Fino Maritime SA v Shipping Corporation of India Ltd and Another (A176/2004) [2008] ZAKZHC 14; [2008] 3 All SA 285 (D) (8 January 2008)

IN THE HIGH COURT OF SOUTH AFRICA

DURBAN AND COAST LOCAL DIVISION

(Exercising its Admiralty Jurisdiction) REPORTABLE

Case No: A176/2004

In the matter between:

FINO MARITIME SA APPLICANT

And

SHIPPING CORPORATION OF INDIA Ltd

RESPONDENTS

AND ANOTHER

­­­­­­­­____________________________________________________________

JUDGMENT

__________________________________________________­­­­­____________

MADONDO J

INTRODUCTION

[1] On 23 September 2004 this Court in the exercise of its admiralty jurisdiction granted an order on an urgent application for the arrest in terms of section 5(3) of the Admiralty Jurisdiction Regulation Act 105 of 1983 (as amended) of the second respondent vessel, “mv Lok Pratima” (the arrest application). The purpose of the arrest was to obtain security for a claim the applicant had instituted against Fertilizers and Chemicals Travancore Ltd (FACT), of Udyong Mandal, Kochi, India, by means of arbitration proceedings in India, Calcutta, in the sum of US$476495.88 together with interest at 12% per annum and costs. Pursuant to a charter party entered into in respect of the “mv Jovial Ducking” between the applicant and FACT on 8 November 2002 in India. The vessel was arrested on the basis that it was an associated ship of FACT. The Government of India is a majority shareholder in almost all of its public companies.

[2] On 24 November 2004 the first respondent launched an application (the setting aside application) out of this Court for an order:

(a) Setting aside the deemed arrest of the second respondent vessel, “mv Lok Pratima.”

(b) Discharging the letter of undertaking provided by the North of England Protecting and Indemnity Association Limited;

(c) Directing the attorneys of the applicant to return the letter of undertaking to the attorneys of the first respondent for cancellation, and

(d) Ordering the applicant to pay the costs of the application.

PARTIES

[3] The applicant is Fino Maritimes SA, a company duly incorporated and registered in accordance with the laws of Panama having its address at Salduba Building, Top Floor, Est, 53rd Street, Urbanzagton Oberio, Panama, and carrying on business as, inter alia, a ship owner at care of its managers TMTCo, Ltd, 12th Floor, No. 167 Fuhsin N Road, Taipei, Taiwan.

[4] The first respondent is the Shipping Corporation of India Ltd (SCI), a company duly incorporated and registered according to the company laws of India and which carries on business at Shipping House, 245 Madame Cama Road, Bombay, India 400021.

[5] The second respondent is the ship, Mv “Lok Pratima”, owned by SCI and which was during September 2004 within the jurisdiction of this Court. In order to avoid confusion the original heading and citation of the parties have been retained, notwithstanding the fact that the first respondent is technically the applicant in this application.

FACTS

[6] On 8 November 2002, applicant and FACT concluded a voyage charter party (the charter party), and in terms of which the applicant chartered the ship, mv “Jovial Duckling” to FACT for the carriage of 45000 metric tons of rock phosphate from Casablanca to Kochi, India, at the freight rate of $21 per metric ton. The charter party also provided that a demurrage at the rate of $6000,00 per day, address commission, and brokerage commission of 1,25% would be payable. FACT is described as a major Indian Government manufacturing enterprise which has been in business since 1947. It is listed on the Cochin Stock Exchange, Kochi, Mumbai Stock Exchange and National Stock Exchange, Mumbai. Its majority shareholder to the extent of 98.1% is the Government of India in the form of the State Resident of India. It carries on business as the manufacturers and marketers of fertilizers. In addition, it provides engineering consulting services and it fabricates certain equipment and having interests in petro-chemicals, hydro-metallurgy, chemicals and pharmaceuticals.

[7] Pursuant to clause 57 of the charter party, the parties agreed that all disputes arising under their charter party should be settled in India in accordance with the provisions of the Arbitration and Conciliation Act, 1966(No. 26 of 1996) or any further amendments thereof, and under the Maritime Arbitration Rules of the Indian Council of Arbitration. The arbitrators to be appointed from out of the maritime panel of arbitrators of the Indian Council of arbitration. The arbitrators should be commercial men.

[8] A total of 44 809,00 metric tons of rock phosphate was transported from Casablanca, Morocco; at the agreed rate of $21,80 per metric ton, to Kochi, India. Subsequent thereto, a dispute arose between the applicant and FACT with regard to the balance of freight, demurrage and shifting charges which were due and payable by FACT to the applicant. However, FACT refused to pay. As a result of the alleged breach of the charter party by FACT, the applicant referred the dispute to India for arbitration as per agreement. In such arbitration proceedings, the applicant was suing FACT for the payment of the sum of $476 493-88 together with interest at 12% per annum with effect from 1 May 2003 to date of payment. FACT denied that it was indebted to the applicant and claimed that it had due to the late arrival of the vessel, mv Jovial Duckling, suffered much damages. In consequence thereof, FACT brought a counter claim against the applicant.

[9] On 23 September 2004, the applicant caused the second respondent to be arrested in terms of section 5(3) of the Admiralty Jurisdiction Regulation Act No. 105 of 1983 (the Act) for the purpose of providing security to the applicant for its claim, advanced in the arbitration proceedings in India, against FACT.

[10] The first respondent procured a letter of undertaking from the North of England Protecting and Indemnity Association Limited (the Club) which provided that the Club would make payment of any sum that would in terms of a written settlement agreement between the applicant and FACT be due to the applicant in respect of the claim or for which FACT would be found liable to pay to the applicant in terms of the Indian Arbitration award. In consequence thereof, the vessel was released from arrest, but still it is in terms of section 3(10) (a) (i) of the Act deemed to remain under arrest.

[11] However, the claim against FACT was settled in April 2005 and in consequence thereof, FACT paid to the applicant the sum of US$75,000 in full and final settlement of its claim.

[12] On 24 March 2004 the first respondent lodged an application for the release of the second respondent vessel from a deemed arrest and the discharge of security established in this Court on the basis that the applicant had at the time of the arrest of the vessel and of the application for the release of the vessel no genuine and reasonable need for security in respect of its claim.

ISSUE

[13] The matter came for argument on the opposed roll on 15 November 2007. The issue between the parties was whether the applicant had demonstrated the existence of a genuine and reasonable need for the security sought. However, it was common cause between the parities that the original applicant (applicant in the arrest application) retained the onus of satisfying the Court that it was entitled to the original order and that such onus be discharged on a balance of probabilities.

[14] Mullins for the applicant argued that the applicant was entitled to arrest the second respondent for the purposes of providing security for its claim. Section 5(3) of the Act does not lay down any specific requirements which have to be met in order to acquire security. FACT had been in financial crisis over a long period of time. It had suffered profit losses every year. This is evident from the company’s financial statements for 2002 – 2003. Its continued viability as a company depended largely on the state aids, loan, etc.

[15] Mr Mullins further argued that it is not correct to say that an arrest for security in South Africa is permissible only where the applicant cannot obtain such security in the contemplated or pending arbitration proceedings and that the arrest provisions in section 5(3) of the Act are available only as a matter of last resort. He argued, further, that it is trite law that in resisting an application to set aside an arrest obtained in terms of section 5(3) of the Act, the original applicant is entitled to advance any ground to justify the arrest irrespective of whether or not it was relied upon in obtaining the order in the first instance.

[16] Mr Mullins contended that the applicant’s need for security was both genuine and reasonable. In support of his contention Mr Mullins argued that it was common knowledge that FACT was in the process of winding down its operations, the prospect of FACT challenging execution of an award in Court proceedings in India could result in enforcement of award being delayed in excess of a decade, and that the commodities imported by FACT would not necessarily be available for attachment.

[17] Section 5(3)(a) provides:

“A court may in the exercise of its admiralty jurisdiction order the arrest of any property for the purpose of providing security for a claim which is or may be the subject of an arbitration or any proceedings contemplated, pending or proceeding, either in the Republic or elsewhere, and whether or not it is subject to the law of the Republic, if the person seeking the arrest has a claim enforceable by an action in personam against the owner of the property concerned or an action in rem against such property or which would be so enforceable but for any such arbitration or proceedings.”

[18] In order to succeed in the application for an order for the arrest of a ship in terms section 5(3)(a) of the Act for the purpose of obtaining security in respect of a claim the applicant must satisfy the Court that:

(a) it has a claim enforceable by an action in rem against the ship in question or against a ship of which the ship in question is an associated ship;

(b) it has a prima facie case in respect of such a claim, which is prima facie enforceable in the nominated forum or forums of his choice;

(c) it has a genuine and reasonable need for security in respect of the claim.

If the applicant satisfies the above mentioned requirements, then it is entitled to an order in terms of the section, unless the respondent ship owner places countervailing material before the Court by which it is proved that there are sound reasons for not granting the order. See Cargo Laden On Board The MV Thalassini AVGI v MV Dimitris 1989(3) SA 820(AD), 832I – 833A-B.

GENUINE AND REASONABLE NEED FOR SECURITY

[19] In casu, this is the only requirement which is in issue and therefore relevant for decision. The law on this requirement was first developed in Katagum Wholesale Commodities Co Ltd vs The MV PAZ 1984(3) SA 255. Friedman J, with Kriek J concurring, stated at page 268B-C that where the application is one to obtain security for a claim sounding in money, it would at least be expected of an applicant that he alleges and explains:

(a) why he needs security;

(b) that he has not already obtained security; and

(c) that he cannot obtain such security in other contemplated or pending arbitration proceedings.

[20] Didcott J at 269H – 270 A had the following to say in this regard:

“It is a serious business to attach a ship. To stop or delay its departure from one of our ports, to interrupt its voyage for longer than the period it was due to remain, can have and usually has consequences which are commercially damaging to its owner or charterer, not to mention those who are relying upon its arrival at other ports to load or discharge cargo. Especially when the attachment is sought ex parte, as can be and almost always is done, the Court must therefore be given sufficient information to show that a measure with results so harmful to others is nevertheless necessary for the protection of the applicant’s legitimate interests. It will therefore want to assure itself, for instance, that his claim in the main proceedings is apparently no spurious one, that he is not bent on merely harassing the other side in these or gaining a tactical advantage in relation to them, that his need for security is both genuine and reasonable, that no alternative and less disruptive opportunity for obtaining such has been or is likely to become available to him and, if one has already been lost, that this was not his fault or, I should rather say, not his fault to such a degree as to be fairly held against him. The Court must be told enough to put it at its ease on all these scores.”

NEED FOR SECURITY

[21] The applicant has to satisfy this Court on the balance of probabilities that it was entitled to the original order. The first question for decision is whether there was a need for security for the applicant’s claim. On, my view, in order for this Court to be able to sufficiently determine the existence of the need for security, it must first establish whether FACT was at the time of arrest of the second respondent vessel able to pay its debt. The answer to the question is a prime consideration and a decisive factor in determining the genuineness of the need for security, considerations of convenience and of not meeting the requirements for the granting of an interim relief in another country are, in my opinion, only relevant to determine the reasonableness of the need for the security sought.

[22] In the Founding Affidavit of the arrest application, the applicant averred that it had a genuine and reasonable need for security on the grounds that:

(a) Given the then financial position of FACT, the fact that it had not yet made payment was a matter for great concern.

(b) The applicant had a concern that if it were to obtain an award in the arbitration proceedings, which were then pending, in India, it would not be able to execute it against FACT in India unless it held security for its claim. This was based on the information that FACT was in the process of winding down its operations. This, in applicant’s view, created a real risk that an arbitration award would simply not be paid;

(c) The commodities imported by FACT would not necessarily be available for attachment, and

(d) Obtaining an arbitration award in favour of the applicant could not preclude FACT from challenging execution of the award in Court proceedings which would delay enforcement thereof for several years.

[23] I propose to deal with the financial position of FACT at the time of an application for arrest. It has been argued on behalf of the applicant that FACT had been running at a loss since 1998 and that it was in financial crisis. This appears more fully in the affidavit of Venkites Subramanian, in his capacity as an advocate of record for the applicant in the arbitration proceedings between it and FACT at Cochin, India, filed in opposition to an application by the first respondent to set aside the arrest of the second respondent, that on 20 April 2004 a report appeared in the newspaper, “The Hindu”, stating that FACT was heading towards a financial crisis.

[24] According to the report FACT was facing a severe shortage of working capital and there was no immediate government help in sight. In paragraph 2 of the report, it was stated that FACT had exhausted its overdraft facility and that it had to meet its monthly salary bill of Rs.10 crores. Further, that it owed a sum of Rs.60 crores to Kochi Refineries Ltd, and about Rs.20 crores to its transport contractors. Further, that FACT had approached the Government of India for a Rs.200 crores soft loan as working capital for the company, which had not been forth coming. The financial situation of FACT was in the affidavit of Subramanian described as bad.

[25] There are conflicting opinions by recognized Indian chartered accountants, Kishore Shantilal Shah (K.S.S) and Dr Pravin P Shah (Dr P.P.Shah). In the affidavit of K.S.S, a practicing chartered accountant of Mumbai requested by Advocate V Subramanian, acting on behalf of the applicant, to study certain annual reports and accounts of FACT and to give his opinion thereon. The applicant has relied heavily on the opinion of K.S.S in order to establish the existence of the need for security for its claim. Upon perusing the documents referred to above K.S.S concluded that the balance sheet of FACT for the year ended 31st March 2003 indicated that the reserves and surplus, which is an important pointer to the net worth of a company and its future financial strength, soundness and stability, had reduced by a substantial amount of Rs.6158.70 lakhs, as compared to the previous year. K.S.S described this as an indicator to an unsound financial condition.

[26] In the same balance sheet an increase on loan funds of the company was shown, to K.S.S, this was indicative of the fact that FACT was facing a liquidity problem. The net sales of the company, as compared to the previous year, had reduced, but the sundry debtors had substantially increased by Rs.7834.44 lakhs, and which to K.S.S did not augur well for the financial soundness or strength of the company.

[27] The other liabilities of the company had increased by Rs.5012.34 as compared to the previous year. This according to K.S.S indicated a substantial increase in the general liability of the company which would affect its payment capabilities.

[28] For the year ended on 31st March 2003 the Government of India gave a grant of Rs.1000 lakhs to FACT in order to pay compensation to its workers who opted for a voluntary retirement scheme (VRS). According to K. S.S a company would normally announce a voluntary retirement to, among other things, down size its operation due to lack of business or financial weakness. There was also a deterioration or erosion of the share capital of the company.

[29] Mr Mullins for the applicant has also argued that the ten year financial highlights of the financial statements reflect an accumulated loss over the five year period amounting to US$98664 477. The abstract for the years 2003-2004 reflects a further operating loss of Rs.16722 lakh (US$370 365 54). The accumulated losses suffered by FACT over the six year period accordingly amounted to US$135701031.

[30] Mullins further argued that the balance sheet of FACT for the year 2002-2003 might reflect total assets of US$ 204 138 792.61, more than half of the asset value represented the investment of the interest –bearing Government loans (US$110 121 845). Loans in respect of which FACT had defaulted and which were repayable under the restructured arrangement subsequently proposed by the Government. According to Mullins the financial statements themselves paint a picture of a company in severe financial crisis, the viability of which dependent upon largess from the Government of India. Basing his argument on the director’s report of November 2004 with regard to the financial position of FACT, Mr Mullins said that the sustained losses experienced by FACT would erode the remaining net worth of the company to nil within the space of a few years.

[31] To the contrary, Mr Stewart for the first respondent argued that the applicant must show that the party against whom it has the claim is “in a financially precarious situation or would not otherwise be able to meet any judgment obtained in the proposed action for damages”. In support of his argument, he referred me to the mv “Leresti”: Afris Shipping International Coporaton v mv “Leresti” (DMD) Part time Intervening 1997(2) SA 681(D) at 689D-E and mv “Rizcun Trader(4): mv Rizcun Trader” v Manley Appledore Shipping Ltd 2000(3) SA 776(C) at 805B.

[32] Stewart argued further, that the applicant has missed the point when it alleged that the fact that FACT had not made payment of its claim was a cause for concern with regard to the financial position of FACT because the claim was defended on bona fide grounds.

[33] The allegation that FACT was in the process of winding down its operations and that there was accordingly a very real risk that an arbitration award would simply not be paid was patently false and has not been substantiated. The allegation that the applicant might experience difficulty in effecting an attachment on the commodities imported by FACT has been entirely misleading on the grounds that FACT has very considerable fixed assets in India.

[34] In the founding papers of the setting-aside application the first respondent states that FACT is a major Indian Government manufacturing enterprise that has been in business since 1947. It is listed on the Cochin, Mumbai Stock Exchange, Mumbai and National Stock Exchange, Mumbai. Its majority shareholder to the extent of 98.10% is the Government of India in the form of the State President of India. Since FACT is a listed company the first respondent had easily managed to obtain a copy of FACT’s audited financial statement for the financial year ended 31 March 2003 and the copy of which was annexed to the founding papers as “KP4”.

[35] The company is a major operation with depreciated fixed assets, which have not been re-valued, of US$159.4 million and capital work in progress of US$2.5 million. Its current assets exceeded current liabilities by US$42.2 million. It also had small investments of US$0.1 million and the net assets of US$204 million.

[36] The financial highlights of the company for the last ten years show that the company started making losses in the 1999 financial year of just over US$10 million, in 2000 of nearly US$9 million, in 2001 of around US$33.5 million, in 2002 it turned a profit of around US$125,000.00. In 2003 financial year the company suffered a loss of US$44.25 million. The net asset worth of FACT of US$ 204 million takes into account all of those losses and the first accumulated loss of the company recorded in the 2003 financials of US$30.5 million.

[37] Mulla & Mulla & Craigie Blunt & Caroe, firm of solicitors at Mumbai, acting on behalf of the first respondent, requested Dr Pravin P. Shah, a chartered accountant of Pravin P. Shah & Co, to study the opinion of K.S.S dated 14 February 2005 as well as the annual reports and related papers of FACT and to give his expert opinion thereon. Dr P.P Shah is the chartered accountant in possession of a Ph.D Degree in cost accounting and a senior managing partner of Pravin P. Shah & Company of chartered accountants at Mumbai, India. In his affidavit Dr P.P. Shah accuses K.S.S of having considered irrelevant materials, ignored relevant materials and aspects misunderstood and misinterpreted some of the facts when studying the documentation relating to the financial position of FACT. The K.S.S opinion was based only on the audited accounts of FACT for the year 2002- 2003 and certain results of fact.

[38] Dr P.P. Shah based his opinion on the audited accounts of FACT for the financial years ended 31st March 2003, as contained in the auditors report issued by Ayyar & Cheian, chartered accountants in FACT’s 59th Annual Report (exhibit “A”), the audited financial results for the year ended 31st March 2004 (exhibit “B”), published by FACT and made available at FACT’s internet site, and the unaudited financial results for three months ended 30th September 2004, as published by FACT and extracted by Dr P.P. Shah from FACT’s internet site (exhibit “C”).

[39] In the previous year, the Government of India had granted to FACT an amount of Rs.16.717.43 lakhs as an interest waiver, as against Rs.1309.70 lakhs granted in the year ended 31st March 2003. Notwithstanding the fact that the Government of India had actually waived the interest, K.S.S dealt with a hypothetical situation that the loss would have been more if the waiver was not allowed. According to Dr P. P. Shah the quantum of the total loss indicated under profit and loss account in K.S.S opinion does not indicate the correct picture or financial standing of FACT.

[40] In his opinion K.S.S states that the deferred Governments grants are repayable to the Government, with or without interest. In his affidavit Dr P.P. Shah states that the opinion of K.S.S is incorrect on the ground that it is a common knowledge that grants, by their nature, are not repayable.

[41] K.S.S failed to appreciate the fact that a subsidy is given to the manufacturers by the Government in order to enable the farmers to buy the fertilizer at a concessional price from such manufacturers. The subsidy is for the benefit of the customers and not of FACT. Dr P.P. Shah concluded that the grant of a subsidy by the Government could, by no means, indicate the financial instability of FACT.

[42] In his opinion K.S.S states that for the year ended 31st March 2003, the Government of India gave FACT a grant of Rs.1000 lakhs for the payment of compensation to its worker who opted for a voluntary retirement scheme (VRS) K.S.S then concluded that FACT wanted to down size its operation due to lack of business or financial weakness. To the contrary, Dr P.P. Shah states that reduction in the workforce may improve the financial soundness of the company. According to Dr P.P. Shah no adverse inference can be drawn against FACT merely on the basis of an offer for a voluntary retirement scheme.

[43] K.S.S heavily relied on the qualifications given in the auditor’s report for the financial year 2002 – 2003 and concluded that the accounts did not reflect true and correct state of affairs of FACT. K.S.S did not consider the replies in this regard by the Board of Directors in the Director’s Report, given at page 10 of the 59th Annual Report. Nor has he explained the reasons for not considering them. Dr P.P. Shah confirmed that the heavy reliance placed by K.S.S on the qualifications in the auditor’s report for the financial year 2002-2003 was unwarranted and that it could not have formed the basis of his opinion.

[44] Dr P.P. Shah is of the view that the audited accounts alone, cannot be considered for judging the financial soundness of a company. The financial health of a company depends on various factors such as, the current market value of its assets, future prospects of the business of the company, diversification program and financial restructuring. The accounts of most capital intensive companies may show a negative network in the initial years and from this alone, one cannot conclude that they are financially unsound companies.

[45] The other important factor which can indicate the ability of a company to discharge its potential liability is a large turnover of funds during a year. Dr P.P. Shah states that during the financial year 2003- 2004 FACT realised Rs.861crores from its debtors. This shows the large size of funds FACT was dealing with.

[46] According to the unaudited financial results, the net sales of FACT for the 9 months ended 31st December 2004 were Rs.863 crores. That, according to Dr P.P.Shah, is suggestive of that the funds rotation was also substantially large during the financial year 2004 – 2005. The annual general meeting of FACT was held on 30 December 2004 and that means that the audited accounts of FACT, for the year ended 31st March 2004, were available to the public before 30 December 2004. K.S.S based his opinion on the 59th Annual Report of FACT and did not consider the audited accounts for the year ended 31st March 2004 which was the then available latest data about FACT.

[47] Dr P.P. Shah states that the net worth as per the balance sheet of a company is not always indicative of the real worth of the company. The appreciation in the value of assets is not reflected in the balance sheet. What is stated in paras 10,11,17,18 and 19 of the K.S.S opinion could have an impact on the book net worth and not on the actual worth of FACT based on fair value of assets and liabilities.

[48] This Court has to decide whether FACT was at the time of the arrest of the second respondent ship in a precarious financial position in that it could be said that it would not be able to satisfy an award which might be issued against it, in the pending arbitration proceedings, in India. It has been argued on behalf of the applicant that FACT’s failure to pay its debt to the applicant until the arrest of the second respondent ship, had something to do with its payment incapability. It is undeniable fact that FACT had also brought a counter-claim to the applicant’s claim of US$476.495.88.

[49] In its counter-claim FACT sought payment of the sum of US$5.11.076.52 by the applicant, as the losses it had suffered towards extra charges incurred for obtaining phosphonic acid from external sources to make good shortfall in production of phosphonic acid, interest paid to the bank for payment towards cost of cargo/freight and as loss arising consequent to loss of production on account of non-availability of rock phosphate. These losses came as a result of a substantial delay in the arrival of the vessel, mv “Jovial Duckling” at Cochin. The reason for such delay was the arrest of the vessel at Gibraltar on account of a non-fulfillment of its obligations under another contract. The FACT was allegedly in no way responsible for the delayed arrival of the vessel at Cochin and the consequent demurrage incurred by the vessel at the discharge. FACT alleged that the delay in arrival at Cochin was due to reasons solely attributable to the applicant. In the light of the aforegoing, FACT was adamant that it was not liable to pay any amount to the applicant towards any outstanding amount under the charter party. On the contrary, it was the applicant which was indebted to FACT in the sum of US$5.11.076.52.

[50] The applicant in its reply admitted that the vessel arrived late at Cochin and stated that the delay was not due to its conduct, default or neglect, but to an excepted cause, i.e arrest order passed by a Court in Gibraltar for which the applicant was not responsible or liable. However, it could reasonably be inferred from the settlement agreement reached between the applicant and FACT, and in terms of which FACT paid a sum of US$75.000 to the applicant in full and final settlement of its claim including a counter-claim, that FACT had a bona fide defence to the applicant’s claim. In the premises, it cannot be true and correct to attribute FACT’s failure to pay its debt to the applicant to its payment incapability.

[51] In an application to have an arrest set aside an owner may place evidence before the Court to refute the evidence adduced in the arrest proceedings and may furthermore canvas any other ground to show that the vessel should not have been arrested and ought to be released. See Akademik Fyodorov: Government of the Russian Federation and Another v Marine Expeditions Inc 1996(4) SA 422(C) at 442 E-F.

[52] It is generally accepted that the decision whether the arrest of a vessel should be set aside maybe based not only on the allegations made in the affidavits in the arrest proceedings but also on the allegations in the answering affidavits filed in opposition to the application to have the arrest set aside. See Thalassini Avgi, supra, at 834 F-G and Weissglass NO v Savonnerie Establishment 1992(3) SA 928(A) at 936H.

[53] In order to discharge an onus resting on it, to establish the existence of the need for security for a claim sounding in money, the applicant must show that FACT was in a financially precarious situation or would not otherwise be able to meet an award obtained in the then pending arbitration proceedings. See The Leresti, supra, at 689 D-E; Rizcun Trader, supra, at 805 A-B.

[54] It is more apparent from the papers that Venkiteswaran Subramanian, an advocate of record of the applicant, in assessing the financial situation of FACT placed undue reliance on insufficient information, irrelevant facts and on unsubstantiated newspaper reports and concluded that FACT was in financial crisis. Subramanian lost sight of the fact that although FACT had suffered profit losses over a period of time, its assets had at all times relevant hereto exceeded its liabilities. There is nothing to show that the asset base of FACT was eroding in such a way that could generate a reasonable fear that FACT could not pay its debt of US$350.000. This was a very small amount of money regard being had on that FACT did not have any liquidity problem.

[55] Subramanian placed an undue weight on a report which appeared in the newspaper, “The Hindu”, of 20 April 2004, annexed to his affidavit as exhibit “D”, that FACT was heading towards a financial crisis. In such report it was stated that FACT was facing a severe shortage of working capital and that there was no immediate Government help in sight. It was also reported that the opening of FACT’s plant after its annual maintenance shut down, was also likely to be delayed due to a shortage of working capital. He also relied on the report which appeared in the newspaper, “Business Express” of 29 April 2004, annexed to his affidavit as exhibit “E”. In this newspaper, it was reported that FACT was hoping to make a saving of about Rs.60 crores though restructuring exercises’ at all levels so as to prevent FACT company from slipping into clutches of Birf. The report further quoted the chairman and managing director of FACT, Mr S Balan stating, “The company had been identified as a potentially sick unit and all our attempts will stop it from going to Birf without asking the Government for any fresh induction of funds.”

[56] From all this, Subramanian then wrongly concluded that FACT was indeed in financial crisis and that by the time the applicant obtained an award and sought to execute it against FACT for the recovery of its claim, FACT might not be in a position to pay. For this reason, Subramanian was of the view that the applicant had a genuine and reasonable need for security. Since the source of the information contained in the newspaper reports was not disclosed and the authenticity thereof, was not proved, such reports are hearsay, therefore lack probative value and as a result, no weight could be attached to them in assessing the financial situation of FACT. It, therefore, necessarily follows that such an assessment by Subramanian could not be said to be proper and fair and, in my view, no reliance can be placed thereon in determining the financial situation of FACT at the time of arrest of the second respondent ship.

[57] In the papers as well as in the heads of argument various criticisms have been levelled against the opinion of Kishore Shantilal Shah (K.S.S), a practicing chartered accountant in Mumbai. However, I do not propose to deal with the whole gambit of criticisms levelled but with a few, which in my view, are salient and legitimate.

[58] On the examination of very limited facts and documentation available to him, K.S.S concluded that FACT was not financially sound so to be able to pay the applicant’s claim. On his own version K.S.S only studied the audited accounts of FACT for the financial year ended 31st March 2003 as contained in FACT’s 59th Annual Report, the audited financial results for the year ended 31st March 2004, the audited financial results for three months ended 30th September 2004. He did not have the benefit of any discussions, nor did he have any reference to any other books of accounts of FACT. There were no inputs or documents from FACT.

[59] K.S.S did not consider the 60th Annual Report which was the then latest date available about FACT. The KSS opinion is mainly based on the 59th Annual Report. Nor has he proferred any explanation for not considering the 60th Annual Report. The 60th annual general meeting of FACT was held on 30 December 2004 and K.S.S gave his opinion on the matter on 14 February 2005. KSS did not also base his opinion on the audited financial accounts for the financial year 2003- 2004 but on 2002 – 2003 instead, despite the fact that such accounts were published before the date of his opinion. Mr Mullins for the applicant has argued that the financial position of FACT appearing from the financial statements for 2002 – 2003 speaks volumes.

[60] Dr P.P.Shah in his affidavit states that in terms of clause 8 of Part 1 of Second Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice should obtain sufficient information to warrant the expression of an opinion. In, my view, K.S.S has not laid sufficient basis for his opinion that FACT is not a financially sound company. Owing to the paucity of the information K.S.S examined prior to giving his opinion and a misdirection on his part as to the relevance of all documentation which was at the time before him, I am not convinced that such an opinion is a true and correct reflection of the financial condition of FACT.

[61] Nor am I satisfied that the applicant has demonstrated sufficient objectivity when dealing with the financial state of affairs of FACT. This is more apparent from the assessment of the financial situation of FACT. In assessing the financial situation of FACT K.S.S ignored some of the relevant documentation and facts, which if considered, could have impacted positively on the financial situation of FACT: K.S.S inexplicably placed undue reliance on the audited financial results of FACT for the financial year 2002-2003 instead of the audited financial accounts for the financial year 2003 – 2004 which, in my view, were more relevant as the then most recent data available about FACT. Secondly, FACT had both fixed and movable property in India in the form of freehold land, buildings, railway sidings, plant and machinery as well as the furniture and office equipment and vehicles. Thirdly, in all financial years relevant hereto, the current assets of FACT exceeded its current liabilities by far. In the financial year in point, the current assets had exceeded the current liabilities by US$42.2 million. Fourthly, it had nett assets of US$204 million. Fifthly, in the financial year 2003-2004 the company had made a profit of Rs.30560.69 lakhs and realized Rs.861 crores from its debtors, Rs.861 crores was a large turnover which was, in my view, indicative of FACT’s ability to discharge its potential liability in the normal course of its operations. FACT had turned a profit of US$125000.00 in 2002. Sixthly, the balance sheet of FACT as at 31st March 2004 showed an increase in cash and bank balances to Rs.2466 lakhs as compared to Rs.1649 lakhs in the previous financial year.

[62] In judging the financial health of the company the current market value of the assets and the future prospects of the business of the company are also necessary and relevant considerations. The audited financial accounts of the company alone, cannot sufficiently judge its financial soundness. After 2003-2004 financial year FACT formulated a corporation plan for diversification and revival. In consequence thereof, the company’s financial accounts for the financial year 2004-2005 and 2005-2006 show an increase in its sales and it made a profit. In order for the applicant to succeed in its claim that there was a need for security, it must prove on the balance of probabilities that FACT was unable to pay its potential liability during the course of its normal operation. Since all the relevant material and facts were not considered when judging the financial state of affairs of FACT, I am not satisfied that the assessment by Subramanian as well as the opinion by K.S.S is a true and fair reflection of the financial position of FACT.

[63] In the premises, I find the opinion of Dr P.PShah as to the financial situation of FACT to be well-reasoned, more plausible and credible as compared to that K.S.S. Nor do I have a doubt in my mind that such an opinion is a true and fair reflection of the financial state of affairs of FACT at the time of the arrest and subsequent thereto.

[64] Subramanian in his affidavit also alleges that FACT was at the time of the arrest of the second respondent ship winding down its operation due to lack of business or financial weakness. In support thereof, K.S.S in his affidavit states that in the year ended 31st March 2003, the Government of India gave FACT a grant of Rs.1000 lakhs for the payment of compensation to its employees who opted for a voluntary retirement scheme (VRS), K.S.S states that normally, a company would announce the VRS in order to reduce its workforce to be able to attain a reduction and/or control in its wage bill, or alternatively, if it wants to down size its operation due to lack of business or financial weakness. On the contrary, Dr P.P. Shah states that reduction in the workforce may improve the financial soundness of the company. I fully agree with the statement by Dr P.P. Shah that in the absence of concrete evidence as to the winding down of FACT’s operations due to a lack of business or financial weakness, no adverse inference can be drawn against FACT merely on the basis of offer for VRS to employees.

[65] It appears more fully in the affidavit of Dipankar Haldar that the allegation that FACT was facing financial crisis and that as a result it was then winding down its operation, was unfounded. Looked in retrospect as proof of financial stability, to date, FACT still carries on its trade and business without interruption. This is evident in the 62nd Annual Report of FACT for the period ended 31st March 2006. In this financial year FACT made a profit of Rs.23565.78 lakhs. In the circumstances, I am not satisfied that the applicant has succeeded to establish the existence of the need for security for its claim.

CONTEMPLATED DELAY AND INCONVENIENCE

[66] In an attempt to demonstrate inordinate delay and inconvenience attendant thereto the applicant would have experienced had it approached Indian Courts for the interim relief, i.e. security for its claim, Subramanian in his affidavit has made reference to the cases of Food Corporation of India (FCI) and Antclizo Shipping Corporation and the case of MMTC and The Owner of the mv “Ocean Lake”. These are according to Subramanian represent classic cases with regard to the delaying and avoiding of enforcement of the arbitration awards by Indian public companies, by unnecessarily resorting to appeal process.

[67] Dipankar Haldar in his affidavit correctly submits that there are 110 Government or public sector undertakings in India and that citing two instances of non-payment of awards by two public companies does not prove that all public companies do not honour the awards passed against them.

[68] It is trite that similar fact evidence can only be accepted in exceptional circumstances. Before similar fact evidence can be admitted, the similarity of conditions applicable in each case has to be satisfactory established. See Laubscher v National Foods Ltd 1986(1) SA 553(ZS) at 554I-J. It should not be admitted unless its value as proof warrants its reception in the interests of justice and its admission does not operate unfairly against other party.

[69] In, my view, the acceptance of similar fact evidence contained in the affidavit of Subramanian will be fallacious and not justified. Firstly, the alleged similarity between the cases referred to in the affidavit and the present case does not relate to previous or similar cases in which FACT itself had been involved but rather to cases the other Indian public companies had been involved. Secondly, such evidence does not have any probative value and is, therefore, irrelevant. Lastly, the prejudice the introduction of such evidence may cause is too great, having regard to its value. For the first respondent to be able to deal with it effectively, it must conduct an exhaustive inquiry into all cases involving more than 110 Indian public companies and the outcomes thereof. That may involve considerable loss of time and enormous expense on the part of the first respondent. The mere fact that arbitration proceedings were delayed in few of the cases in which the Indian public companies had been involved, would not by itself assist the applicant in establishing even by reference that it would also suffer the same fate.

[70] Under section 9 of the Arbitration and Conciliation Act, of 1996, (of India) a party to the arbitration proceedings can make an application to the Court for interim measures either before the commencement of the arbitration or during the arbitration proceedings or even after the completion of the arbitration proceedings. Hosbet Suresh, a former Judge of the High Court of Judicative Bombay, is of the opinion that since in the present case the arbitration proceedings had already commenced, it would have been appropriate if the applicant had moved for the security of the amount in dispute in the Indian Court. It therefore, necessarily follows that the applicant could have utilized the procedure available under the Act to get security without the need for an arrest in South Africa. It is common cause that the applicant did not make any attempt to approach the Indian Courts for an interim relief in the form of security. In Westley and others v Attorneys Fidelity Fund 2004(3) SA31(CPD) at 40H-41B, the Court held that it is impermissible attempt to employ guilt by association as a substitute for admissible evidence and competent inference. It therefore, necessarily follows that the similar fact contained in the affidavit as proof of delays or inconvenience in proceedings involving Indian public companies is rejected as being irrelevant and prejudicial.

[71] It has been argued on behalf of the applicant that even if the applicant were to approach the Indian Courts for the security of its claim, it would not be able to satisfy the requirements for the granting of such relief. However, it was common cause that such a case is not made out by the papers filed on behalf of the applicant. It is the general principle of our law that a party must make its case in the pleadings. The evidence shows that the financial situation of FACT had not thoroughly been traversed so to justifiably conclude that it was in a financially precarious situation or would not otherwise be able to meet any award obtained in the then pending arbitration proceedings. The evidence has painted a picture that security was being required because of consideration of convenience rather than necessity in respect of a claim for damages that was pending in the arbitration proceedings in India.

[72] In Katagum Wholesale Commodities Co. Ltd, supra, it was stated that the applicant for a security arrest should explain why he cannot get security elsewhere less drastically or more conveniently . He should show that no alternative and less disruptive opportunity for obtaining such security has or is likely to become available to him. The applicant has not satisfied these requirements. It is undeniable fact that at the time of arrest of the second respondent ship, the currents assets of FACT exceeded its current liabilities (including loans and advances) by US$42.2 million. FACT owned substantial property in India and the nett assets of a value far in excess of the claim by the applicant in the then pending arbitration proceedings. There is no meaningful explanation why security was not sought in India instead of against the second respondent ship. In any event, it has not been explained why security for the claim was reasonably necessary against FACT which is not an indigent debtor in regard to whom there is a real risk of its inability to pay the claim should it be awarded. FACT is a major Indian manufacturing enterprise owning vast property in India and listed in the National stock exchange of India. The Government of India in the form of the state president of India is its majority share holder. FACT receives financial aids from the Government of India. In the premises, I am not satisfied that the applicant has shown a genuine and reasonable need for the security which it has sought to establish in these proceedings by way of the arrest of the ship.

[73] ORDER

In the result, I make the following order:

(a) The deemed arrest of the second respondent ship, mv “Lok Pratima”, is set aside;

(b) The letter of undertaking provided by the North of England Protecting and Indemnity Association Limited is set aside and the attorneys of the applicant are directed to return such letter to the attorneys of the first respondent for cancellation;

(c) The applicant is ordered to pay the costs of the application and such costs to include the qualifying and witness fees of the expert witnesses Hosbet Suresh ad Dr Pravin Shah.

Judgment reserved on: 15 November 2007

Judgment delivered on: 8 January 2008

Counsel for Applicant: Mullens SC

Instructed by: Garlicke& Bousfield Inc.

REF: Ms K Pitman/04/1473

Counsel for Respondents: Stewart SC

Instructed by: Shepstone and Wylie

(Durban)

REF: Mr K Reddy/ KR