Enviroco Ltd v Farstad Supply A/S
| Jurisdiction | England & Wales |
| Judge | LORD MANCE,LORD RODGER,LORD CLARKE,LORD COLLINS,LORD HOPE |
| Judgment Date | 06 April 2011 |
| Neutral Citation | [2011] UKSC 16 |
| Date | 06 April 2011 |
| Court | Supreme Court |
[2011] UKSC 16
Lord Hope, Deputy President
Lord Rodger
Lord Mance
Lord Collins
Lord Clarke
Appellant
George Bompas QC
Poonam Melwani
Saira Paruk
(Instructed by Clyde & Co LLP)
Respondent
Ceri Bryant
Ben Griffiths
(Instructed by HBJ Gateley Wareing)
Introduction
It is not often that, as in this case, the question of the construction of a charterparty arises in the Chancery Division. The issue between the parties is whether one of them is an "Affiliate" of the charterer for the purposes of provisions in a charterparty by which both the owner and the charterer agreed to indemnify and hold each other harmless (including in the case of the charterer its "Affiliates") in relation to certain liabilities.
The charterparty provides (in clause 1):
"In this Charter Agreement the following words and expressions shall have the meanings hereby assigned to them except where the context otherwise requires:-
a) 'Affiliate' means any subsidiary of the Charterer … or a company of which the Charterer … [is] a Subsidiary or a company which is another Subsidiary of a company of which the Charterer … is a Subsidiary. For the purposes of this definition 'Subsidiary' shall have the meaning assigned to it in Section 736 of the Companies Act 1985."
By clause 1.2 a reference to any statute or statutory provision is to include a reference to any amendment, extension, consolidation or replacement thereof.
Although for the purposes of this dispute the relevant provisions are to be found in the Companies Act 1985 (as amended by the Companies Act 1989) identical provisions are re-enacted by the Companies Act 2006, and the issue on this appeal is of some general importance. The statutory definition of "subsidiary" is incorporated by reference in other legislation (e.g. Transport Act 2000, section 65; Enterprise Act 2002, section 223; Energy Act 2004, section 196). Incorporation of the statutory definition in commercial contracts (of which this case is an example) is very common. In this case it has had an unexpected result which has arisen through a combination of two factors. The first factor is that, as will be seen, the statutory definition of subsidiary in important respects uses the term "member" which normally connotes the person on the share register. The second factor flows from a difference between English and Scots law and practice relating to the holding of shares by way of security: under Scots law and practice the mortgagee is registered as the holder of the shares, by contrast with the position in England, where commonly an equitable charge by way of deposit of the share certificate will constitute the security. As Lord Hope and Lord Rodger explain fully in their judgments, under Scots law the only way in which a fixed security over shares can be taken is by fiduciary transfer of the shares to the creditor (fiducia cum creditore). The security is known as a share pledge, under which registration of the creditor as holder of the shares constitutes the security.
The unexpected result may be (if the Court of Appeal was right) that, in the somewhat unusual circumstances of this case, a company which would otherwise undoubtedly be the subsidiary of another company ceased to be so when the shares in the former company were charged by the latter company to a Scottish bank. To oversimplify considerably, a major question on the appeal is whether, for the purposes of the statutory provision and the contract, the putative holding company remained a "member" notwithstanding that the shares which it owned were charged to, and registered in the name of, the mortgagee's nominee company.
The facts
The charterparty was entered into on February 4, 1994. The owner was Farstad Shipping A/S ("Farstad") and the charterer was then called Aberdeen Service Company (North Sea) Ltd ("Asco UK Ltd" or "the Charterer"). The chartered vessel was the "Far Service" ("the Vessel") and the charter was, initially, for 5 years with an option to extend for up to a further 5 years. The Vessel was to supply and/or assist and/or service offshore installations. The charter in fact continued until at least December 2005.
The charterparty contained mutual exceptions and indemnities to lay out a regime allocating risk and responsibility in respect of the main types of liability situations that might arise as between Farstad and the Charterer. In particular Farstad was to defend and hold harmless the Charterers, its Affiliates and Customers, in respect of any loss or damage to the Vessel or to other property of Farstad (clause 33.5).
Asco UK Ltd is a wholly owned subsidiary of what is now called ASCO plc, formerly ASCO Group plc ("ASCO"), a major oil and gas logistics company. Enviroco Ltd ("Enviroco") carries on business (inter alia) in the industrial cleaning of ships. Until 1999 it too was a wholly owned subsidiary of ASCO.
In November 1999, in connection with a joint venture with Stoneyhill Waste Management Ltd ("Stoneyhill"), the shares in Enviroco were converted into equal numbers of A and B ordinary shares with ASCO retaining the A shares and Stoneyhill holding the B shares. The effect of the amended Articles of Association was that ASCO had the right to appoint a majority of directors. In addition, pursuant to an agreement with Stoneyhill, ASCO was entitled to exercise a majority of the voting rights in Enviroco. The A shares were registered in the name of ASCO and the B shares were registered in the name of Stoneyhill.
ASCO and Enviroco are both registered in Scotland, and in May 2000 ASCO executed a Deed of Pledge, governed by Scots law, in favour of the Bank of Scotland ("the Bank"), for itself and as agent and "Security Trustee" for a syndicate of banks, to secure facilities granted or to be granted by some of the banks. By the Deed of Pledge ASCO pledged, charged and assigned to the Bank the A ordinary shares held by it in Enviroco, and agreed to register, or procure the registration of the shares in the name of the Bank or its nominees until the secured liabilities were repaid. The shares were then registered in the name of Bank of Scotland Branch Nominees Ltd ("the Nominee").
The Deed of Pledge provided that until the security became enforceable "the full voting and other rights and powers in respect of the Shares" were exercisable by ASCO and that ASCO would be appointed as proxy in relation to the voting of the shares until the security was enforced. No voting rights or other powers were exercised by the Bank or the Nominee, all dividends were paid to ASCO and the security was never enforced.
The proceedings
On July 7, 2002 Enviroco was employed to clean the oil tanks of the Vessel. While the tanks were being cleaned by Enviroco's employees, a fire occurred in the engine room causing substantial damage to the Vessel and the death of an Enviroco employee.
On March 26, 2007 Farstad issued proceedings in Scotland claiming damages from Enviroco amounting to approximately £2.7 million in respect of losses allegedly suffered by Farstad as a consequence of the incident in 2002. Enviroco sought to rely on the mutual exception and indemnity clauses on the basis that it was an "Affiliate" of Asco UK Ltd because each of them was a subsidiary of ASCO.
The principal issue is whether the fact that, in accordance with Scottish practice, the shares in Enviroco were registered in the name of the Bank's nominee company has the result that Enviroco was not a subsidiary of ASCO at the relevant time and therefore not an "Affiliate" for the purposes of the charterparty.
In December 2007 Enviroco issued these proceedings in England seeking a declaration that on the true and proper construction of the charterparty Enviroco was an Affiliate of the Charterer.
"Subsidiaries": the statutory definitions
There are many situations in which company law takes account of groups of companies: see Gower and Davies, Principles of Modern Company Law, 8 th ed. 2008, para 9-16. They include financial reporting, the control of transactions between a company and its directors, or of the purchase of a company's own shares. It is plainly important and necessary to define what is meant by a "subsidiary" for these and other purposes. There is a special definition for accounting purposes in section 1162 and schedule 7 of the 2006 Act, previously in section 258 and schedule 10A of the 1985 Act (inserted by the Companies Act 1989). The definition for general purposes is in section 1159 and schedule 6 of the 2006 Act, previously in sections 736 and 736A of the 1985 Act as amended by the Companies Act 1989.
Greene Committee and the Companies Acts 1928 and 1929
The Companies Act 1928 was the first to deal with the definition of subsidiary, by amending the Companies Acts 1908 to 1917 prior to their consolidation into the Companies Act 1929. The terms "holding company" and "subsidiary" were defined for the purpose of new accounting provisions in sections 122 to 128 of the 1929 Act, which gave effect to the recommendations of the Company Law Amendment Committee (the Greene Committee), 1926, Cmd 2657. Section 127 of the 1929 Act (re-enacting section 40 of the 1928 Act) provided that a company would be deemed to be a subsidiary company of another company if the latter held shares, directly or through a nominee, and (a) the amount of the shares so held was more than 50% such as to entitle the shareholder to more than 50% of the voting power; or (b) the shareholder had power (other than under security documents) to appoint the majority of the board. Where a company the ordinary business of which included lending held shares in another company as security only, no account was to be taken of the shares so held in determining if that...
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