Piercing the Corporate Veil in arrest of sister ships: A Paradigm Shift

by Ms Naghm Ghei, 4th year, BA LLB (Hons) Jindal Global Law School and Mr Ishaan Saha, 5th year, BA LLB (Hons) Jindal Global Law School

Owing to the transient nature of ships which are always in a state of motion, thus creating the likelihood of an errant vessel not being available for arrest, Article 3 of the 1952 Arrest Convention provides that a claimant may arrest not only the particular ship in respect of which a maritime claim arose but also “...any other ship which is owned by the person who was, at the time when the maritime claim arose, the owner of the particular ship...” India was brought under the ambit of this convention by virtue of the M.V. Elisabeth & Ors v Harwan Investment and Trading decision.

In practice, this power to vindicate a maritime claim through arrest of a sister ship is often rendered nugatory by the convoluted corporate structuring of entities by companies, into single ship enterprises, whose assets comprise of no more than the single ship plying on a voyage, in order to insulate themselves from liability to claimants. Owing to this peculiar commercial exigency in the business of shipping, in order to preserve the bite of the remedy of sister ship arrests, it becomes imperative that corporate laws on limited liability are interpreted in a manner cohesive to the objectives of admiralty law.

The courts have sometimes resorted to piercing the veil so that a common parent of a common parent of different registered owners of both guilty and sister ships is treated as liable for a claim against the ship to be arrested.

However the English courts have been reticent to lift the corporate veil for identifying sister ships unless separate companies have been created by a ship-owner to perpetrate a fraud, or where the corporate form is a mere sham or façade to conceal ‘true facts’.

While India has traditionally shown deference to the English criterions for disregarding corporate existence, in a deviation from the strict English norm of deeming corporate existence as sacrosanct, the case of Great Pacific Navigation (Holdings) Corporation Ltd. vs. M.V. Tongli Yantai in the Bombay High Court seems to evince a change in the trajectory of interpretations of ownership in piercing the corporate veil, where fraud is no longer an indispensable prerequisite. It concluded that the test is whether the entities in question exist as autonomous units or as organs of each other. The court looked beyond the registered ownership of the vessel, to determine the beneficial ownership. Though it was pointed out to the court that the veil could only be lifted when fraud was pleaded, the court observed that the principle behind the doctrine was a dynamic concept, and expanded its horizons.

Thus, this judgment is a landmark as it undermines the prerequisite of fraud for invoking the doctrine of lifting the veil, and recognizes the exigencies created by corporate structures prevailing in the shipping business, urging the courts to do complete justice upon equitable considerations. This judgment empowers the court to disentangle the corporate maze enabling the determination of the beneficial ownership of sister ships lying with the same entity, thus removing the impediments erstwhile plaguing the exercise of the power to arrest sister ships.