No doubt, the legislature can a forge a sledge-hammer capable of cracking open the corporate shell, and it can, if it chooses, demand that the courts ignore all the conceptions and principles which are at the root of company law.
Three major problems are encountered in modern shipping. All three are linked to the abuse of the corporate identity: the sub-standard ship, the enforcement of maritime claims and, a relative newcomer, international terrorism. The unscrupulous have not been slow to take advantage of the hard to define, metaphysical personality of the corporation.
Recent environmental disasters have cast the phenomenon of nebulous corporations into sharp relief. In December 1999, the Erika sank in a storm in the Bay of Biscay. Investigators who attempted to find the owner became lost in a labyrinth of brass plate companies. The Prestige which sank off the coast of Spain in November 2002 was owned by a one ship Liberian company.
Publicity has always been recognized as the safeguard of responsible conduct and ships have, since the voyages of discovery, flown the flags of their national states. The flag was the ship’s identity to the outside world and the Jolly Roger was hoisted only at the very last moment. Operators under the open registries or flags of convenience of today are more subtle. Lax rules of incorporation of companies and registration of ships allow for the generation of a dense fog to cover those who do not wish to be seen. Their use by the major trading nations has given open registers a patina of respectability.
Under the 1958 Geneva Convention on the High Seas, each state was left to decide its own conditions of registry. This freedom allowed a number of small countries to set up their own registers attracting considerable tonnage without adequate administrative or governmental facilities for regulating and enforcing necessary standards at sea.
The advantages of open registries have been recognized as freedom from national manning scales and regulations, wage scales and social security requirements, freedom to hire crews of any nationality in the cheapest markets, freedom from restriction on raising or transferring capital; freedom to buy, sell, or charter ships, freedom from state investigation in the event of major casualties, freedom from strict safety regulations and evasion of fishing and whaling conventions.
In the after-shock of September 11, 2001 and the heavy emphasis in the United States of America on national security, it is ironic to consider that the modern use of flags of convenience arose in that country. In the 1920’s several American vessels were reflagged in Panama to avoid the ban on the sale of alcohol aboard nationally flagged ships. A former American secretary of state is credited with the institution of the Liberian registry with even fewer requirements than its Panamanian counterpart. The trend has continued steadily and in 1991, over half the tonnage of the three major ship owning nations, Greece, Japan and the United States was registered in open registries.
Because of the tonnage they command, the two largest open registers, Liberia and Panama have a significant voice in the IMO.The secrecy offered by them which provides the lethal potential for terrorism is also the drawcard which they are loath to relinquish.
A current website lists the following advantages of incorporation in Panama:
• No reporting requirements for taxes.
• No piercing of the corporate veil.
• Anonymous ownership.
• No capital requirements.
• Nominee directors
Ships owned by companies incorporated according to these rules crowd the registers of flag of convenience countries.
In most cases, the beneficial owners of open registry ships are phantoms to the governments of their own countries. Open registers with no true involvement do not record in their trade and balance of payments statistics the value of the ships registered. In the event of a casualty, the foreign owners of open registry ships, if they can be found, cannot be compelled to testify at enquiries.
There are serious proponents for both the abolition of the small company and open registers but both institutions are so firmly entrenched that their direct elimination is a pipe dream. A determined and persistent call for transparency and accountability should serve as a beginning to undo the pernicious effects of both.
In response to the deep-rooted distrust of companies prevailing in England in the middle of the 19th century, the following was said when introducing the Joint Stock Companies Bill in the House of Commons:
In my judgment the principle we should adopt is this: not to throw the slightest obstacle in the way of limited companies being formed – because the effect of that would be to arrest ninety nine good schemes in order that the bad hundredth might be prevented.
Oil and other multi-national companies make extensive use of open registries with the primary objective of minimizing ocean transport costs and maximizing profits. The avoidance of political restrictions, risks of political instability and the achievement of greater flexibility are seen by mainstream commentators as legitimate objectives.
The call in the 1958 Geneva Convention on the High Seas for a genuine link between a ship and its flag state fell on deaf ears. The United Nations Convention on Conditions for Registration of Ships was a further attempt to achieve this objective. The convention also sought to provide that the flag state should ensure that those responsible for the management and operation of the ships on its register be readily identifiable and accountable. A failed attempt was made to provide that signatory states were not to accept on their registers ships owned by companies which issue (anonymous) bearer shares.
Vessels with beneficial owners hiding behind nominees sworn to secrecy are little better than stateless vessels. In the consolidated cases of two stateless vessels used for drug trafficking, the United States Court of Appeals for the Eleventh Circuit held that it was proper to exercise jurisdiction over the vessels even without evidence that the drugs were bound for the United States. The vessels were considered international pariahs with no right to navigate freely on the high seas. Statelessness of one of the vessels the Four Roses was determined on the basis of a patent attempt to disguise its nationality.
It bears repeating that a company cannot exist apart from the natural persons in control. To ensure accountability the identity of these persons must be public. Where the benefit of limited liability is conferred there should be strict rules about minimum capital and its maintenance in which regard Kahn-Freund has said the following:
If British Law came closer to those systems which connect the act of company formation with raising of capital, one obstacle would be placed in the way of the wholesale abuse of corporate personality. But other steps are necessary. The law fails to provide for any minimum capital. It is possible to form a company with capital of £10. There can be little doubt that, in certain exceptional cases, the small company has its legitimate place in the social system. It would be a mistake to prevent a businessman from converting his undertaking into a company in order to facilitate the distribution of his financial interests among his children. Nor should the law stand in the way of those who try to embark upon an uncertain enterprise – the exploration of a patent, the opening up of a new line of trade – with small means and to safeguard themselves against personal liability. It is, however, submitted that those who wish to do so should bear the burden of making out a case. In other words: The formation of companies with an initial issued capital below a certain minimum – say £5000 – should no longer be a matter of right. It should be a pre-condition of registration that the subscribers to the Memorandum produce a certificate from the Board of Trade which confirms that, in view of the risks involved in the enterprise or for other reasons, there is justification for the formation of the company and that the holders of the controlling interests are personally reliable.
The Way Forward
International co-operation involving a significant number of the major powers in both areas, ship registration and company law is a sine qua non for effective intervention. The shipping conventions referred to above have tried to address the problems created by open registries. The only international convention on company law is the Hague Convention Concerning the Recognition of the Legal Personality of Foreign Companies, Associations and Institutions. This convention omits to deal with the problem created by bearer shares and the ultimate mechanism in obtaining secrecy, the use of corporate directors. Refusal to recognize corporate status is a powerful weapon which could be used to compel adherence to agreed rules.
The price for the international recognition of corporate personality should be publication of the identity of the shareholders and some basic capital requirements along the lines suggested by Kahn-Freund.
For small companies, a reverse onus could be promulgated requiring a genuine separate identity to be proved where the following factors are present:
• No directors are elected.
• No corporate records are kept.
• Personal funds of shareholders are mingled with those of the corporation.
• No separate bank accounts are kept.
• No shareholders’ meetings are held.
• No dividends are paid to shareholders.
Other indications could be added.
A Return To First Principles
[T]he classical concept of a corporation is neat, simple, enshrined in company law and rooted in nineteenth century ideology. Unfortunately it bears about as much resemblance to the reality of the modern corporation as a hang-glider does to Concorde.
This quotation from an academic writer is an example of the derision with which a return to simplicity is treated. Yet the elaborate, modern concatenation of companies is almost always designed to mystify and to achieve ends not openly and honestly attainable.
The case of the Amoco Cadiz provides an example of the unintended consequences which creep in with over elaboration. The ship was registered in the name of a wholly owned subsidiary. When the separate management company under the same umbrella of companies and ultimately owned by the same interests was sued in the United States by the French Government, one of the bases upon which it was held to be unable to limit its liability was the fact that limitation was only available to the owner.