Admiralty jurisdiction over ships

The importance of registered ownership

Summary

Recent case law in Hong Kong confirms that when deciding to invoke its admiralty jurisdiction over a ship, the court is entitled to rely on the particulars of registered ownership in a  shipping register. In this context, and in the absence of exceptional or special circumstances, such particulars are conclusive of legal and beneficial ownership. While these legal principles are not new, the cases are a welcome reminder that a co-owner of a ship who wishes to protect it from arrest (in Hong Kong), with respect to a maritime claim for which the co-owner is not responsible, needs to register its part ownership of the ship.

Background

Shipping Register

In Hong Kong, a Register of Ships (the Shipping Register) is maintained by the Marine Department. Registration is voluntary but offers ship owners and their ships the benefits of flying a Hong Kong flag.

Subject to applicable laws, shipping jurisdictions each have their own Shipping Register. Registration can assist in identifying a ship and its ownership, as well as any demise charterers and mortgagees.

Jurisdiction

The first instance admiralty jurisdiction of the High Court of Hong Kong is set out in section 12A-E of the High Court Ordinance (Cap. 4 – the Ordinance). That jurisdiction can be exercised in respect of (for example) an owner of a ship (in personam) or, in certain circumstances, in respect of a ship (in rem).

In exercising its admiralty jurisdiction against a ship1, the court must be satisfied that (among other things) the person who would be liable for the claim in personam was either the sole beneficial owner of the ship or its demise charterer at the time the action is commenced against the ship2.

In this context, “owner” means legal and beneficial owner of all the shares in the ship. A ship  is often registered to a one-ship company and that company is the legal and beneficial owner (irrespective of who owns the shares in the company)3. The concept of ownership is central to the court’s exercise of admiralty jurisdiction in rem. The exercise of that jurisdiction over a ship in Hong Kong waters provides the basis for the power of arrest over a ship, in order to obtain the sale of the ship or, more usually, security pending a judgment of the court.

The form of security is usually agreed contractually (for example, a P&I club letter of undertaking) or, in default of agreement, by a bail bond or a payment into court.

Recent cases

The proceedings

In two recent cases relating to The Vessel “Almojil 61”4 (the Almojil 61 case), the ship was registered in the Commonwealth of Dominica and the registered owner as to all her shares was a Saudi Arabian company (the Saudi company). A plaintiff (the plaintiff), who had chartered a number of other vessels to the Saudi company, commenced court proceedings to enforce its claims under the charterparties.

The plaintiff had the ship arrested in Hong Kong pursuant to the court’s admiralty jurisdiction and on the basis that, at the time the action was commenced, the ship was beneficially owned as respects all her shares by the Saudi company5. The ship was subsequently sold and the proceeds of sale secured in court (the sale proceeds).

The Saudi company did not defend the court proceedings, but subsequently another company (based in Dubai – the Dubai company) sought to do so on the basis that it was a co-owner of the ship. The evidence before the court suggested that the Saudi company and the Dubai company were part of the business interests of the same family.

The Dubai company had also commenced court proceedings with respect to the sale proceeds on the basis that it was part owner of the ship and had an interest in the sale proceeds.

The Dubai company argued that the court had no jurisdiction over the ship because of its part ownership; said to be a stake of approximately 22 per cent. That part share was said to arise out of an agreement between the Saudi company and the Dubai company, under which the Dubai company paid the final instalment of the purchase price of the ship to the seller.

Issues

In deciding whether it had admiralty jurisdiction over the ship, two issues arose for determination by the court.

First, whether the Dubai company was a part owner of the ship pursuant to the agreement with the Saudi company.

Second, whether the Dubai company was entitled to go behind the registration of the ship in order to contend that the Saudi company was not the beneficial owner of the ship as to all her shares at the time the proceedings were commenced (the second issue)6.

The court answered both issues in the negative. For the purposes of this article, the second issue is more important.

Decision

On the facts, the court found that the Dubai company’s interest in the ship was not as a beneficial owner; rather, it was an interest as a lender to the Saudi company of part of the purchase price for the ship7. This did not give rise to a beneficial interest arising out of a trust.

The court also noted, in passing, that the Dubai company was claiming the full amount of the final instalment for the ship in the other court proceedings (relating to the sale proceeds), whereas if it had a beneficial interest in the ship the value of that interest should have depreciated in proportion to the reduced value of the ship at the time of its judicial sale.

As to the second issue, the court held that in exercising its admiralty jurisdiction over a ship, pursuant to section 12B(4) of the Ordinance and in order to determine the beneficial owner of a ship, the court would not go behind the ship’s registration, save in exceptional or special circumstances (such as where registration had been procured by fraud).

The court noted that a shipping register was of fundamental importance in establishing legal and beneficial ownership of a ship. On a review of the relevant legal authorities, the court observed:

... it is reasonably clear that the authorities speak in one voice and stress the fundamental importance of the shipping register8.

As a result, the Dubai company’s challenge to the court’s admiralty jurisdiction over the ship failed.

Comment

The court’s decision is not unexpected. It upholds the fundamental importance of shipping registers in establishing legal and beneficial ownership of ships.

In many cases registered owners are one-ship companies that are both legal and beneficial owners, irrespective of whether the shares in the company are held by different persons or on trust for others.

A ship’s registration is thus virtually conclusive of her legal and beneficial ownership and the court need not look behind the registration in order to decide to exercise its admiralty jurisdiction over the ship.

The court may exceptionally look behind registration where there is convincing evidence that (for example) registration has been procured by fraud or there are other similar compelling or special circumstances; this is, however, a high threshold and successful challenges are rare9.

In the Almojil 61 case the plaintiff obviously did not seek to arrest the vessels that it had chartered to the Saudi company. Rather, the plaintiff proceeded to invoke the court’s admiralty jurisdiction over the Almojil 61 in order to enforce its in personam claim against the Saudi company.

It is worth stressing (as the court pointed out in the Almojil 61 case) that those who advance money to enable a ship to be purchased can seek to enforce their claims by bringing an in personam claim against the registered owner10. They may also structure (and register) their transaction as a mortgage.

A co-owner of a ship who wishes to protect it from the court’s power of arrest in Hong Kong waters (with respect to a maritime claim for which it is not responsible) should seek to register its part ownership of the ship in accordance with the applicable laws of the port of registration11.