UK: Piercing The Corporate Veil And Chabra Injunctions -Clarification From The English High Court

Linsen International v Humpuss Sea Transport & others [2011] EWHC 2339 (Comm)

In this case, the Commercial Court (Flaux J.) has reviewed and examined the relevant English legal principles with regard to piercing the corporate veil, as well as the specific set of circumstances in which a Chabra injunction may be obtained. A Chabra injunction is, in essence, a freezing order directed to a party against whom the Claimant does not have a substantive cause of action ("NCAD") which is made in aid of enforcement of a judgment, or anticipated judgment, against a party against whom the Claimant does have a substantive cause of action ("CAD").

The background facts

The claimant shipowners ("Owners") were companies in a group of which Empire Chemical Holdings Inc was head ("the Empire Group"). In 2007, the Empire Group entered into negotiations with a number of shipyards for the construction of twelve chemical tankers, and also entered into an agreement where seven of those tankers would be chartered to the defendant charterers, who were companies in the Humpuss group of companies ("the Humpuss Group"). Various time charterparties were entered into between various companies in the Empire Group and the Humpuss Group in October 2007 and again in January 2008.

At the time the vessels were delivered to the charterers under the charterparties in early 2009, the freight market had collapsed. The charterers were unable to sub-charter the vessels at rates which covered the time charter hire and so did not pay hire to the Owners by the due dates. The Owners commenced arbitration, obtained arbitral awards against the charterers for repudiatory breach of the charterparties and also obtained summary judgment against the guarantor of the charterers' obligations under the charterparties. They also obtained freezing orders against both the First and Second Defendants (the charterers and guarantors) in these proceedings. However, neither the arbitral awards nor the summary judgment were honoured, and the Owners applied for and obtained world wide freezing orders against the Third to Thirteenth Defendants on an ex parte basis. Those defendants were principally other companies within the Humpuss Group, and the orders were granted on the basis that (i) there was a good arguable case that there had been abuse of the corporate structure of the Humpuss Group and (ii) thus that various corporate veils could be lifted so as to render the other companies within this group liable as parties to the charterparties/guarantees on the basis that they were in fact the "true" parties to the charterparties/guarantees.

The present application before Flaux J. was for a continuation of the freezing orders against the Third to Thirteenth Defendants.

The Commercial Court decision

i. Piercing the corporate veil

The Judge reviewed the evidence submitted by Owners to support their case that there had been an abuse by the Defendants of their corporate structure entitling Owners to pierce the corporate veil. He rejected many of the Owners' allegations in respect of abuse but did accept that there was evidence that assets had been moved from the First Defendant to the Third Defendant with a view to frustrating enforcement against the First Defendant.

He then went on to review the authorities in relation to the piercing of the corporate veil to identify in what circumstances the corporate veil would be pierced so as to impose liability in contract on a party who was not, ostensibly, a party to the contract concerned. One of the cases relied upon by the Owners on this issue was the recent Commercial Court decision of Burton J. in Antonio Gramsci Shipping v Stepanovs [2011] 1 Lloyd's Rep 647 where the Court held that it was sufficiently arguable (for the purpose of founding jurisdiction) that the Claimant shipowners could pierce the corporate veil of the chartering entities, so as to hold Mr Stepanovs liable as a party to the charterparties.

In his Judgment Flaux J. notes that there are circumstances in which a Court may lift the corporate veil so as to ignore transactions which are plainly a sham. However, he said that there was no authority which supported the proposition that abuse of the corporate structure, subsequent to the conclusion of contracts, could be used to pierce the corporate veil in the sense of rendering third parties liable under contracts concluded prior to such abuse. The Court's decision in the Antonio Gramsci case could, he said, easily be distinguished from the present case since in that case the Court found that the Claimants had a good arguable case that the whole purpose of the corporate structure was to perpetrate the relevant fraud and that both the chartering companies and the charterparties themselves were effectively a sham or facade from the outset. In the present case the Court concluded that at the time the original charterparties and guarantees were entered into in 2007, "there was no question of any abuse of the corporate structure" and that there was "no basis for impugning the genuineness of the original charterparties or guarantees or for suggesting that those contracts were shams...".

In the circumstances, he concluded that there was no basis for any of the Third to Thirteenth Defendants being held liable as parties to the charterparties and the existing freezing orders against them should not be continued.

ii. The application for a Chabra injunction

Flaux J. then considered the application for a Chabra injunction against the Third Defendant. In doing so, he reviewed the various authorities in relation to the basis for the grant of a Chabra Injunction. He considered the question of the level of control over the disposal of the asset held by the NCAD which the CAD had to have in order to justify such a injunction against the NCAD. In doing so he adopted much of an earlier judgment of Sir John Chadwick P in a case in the Cayman Islands which had stated that whilst it was necessary that the CAD had to have substantial control over the assets held by the NCAD, the Court should also be satisfied that there was a good reason to suppose that (i) the CAD can be compelled (through some process of enforcement) to cause the assets held by the NCAD to be used to satisfy a judgment; or (ii) that there is some other process of enforcement by which the Claimant can obtain recourse to the assets held by NCAD.

On the facts of this case Flaux J. concluded that, leaving aside the issue of jurisdiction, the requirements for a Chabra Injunction were satisfied as against the Third Defendant. However, the Third Defendant was based in Indonesia and was not prepared to accede to the jurisdiction of the English Court. The issue was therefore whether the Court had jurisdiction to order that the Third Defendant be joined to the proceedings for the purposes of granting a Chabra Injunction against it. In that respect, the Owners relied on paragraph 3.1(3) of the Practice Direction 6B of the Civil Procedure Rules which allows for service out of the jurisdiction where :

The Judge held that the above provision did not permit the Court to assume jurisdiction over the Third Defendant because the dispute between the Claimant (i.e. Owners) and the First Defendant was subject to London arbitration in accordance with the arbitration clause in the charterparties. Thus, there was never going to be an issue for the Court to try. The Court therefore had no basis for assuming jurisdiction so as to make any Chabra Injunction as against the Third Defendant.

Comment

The decision in the Antonio Gramsci case may have acted as an encouragement to parties to seek to pierce the corporate veil so as to fix puppeteers with the liability of their puppets irrespective of the date in which the abusive relationship between the two began. The decision in this case acts as something of a brake on such enthusiasm - underlining, as it does, that subsequent abusive conduct cannot be used to fix liability on the puppeteer in relation to contracts entered into before the abuse occurs.

So far as the Chabra jurisdiction is concerned, this can provide useful protection in some cases but only if the substantive dispute is subject to the jurisdiction of the English Courts. As this decision confirms, it will provide no assistance when that dispute is subject to arbitration or, of course, the jurisdiction of the courts of another country.

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