EWCA Civ 1399

In December 2009, the Court of Appeal overturned a High Court decision and held that as a result of a holding company’s pledge to a bank of shares in its subsidiary and the registration of the shares in the name of the bank’s nominee as security (the security was governed by Scottish law), the subsidiary ceased to be a subsidiary of the holding company within the meaning of sections 736 and 736A Companies Act 1985 (CA 1985).

The case concerned the construction of an indemnity clause in a charterparty. In 1997, Farstad chartered a vessel to Asco UK. In 2002, Enviroco was appointed to clean the oil tanks in the vessel. Enviroco and Asco UK were both subsidiaries of Asco plc. A fire broke out when the oil tanks were being cleaned, causing considerable damage to the vessel. Farstad brought proceedings against Enviroco, who sought to rely on the benefit of an indemnity clause in the charterparty between Farstad and Asco UK as the indemnity applied to Asco UK’s 'affiliates'. The definition of 'affiliate' in the charterparty referred to the definition of 'subsidiary' in section 736 CA 1985.

The High Court looked at whether Enviroco was an 'affiliate' of Asco UK on the true construction of the charterparty, or whether, because of the pledge, Asco plc had ceased to be a member of Enviroco when its shares in Enviroco were registered in the name of the bank’s nominee.

The High Court held that the effect of the cross-reference to section 736A CA 1985 in the charterparty was that section 736 had to be treated as set out in the charterparty and, on the construction of the charterparty, Enviroco was an affiliate of Asco UK despite the existence of the pledge, so Enviroco was entitled to the benefit of the indemnity.

However, the Court of Appeal overturned this decision and held that, as a result of the pledge, Enviroco was no longer a subsidiary of Asco plc within the meaning of sections 736 and 736A CA 1985 and so was not an affiliate of Asco UK and could not rely on the benefit of the indemnity.

Enviroco had argued that it was a subsidiary of Asco plc as it fulfilled the conditions in section 736(1)(c) CA 1985, that the condition of membership was derived from section 736A so that the rights attached to the shares in the bank nominee’s name should be treated as held by Asco plc and these rights must include the right to be registered as a member (for example, on repayment of the loan).

The Court of Appeal held that the statutory meaning of section 736 CA 1985 applied in the charterparty but did not agree that the 'rights' in sections 736A(6) and 736A(7) CA 1985 included the right to be registered as a member of a subsidiary company. Membership of a company is not a right but a status derived from entry of the shareholder’s name in the register of members. Whilst in the High Court the judge had started from the proposition that it would be absurd if the giving of a charge by a parent company under which the chargee became the registered shareholder in the subsidiary meant that the statutory definition in section 736 CA 1985 ceased to apply, the Court of Appeal stated that a court does not have the power to revise the provisions of a statute simply because it takes the view that the operation of the statute may produce uncommercial results.

Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399