Enviroco Ltd v Farstad Supply A/S

The Supreme Court held that the statutory definition of "subsidiary" incorporated into the charterparty must be read according to company law meaning: a "member" is the person entered on the register of members (see section 22 of the Companies Act 1985) and the attribution provisions in section 736A treat rights (such as voting rights) and not membership status. Under Scots law a share pledge perfected by registration in the name of the creditor or its nominee makes that nominee the registered member with the attendant rights and liabilities. For these reasons the putative parent (ASCO) was not a member of Enviroco while the bank's nominee was registered and therefore Enviroco was not an "Affiliate" for the purposes of the charterparty under sections 736 and 736A of the Companies Act 1985.

The Court rejected arguments that (a) the attribution provisions should be read as deeming membership to remain with the beneficial owner, (b) the statutory wording should receive a different construction in a commercial contract, or (c) ministerial or drafting history justified judicial correction of the statutes. The Court emphasised that any legislative correction is for Parliament or the appropriate statutory power-holder rather than the courts.

Background and parties: The dispute arose under a long-term charterparty between Farstad (owner) and ASCO UK Ltd (charterer). Enviroco, formerly wholly owned by ASCO, carried out tank cleaning on the chartered vessel in July 2002. ASCO had earlier converted Enviroco into a joint venture and, in May 2000, granted a Scots-law Deed of Pledge to the Bank of Scotland under which its A shares in Enviroco were registered in the name of the bank's nominee.

Nature of the claims and procedural history: Farstad sued Enviroco in Scotland (March 2007) for approximately 2.7 million in damages arising from a fire. Enviroco sought in England (December 2007) a declaration that it was an "Affiliate" of the charterer, relying on the charterparty definition which incorporated the Companies Act 1985 definition of "subsidiary." A Deputy Judge in the Chancery Division held for Enviroco on contractual construction and statutory interpretation. The Court of Appeal allowed Farstad's appeal ([2009] EWCA Civ 1399). The matter came to the Supreme Court on Enviroco's appeal.

Issues framed:

• Whether ASCO remained a "member" of Enviroco for the purposes of section 736(1)(c) of the Companies Act 1985 after the shares were registered in the bank nominee's name pursuant to a Scots-law share pledge;
• whether the attribution provisions in section 736A(6) and (7) operate to attribute membership (status) to the beneficial owner; and
• whether incorporation of the statutory definition into the charterparty or policy considerations required a different contractual construction or judicial correction of the statute.

Reasoning and subsidiary findings: The Court held that the statutory concept of "member" derives from entry on the register (section 22 of the 1985 Act) and that the attribution rules in section 736A concern the treatment of rights (voting, appointment) rather than conferring or deeming membership. The Court of Appeal's construction was therefore correct. The Supreme Court also emphasised Scots law practice: to create a fixed security over shares a transfer (fiducia cum creditore) and registration in the creditor's name is required, which as between third parties makes the nominee the member with the relevant rights and liabilities. The Court declined to correct perceived drafting defects in the 1989/1985 provisions, holding that any remedy lay with Parliament or the Secretary of State rather than judicial re-drafting. Ministerial statements and legislative history did not justify application of Pepper v Hart to alter the statutory meaning.

Relief sought: Enviroco sought a declaration that it was an Affiliate of the charterer; the appeal was dismissed and that declaration was not available.

Appeal dismissed. The Supreme Court held that the statutory definition of "subsidiary" must be given its company-law meaning: "member" means the person registered as a member (section 22, Companies Act 1985). The attribution provisions in section 736A address rights attached to shares, not membership status, and under Scots law the registration of the bank's nominee made that nominee the member. The Court would not rewrite the statute or import a deeming of membership into sections 736/736A, leaving any correction to Parliament or the statutory power-holder.

Proceedings began with Farstad issuing damages proceedings in Scotland (26 March 2007). Enviroco issued proceedings in England seeking a declaration (December 2007). A Deputy Judge in the Chancery Division found for Enviroco. The Court of Appeal allowed Farstad's appeal ([2009] EWCA Civ 1399). The Supreme Court dismissed Enviroco's appeal ([2011] UKSC 16).