Equitable charges - Pledges - Security - Shareholders

Enviroco Ltd v Farstad Supply A/S: SC (Lords Hope (deputy president), Rodger, Mance, Collins, Clarke): 6 April 2011

The appellant Scottish company (E) appealed against a decision ([2009] EWCA Civ 1399; [2010] Bus LR 1008) that it was not covered by an indemnity in a charter party.

E had been sued by the respondent owner of the charter party (F) for damages arising from a fire.

The charter party contained an indemnity by F in favour of the charterer (C) and its affiliates.

E claimed the benefit of the indemnity on the ground that it was C’s affiliate because both companies were subsidiaries of the same Scottish parent company (P) and because the definition of ‘affiliate’ in the charter party included subsidiary companies.

F’s case was that as E’s shares had been charged as security to a Scottish bank, P was no longer a ‘member’ of E within the meaning of section 736(1)(c) of the Companies Act 1985 so that E no longer qualified as its subsidiary.

The first instance judge found in favour of E, concluding that a company remained a holding company of its subsidiary for the purposes of section 736 even after it had given its shares to a lender and the lender’s nominee had been registered as holder of them.

That finding was overturned on appeal, where E was held not to be P’s subsidiary because of the requirement that the putative holding company be a ‘member’ of the subsidiary within the definition of ‘member’ of a ‘company’ in section 22 of the act.

It was held that that requirement could not be satisfied by the attribution provisions in sections 736A(6) and 736A(7).

E submitted that: (1) ‘member’ in section 736 was intended to refer to the holding of membership rights rather than to an actual entry on the subsidiary’s register of members; and (2) the attribution provisions in the act attributed to the putative holding company the membership rights enjoyed by a nominee or chargee so that it was thereby a ‘member’ for the purposes of section 736.

Held: (1) The definition of ‘member’ in section 22 of the act reflected the fundamental UK company law principle that except where there was express contrary provision, members were those on the register of members, to the exclusion of any other person.

Special legislative provisions were applicable to those not on the register.

There was no basis for construing sections 736(1)(b) or 736(1)(c) any differently. There was no equivalent, in section 736 nor in 736A, to the deeming provision in section 258(3)(b) of the act.

The absence of such a provision was indicative, although not decisive, and the reason for its absence was a matter for conjecture only (see paragraphs 37, 39-40 of judgment).

There was also no basis for construing the definition of ‘member’ differently just because it was incorporated in a contract (paragraphs 51-52).

The problems in the case flowed from the difference between English and Scots law and practice relating to the holding of shares by way of security (paragraph 4).

(2) The attribution provisions did not attribute to P the membership rights enjoyed by the nominee because neither provision mentioned membership; both were concerned with rights rather than status (paragraphs 41-43).

In the unusual situation of the case, the legislation led to an odd, and possibly absurd, result.

But there was no relevant ambiguity in section 736 and no clear statement to cast light on the question of whether there had been an omission from sections 736 or 736A of a provision equivalent to section 258(3) or whether section 258(3) had been inadvertently retained.

A drafting error seemed likely, but there was no clear basis on which the court could be abundantly sure.

A correction in the manner proposed by E would be an impermissible form of judicial legislation (paragraphs 44-50, 73).

The court instead outlined the action that could legitimately be taken if the loophole in statutory regulation were to be taken advantage of (paragraph 50).

Appeal dismissed.

George Bompas QC, Poonam Melwani, Saira Paruk (instructed by Clyde & Co) for the appellant; Ceri Bryant, Ben Griffiths (instructed by HBJ Gateley Wareing) for the respondent.