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This two day hearing is being heard on 19 and 20 January 2011. The dispute in question surrounds the issue of whether a subsidiary company, whose parent company has pledged its controlling shares in the subsidiary as security to a bank, remains a subsidiary of the parent company as defined in section 736 of the Companies Act 1985.

Background

Farstad Supply A/S (“Farstad“) was the owner of an oil rig supply vessel which it chartered to Asco UK Limited (“Asco UK“), a subsidiary of Asco plc, in 1997. The charterparty was governed by English law and contained an indemnity against various liabilities in favour of Asco UK and its ‘affiliates’. The charterparty defined ‘affiliate’ as including either: (a) a subsidiary of Asco UK itself; or (b) a subsidiary of a company of which Asco UK was also a subsidiary. ‘Subsidiary’ was expressly defined by reference to the definition provided in section 736 of the Companies Act 1985 (“CA 1985“).

Asco UK engaged Enviroco Limited (“Enviroco“) to clean the oil tanks of the vessel whilst it was in port. During the cleaning process the vessel caught fire, causing both the death of an Enviroco employee and substantial damage. Farstad brought a claim in negligence against Enviroco. However, Enviroco considered itself also to be a subsidiary of Asco plc and as such sought to rely on the indemnity as an affiliate under the charterparty.

The Issues

The issue before the Court of Appeal in December 2009 was whether Enviroco had the benefit of the indemnity clause and for such purposes whether Enviroco was a subsidiary within the meaning of section 736 of the CA 1985.

Section 736(1) of CA 1985 provides that a company is a “subsidiary” of another company, its “holding company”, if that other company—

(a)     holds a majority of the voting rights in it, or

(b)     is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c)     is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it,

or if it is a subsidiary of a company which is itself a subsidiary of that other company.

To fall within section 736(1)(b) or (c) the holding company must not only have the particular right but must also qualify as a ‘member’ of the subsidiary, meaning that it must be entered into the subsidiary’s register of members.

Asco plc owned only 50% of Enviroco and as such did not hold a ‘majority of the voting rights’ as required for section 736(1)(a). Furthermore Asco plc had pledged its shares in Enviroco to the Bank of Scotland (“the Bank“) pursuant to a Scottish security agreement. The agreement required the shares of Enviroco to be registered in the name of the Bank or its nominee. As a result Asco plc was no longer the registered holder of the shares. Asco plc did, however, retain ‘full voting and other rights and powers’ pending an event of default.

Past decisions

In the High Court it was held that it would be commercially nonsensical for a parent/subsidiary relationship to be set aside merely as a result of the giving of a charge where the chargee became the registered shareholder.

The Court of Appeal however overturned this decision and held that at the point Asco plc pledged its shares to the bank, it had ceased to be a member of Enviroco and accordingly Enviroco could no longer qualify as Asco plc’s subsidiary within the meaning of the legislation. Membership of a company, in the Court of Appeal’s view is a status derived from entry of a shareholder’s name into the register of the members.

The Court of Appeal stated that the mere fact that the provisions of a statute may on occasion operate to produce uncommercial results does not empower the Court to revise those provisions.

The appeal is being heard by Lord Hope, Lord Mance, Lord Collins, Lord Kerr and Lord Clarke.