Enviroco Ltd v Farstad Supply A/S
| Jurisdiction | England & Wales |
| Judgment Date | 22 May 2009 |
| Neutral Citation | [2009] EWHC 906 (Ch) |
| Court | Chancery Division |
| Date | 22 May 2009 |
[2009] EWHC 906 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. G. Moss QC
sitting as a deputy High Court Judge
Ms Poonam Melwani and Ms Saira Paruk, instructed by Clyde & Co LLP for Claimant
Ms Ceri Bryant, instructed by HBJ Gately Wareing (Scotland) LLP for Defendant
Introduction
This is a reserved judgment in relation to the trial of a preliminary issue. It raises a question as to the meaning of “subsidiary” in a charterparty where the wording has used a cross-reference to section 736 of the Companies Act 1985, which is in substance reproduced as section 1159 of the Companies Act 2006.
To avoid confusion as to the relevant companies, I will refer to the parties and the other relevant companies as follows:—
“Parent”– Asco plc
“Contractor”– Claimant
“Owner”– Defendant
“Charterer”– Asco UK Ltd (formerly known as Aberdeen Service Company (North Sea) Ltd)
“Vessel”–Far Service.
By a charterparty dated 4 th February 1994 governed by English law the Vessel was chartered to the Charterer. The Owner acquired the Vessel in January 1998 and at the material time was party to the charterparty.
On 7 th July 2002 the Contractor was instructed to clean the oil tanks of the Vessel. Whilst the tanks were being cleaned by employees of the Contractor, a fire occurred in the engine room of the Vessel, causing substantial damage.
The Owner has brought proceedings against the Contractor in Scotland for damages claiming about £2.7 million. The Contractor contends that the Owner is not entitled to bring those proceedings because of an “indemnity” contained in the charterparty.
The “indemnity” is in substance a type of exemption clause which seeks to allocate insurable risk between the Owner and the Charterer and their related companies. For the purposes of the preliminary issue, the key question is whether the indemnity, i.e. the exemption, extends to the Contractor as an “Affiliate” of the Charterer.
In the charterparty, clause 1(a) the term “Affiliate” is defined as follows:-
““Affiliate” means any Subsidiary of the Charterer or Customer or a company of which the Charterer or Customer are a Subsidiary or a company which is another Subsidiary of a company of which the Charterer or Customer is a Subsidiary. For the purposes of this definition “Subsidiary” shall have the meaning assigned to it by section 736 of the Companies Act 1985 …”
At clause 1.2, the charterparty states that a reference to “any statute or statutory provision shall include a reference to any amendment, extension, consolidation or replacement thereof …”.
At the time of the incident in July 2002, section 736 existed in a form amended by the Companies Act 1989. The relevant provisions will be set out below.
For the purposes of the preliminary issue I am to assume that the Contractor and the Charterer would, but for one aspect, be “Affiliates” on the basis of being each subsidiaries of the Parent. The sole question relates to the fact that the Parent has “pledged” its shares in the Contractor to the Bank of Scotland (“the Bank”).
The word “pledge” is a well-known misnomer in this context as far as English law is concerned. As a matter of strict legal analysis in English law, only physical objects can be pledged and although shares were traditionally represented by a piece of paper called the share certificate, the correct legal analysis has always been that shares are a bundle of rights: Michaels v Harley House Ltd [2000] Ch 104 at 117G (CA). They are therefore, as a matter of strict legal analysis, intangibles and incapable of being pledged. What therefore is commonly referred to as a “pledge” is in fact a mortgage or charge. It is unnecessary for the purposes of this judgment to distinguish between mortgage and charge and I will generally refer to the creation of the security interest by “pledge” as a “charge”.
The general way in which security is created over shares under English law is in the form of an equitable charge, traditionally by means of handing over a share certificate and signed transfer forms, enabling the security holder, if it enforces, to become registered as a member of the company as part of the enforcement process. It is however possible for a legal mortgage or charge to be created by registering the security holder as a member of the company, but contracting to leave the control of voting and the receipt of dividends in the hands of the chargor until enforcement.
In the present case, there was a Scottish law “Deed of Pledge” by the Parent in favour of the Bank in respect of the Parent's shares in the Contractor. The Parent is a Scottish registered company. This Scottish law “pledge” required the Bank or its nominee to become the registered holder of the “pledged” shares. However, the Deed makes it clear that the registration of the Bank or its nominee in the Register of Members of the Contractor is for the purposes of security only. With regard to the voting powers relating to the shares in the Contractor, clause 5(A) of the Deed provides:-”The full voting and other rights and powers in respect of the shares shall be exercised on all matters by the Pledgor …”
subject to an express proviso protecting the security. Clause 2(b) provides that all dividends are to be paid to the Pledgor.
There is no doubt that but for the “pledge” of the Parent shares in the Contractor, the Contractor for the purposes of the preliminary issue fell within the “indemnity”, i.e. exemption clause, allocating insurable risks between the Owner on the one hand and Charterer and Contractor on the other.
The fact that the Parent borrowed money from the Bank and was required to execute a Scottish law form of security which made the Bank or its nominee, as a matter of either perfecting or protecting the Bank's security, a registered member of the Contractor in place of the Parent, but with all the key rights exercisable by the Parent, would not, in the view of any reasonable businessman, make any difference to the allocation of insurable risk as between Owner and Charterer and their related companies. The transfer of registration of membership is a mere technicality required to perfect or protect the Bank's security.
The question raised by the preliminary issue is whether the law, and in particular the cross-reference to section 736 of the Companies Act 1985 (or now its Companies Act 2006 equivalent) comes to a different conclusion.
Approach to Construction
The words “Affiliate” and “subsidiary” must be construed in the context of the contract and against the relevant factual and commercial background known to the parties.
In the charterparty, the parties to the contract have chosen to cross-refer to section 736 of the Companies Act 1985 as amended from time-to-time. This raises two sub-issues. The first sub-issue is whether, even after the “pledge” of the Parent's shares in the Contractor to the Bank the Contractor would be considered the subsidiary of the Parent for the purposes of section 736 of the Companies Act 1985. The second sub-issue is whether, even if the Contractor would no longer be considered to be a subsidiary pursuant to section 736 if the statute alone were considered, a different result pertains because the question arises in the context of the charterparty.
In my judgment, although the two sub-issues can conveniently be separated for the purposes of legal analysis, there is in truth only one question, and that is the meaning of the cross-reference in the context of the charterparty itself.
It is often not appreciated that when a section of a statute is incorporated into a contract by cross-reference, the effect of the cross-reference is to treat the statutory provisions as being set out in the contract and to take its meaning from that context. This meaning may not be the same meaning as the provision has in the context of the statute itself or in another context.
Ms Melwani for the Charterer cites in support of this approach the Court of Appeal decision in Brett v The Brett Essex Golf Club Limited (1986) 278 EG 1476. That case concerned the construction of a rent review clause in a lease and in particular the construction and effect of a reference in that clause to section 34 of the Landlord and Tenant Act 1954. The issue in that case was a question of interpretation of a clause in the lease relating to the determination of “open market rental value” which was to be carried out “disregarding if applicable those matters set out in paragraphs (a) (b) and (c)” of section 34 of the 1954 Act as originally enacted.” The Court of Appeal accepted certain submissions of Counsel (Mr. Steinfeld QC) as follows:—
“The relevant words in clause 4(1) constitute simply a shorthand method of incorporating in the sub-clause as matters to be disregarded, the matters set out at paragraphs (a) (b) and (c) of section 34. That sub-clause can and should accordingly be read as though it contained an express provision directing disregard of, inter alia, “Any effect on rent of any improvement carried out by the tenant or a predecessor in title of his otherwise than in pursuance of an obligation to his immediate landlord”. It is these words as incorporated in the sub-clause that fall to be construed and not the same words in the context of the statutory scheme from which they have been lifted. In the “Wonderland”Cleethorpes case, he reminded us, the House of Lords was concerned with the construction of paragraph (c) of section 34 in the context of an application for a tenant for a new tenancy under the 1954 Act, following the expiry of the previous tenancy. In his submission it does not follow that the same words must be given the same construction in the different context of the 1978 lease. As will appear a little later, I think the speeches in the...
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