III UNDER ESTONIAN FLAG

CHAPTER 6

THE NEW OWNERS / MANAGERS AND THE TAKE-OVER

Already in October 1992 the formalities to buy the WASA KING ex VIKING SALLY were finalised and the decision made, to operate the vessel under Estonian flag with Estonian crew. Since the Estonian Ships Register was not accepted by the mortgagee banks, the vessel had to be registered with one of the acknowledged Ships Registers and Cyprus was selected. To permit an additional entry in the Estonian Bareboat Register - condition to fly the Estonian flag and to employ Estonian crew - the structure of owning/operating/ managing companies as below stated was created.

MV ESTONIA was owned by the Cyprus company Estline Marine Company Ltd. The shares of this company were owned 50% by Estonian Shipping Company (ESCO) and 50% by Nordthulin Luxembourg S.A., which is a wholly owned daughter company of Nordström & Thulin AB (N&T), Stockholm, whilst ESCO was owned by the Estonian Government. The vessel was registered in Cyprus with permission for parallel registry in Estonia on the basis of a bareboat charter party.

The reason for the vessel being registered in Cyprus was - as said before - the demand of the mortgagee, the European Bank for Reconstruction and Development (EBRD), that the vessel had to be entered in a register with mortgage security acceptable to the bank, which was not the case with the Estonian register.

The vessel was chartered by Estline Marine Company Ltd. to the Estonian company E-Line Ltd. (E-Line) on basis of a bareboat charter party. E-Line is owned 50% each by ESCO and Nordthulin Luxembourg.

MV ESTONIA was then registered in the Estonian bareboat register and therefore had the right and obligation to sail under Estonian flag and with Estonian crew.

The bareboat charter agreement provided - as is usual - that the vessel was let without crew and that the bareboat charterer was responsible for crewing and all other obligations of a ship-owning company.

The bareboat charterer E-Line contracted ESCO on the basis of a Ship Management Contract to provide the crews and to take care of technical maintenance/operations as well as insurance. The reason for this was that ESCO was a Tallinn based, state-owned stock company. Its history dates back to 1879, when the first shipping company Linda was established in Estonia. ESCO operated worldwide a variety of cargo vessels of up to 50,000 dwt. ESCO also operated passenger ferries in the Baltic Sea and in the Gulf of Finland. In the autumn of 1994 the company owned and operated 55 vessels and thus had considerable better possibilities than E-Line in dealing with crew matters, such as employment, quality control, education/training and follow-up.

ESCO for their part left the technical maintenance/operation on the basis of a respective subcontract to N&T, allegedly being more competent and experienced in respect of larger passenger ferries than ESCO and also having better connections to suppliers of equipment and spare parts, etc. Also insurance matters and administration were left to N&T having more experience than ESCO with the international insurance of vessels.

On basis of an agency agreement, E-Line also subcontracted the commercial activities (sale of tickets and freight, hotel - restaurant activities on board, terminal activities, etc.) to the Swedish company ESTLINE AB, which was owned 50/50 by ESCO and N&T.

One of Estline AB's Estonian sister companies, Estonian Ferry Services Ltd. (EFS), had the responsibility for the sale of tickets and freight in Estonia as well as the terminal activities in Tallinn, whilst Estline AB took care of the Swedish side.

Details of the structure of companies explained above can be taken from the next page and from Enclosures 6.1.112 / 6.1.113.

As a matter of fact all the owning/operating/servicing/managing companies in relation to the ESTONIA were owned equally by N&T and ESCO.

It is apparent from the structure of companies that

(a) N&T was in charge of all technical matters including classification and ship safety, insurance and spare parts;
(b) ESCO had to provide a sufficiently trained and qualified crew including the nautical officers and engineers, but also the hotel and restaurant staff including the management provided by Hornet;
(c) ESTLINE AB was in charge of commercial matters and terminal operations at both sides.

It is obvious that N&T was the more powerful partner being in the driving seat as far as all operational matters were concerned.

The Estonian National Maritime Board (E.N.M.B) was only established after Estonia's independence in 1991 and thus had no experienced inspectors to carry out the safety inspections on large and complicated vessels which were required from the flag state by SOLAS. It was apparently for this reason that B.V. was asked whether they would be prepared to perform, in addition to their obligations as Classification Society, the safety inspections. B.V. obviously agreed and a respective contract was signed already on 18 August 1992, a copy of which is attached as Enclosure 6.2.114. Another contract was agreed and signed by B.V. and N&T which dealt apparently with activities in addition to the normal relationship between owner respectively technical manager and the Classification Society. This contract is in the files of the JAIC and remains classified even after the publication of the Final Report. It is only known that the parties to the contract have agreed to refer disputes to London Arbitration.

According to the then head of Sjöfartsverket's Stockholm inspection office, Ulf Beijner, however, also B.V. was uncertain about the requirements to be performed by the Maritime Administration of the new flag state in case of a large and almost 13 year old car/passenger ferry like ESTONIA. Therefore Sjöfartsverket was asked to render assistance during the take-over inspections at Turku and Tallinn, perform the "operative control" and whatever else might be required as a consequence of the flag change.

It will be explained in the subsequent subchapter that Sjöfartsverket complied with this request against respective payments and a rather close co-operation between the otherwise totally different organisations N&T, B.V./ E.N.M.B and Sjöfartsverket in connection with the take-over and flag change of the ESTONIA commenced.