The Court of Appeal (CA) has handed down what many consider to be a surprise decision which reversed a High Court judgment on the meaning of “subsidiary” under sections 736 and 736A of the Companies Act 1985 (now reproduced in section 1159 of the Companies Act 2006).

In Enviroco Ltd v Farstad Supply A/S [2009] (Enviroco), the CA considered whether a subsidiary company remained a subsidiary within the relevant definition in the legislation after the parent company charged its shares in the subsidiary, Enviroco Ltd, to a bank. The CA held that as a result of the registration of the bank as holder of the shares, Enviroco Ltd was no longer a subsidiary of its parent company within the meaning of sections 736 and 736A. In reaching this decision, the CA held that a company whose shares were pledged to a bank by its holding company and registered in the name of the bank’s nominee by way of security ceased being a “subsidiary” under the legislative definition.

Questions have arisen on whether, and if so, to what extent, the Enviroco decision could impact on the “moral hazard” provisions of the Pensions Act 2004 (PA 2004). We think it is unlikely that the decision should affect this area of pensions law. This is because the PA 2004 uses the “connected” and “associated” definitions in the Insolvency Act 1986 (IA 1986) in determining the potential liability of related companies, rather than those in the Companies Acts. Under the IA 1986, the definitions rely on concepts of control and voting power whereas those in the Companies Acts refer to voting rights.

However, one area which may need close consideration is in corporate transactions, where share purchase agreements seek warranties about target companies covering the issue of contribution notices and financial support directions, or confirmation that no circumstances have arisen which may potentially give rise to TPR seeking such sanctions. The relevant warranties are often drafted with reference to the Companies Acts definition of “subsidiary” and, pending the expected appeal to the Supreme Court, future agreements should use a broader definition of “subsidiary” to include those companies whose shares are held by a nominee of the parent company, or where the parent has granted security in favour of a lender which has become a registered member as a result of such security rights.

View the judgment.