2011 has led to three significant results: the possibility of a pan-India arrest jurisdiction when working through the Bombay High Court (for all other high courts, such as Calcutta, Chennai and Gujarat, jurisdiction is within state territorial waters only); that admiralty jurisdiction can be acquired when the warrant of arrest is executed on the ship even while it is outside territorial waters (whereas before, in India, this could only be executed when the vessel was in Indian waters); and the recognition that one-ship companies need to be scrutinised closely to ensure they are legal entities – or just shell companies being used to cover up the link between sister ships in order to avoid arrest of a sister ship.
The appeal was launched by Great Pacific Navigation (Hong Kong) at the Bombay High Court to arrest Chinese-registered Tongli Yantai in Chennai, for security in respect of a claim pending arbitration, against Tongli China. It was argued that Tongli Yantai was the sister ship of the Nasco Diamond that Great Pacific had chartered to Tongli China and which had sunk.
The result of this successful appeal concluded: Tongli Yantai was registered as a one-ship company and was owned by Halycon Ocean Shipping Companies. Therefore, it was argued, it was not a sister ship to the Nasco Diamond. But Great Pacific argued that Halcyon was a shell company and that the true owner was Tongli China, thus making the vessels sister ships.
The appeal court overturned the original ruling, which had refused to consider Halycon as a shell company or to record any fraud, releasing the Tongli Yantai from arrest. It observed that the test of a company as a shell company is to see whether it exists as an autonomous unit or as an essential organ to a network of companies.
This decision will help to untangle the complex web behind one-ship companies that masks the real owner and, in this case, effectively detaches a ship from sister vessels, thus making it difficult to access these assets because the real owner is unknown.The one-ship company concept limits the financial liability of the individual company or group of such companies. As such, they are valid commercial entities but they are expected to have their own corporate structure, sufficient for their separate distinct presence.
Courts cannot countenance the presence of an entity that causes injury, damage or injustice to creditors or other third parties. A one-ship company must show that it is a distinct legal entity with capability to meet its distinct and separate liabilities. It should have: a place of business, shareholders and management distinct and separate from the group of companies so as not to rely upon the assets or control of those companies for its survival. If this is not the case, the one-ship company would not be a distinct incorporated entity at all and would be merely a cover for the companies or the individual behind it.