Member Article

Readers familiar with South Africa’s associated ship arrest provisions will recall that in terms of sections 3(6) and (7) of the Admiralty Jurisdiction Regulation Act No. 105 of 1983, a ship, other than the one in respect of which the relevant maritime claim arose, may be arrested to enforce the claim or to obtain security for it. 

An associated ship is one that is owned, at the time when the action is commenced:

• by the person who was the owner or charterer of the ship concerned at the time when the maritime claim arose;
• by a person who controlled the company that owned or chartered the ship concerned when the maritime claim arose;
• by a company that is controlled by a person who owned or chartered the ship concerned when the maritime claim arose; or
• by a company that is controlled by a person who controlled the company that owned or chartered the ship concerned, when the maritime claim arose.
• In each case the association can only be established in the case of a claim against an owner, by tracing an association from the owner; and in the case of a claim against a charterer, by tracing an association from the charterer.

In terms of section 3(7)(b)(ii) a person (natural or artificial) is deemed to control a company if it has the power, directly or indirectly, to control the company. Actual shareholding reflects the direct source of control over a company where voting rights are commensurate with shareholding. Indirect control can be exercised in a number of ways, for example, by a principal over a nominee shareholder or where “pyramiding” takes place.

The test is factual and involves proof of the ability of the common component (be it the person that controls de jure or de facto) to steer the direction of the company.  In that respect the question is whether the common component has the legal right to oblige the company/ies to take a particular course of action against the wishes of all others with an interest in the company/ies concerned.  It is therefore necessary to identify with whom the ultimate legal power over the company/ies concerned vests and that such sources are common.

ENS recently had occasion to consider an allegation of association between two ships, in circumstances where the associated ship was owned by a company whose two shareholders each held 50% of the shares in the company.

The matter raised again the interesting question regarding the interpretation of ‘control’ as contemplated by section 3(7) of the Act, and more particularly whether 50% equity in a company confers the requisite control as contemplated by the Act.

The fact that the test for control involves proof of the ability of the common element to steer the direction of the company is well illustrated by the judgement in the matter of mv “ALS Express”: Kherson Shipyard v mv “ALS Express” (unreported judgement, Durban & Coast Local Division, A55/2001, 11 July 2002) in which the court found that the claimant could not prove that the common component owned more than 50% of the shares in the companies concerned. On that basis the court found there to be no common control.  This finding was based on the fact that the claimant did not argue against the contention that a 50% shareholding was insufficient to establish control.

In this regard, in the matter of re The News Corporation Ltd (1987) 70 ALR 419 (FC of Australia) Bowen CJ rejected the argument that a company’s power to appoint only half of the board of another company did not put it in a position to exercise control of that other company, and that a power of veto does not constitute control in the relevant sense, which exists only where there is a power to get one’s own will. Control, the learned judge held, is a power “to exercise restraint or direction”; a power to veto is a power to restrain, and hence to control. He pointed out that this view of control accords, in general, with the view of the concept taken by the New South Wales Court of Appeal in North Sydney Brick & Tile Co Ltd v Darvall (1986) 10 ACLR 837 CA (NSW) 844. And see Re Kornblum’s Furnishing Ltd; Blair v Wade 1982 VR 123 132–34; Re Herald & Weekly Times Ltd (1983) 7 ACLR 821 SC (Vic) 838; Fraser v NRMA Holdings Ltd supra.

This argument was not run in the matter of the mv “ALS Express” but was run in the matter of mv “La Pampa:  Louis Dreyfus Armateurs SNC v Tor Shipping 2006 (3) SA 441 (D) and mt “Berg”: SLS Shipbuilding Co Ltd v mt “Berg” SCOSA B415 (CPD), in which it was rejected and the judgement in the mv “ALS Express” confirmed.

Being decisions of a single Judge, the “mv La Pampa” and “mt Berg” decisions will be persuasive, but not binding, on any other judge who might be called on to consider the matter in future. These decisions are briefly discussed below.

The mv La Pampa was arrested by TOR Shipping Ltd (“TOR”) on 2 December 2002. Pursuant to the arrest of the mv La Pampa, Louis Dreyfus Armateurs SNC (“LDA”) applied to have the arrest set aside asserting, inter alia, that the mv La Pampa was not an associated ship of the ship in respect of which the claim arose.

TOR advanced the argument, based on an interpretation of Smalberger JA’s judgement in the well-known MV Heavy Metal judgement, that in cases where two parties own equal shares in a company, they are both said to indirectly control that company since without the concurrence of both shareholders, no decisions of any significance can be taken.

The court (Tshabalala JP) was, however, not persuaded by TOR’s argument and held that LDA could not be said to be in control of the company, given that it was common cause that it held only 50% of the shares. The court held that in such circumstances, LDA could not be said to be in control of the company given that no binding resolution could be taken by LDA alone.

In the matter of the mt Berg (a decision of Mitchell AJ (Western Cape Division), SLS Shipbuilding Co Ltd (“SLS”) obtained an order for the arrest of that vessel as an associated ship of the ship in respect of which SLS’s claim had arisen, on the basis that she was owned by Unicorn Tankers (International) Ltd (“UTI”), the second respondent and SLS’s debtor.

Following the arrest, Petrochemical Shipping Limited (“PS”) intervened in the application and asserted that it was in fact the registered and legal owner of the mt Berg. In response to PS’s intervention, SLS sought to maintain its arrest on the basis that UTI and PS were controlled by the same entity, namely Unicorn Shipping (Pty) Ltd, alternatively Grindrod Ltd. In answer to that, PS adduced evidence to show that its shares were held as to 50% by IVS Unicorn International Ltd and as to 50% by Engen Petroleum Ltd.

The court, agreeing with Tshabalala JP in the mv La Pampa matter, held that the de jure control of the intervening party was divided equally between its two shareholders: while it was recognised that each had the power to ‘deadlock’ the company, they did not have the power to determine the company’s direction and fate without the co-operation of the other, and accordingly the arrest was set aside.

The sustainability of an arrest of an associated ship that is challenged often turns on the strength of evidence that is placed before the Court in support of an association, or against association. However, where it is objectively established that the equity of a ship owning company is in fact held jointly by two different shareholders, and that neither shareholder wields control over the other, or has relinquished or vested control to or in the other, a court might very well be persuaded that the requisite ‘control’ as contemplated by the Act is absent, as was held by Tshabalala JP and Mitchell AJ in the mv “La Pampa” and the mt “Berg” decisions.

The judgment in the matter of the mv “Guangzhou : China National Chartering Co Ltd v the mv “Guangzhou SCOSA C197 (Durban) is illustrative of how a company’s articles of association, by providing a mechanism to deal with deadlock between joint venture partners, may determine which partner has ultimate power at the relevant time.  In that matter, the company’s articles of association resolved any power dispute in favour of the non-common shareholders.  Of course, the articles of association or shareholders agreement, for example, could quite easily resolve the issue the other way.

 

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