Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16

Enviroco sought protection under a charterparty's indemnity provisions as an 'Affiliate' of the charterer. The issue was whether Enviroco remained a 'subsidiary' of ASCO when ASCO's shares in Enviroco were pledged to a Scottish bank and registered in the bank's nominee's name. The Supreme Court held that under the statutory definition, ASCO ceased to be a 'member' when removed from the register.

Facts

Farstad Supply A/S (‘Farstad’) was the owner of a vessel chartered to Aberdeen Service Company (North Sea) Ltd (‘the Charterer’), a subsidiary of ASCO plc (‘ASCO’). The charterparty contained mutual indemnity provisions protecting the charterer and its ‘Affiliates’, defined by reference to the Companies Act 1985 definition of ‘subsidiary’. Enviroco Ltd (‘Enviroco’) was wholly owned by ASCO until 1999, when it became a joint venture with Stoneyhill, with ASCO retaining control through A shares. In May 2000, ASCO pledged its shares in Enviroco to Bank of Scotland under a Deed of Pledge governed by Scots law. Pursuant to Scottish practice for creating security over shares, the shares were registered in the name of Bank of Scotland Branch Nominees Ltd (‘the Nominee’). In July 2002, a fire occurred on the vessel during cleaning operations by Enviroco’s employees, causing substantial damage. Farstad sued Enviroco for approximately £2.7 million.

The Security Arrangement

Under Scots law, a fixed security over shares requires fiduciary transfer (fiducia cum creditore), meaning the creditor must be registered as holder of the shares. ASCO retained voting rights and received dividends through proxy arrangements, but was removed from Enviroco’s register of members.

Issues

The central issue was whether Enviroco was an ‘Affiliate’ of the Charterer under the charterparty, which required Enviroco to be a ‘subsidiary’ of ASCO within the meaning of section 736 of the Companies Act 1985. The specific question was whether ASCO remained a ‘member’ of Enviroco for statutory purposes when the shares were registered in the Nominee’s name by way of security.

Judgment

The Supreme Court unanimously dismissed the appeal, holding that Enviroco was not a subsidiary of ASCO at the relevant time.

The Meaning of ‘Member’

Lord Collins, delivering the lead judgment, held that the definition of ‘member’ in section 22 of the 1985 Act reflects a fundamental principle that the person on the register is the member to the exclusion of any other person:

“The starting point is that the definition of ‘member’ in what is now section 112 of the 2006 Act (section 22 of the 1985 Act for the purposes of this appeal) reflects a fundamental principle of United Kingdom company law, namely that, except where express provision is made to the contrary, the person on the register of the members is the member to the exclusion of any other person, unless and until the register is rectified.”

The Attribution Provisions

The Court rejected the argument that sections 736A(6) and (7) attributed membership to ASCO. Lord Collins stated:

“Neither of these provisions says anything about membership. They are concerned with rights, not status, and plainly refer back to the voting rights and the right to appoint or remove the board in section 736(1)(a)-(c).”

Scots Law on Share Pledges

Lord Rodger explained that under Scots law, when shares are transferred in security, the security-holder becomes fully liable as a member. Referring to the City of Glasgow Bank cases, he concluded:

“Anyone who is entered on the register of a company as a member in any capacity is quite simply a member, with all the relevant rights and liabilities.”

Contractual Construction

The Court held there was no basis for construing the statutory definition differently because it was incorporated in a contract. Lord Collins observed that this was not a case where the wording “flouts business commonsense” or where “something must have gone wrong with the language.”

Implications

This case has significant implications for commercial arrangements involving Scottish companies and security over shares. The decision confirms that under Scots law, a share pledge requiring registration of the creditor as shareholder transfers membership status entirely, potentially affecting corporate group structures for various legal purposes. The statutory definition of ‘subsidiary’ is widely incorporated in legislation and commercial contracts, making this interpretation broadly applicable. The Court acknowledged the result was ‘certainly odd and possibly absurd’ but declined to engage in judicial re-drafting, noting that Parliament could amend the relevant provisions if needed.

Verdict: Appeal dismissed. Enviroco was not a subsidiary of ASCO within the meaning of section 736 of the Companies Act 1985 because ASCO was not a ‘member’ of Enviroco when its shares were registered in the name of the bank’s nominee by way of security under Scots law.

Source: Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16