Enviroco Ltd v Farstad Supply A/S

Where a contract incorporates a statutory definition by cross-reference, the provision is construed as part of the contract and in its contractual, commercial context. The statutory meaning may therefore differ from its meaning in another context. Under sections 736 and 736A of the Companies Act 1985, a holding company may remain the subsidiary’s holding company where its shares have been transferred to a lender or nominee as security, while the security provider retains the relevant voting and management rights. An interpretation which allows registration of security interests to defeat the statutory relationship or reallocate commercial risk arbitrarily should be avoided.

The claimant cleaned the defendant’s vessel under a charterparty containing an indemnity extending to an “Affiliate” of the charterer. “Affiliate” was defined by reference to the statutory meaning of “Subsidiary” in section 736 of the Companies Act 1985. The claimant and charterer would otherwise have been subsidiaries of the same parent company. The parent had, however, granted a Scottish-law security interest over its shares in the claimant, requiring registration of the lender’s nominee as shareholder while the parent retained the voting rights and dividends.

The preliminary issue was whether the claimant remained an Affiliate despite that registration.

1. Preliminary issue determined for the claimant. On the assumed facts, the claimant was an “Affiliate” of the charterer and fell within the indemnity.
2. Statutory wording incorporated into a contract by cross-reference is treated as set out in the contract. Its meaning must be determined in the contractual and commercial context, rather than automatically adopting its meaning in the statute’s own context. This approach was supported by Brett v The Brett Essex Golf Club Limited (1986) 278 EG 1476.
3. Section 736A(7) was capable of applying where shares were registered in the name of a security holder or nominee. Treating rights attached to security-held shares as held by the security provider required, in the relevant context, treating the provider as the member for the purposes of section 736.
4. That construction was necessary to prevent simple evasion and commercially irrational results. Otherwise a holding company could cease to be treated as such merely because security enforcement or perfection changed the registered shareholder, even though the parent retained the substantive rights and control.
5. The same interpretation was appropriate in Companies Act contexts affecting third parties and the public interest, including provisions concerning financial assistance, directors’ transactions, loans and investigations. The court rejected the contrary textbook analyses as unpersuasive. The wider conclusions were not necessary to decide the charterparty issue but were given because the issue had been fully argued and was of general importance.