Registration Of Share Pledge Affected Group Structure

The Enviroco case will be of interest to banks' in-house lawyers, credit policy teams and credit documenters dealing with security issues. The case looked at the holding company/subsidiary relationship and the impact on that relationship of the holding company granting security over shares in the subsidiary. Specifically, the case considered whether a particular company was a "subsidiary" that fell within the scope of an indemnity. In considering that, it held that the transfer of legal title to the company's shares by way of security to a bank (which became the registered holder of the shares in the company's share register) caused the company to lose its status as a Companies Act subsidiary.

The problem arose because the holding company in the case did not hold more than 50% of the voting rights in the subsidiary. It was a subsidiary because it instead controlled voting rights through an agreement with other shareholders but, in order for this to give rise to a holding company/subsidiary relationship, the holding company had to be a "member" of the subsidiary: section 736(1)(c) Companies Act 1985. Because the holding company had transferred legal title to the shares by way of security to the bank, it was no longer a "member"; the bank was. The Court of Appeal's decision meant that the "subsidiary" could not claim the benefit of the indemnity. This article looks at the case in more detail and reflects on the implications for banks taking security over shares in such cases.

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The Enviroco case will be of interest to banks' in-house lawyers, credit policy teams and credit documenters dealing with security issues. The case looked at the holding company/subsidiary relationship and the impact on that relationship of the holding company granting security over shares in the subsidiary. Specifically, the case considered whether a particular company was a "subsidiary" that fell within the scope of an indemnity. In considering that, it held that the transfer of legal title to the company's shares by way of security to a bank (which became the registered holder of the shares in the company's share register) caused the company to lose its status as a Companies Act subsidiary.

The problem arose because the holding company in the case did not hold more than 50% of the voting rights in the subsidiary. It was a subsidiary because it instead controlled voting rights through an agreement with other...