NEW ZEALAND MARITIME LAW

Wallace & Cooper Engineering Ltd v FV Orlovka (No 3)

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
NO AD 93-99/98
IN THE MATTER of admiralty actions both in rem and in personam

BETWEEN WALLACE AND COOPER ENGINEERING LTD and WALLACE AND COOPER ENGINEERING (LYTTELTON) LTD
Plaintiffs

AND F V ORLOVKA AND OTHERS
First Defendants

AND KARELRYBFLOT JSC
Second Defendant

Date of Hearing: 13 August 1999
Judgment Released: 20 August 1999
Counsel: Mr Matthews for the Plaintiffs
Mr Tetley and Mr O’Connor for Kareltrust

RESERVED JUDGMENT (NO 3) OF YOUNG J

INTRODUCTION

1. This is a sequel to a judgment which I delivered on 19 July 1999. It should be read with that judgment. A brief introduction to the issue which I must resolve is, nonetheless, appropriate.

2. These proceedings involve claims against four Russian owned fishing vessels, the "Orlovka", the "Osha", the "Om" and the "Olenino" for work done and goods supplied by the plaintiffs between 1 August and 8 December 1997. At this time the vessels were owned by a Russian company, Karelrybflot. Proceedings were commenced in July 1998 and are in rem against the fishing vessels and in personam against the second defendant, Karelrybflot.

3. On 23 February 1998 - that is after the work was carried out but before the proceedings were commenced - these four vessels (together with the "Ognevka") were forfeited to the Crown under the Fisheries Act. At the time when the relevant offences which resulted in forfeiture were committed, the vessels were being operated by a New Zealand company, Abel Fisheries Ltd.

4. On 3 April 1998 an agreement was entered into between Karelrybflot and another Russian company, Kareltrust, which provided that, in the event that the vessels were redeemed by the Minister of Fisheries, they would be immediately acquired by Kareltrust. I will discuss later the terms of this agreement. In the result, the vessels were redeemed on 12 June 1998. The effect of the April 1998 agreement was that title immediately passed to Kareltrust for a "purchase price" which in the end amounted to approximately $NZ800,000. This was made up of $500,000 which had to be paid to redeem the vessels and $300,000 which related to wages claims from seamen who, as at April 1998, were occupying the vessels. The agreement made provision for Karelrybflot to repurchase the vessels following the expiration of six months. The option to purchase has not yet been exercised.

5. Accordingly, at the time the present proceedings were commenced, the vessels were ostensibly owned by Kareltrust.

6. Section 4(1)(l), Admiralty Act 1973, provides for this court to exercise admiralty jurisdiction in respect of, inter alia:-

"Any claim in respect of goods, materials, or services ... supplied or to be supplied to a ship in its operation or maintenance"

7. The claim by the plaintiffs is within the scope of this subsection and thus within the Admiralty jurisdiction of this court. The real question, however, is whether an in rem claim is available. This turns on s 5(2) of the Admiralty Act. That subsection provides:-

"[T]he admiralty jurisdiction of the High Court may be invoked by an action in rem in respect of all questions and claims specified in subsection (1) of section 4 of this Act ...

Provided that –

… (b) In questions and claims specified in paragraphs (d) to (r) of subsection (1) of section 4 of this Act arising in connection with a ship where the person who would be liable on the claim in an action in personam was, when the cause of action arose, the owner or charterer of, or in possession or in control of, the ship, the jurisdiction of the High Court may (whether the claim gives rise to a maritime lien on the ship or not) be invoked by an action in rem against-

(i) That ship if, at the time when the action is brought, it is beneficially owned as respects all the shares therein by, or is on charter by demise to, that person; or

(ii) Any other ship which, at the time when the action is brought, is beneficially owned or on charter by demise as aforesaid."

8. The elements of the Wallace and Cooper claim in respect of each vessel are as follows:-

1. Karelrybflot was in contract with Wallace and Cooper in respect of the work done and goods supplied to the vessels;

2. At the time when the cause of action arose (August-December 1997), Karelrybflot was the owner of the vessels; and

3. At the time when the actions were brought (July 1998), Karelrybflot was the beneficial owner of the vessels.

9. Kareltrust applied out of time to file a conditional appearance and also for an order that the proceedings in rem against the vessels be set aside or struck out.

10. In my judgment delivered on 19 July 1999 I granted leave to Kareltrust to file the conditional appearance out of time. In the same judgment I endeavoured to resolve, as far as I sensibly could, the application to set aside the in rem proceedings. In the course of that judgment I held that there was an arguable case for the view that Karelrybflot had an in personam liability to Wallace and Cooper. I also held that if there was a statutory claim in rem by Wallace and Cooper against the vessels, it was not extinguished by reason of the forfeiture and later redemption of the vessels. In this way I dealt with and dismissed two of the three grounds advanced by Kareltrust in support of its application to set aside the in rem proceedings.

11. The point at which my judgment stalled was in respect of the third argument raised by Kareltrust - that at the time the actions were brought (July 1998) Karelrybflot was not the beneficial owner of the vessels.

12. The parties were not ad idem as to how that issue should be resolved in the context of an application to set aside in rem proceedings.

13. Following what I take to have been the view of the Court of Appeal in Baltic Shipping Co Ltd v Pegasus Lines SA [1996] 3 NZLR 641 and the overwhelming preponderance of overseas authority, I held that the making of the application to set aside cast an onus on the plaintiffs to establish, on the balance of probabilities, that Karelrybflot was the beneficial owner of the vessels in July 1998. In so doing, I did not follow three High Court decisions which post-dated Baltic Shipping. Those cases indicated that it is sufficient for a plaintiff responding to an application to set aside in rem proceedings to show that there is an arguable case on the jurisdictional issue.

14. At the original hearing of the application to set aside the in rem proceedings, the plaintiffs had come prepared only to argue that there was an arguable case. They did not set out to establish the sort of case which, on the basis of my interpretation of Baltic Shipping, they were required to make out.

15. In the course of my earlier judgment, I gave some very preliminary consideration to issues as to ownership. There did seem to be at least a basis upon which it might be thought that Karelrybflot was, despite the terms of the April 1998 agreement, the beneficial owner of the vessels as at July 1998. In those circumstances, and for reasons which I gave in that judgment, I decided to reconvene the proceedings to give Wallace and Cooper and Kareltrust the opportunity to deal with the issues which I saw as relevant as to the ownership issues. Given the events which led to the necessity (as I saw it) to reconvene the proceedings, I ordered Wallace and Cooper to pay costs.

16. The resumed hearing occurred on 13 August 1999.

17. Kareltrust, in the meantime, appealed against my judgment of 19 July 1999 and sought a stay of the present proceedings pending the outcome of that appeal. In a judgment delivered on 10 August 1999 I expressed the view that no appeal lay (as I had not finally determined the application to set aside the proceedings). For that reason I refused a stay. Kareltrust sought to obtain a stay from the Court of Appeal but in the limited time available before 13 August and in the context of pressure of other work, it was not able to obtain a hearing in the Court of Appeal for this application.

18. As I indicated in my judgment of 10 August, it was Kareltrust’s position that, if I did not grant a stay, it wished to retain the fixture on 13 August (this despite my willingness to adjourn the proceedings until 20 August). Kareltrust did not wish to be required to address before me factual issues associated with beneficial ownership of the vessels as at July 1998. Hence the appeal and the application for a stay. But in default of a stay being able to be obtained it wished to have the proceedings dealt with on 13 August and thus on such evidence as was available. So the timing problem was essentially of Kareltrust’s own making.

19. For reasons which are associated with Kareltrust’s attempts to obtain a stay, first from me and then from the Court of Appeal, its further affidavits were not made available until very much the last minute, that is on 12 August; this although some of them had been sworn some days earlier.

20. The hearing proceeded on 13 August 1999 on the basis of the affidavits. In the case of one witness I made an order requiring Kareltrust to produce him for cross-examination. I made it clear that the consequence of not producing this witness for cross-examination was that his affidavit would not be read (cf Rule 508, High Court Rules). In other words, I was not making an order that was in the nature of a subpoena. Kareltrust did not produce this witness for cross-examination with the result that his affidavit was not read. I will refer to the circumstances surrounding this later in my judgment.

21. In this judgment I now determine the issue left outstanding in my earlier judgment, that is as to the beneficial ownership of the vessels as at July 1998.

THE CIRCUMSTANCES SURROUNDING THE SALE BETWEEN KARELRYBFLOT AND KARELTRUST

Karelrybflot and Kareltrust

22. Karelrybflot is a fishing company based in Belomorsk in the Karel Republic. The Karel Republic is one of the constituent units of the Russian Federation.

23. The government of the Karel Republic has a 30% stake in Karelrybflot. It is the largest shareholder. The individual who has the largest personal shareholding in Karelrybflot is Mr A A Arutunyan. The chief executive of Karelrybflot is Mr DA Potrebich. Mr Arutunyan is a director.

24. Kareltrust is an open joint stock company. It was incorporated in Belomorsk. Its founding shareholders were Karelrybflot and an entity known as "OAO Alpha Invest". Karelrybflot has a 20% interest in Kareltrust. Alpha Invest has an 80% stake. Alpha Invest appears to be an investment fund with 48,000 members. The directors of Kareltrust include a Mr Igor Chevichalo.

25. In his first affidavit, Mr Zhuk, who is the general manager of Kareltrust, indicated that Kareltrust is "a separate independent company from Karelrybflot". He indicated that it was incorporated in Belomorsk but had "a branch office in Murmansk". He went on to say:-

"Kareltrust has trading arrangements with Karelrybflot, including the management of Karelrybflot vessels. Kareltrust has its own trading arrangements including, for example, its own cool store with a capacity of 1,200 metric tonnes, its own quota and its own vessels. Arrangements with Karelrybflot are governed by written contract. Kareltrust has managed a number of Karelrybflot vessels in the past. It currently has five Karelrybflot vessels under management operating in the Barents Sea."

26. A company also known as "Kareltrust" was incorporated on 4 March 1999 and is registered at Murmansk. Apparently it is not uncommon for companies incorporated in different cities to have the same name. The founding shareholders of the Murmansk Kareltrust are Mr A A Arutunyan and Mr D A Potrebich. Both men are associated with Karelrybflot. Mr Igor Chevichalo is a director. He seems to be the same person who is also a director of the Belomorsk Kareltrust.

27. Mr Potrebich in his last affidavit, when discussing the Murmansk Kareltrust, said that it owned a coolstore. He also said that:-

"Kareltrust in Belomorsk has a separate representative office in Murmansk."

28. This at least implies that the Murmansk Kareltrust is separate from the Belomorsk Kareltrust’s Murmansk "branch office" or "representative office" referred to by Messrs Zhuk and Potrebich. There is, nonetheless, considerable scope for the view that there is a reasonably close association between the Murmansk Kareltrust and the Belomorsk Kareltrust.

29. Karelrybflot and the Belomorsk Kareltrust have the same registered office, that is 51Bankovskya St, Belomorsk.

30. Mr Potrebich of Karelrybflot has witnessed the execution by Kareltrust of certain documents. Most of these are of no particular moment but one does call for comment. This is a loan agreement between Kareltrust and Scandsea International AB, a Swedish company. I will refer to this later.

31. Finally, Kareltrust and Karelrybflot use the same solicitors in New Zealand: Russell McVeagh McKenzie Bartleet and Co.

32. Arising out of all of this, there is no scope for a finding that Kareltrust is the corporate alter ego of Karelrybflot. On the other hand, it does rather appear that the two companies are reasonably closely associated.

Reasons As Expressed by Kareltrust/Karelrybflot For The April 1998 Sale Agreement

33. The commercial rationale for the April 1998 transaction has been described by the witnesses who have given evidence on behalf of Kareltrust and Karelrybflot in a flat and comparatively uninformative way.

34. In his first affidavit, sworn in March 1999, Mr Zhuk (of Kareltrust) said this:-

"In early 1998, through its trading relations with Karelrybflot, Kareltrust became aware of the opportunity to take an interest in five Karelrybflot fishing vessels, being the "Om", "Orlovka", "Olenino", "Osha" and "Ognevka". Karelrybflot was having obvious difficulties with the vessels. On 23 February 1998, all five of the vessels were forfeited to the Crown for offences against the Fisheries Act 1983 by the then charterer Abel Fisheries Ltd. Karelrybflot approached Kareltrust for financial assistance. Kareltrust was interested in acquiring the vessels."

35. In a second affidavit sworn this month, Mr Zhuk has provided a little more information:-

"As I said in my earlier affidavits, Kareltrust identified Karelrybflot’s difficulties in New Zealand as an opportunity to acquire the five vessels there on attractive terms. Karelrybflot had apparent cash flow difficulties and Kareltrust was able to offer assistance.

At the time of signing the sale and purchase agreement after forfeiture of the vessels, Kareltrust took the view that if the vessels were returned to Karelrybflot by the New Zealand Government it was likely to be for less than the market value. Even taking into account the wages which might be agreed payable to the crew by Karelrybflot (which formed part of the purchase price) Kareltrust estimated the price would be attractive. Kareltrust was advised by its New Zealand lawyers that forfeiture had probably extinguished mortgages and other claims on the vessels. This was taken into consideration by Kareltrust in making its decision.

There was some element of risk in the arrangement as Kareltrust could possibly have been forced to purchase the vessels at a higher price than it was comfortable with the price set by the New Zealand Government had been high and Karelrybflot had agreed to pay wages for the crew at a level substantially beyond what it had told Kareltrust was due to the crew. However that risk was small because it would not have been in Karelrybflot’s interest to agree to a high price or inflated wage payments. The total amount in the end paid to settle the crews’ claims was just under the equivalent of NZ$300,000."

36. There is no explanation, from the Karelrybflot perspective, of the transaction. Mr Potrebich of Karelrybflot has sworn two affidavits in respect of the present proceedings. Yet he has not explained why it was that Karelrybflot entered into this particular transaction.

37. Mr Zhuk’s affidavit does not refer to the internal document trail which I would expect to exist: letters, file notes and perhaps management reports.

Karelrvbflot’s Awareness Of Claims

38. As will be apparent from what I have already said, there were, in April 1998, claims by crew members against Karelrybflot in respect of wages allegedly due to them. The vessels were in fact occupied by the crew members at that time. The sale of the vessels was irrelevant in respect of such claims; this because, to the extent to which such claims were valid and not affected by the forfeiture of the vessels, the associated maritime liens would survive any sale.

39. Karelrybflot, however, was aware that it faced claims from at least the Wallace and Cooper companies and also from the receivers of Abel Fisheries Ltd. It seems reasonable to assume that Karelrybflot was aware of the risk that it might face in rem claims if it took title to the vessels upon redemption. Mr Zhu’s affidavit indicates that Kareltrust received advice from New Zealand lawyers (I assume Russell McVeagh McKenzie Bartleet and Co) as to whether the forfeiture and likely redemption would extinguish "mortgages and other claims on the vessels". It seems reasonable to assume that Karelrybflot too received this or similar advice from Russell McVeagh McKenzie Bartleet and Co.

40. Two of the vessels are subject to mortgages in Russia. I will be referring to this a little later in the judgment. There was no suggestion in the evidence that Kareltrust and Karelrybflot have acted on the basis that those mortgages have in fact been extinguished by forfeiture and redemption. Indeed, as will be apparent, the April 1998 agreement between Kareltrust and Karelrybflot proceeds on the basis that the mortgages remain in place. In any event, I would be surprised if advice was given that mortgages on the vessels would be extinguished by forfeiture and redemption. In this regard, I refer to the way a similar issue was addressed at the High Court stage of the litigation now reported as Equal Enterprises Ltd v Attorney-General [1995] 3 NZLR 293.

41. It is quite clear from Mr Zhuk’s affidavit that it was appreciated that there was a risk (this being the other side of the coin to probable extinction) that other claims on the vessels might be advanced successfully if Karelrybflot’s title to them was revived on redemption.

42. As will appear in the next section of my judgment, Kareltrust and Karelrybflot did address issues associated with the mortgages and the maritime liens in the April 1998 agreement. It was plainly envisaged by them that the relevant creditors would be paid. What is also quite clear is that there is no equivalent recognition of the rights of those who had statutory in rem claims in respect of the vessels.

Analysis Of Agreements

43. Karelrybflot and Kareltrust entered into two agreements on 3 April 1998. The first was a conditional sale agreement and the second a management agreement.

44. The sale agreement was conditional upon the Minister of Fisheries redeeming the vessels. It was expressly contemplated in the recitals to the agreement that redemption would be subject to a redemption price being paid.

45. The scheme of the agreement was that Kareltrust would make available Karelrybflot what was described in the agreement as the "purchase price". This was an amount equal to the redemption price and any sum "agreed payable" to the crew of the vessels by Karelrybflot. This was to be made available "in roubles". The purchaser itself or the vendor, on behalf of the purchaser, was then to:-

"arrange for the roubles to be converted into New Zealand dollars and/or US dollars as necessary and held in a New Zealand bank account on behalf of the Purchaser."

46. The agreement provided that:-

"Completion of the sale and purchase of the Vessels shall be deemed to occur immediately upon the Minister of Fisheries redeeming the Vessels to the Vendor and title to the Vessels shall immediately pass to the Purchaser."

47. Clause 3.6 provided:-

"As soon as practicable after completion, the Vendor shall deliver to the Purchaser all documents and things necessary to evidence the transfer to the Purchaser of full and unencumbered title to and possession of the Vessels."

48. Clause 4.1 provided:-

"On and from Completion the Purchaser shall have and enjoy quiet and unencumbered possession of the Vessels and the Vendor shall indemnify the Purchaser against any claim, action, proceeding, demand, damage, expense or liability which relates to the ownership of the Vessels including without limitation any proceeding brought by creditors of the Vendor in respect of debts incurred by the Vendor prior to the forfeiture of the Vessels."

49. Clause 4.2 provided:-

"Notwithstanding clause 4.1, the Purchaser acknowledges that the "Om" and the "Olenino" are subject to mortgages registered against the two ships in Russia and the Purchaser’s title to the "Om" and the "Olenino" is subject to the rights, if any, of the mortgagee of each."

50. The agreement was conditional upon:-

"(a) The Minister of Fisheries agreeing to redeem the vessels to the vendor; and

(b) The vendor in its sole discretion accepting the Redemption Price in deciding to redeem the Vessels".

51. Clause 6.1 provided:-

"6.1 The Vendor or its nominee shall have the right at any time following six months from the date of Completion to repurchase the Vessels from the Purchaser for a price determined in accordance with the following formula, such right to be exercised by the Vendor giving one month’s written notice to the Purchaser:

P=A+B+C

Where

P = the amount to be paid by the Vendor to repurchase the Vessels from the Purchaser;

A = the Purchase Price;

B = interest on the amount of the Purchase Price at the rate of 12% per annum calculated daily from Completion to the date of completion of the repurchase; and

C = any capital expenditure incurred by the Purchaser in respect of the Vessels depreciated on a straight line basis from the date of expenditure calculated on the life expectancy of the capital improvements to the date of completion of the repurchase. If the Vendor and the Purchaser are unable to agree on the amount of depreciation, the dispute shall be referred to, and finally resolved by, an expert who shall be appointed by the Vendor and the Purchaser or, if they are unable to agree on the expert, by the president or vice-president for the time being of the New Zealand Institute of Chartered Accountants or his or her nominee on the request of either party. The parties shall each bear their own costs and expenses in connection with the referral and shall bear equally the costs and expenses of the expert. The termination of the expert shall be final and binding on the parties."

52. I draw particular attention to the fact that the right to repurchase is exercisable "at any time following six months from the date of Completion". Mr Zhuk in his affidavits has proceeded on the basis that the option to purchase could only be exercised within six months of completion. However, this is not a tenable construction of the clause. In saying this I am conscious of the fact that in my earlier judgment, influenced by Mr Zhuk’s first affidavit, I expressed a similar view.

53. An odd feature of the agreement is that there is no provision for the payment of interest on factor "C", that is depreciated capital expenditure incurred by Kareltrust.

54. At the same time as the sale agreement, a management agreement was entered into. The term of that agreement was expressed as follows:-

"This agreement shall commence on the completion of the Sale and Purchase Agreement and shall expire on the date of the repurchase of the Vessels by the Manager, pursuant to clause 6.1 of the Sale and Purchase Agreement."

55. It seems clear enough from this clause that it was contemplated that the repurchase rights under the sale and purchase agreement would in fact be exercised. Otherwise, subject to the possibility of default or the winding up or liquidation of either party, the agreement is of indefinite duration.

56. Under the management agreement Karelrybflot is required to undertake the day to day management of the vessels. In consideration for this it is entitled to:-

"a six monthly management fee calculated at the rate of 10% of net profits before tax received by [Kareltrust] in the operation of the vessels by [Karelrybflot]."

57. The management fee is to be paid by Kareltrust to Karelrybflot in arrears every six months. All operating costs and expenses relating to the provision of services under the management agreement and the operation of the vessels are for the account of Kareltrust.

58. Whether the operation of the vessels since June 1998 has been in accordance with the management agreement may be in issue. I will refer to this later in this judgment.

Value Of The Vessels

59. There is conflicting evidence as to the value of the vessels.

60. They are Atlantic 333 Class vessels built around 1984 for the Russian fishing fleet. They are 56 metres in length with a gross tonnage of 1,898 tonnes.

61. Captain Daish, for the plaintiffs, indicated in his evidence that he had inspected the "Orlovka" and the "Osha" earlier this year. Each had then been commissioned for fishing operations and was about to commence fishing. He values the vessels at $US1.1m each at that time.

62. In early to mid 1998 the vessels were laid up in Lyttelton. They were in the possession of their crews who were then attempting to sit out both the government and Karelrybflot in terms of wage claims. They had not been fished for some months. Allowing for the uncommissioned state of the vessels and also for the comparatively flat market at the time, Captain Daish saw the range of values as being between $US400,000 and $US600,000. He was of the view that the "Orlovka" and the "Osha" would have had values towards the upper end of that range. He then, in his affidavit, tested his conclusions by reference to an exercise involving depreciating the original cost of the vessels.

63. He took the view that the other vessels (which he has not inspected in detail) would be worth in the same range in early to mid 1998, that is between $US400,000 and $US600,000. Because he would expect progressive re-commissioning of the vessels to involve the better vessels first, he valued the "Olenino" and the "Om" as being towards the lower end of that range, say $US400,000.

64. There is perhaps some general support for Captain Daish’s figures from a recent affidavit from Mr Zhuk. That affidavit suggests that the cost of re-commissioning the vessels was in the order of $NZ400,000. This seems to be reasonably consistent with Captain Daish’s postcommissioning valuation and the pre-commissioning figures. Indeed, on a very simple basis of post-commissioning value less costs of commissioning, there may well have been scope for higher precommissioning values. I recognise, of course, that the valuation exercise in this context is more complex than a simple A-B calculation of this sort.

65. Kareltrust put in an affidavit from Mr Robert Hawkins of Auckland. He said that the Daish valuation was optimistic. He gave five reasons for this:-

"(a) The market and demand for Atlantic 333 class vessels in mid 1998 was low and has worsened since. I understand that two of the four vessels concerned in these proceedings the "Om" and the "Olenino" have not been chartered at all since the end of 1997 but have remained berthed throughout Lyttelton and that the other two vessels were only chartered at the beginning of this year;

(b) The vessels have a checkered history in New Zealand well-known to the fishing industry and have been seized in the past by MAF;

(c) The vessels went through a process of forfeiture and redemption with their claim status being uncertain. As at April 1998 1 understood that the vessels were in fact in the ownership of the Crown with an uncertain future;

(d) I understand that the vessels have been laid up or unused for long periods of time immediately prior to April 1998;

(e) The vessels under the former charterers, Able Fisheries, had been a well published [sic] disaster leading to receivership of Able Fisheries and its successful prosecution for fisheries offences."

66. Mr Hawkins went on to say:-

"In absolute terms it is difficult to value the vessels given the somewhat extraordinary circumstances of their situation in New Zealand. It may even have been the case that no buyer could have been found for use of the vessels in New Zealand given the above factors.

In my view it would probably have been difficult in April 1998 to find a buyer for the vessels for use in New Zealand at anything significantly more than $US100,000. For a purchaser taking the vessels out of New Zealand, I would estimate their value higher taking into account the factors detailed above at around $US300,000 per vessel."

67. Mr Hawkins made a good deal of what might be called "forfeiture blight", a factor mentioned three times (in various guises) in his list of five factors. While I accept that a purchaser may be cautious in terms of acquiring a vessel which might be the subject of maritime lien claims, I see no reason in logic why that should be a significant factor in relation to statutory in rem claims (which are extinguished by sale). In any event, I would have thought that protection against pre-acquisition claims could probably be adequately addressed by appropriate arrangements in terms of withholding a portion of the sale price.

68. It is surprising that Karelrybflot and Kareltrust did not put before me more sophisticated and contemporary valuation evidence. Presumably the vessels were valued as part of the redemption process. It would have been extraordinary if Karelrybflot and Kareltrust had not themselves formed and documented a view as to the value of the vessels in or about April 1998.

69. In that context, I rather prefer the valuation approach of Captain Daish supported, as I think it is, by Mr Zhuk’s account of the actual costs of recommissioning. Captain Daish’s current valuation of the two vessels which are in commission at $US1.1 million has not been challenged. Mr Zhuk’s affidavit suggests that the re-commissioning costs were in the order of $NZ400,000 for each vessel. On that basis, a purchaser who bought the vessels for $US100,000 each (postulated as their value by Mr Hawkins) stood to make a very substantial and thus improbable gain in terms of their re-commissioning.

Comparison Of Value Of The Vessels With What Was Paid By Kareltrust

70. Kareltrust paid effectively $NZ800,000 for the vessels; that is $NZ100,000 each (being the redemption fees imposed by the Minister of Fisheries) and a further $300,000 in respect of crew claims.

71. Two of the vessels, that is the "Om" and the "Olenino", were subject to mortgages registered in Russia. Those mortgages remain registered in Russia. There is no indication in the evidence as to how much is secured by those mortgages.

72. Ignoring the mortgages for a moment, the total amount paid for the five vessels was $NZ800,000 implying a value of $160,000 each. This is on the assumption that it is appropriate to average the total consideration in this way.

73. These figures do make an appreciable contrast with the valuations proffered by Captain Daish.

74. It may be that some of the difference between the figures propounded by Captain Daish, and the amounts actually paid, could conceivably be explained by the mortgages over the "Om" and the "Olenino". But this is information which must be in the hands of Kareltrust and it has not been put forward.

75. In the end, on any view of the situation, the purchase price payable under the agreement was calculated by reference to what was required to free up the vessels from forfeiture and possible maritime lien claims from crew members. In those circumstances, any actual resemblance between the amount paid and the true value of the vessels would be purely coincidental. I do not think that this was really disputed by Mr Tetley on behalf of Kareltrust.

Kareltrust’s Funding Arrangements

76. With the exception of the formal final documentation (e.g. the agreement for sale and purchase and the management agreement) and formal documentation associated with those documents (e.g. the power of attorney) very little contemporaneous documentation associated with the sale of the vessels has been produced. Mr Zhuk, however, in his last affidavit did produce two documents dated 9 June 1998 which relate to the funding of the payment. These documents (both conveniently in English) are a loan agreement between Kareltrust and Scandsea International AB of Sweden and a promissory note.

77. It is clear from the loan agreement that Scandsea transferred, for value on 10 June 1998, $US400,000 to the National Bank of New Zealand, Wellington Branch in favour of Russell McVeagh McKenzie Bartleet and Co. This was broadly equivalent to the $NZ800,000 required to be paid as the purchase price under the sale agreement.

78. The promissory note, also dated 9 June 1998, records the terms of the advance. This note is signed by Mr Zhuk. What appears to be the seal of Kareltrust has also been affixed. Mr Potrebich appears to have witnessed the affixing of the seal (or perhaps the signature by Mr Zhuk). The loan is payable on written demand. The interest rate is 18 per centum per annum.

79. It will be recalled that the effect of the agreement for sale was that Karelrybflot had a right to re-acquire the vessels on terms which would provide Kareltrust with perhaps no more than a 12% return on the funds invested and less if there was capital expenditure. That 12% return is, of course, calculated by reference to the transaction denominated in New Zealand dollars.

80. In Mr Zhuk’s second affidavit he said this:-

"In order to meet payment of $NZ500,000 and crew settlements, Kareltrust borrowed $US400,000 from Scandsea International AB and remitted that sum to its solicitors in New Zealand to make the necessary payment. I exhibit marked ‘C’ a copy of the applicable promissory note and the instructions given at that time to that effect. ...

From Kareltrust’s point of view it was always uncertain whether Karelrybflot would exercise its option to repurchase under the sale and purchase agreement. While Kareltrust expected that Karelrybflot would want to exercise its option to repurchase, given the financial difficulties being experienced by Karelrybflot, it was always envisaged by Kareltrust that Karelrybflot might not be in a position to repurchase within the time agreed. At worst for Kareltrust, once the return of the vessels by the New Zealand government was announced at $500,000, Kareltrust could expect a reasonable return on the purchase price even if the option to purchase had been exercised."

81. There are a number of possible criticisms of this evidence. The terms of the management agreement seem to me to be inconsistent with any expectation on the part of Kareltrust other than that Karelrybflot would exercise its right to repurchase. Moreover, the option to repurchase remains able to be exercised (on my interpretation of the agreement). In the present context, the interest rate differential raises an issue whether what Mr Zhuk said can represent the complete picture. Although the transaction, ostensibly, is not a simple loan secured over the vessels, it does, even on its face, have a broadly similar economic effect. It would be surprising if Kareltrust was borrowing at 18% and lending on at 12%. It would be surprising too if the currency risk was not addressed.

82. Well, there may be explanations for this. For instance, Mr Tetley suggested in argument that perhaps this was simply a short term funding arrangement. However there was no evidence of this and Mr Tetley was generally unenthusiastic about taking up my offer of more time to provide explanations.

Failure To Refer To Kareltrust As Owner Of The Vessels

83. In the months which followed June 1998, there were many opportunities where one might have expected the identity of Kareltrust as owner of the vessels to have been revealed. For instance, Russell McVeagh McKenzie Bartleet and Co wrote to the plaintiffs or their advisers setting out what they said were the reasons why Wallace and Cooper should not proceed to arrest the vessels. Conspicuous by its absence from these reasons is mention of the factor which Kareltrust now argues is an unanswerable defence to the statutory in rem claims, that is that Karelrybflot was not, as at July 1998, the owner of the vessels.

84. As well, Karelrybflot itself took steps to recover possession of the vessels from the seamen who were occupying them. These proceedings were dealt with by me. I mentioned this factor in my earlier judgment and it was discussed with counsel at the resumed hearing. It is common ground that the sale to Kareltrust was simply not mentioned in the pleadings. Indeed, I made an order granting possession of the vessels to Karelrybflot in October 1998 without having been told that there had been a sale.

85. Mr Tetley said that this was of no particular moment as Karelrybflot was entitled to possession of the vessels under the management agreement. Mr Matthews agreed that Karelrybflot did not expressly assert that it was the owner of the vessels in the pleadings in the relevant proceedings. But it does seem a little odd that the ownership position was not referred to.

86. Two of the vessels have been let out on charter pursuant to charter arrangements under which Kareltrust is not itself mentioned and under which Karelrybflot itself appears to incur direct liabilities in respect of the provision of the vessels and crews for them.

87. There are other instances where the pattern of events as they have developed is not quite what I would have expected following an orthodox sale. For instance, the vessels in Russia appear to remain registered in the name of Karelrybflot. The mortgage over two of the vessels remains in place, at least according to official records. There is no evidence of Kareltrust assuming the liability of Karelrybflot under the mortgages. Indeed, there is no evidence as to those mortgages at all.

88. An explanation for not referring to the sale to Kareltrust in the correspondence with Wallace and Cooper’s lawyers is given by Mr Zhuk in his most recent affidavit:-

"For commercial reasons Kareltrust did not want to openly declare itself as owner until the option to repurchase date under the sale and purchase agreement had passed. At that point, Karelrybflot lost its right to repurchase. For that reason, Kareltrust instructed its lawyers in New Zealand not to disclose its identity as owners in correspondence with Wallace and Cooper’s lawyers. There was no reason to do so."

89. This is a surprising explanation. The option to repurchase date under the sale and purchase agreement has not passed. It did not in fact become operative until six months had passed. It is still current. So the asserted reason given by Mr Zhuk is wrong. The suggestion that there was no reason to identify Kareltrust as owner in the correspondence with Wallace and Cooper and its solicitors is fatuous. There was every reason to do so given that Russell McVeagh McKenzie Bartleet and Co were purporting to record the reasons why the vessels should not be arrested. Why not record what, on Kareltrust’s case, was a complete answer to any in rem proceedings?

Payment Of Expenses Associated With Re-commissioning And Operation Of The Vessels

90. In his most recent affidavit Mr Zhuk said:-

"Kareltrust has spent substantial sums of money in refitting the vessels in New Zealand to make them more attractive to New Zealand charterers and for necessary class requirements. Since July 1998, through its New Zealand agent. Pesca Maritime, Kareltrust has commissioned repairs and maintenance of approximately $NZ400,000 each vessel which has been required to bring the vessels to a proper operating standard and to bring them into class. The requirement to meet class requirements, in particular, has involved considerable expense as the vessels’ classes for all five vessels expired at the end of 1998. Without approved classification and the accompanying documentation, the vessels cannot operate in New Zealand or elsewhere. The last of the three vessels not currently working under charter is in the process of being dry docked in Lyttelton.

To meet the payments for all repairs and maintenance Kareltrust has been periodically transferring moneys to its local New Zealand agent, Pesca Maritime Ltd which has been overseeing the repairs and maintenance costs. Kareltrust has also transferred moneys in the same way to meet other operating expenses of the vessels such as crew wages and berthage. Karelrybflot has contributed no monies to the maintenance, upkeep and repair of the vessels or crew wages since they were released by the New Zealand government."

91. The other side of the coin to this evidence was proposed to be in the form of an affidavit from a Mr Montgomery of Pesca Maritime Ltd. His affidavit was consistent with what Mr Zhuk said in his affidavit and suggested generally that he had been dealing with Kareltrust and not Karelrybflot.

92. Upon me making an order that Mr Montgomery be produced for cross-examination there followed considerable vacillation on the part of Kareltrust. This is recorded in two rulings which I gave in the course of the hearing. Mr Tetley initially elected not to produce Mr Montgomery with the necessary result that his affidavit could not be read. Later I made some disparaging comment about the failure to produce Mr Montgomery for cross-examination. There followed some discussion as to whether inferences might be drawn from that. Mr Tetley then sought to reconsider his position as to whether to call Mr Montgomery. I said that he was perfectly free to call Mr Montgomery and I gave him another opportunity to decide whether to do so. Having taken that opportunity he, in the end, decided not to call Mr Montgomery.

93. I think it is most unfortunate that Mr Montgomery was not called. I would have thought that it would be a straight-forward task for Kareltrust and Mr Montgomery to establish that Mr Montgomery was in truth dealing with Kareltrust as he and Mr Zhuk claimed; at least if that was indeed true. This is in a context where there is considerable scope for suspicion as to the bona fides of the transaction. In circumstances such as these, the failure to produce Mr Montgomery for cross-examination simply invites suspicion that his affidavit is not correct and, in turn, that the legal documentation upon which Kareltrust relies is a sham.

THE LAW

94. The concept of "beneficial ownership" is discussed in my judgment delivered on 19 July. That discussion was without the benefit of any substantial argument from counsel. Having had the benefit of argument from Mr Tetley, I think that there are elements of that discussion which are incorrect or at least in need of a sharper focus.

95. That being so, I propose to summarise what I think are the relevant principles:-

1. The preponderance of authority supports the view that the expression "beneficial ownership" in s 5, Admiralty Act, must be read as involving a distinction between legal and equitable interests. In The Andrea Ursula [1973] QB 265 Brandon J held that persons with complete possession and control of vessels who could therefore become liable to claims under s 4(1)(l) of the Admiralty Act were within the concept of beneficial ownership. That case involved a demise charterer. I referred to this case in my earlier judgment. The issue has been somewhat clouded in New Zealand because s 5(2)(b)(i), Admiralty Act, refers expressly to demise charters and thus, in one sense, can be regarded as a statutory adoption of the actual decision in The Andrea Ursula. However, the view of Brandon J that the position of a demise charterer (and anyone else with complete possession and control of vessels) be regarded as beneficial ownership, is usually seen as unsound, see particularly I Congreso del Partido [1978] QB 500 and Colombo Dry Docks Ltd v The Om Al-Quora [1990] 1 NZLR 608 and the authorities referred to in the latter case.

2. The expression "beneficial ownership" is apt to capture the position of a mortgagee who retains a right of redemption; this even though legal title to the vessel is assigned to the mortgagee. This was the view of Anderson J in Beacon Services (1985) Ltd v The FV Endeavour III (unreported, AD5/94, Tauranga Registry, judgment delivered 8 July 1994). Although Mr Tetley invited me not to follow this case, he referred to no other authorities in which this issue has been resolved adversely to the approach of Anderson J. I note as well that the law as stated by Anderson J was regarded as obviously correct by Jackson, Enforcement of Maritime Claims, 2^nd Edition, 1996 at 200:-

"The traditional method of ship financing through mortgage of the ship and assignment of insurance policies and charter-hire raises no question as to beneficial ownership of the ship. This clearly remains with a mortgagor borrower."

3. It might be arguable that the existence of an option to purchase, associated with the right to bring specific performance proceedings, means that the person with the option to purchase has beneficial ownership. Jackson observes (loc cit):-

"[W]here the financing arrangement is an instalment sale or, in effect, hire purchase (with an option to buy built in) it may be argued that "a purchaser" is the beneficial owner. It seems clear that this is only if the arrangement could be enforced by specific performance that any such contention could be argued. If the vendor has the power to revoke the agreement in default of payment this is a compelling factor in the "beneficial ownership" remaining in the vendor. Even where the remedy of specific performance is available it does not necessarily follow that as regards a ship (a chattel) the beneficial ownership is passed. The remedy is discretionary and, further, it may be argued, the principle of transfer of equitable ownership resulting from a contract to sell has little place in the context of the code represented by the Sale of Goods Act 1979."

I have omitted the references and I do not propose to explore this issue any further because it was not argued before me and I can, on the basis of what was argued, decide the case. It may, however, be arguable that Karelrybflot’s option to purchase the vessels means that it should be regarded as their beneficial owner; this notwithstanding the default provisions in the agreement.

4. There are circumstances in which the courts will lift the corporate veil so as to find that a party who, ostensibly, is not the owner of a vessel is nonetheless its beneficial owner, see Jackson, op cit at 199-200. The circumstances in which the corporate veil will be lifted in respect of beneficial ownership of ships are limited, see for instance The Maritime Trader [1981] 2 Lloyd’s Rep 153 and The Aventicum [1978] 1 Lloyd’s Rep 184.

5. If it be the case that ostensible ownership of a vessel has been transferred with a view to defeating the interests of creditors then the transferor can be regarded as remaining the beneficial owner, see for instance The Maritime Trader, supra and The Tjaskemolen [1997] 2 Lloyd’s LR 465. As to this issue, I note that the authorities indicate that it is sufficient for the plaintiff to show that there is an arguable case as to the underlying liability. For instance in The Tjaskemolen at 471 the judge talked of transfers which would "defeat a creditor’s claim or potential claim". There is more than one legal route to this conclusion. For reasons which will become apparent I prefer to rely on s 60 of the Property Law Act (dealing with transactions intended to defraud creditors).

96. There are really three issues which arise on the plaintiff's case:

(1) Should I pierce the corporate veil so as to regard Kareltrust as, in effect, the alter ego of Karelrybflot?

(2) Should I treat the transaction between Kareltrust and Karelrybflot as a mortgage? and

(3) Should I regard the transaction between Kareltrust and Karelrybflot as voidable under s 60 of the Property Law Act as intended to defraud creditors?

97. I propose now to discuss these issues.

SHOULD I PIERCE THE CORPORATE VEIL SO AS TO TREAT KARELTRUST AS THE ALTER EGO OF KARELRYBFLOT?

98. In this case there is no scope for regarding Kareltrust as the corporate alter ego of Karelrybflot. They are, it seems, truly separate companies with quite different shareholding and management structures.

99. The complaint made bythe plaintiffs is not really that Kareltrust should be regarded as the alter ego of Karelrybflot, so that ownership of Kareltrust can be attributed to Karelrybflot. Rather the complaint is specific to the detail of the transaction - that is an ostensible transfer of ownership having the effect and, so it is said, the purpose of defeating creditors.

100. Cases such as this can be analysed as involving the question whether the corporate veil should be lifted, see for instance The Tjaskemolen supra. But given that the statutory jurisdiction under s 60, Property Law Act appears right in point, I think that the general authorities on piercing the corporate veil are of limited assistance. I prefer to analyse the case in terms of principles of law which are specific to the particular complaint which is made by the plaintiffs here. That is not to say that I reject the plaintiffs’ arguments on this point. The present case is in fact quite similar to The Tjaskemolen.

SHOULD I REGARD THE TRANSACTION AS A MORTGAGE?

101. The arrangement between Kareltrust and Karelrybflot is, unmistakably, an in-substance financing transaction. The "purchase price" was calculated by reference to the financial exigencies of the situation facing Karelrybflot and not an assessment of the market value of the vessels. Tied up in the purchase agreement is an option to repurchase on terms which, at least in general, are closely analogous to the redemption rights of a mortgagor. Given what I think to be the discrepancy between the market value of the vessels and the purchase price, I think it practically inevitable that Karelrybflot will indeed redeem the vessels. That such redemption was contemplated as being inevitable is apparent from the terms of the management agreement which, in the absence of liquidation of one or other of the parties or default, continues until the option is exercised. Throughout, Karelrybflot has remained in possession of the vessels and acted in respect of the vessels as an owner might.

102. There are three aspects of the transaction which are not consistent with a mortgagor/mortgagee relationship. The first is that the redemption price does not provide for a reimbursement with interest for Kareltrust in respect of all capital expenditure; this because there is a discount to be applied in respect of depreciation on such capital expenditure and no allowance for interest. The second - and it is perhaps a related point - is that the agreement provides for entrepreneurial risk and reward in respect of the operation of the vessels to rest with Kareltrust. Karelrybflot’s entitlement is confined to a management fee. The third and most important factor is that there is no obligation on Karelrybflot to redeem the vessels. In other words, while Karelrybflot can insist upon exercising its option to purchase at any time in respect of the vessels, Kareltrust has no right to require Karelrybflot to exercise the option to repurchase and thus "repay" the money "advanced" to it.

103. For the plaintiffs it could be said that given the difference between the market value of the vessels and the purchase price under the agreement, the absence of an obligation on Karelrybflot to redeem/repurchase the vessels is of limited significance in terms of the practicalities of the situation. This is true. But it is not decisive.

104. The relationship of mortgagor/mortgagee is dependent upon there also being the relationship of debtor and creditor. In determining whether such a relationship exists, the pith and substance of the transaction will not be regarded as determinative, see for instance Re Securitibank (No. 2) [1978] 2 NZLR 136. The decision to leave out of the documents any requirement for the option to be exercised was, undoubtedly, deliberate. On this aspect of the case, the plaintiffs’ argument must come down to the assertion that the transaction was deliberately misdescribed in the agreement. If this was the case, then the only reason for such misdescription must have been an intent to defeat creditors. Since that is an independent and more general ground for challenging the transaction, it is, I think, convenient to cut to the chase and go directly to that issue.

SHOULD I REGARD THE TRANSACTION BETWEEN KARELTRUST AND KARELRYBFLOT AS VOIDABLE UNDER S 60 OF THE PROPERTY LAW ACT AS INTENDED TO DEFRAUD CREDITORS?

105. Section 60, Property Law Act, provides:-

"(1) Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors."

106. This section has a lengthy provenance (referred to briefly in my earlier judgment). The courts have always been astute to enforce s 60 and its precursors. For instance, in Freeman v Pope (1870) LR 5 Ch 538 Lord Hatherly LC at 541 said:-

"It is established by the authorities that in the absence of any such direct proof of intention, if the person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors and that the case is within the statute."

107. The authorities on this were reviewed by Perry J in Re Hale [1974] 2 NZLR 1 where other cases broadly to the same effect were discussed. The other authorities which I should mention here are Julius Harper Ltd v F W Hagendorn & Sons Ltd [1991] 1 NZLR 530 and Swann v Secureland Mortgage Investment Nominees Ltd (in Liquidation) (1992) 2 NZConvC 191,088. The relevant principles have also been discussed extensively in the recent High Court of Australia decision Cannane v J Cannane Pty Ltd (1998) 192 CLR 557.

108. The salient features of the present case are as follows:-

1. As at April 1998 Karelrybflot faced claims from creditors, including Wallace and Cooper.

2. It is to be inferred from the correspondence produced, clause 4.1 of the sale agreement and Mr Zhu’s affidavits that Kareltrust and Karelrybflot were aware of the possibility that claims might be enforced against the vessels by in rem proceedings if and when the vessels were redeemed.

3. It is to be inferred from Mr Zhu’s second affidavit that Kareltrust and Karelrybflot were aware that the argument that forfeiture and likely redemption of the vessels extinguished in rem claims was not necessarily going to succeed against such claims.

4. It is likewise to be inferred that they knew that, in the event of such in rem claims being brought, a prior "sale" of the vessels to a separate but associated company would provide, on a belt and braces basis, a defence additional to the extinction by forfeiture argument to which I have just referred. I say this given that legal advice of a sophisticated nature was taken. As well, the scheme of the agreement as a whole points to such an awareness. So too does the arrangement under which title to the vessels, following redemption, was to vest immediately in Kareltrust. This rather points to an intention that there be no practical opportunity for in rem proceedings to be commenced following redemption.

5. The April 1998 transaction between Karelrybflot and Kareltrust was, at best for Kareltrust, a financing arrangement.

6. In practical terms (and with the possible and significant exception of who has met outgoings in respect of the vessels), nothing changed as to the externalities with regard to the vessels and their operation by reason of the sale. The sale has not been registered in Russia (at least when this point was last addressed in affidavits). Mortgages affecting the vessels in Russia appear not to have been discharged or otherwise interfered with. Karelrybflot resisted, in correspondence, threats to have the vessels arrested as if it were the owner and without mentioning (in circumstances where I think that mentioning was at least warranted) the position of Kareltrust as owner. Karelrybflot obtained a court order for possession of the vessels against crew members in litigation where Kareltrust was not mentioned as the owner of the vessels. The position of Kareltrust as owner was only raised when these proceedings in rem against the vessels were taken.

7. There were three possible categories of claim which might affect the vessels which were in the minds of Kareltrust and Karelrybflot: mortgages, maritime lien claims by crew members and other statutory in rem claims. The agreement provided for the practical recognition of liabilities to crew members and mortgagees. The failure to make provision for the payment of those with statutory in rem claims must have been, in that context, deliberate.

8. It appears likely that the sale to Kareltrust would never have been mentioned otherwise than between the parties to it and their professional advisers if these in rem proceedings had not been commenced.

9. Mr Tetley suggested that Wallace and Cooper could have other vessels belonging to Karelrybflot (operating in the Barents Sea) arrested in support of the claims. This strikes me as being unrealistic. At the risk of being thought to be cynical, I believe that the purpose of the present application to set aside the in rem proceedings is to create a situation in which Karelrybflot can deploy, against Wallace and Cooper, commercial arguments based on a practical inability to enforce in New Zealand any judgment which might ultimately be obtained. I can see no other practical reason why Kareltrust should have incurred the expense which it has in respect of the present proceedings given the complete indemnity which it is entitled to from Karelrybflot under the sale agreement and, given as well, the absence of any arrest. Indeed, I see no reason why the April 1998 arrangements were entered into in the form in which they were unless this was the intention.

109. As is perhaps apparent from my review of the facts, I am sceptical whether the legal documentation put in place by Russell McVeagh McKenzie Bartleet and Co represents the bargain as acted upon by Kareltrust and Karelrybflot.

110. I have mentioned already the apparent incongruity between the interest rate payable by Kareltrust to Scandsea and the interest to which it is entitled if the option to purchase is exercised. As I have indicated, I have seen none of the preparatory or internal documents of the sort which I imagine would have been generated in respect of this transaction. Although Mr Zhuk has said in his most recent affidavit that Kareltrust has in fact met expenses associated with the commissioning and operation of the vessels, no documentation in support of this assertion was produced in admissible form. Moreover, although an affidavit to the same effect was obtained from Mr Montgomery, Kareltrust failed to produce him for cross-examination when ordered to do so with the result that his affidavit was not read. If the management agreement had been complied with faithfully I would have expected there to be accounting exercises carried out between Kareltrust and Karelrybflot. If such accounting exercises had been carried out these would have left a written trace. Yet no accounting records have been produced. As well, it is unclear to me just why Kareltrust should have raised funds to enable the redemption of the vessels when presumably Karelrybflot could have done so itself. The major shareholder of Karelrybflot is the government of the Karel Republic. While there might well be financial circumstances particular to Kareltrust and Karelrybflot which made Kareltrust a more credit worthy borrower, there has been no direct evidence as to this.

111. It is not necessary for me to go as far as to hold that the written agreements are shams. I would be reluctant to do so in a case where Mr Zhuk has not been cross-examined. I need not determine finally whether I should do this notwithstanding my reluctance as it seems to me that, in any event, the sale agreement falls foul of s 60, Property Law Act. If it was the case that Karelrybflot needed to borrow $NZ800,000 in order to secure redemption of the vessels, and deliberately structured the financing arrangements associated with this in an artificial way so as to exclude claims in rem which it knew were likely to surface as soon as the vessels were redeemed, and this in a context where there was a general intention to prejudice such claimants, then I think that this constitutes an agreement entered into with intent to defraud creditors.

112. It is, I think, inescapable that, at the very best from the point of view Kareltrust and Karelrybflot, this is exactly what they set out to do. By entirely artificial arrangements they have purported to preserve to Karelrybflot the practical incidents of ownership but, at the same time, exclude what would otherwise be the rights of its creditors to enforce the recovery of payment of money which may be owed to them. This is in a context where I think it is inescapable that both parties knew that such creditors would be prejudiced and thus that such prejudice was intended. Indeed such prejudice was the very purpose of the transaction. In accordance with the approach of Lord Hatherly in Freeman v Pope, supra I think that this was a dishonest and fraudulent transaction.

113. Mr Tetley, on behalf of Kareltrust, suggested that I was in effect reversing the onus of proof by requiring Kareltrust and Karelrybflot to explain the transaction; this in circumstances where the onus of proof, in terms of establishing an intention to defraud creditors, rests with the plaintiffs. Perhaps predictably, I disagree.

114. The inferences in this case involve filling in missing parts of the picture; that is parts of the picture which are not the subject of direct evidence. All the relevant inferences relate to matters which are within the direct knowledge of Kareltrust and Karelrybflot. I am satisfied that there is evidence before me which does permit me to complete the picture in a way which is adverse to Kareltrust and Karelrybflot. Those companies knew they faced an allegation of being parties to a fraudulent conveyance of the vessels. If convincing and innocent explanations of the evidence had been proffered by Kareltrust or Karelrybflot then, of course, I would not have drawn the inferences which I do draw. Their failure to provide that evidence not only permits me to draw inferences which would not otherwise be available but also gives me confidence that I have reached the right conclusion.

115. Given the terms of my judgment of 19 July 1999, Kareltrust and its solicitors were well aware that there were issues relating to the April 1998 transaction which I regarded as warranting explanation. I reiterated that view in two conferences which occurred between 19 July and the resumed hearing of the application on 13 August. Kareltrust/Karelrybflot did provide some additional information in relation to transactions but this at such a level of generality (and at times inaccuracy) as to be unhelpful.

116. I understand that there are difficulties in dealing with Russia and that there may well be difficulties in obtaining comprehensive affidavits from Russia and at short notice. I did not wish to proceed with the hearing on 13 August 1999 if the parties felt that they were going to be at a disadvantage in terms of time. In the course of the hearing on 13 August 1999 I made it clear to Mr Tetley that if there were explanations for the matters which troubled me then I was quite happy to give his clients time to provide them. The offers of more time were politely declined. Kareltrust has been insistent that the application be determined as soon as possible. Yet, in a context where the vessels have not been arrested, I find it difficult to understand what the urgency is all about except a desire to take a tactical advantage of what was wrongly perceived to be evidential difficulties confronting the plaintiffs.

117. The point of these remarks is to make it clear that Kareltrust has not been ambushed by what has happened. Up until the conclusion of the hearing on 13 August 1999, Kareltrust continued to have the opportunity to seek more time if it thought that was necessary in order to provide a straight forward and comprehensive account and explanation of the transactions.

118. I am satisfied that the agreement between Kareltrust and Karelrybflot was entered into with intent to defraud creditors so that, for present purposes, I must regard Karelrybflot as the beneficial owner of the vessels at the time the proceedings were commenced.

DISPOSITION

119. The application to set aside the proceedings is dismissed.

120. The plaintiffs are entitled to costs of $5,000 all in. Kareltrust can set-off its entitlement under the costs order made in its favour in respect of the earlier hearing.

Solicitors:
R A Fraser & Associates, Christchurch for the Plaintiffs
Russell McVeagh McKenzie Bartleet & Co, Auckland for Kareltrust