Heavy metal

Heavy metal

IN 1983, South African admiralty jurisdiction was revived from the obsolescence in which it had languished since the 1890 Colonial Courts of Admiralty Act. The revival encompassed some fairly revolutionary concepts, one of the more innovative being the associated ship provisions.

The sistership arrests provisions of the 1952 arrest convention enabled some shipowners to elude the strictures of the convention by clever corporate structuring, particularly through the registration of single-ship companies. This effectively constituted a means of limiting liability and, in the hands of an unscrupulous shipowner, of avoiding liability.

The associated ship provisions of the South African Admiralty Jurisdiction Regulation Act (AJRA) were a response to these practices. The AJRA allows the commencement of in rem proceedings by the arrest of an associated vessel or the arrest of an associated vessel to provide security for proceedings or arbitration contemplated, pending or proceeding anywhere in the world.

It has been said that the associated ship provisions constitute a statutory mode of piercing the corporate veil, as the court is enjoined to look beyond the corporate structures to seek the beneficial owners of the vessels.

Section 3(7) of the AJRA effectively provides that a vessel will be an associated vessel if it is owned at the time action is commenced by a person (which includes juristic persons) who owned the "guilty ship" or controlled the company which owned the "guilty ship" when the claim arose. Owing to the difficulties of proving such common ownership, especially as the claimant is at a great informational disadvantage, several deeming provisions are provided by Section 3(7)(b).

These include, "(ii) a person shall be deemed to control a company if he has power, directly or indirectly, to control the company." The Supreme Court of Appeal recently ruled decisively on the interpretation to be given to this deeming provision and this decision (The Heavy Metal, Belfry Marine Ltd v Base Maritime SDN BHD 1999 (3) SALR 1083 (SCA)) should result in an extension of the ambit of the associated ship provisions.

The Heavy Metal decision dealt with a situation where the companies owning the alleged associated vessel and the "guilty ship", were both registered in Cyprus, and a Cypriot advocate ('L') was the majority shareholder and sole director of both companies. It was alleged that the beneficial owner of the shares in both shipowning companies - and thus the ultimate repository of control of the companies - was the same person ('V') and hence that the vessels were associated. Alternatively, it was alleged that L held direct power to control both companies.

Beneficial ownership

There were several other factors indicating the possibility of common beneficial ownership. V was the managing director of the company which managed both ships. The vessels' names appeared to form part of a sequence. V was also the registered owner of ten per cent of the shares in one of the shipowning companies. Finally, one of the vessels of the fleet had previously been arrested on the basis of association, and security had been provided by the management company, of which V was managing director.

L alleged that V was not the beneficial owner of the majority of the shares in both companies and that he, L, was merely a nominee shareholder for undisclosed principals and, thus, that neither he nor V had the control over the shipowning companies which forms the central requirement of Section 3(7)(b) to prove an association.

The appeal court had to decide two crucial issues. Was it proven that the same person had the "power, directly or indirectly, to control" the two shipowning companies? And, if this were proven, does Section 3 (7)(b) operate as an irrefutable presumption.

The court ruled that the deeming provisions were designed to achieve finality and so would constitute irrefutable presumptions. The former issue provoked an interesting debate.

L had alleged that he operated as a nominee shareholder and director, possessing no discretionary power whatsoever. He was unable to act independently of his undisclosed principals. The court ruled that, as L was the majority registered shareholder, he had the power, in terms of South African company law, to exercise direct control over both shipowning companies. It was this decision that was appealed against.

It was argued that this would result in vessels being associated vessels where apparent control of the companies (the same majority registered shareholders) was the same and that the section was intended to apply only where actual power to control the two shipowning companies was the same.

Power to control

At the outset, the majority of the court defined "power" as being the power to determine the direction and fate of the company, rather than merely the power to control its management operations. The judgment was split on the more contentious issue of whether there could be two "repositories of power to control" (i.e., the de jure power of registered shareholders to control a company in terms of South African company law and the beneficial ownership of the majority shareholding or de facto power to control the company).

In deciding this issue, the majority made observations which will be important for the future interpretation of the act, as they noted that the purpose of the act was to assist the party applying for arrest rather than the party opposing the arrest, the reason being that the creditor is at a disadvantage in tracing the assets of the debtor (emphasising the informational disadvantage of the creditor).

Split decision

The majority decision held that the section referred to power to control directly or indirectly. The majority held that the clear meaning of this provision was that the presumption would operate where a person could be shown to have either de facto or de jure power to control both companies. A strong dissenting minority preferred a more restrictive reading, arguing that the intention of the provision was to enable the court to locate the actual seat of control and to brush aside the cobwebs of the corporate veil in order to do so.

Farlam AJA stated expressly that the intention of parliament was that there should be "only one criterion, namely power to control, and that, whether it is directly or indirectly, there can only be one person who has it for the purposes of this subsection" and hence be the determinative factor on whether there is, in fact, an association.

Both the interpretation favoured by the majority and that of the minority are plausible. One is left with the impression that the majority were motivated by what they held to be the purpose of the act as a whole - to assist a creditor labouring under an informational disadvantage in a field where assets are also highly mobile and elusive. On the other hand, the minority preferred a restrictive reading on account of possible bizarre consequences and the dire financial implications of an arrest.

The judgment should prove to be a seminal one on the AJRA. It will mean that, where it can be shown that the de jure (nominal) ownership of the majority of the shareholding in two shipowning companies is the same, the vessels belonging to the two companies will irrefutably be presumed to be associated vessels. This will facilitate the proof of association immeasurably, assisting creditors seeking to prove an association.

Deemed association

However, one is also uncomfortably confronted by the logical deduction that, where nominal ownership is the same, although the beneficial owners (holding actual control of the companies) might be completely unrelated, the vessels will irrefutably be deemed to be associated.

This inequitable consequence was discussed by the court, the majority again holding that it must have been foreseen by parliament. In view of the leaps of logic which so often emanate from parliament, one is bound to wonder.