Court Of Appeal Decision On The Meaning Of 'Subsidiary' Generates Uncertainty Over The Giving Of Security In Group Structures

A recent decision of the Court of Appeal in a case regarding an indemnity clause in a charterparty has provided an interpretation of the meaning of "subsidiary" in the Companies Acts (both 1985 and 2006) that could have significant implications for any corporate group structures or financial transactions where the shares in a group company or subsidiary are transferred to a security holder. In Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399, the Court of Appeal held that as a result of a parent company's pledge to its bank of shares in its subsidiary, and the registration of the shares in the name of the bank's nominee, the subsidiary ceased to be a subsidiary of the parent company for the purposes of sections 736 and 736A of the Companies Act 1985. The decision has the potential to affect any contractual or financial relationship where there is a transfer to a security holder of shares in a company that is part of a group of companies -- such a transfer could now trigger, for example, change of control and breach of covenant provisions. The case could also provide significant opportunities to holding companies for potential mischief with their group structures -- shares in a subsidiary could be vested in a nominee to place the subsidiary outside of its "group" for the purposes of, for example, facility agreements, VAT group structures or obtaining shareholder approvals. As sections 736 and 736A of the 1985 Act have since been essentially replicated in section 1159 the Companies Act 2006, the decision will equally apply to the interpretation of the term "subsidiary" in the 2006 Act.

The Facts Of The Case

The case arose out of the circumstances of a tragic ship fire at Peterhead docks in 2002. Enviroco Limited, the claimaint, had been instructed to clean the tanks of an oil rig supply vessel, the MV Far Service. The MV Far Service was owned by the appellant, Farstad Supply A/S, but was chartered to Asco UK Limited under a charterparty. During cleaning by Enviroco, oil removed from the MV Far Service's tanks ignited, causing a fire in the ship's engine room, killing one of Enviroco's employees and causing substantial damage to the vessel.

Farstad brought proceedings in Scotland against Enviroco for damages (which were heard in London under the charterparty's choice of law clause). The basis of Enviroco's claim was that, as both it and Asco UK were subsidiaries of Asco plc, Enviroco was for the purposes of the charterparty an...