Farstad Supply A/S v Enviroco Limited

For the general statutory definition of a subsidiary, membership of a company ordinarily depends on entry in its register of members. Provisions attributing voting and appointment rights held by nominees or security-holders concern rights, rather than the status of membership.

A court cannot supply an apparently omitted deeming provision unless it is abundantly sure both that a drafting error occurred and how Parliament intended to correct it. An odd or commercially unexpected result does not suffice.

Where statutory words are incorporated into a contract, they are read as written into the agreement and construed in its contractual context. Commercial common sense cannot justify rewriting clear incorporated language merely because the parties probably did not anticipate its effect.

Farstad chartered an offshore supply vessel to a company within the ASCO group. The charterparty allocated risks through mutual exceptions and indemnities extending to the charterer's “Affiliates”. An Affiliate included a sister subsidiary, with “Subsidiary” having the meaning assigned by section 736 of the Companies Act 1985.

Enviroco sought protection under those provisions after a fire during cleaning work on the vessel. ASCO controlled a majority of Enviroco's voting rights under an agreement, but had transferred its Enviroco shares to a bank nominee as security under Scots law. The nominee, rather than ASCO, was entered in Enviroco's register of members.

A Deputy Judge declared that Enviroco remained an Affiliate. The Court of Appeal allowed Farstad's appeal in [2009] EWCA Civ 1399. The Supreme Court had to decide whether ASCO nevertheless remained a “member” for section 736(1)(c), and whether the incorporated statutory definition bore a different contractual meaning.

1. Appeal dismissed unanimously. ASCO was not a member of Enviroco when the fire occurred. Enviroco was therefore not ASCO's subsidiary under section 736(1)(c) of the Companies Act 1985 and was not an Affiliate of the charterer. Lord Collins gave the principal judgment. Lord Hope and Lord Rodger supplied further reasoning on Scots law, with which Lord Mance and Lord Clarke agreed.
2. The statutory definition of “member” reflected a fundamental company-law principle. Except where legislation expressly provides otherwise, membership belongs to the person entered in the register, to the exclusion of others unless and until the register is rectified. Nothing in section 736(1)(b) or (c) displaced that rule. The accounting definition contained an express provision treating an undertaking as a member where shares were held on its behalf, but sections 736 and 736A contained no equivalent.
3. Sections 736A(6) and (7) did not attribute membership to ASCO. They attributed specified rights held by a nominee or attached to shares held as security. Those provisions referred to voting rights and rights to appoint or remove directors. They dealt with rights, rather than membership status.
4. The legislative history did not permit the court to supply the missing deeming provision. Its omission from sections 736 and 736A probably resulted from error, and the statutory consequence was odd. Nevertheless, the ministerial material did not resolve whether the provision had mistakenly been omitted there or mistakenly retained in the accounting definition. The court could not be abundantly sure of the intended correction. Adding the provision would constitute impermissible judicial legislation.
5. Under Scots law, transferring the shares to perfect the security vested the bank's nominee with membership and its associated rights and liabilities. ASCO could exercise voting powers only through the nominee's proxy. Its beneficial interest and entitlement to restoration of the shares after discharge of the debt did not make it a member while the nominee remained registered.
6. The result was unchanged in the contractual setting. Statutory wording incorporated by reference is read as written into the contract and construed in context. The clear definition neither flouted business common sense nor disclosed a linguistic mistake. The court could not rewrite it merely because the parties probably had not anticipated the consequences of a Scottish share pledge.

1. United Kingdom Supreme Court: The court unanimously dismissed Enviroco's appeal and affirmed the Court of Appeal's conclusion that Enviroco was not an Affiliate under the charterparty: [2011] UKSC 16.
2. Court of Appeal: The court allowed Farstad's appeal. It held that the incorporated statutory definition required ASCO to be registered as a member and that the attribution provisions did not satisfy that requirement: [2009] EWCA Civ 1399.
3. High Court, Chancery Division: A Deputy Judge declared that Enviroco was an Affiliate. He held that ASCO remained its holding company despite transferring the shares to a lender's nominee as security. No citation is stated in the judgment.