The Federal Court of Australia has recently had cause to consider the operation of section 19 of the Admiralty Act 1988 (Cth) which relates to the right of a creditor to proceed in rem against a surrogate ship. This complex case clarifies the position that a ship must be wholly owned by the debtor before it can be arrested under the Admiralty Act 1988.

Key points for consideration

  • the application of section 19 of the Admiralty Act 1988 has been broadened, with the Court interpreting ‘control’ to include the meaning within a “practical, business sense”
  • the decision in Gem of Safaga clarifies the legal position that to maintain an arrest of a surrogate ship when proceedings are bought in rem, all co-owners of that ship must be relevant persons as defined in the Act.

Outcome

A one-tenth share was sufficient for the court to recognise ownership over the Gem of Safaga. The proper construction of s 19(b) of the Act is that the owner (or owners) of a surrogate ship must (all) be a relevant person. Leave granted to West Asia Maritime Ltd for release of the ship.

Background

The Plaintiff, Euroceanica (UK) Limited (Euroceanica) owned two ships, JBU Onyx and JBU Opal. It time chartered these ships to WAM Singapore Pte Ltd (WAMS) which was a subsidiary of West Asia Maritime (WAM). WAMS defaulted on its payment for the hire of Euroceanica’s ships. At the time the charters were entered into, a side letter was entered into between Euroceanica as owner, WAM as parent company and WAMS as charterer, appointing WAM as the party ultimately responsible for the charterer’s obligations under the time charter.

Another vessel, Gem of Safaga, was purchased jointly by WAM and FourM Maritime Private Ltd (4M). 4M was a company controlled by the Managing Director of WAM. The Gem of Safaga was registered in India with WAM holding nine shares and 4M holding one share. Under agreement, 4M conferred powers on WAM in relation to acquisition financing and operation of Gem of Safaga.

Gem of Safaga was arrested in Sydney at the request of Euroceanica on the basis that Euroceanica was owed a debt by WAM as a result of its default on payment for the hire of Euronceanica’s other ships on the time charter.

In order to successfully establish its entitlement to proceed with the arrest of Gem of Safaga, Euroceanica was required to satisfy section 19 of the Admiralty Act 1988.

The right to proceed

Section 19 of the Act provides:

19. Right to proceed in REM against surrogate ship

A proceeding on a general maritime claim concerning a ship may be commenced as an action in rem against some other ship if:

  1. a relevant person in relation to the claim was, when the cause of action arose, the owner or charterer of, or in possession or control of the first mentioned ship; and
  2. that person is, when the proceeding is commenced, the ow
  3. ner of the second mentioned ship.

Euroceanica argued that when the cause of action arose, WAM was: “in control of” the two ships, the subject of the time charter. It also argues that for the purposes of section 19(b) of the Act, WAM was the sole person who was the owner of Gem of Safaga.

Was WAM “in control of” JBU Onyx and JBU Opal?

The time charter was entered into between Euroceanica and WAMS. The side agreement entered into between Euroceanica, WAMS and WAM provided that WAM would be responsible for the charterer’s obligations.

The court held for the purposes of section 19(a) of the Act, notwithstanding that the charterer of the two ships was WAMS, it was WAM who as a matter of fact had exercised control of the commercial operation of the ships and side letters entered into between the parties provided a clear admission of that control. The fact that WAMS also had responsibilities under the charter parties and exercised some of them, did not mean that WAM, as parent, did not have control of the chartered ships for the purposes of section 19(a).

This appears to be the first time that the court has considered the question of control in the first limb of section 19 of the Act.

Was WAM the “owner” of Gem of Safaga?

Gem of Safaga was purchased by both WAM (who held nine shares) and 4M (who held one share). Both the financing and operation of the ship were undertaken by WAM pursuant to an agreement between the two companies. The first matter which needed to be determined for the purposes of section 19(b) was whether the section created a wide jurisdiction which enabled a surrogate ship to be arrested in circumstances where the ship in question was only partly owned by the relevant person responsible for the outstanding debt. The section itself contained no express words of limitation preventing a ship only partly owned by the relevant person from being arrested.

The court determined that the purpose of permitting the arrest of a sister ship is to compel the relevant person, being the owner of that ship to appear so as to answer for the general maritime claim referred to in section 19(a) concerning that person’s other ship. That purpose would not be served by allowing the sister ship to be arrested if the consequence would be to interfere with the proprietary right of a complete stranger to the plaintiff’s dispute.

The question that then needed to be determined was whether notwithstanding the fact that WAM owned only nine of the ten shares in Gem of Safaga, it was in effect the sole owner of the ship.

At first instance, it was determined that 4M had a nominal beneficial ownership interest in Gem of Safaga but that it held this interest on resulting trust for WAM, having given no consideration for the purchase the ship and had no role in the operation of the ship or in the appointment of the ship’s masters and officers. Accordingly it was held that WAM was the sole person who was the owner of the ship for the purposes of section 19(b) of the Act. This was notwithstanding that the ship was registered in the Indian Register of Shipping in the name of both companies.

The determination that WAM was the owner of the Gem of Safaga within section 19(b) of the Act was the subject of an appeal.

The appeal was successful. It was determined that 4M was the beneficial owner of one share in the ship, that 4M did not relinquish its ownership right and did not hold the share in the ship on resulting trust for WAM.

Conclusion

Gem of Safaga was eventually released after spending two months under arrest.

This case highlights the complexities involved in arresting a surrogate ship. It clarifies the position that it is only possible to arrest a surrogate ship which is wholly owned by the debtor.