The Companies Act definitions of “subsidiary” and “holding company” are commonly used in contracts to refer to the wider corporate groups of the contracting parties.

The Court of Appeal has recently held that the granting by a holding company of a pledge (security) over the shares in its subsidiary and the registration of the bank as the holder of those shares caused the subsidiary to cease to be a subsidiary of its holding company. This English decision potentially has particular significance in Scotland where registration of the Bank as shareholder of the ‘subsidiary’ is necessary to perfect security over shares.

While the facts of this case were somewhat unusual and would not apply in the majority of situations (a parent company which held the majority of the voting rights in the subsidiary before the pledge is not affected), the consequences of the decision are unexpected and potentially significant for those companies to which it applies. In most cases it will be straightforward to establish whether or not a company that has pledged, or plans to, pledge a subsidiary's shares is likely to be affected by this decision.