Ince & Co Chinese Shipping E-brief August 2010 English Version

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Charterparty Indemnities and theMeaning of a “Subsidiary”Enviroco Limited v Farstad Supply A/S (TheMV Far Service) [2009] EWCA Civ 1399In The MV Far Service, the Court of Appealconsidered the issue of whether a companywas an affiliated company for the purposesof an indemnity clause in a charterparty.The case turned on the definition of a“subsidiary” as found in the CompaniesAct, as incorporated into the charterparty.This case serves as a caution against theuse of boilerplate wording without givingdue consideration to the corporatestructures in place, although the particularissues in this case are unlikely to arise ingeneral circumstances.FactsIn 1997, Farstad Supply A/S (ʺOwnersʺ)chartered the oil rig supply vessel, MV FarService (ʺthe Vesselʺ) to Asco UK Limited(ʺCharterersʺ). In 2002, Enviroco Limited(ʺEnvirocoʺ), was appointed to clean thetanks of the Vessel prior to its sailing toone of BPʹs North Sea oil platforms.During the cleaning operation, oil whichwas being removed from the tanks cameinto contact with an ignition source andcaused a serious fire in the engine roomwhich killed one of Envirocoʹs employeesand caused substantial damage to theVessel. The Owners commencedproceedings in Scotland against Envirocofor damages for negligence. Envirocoadded the Charterers as a third party to theScottish proceedings, and then commencedproceedings in the High Court in Londonseeking a declaration that they wereentitled to benefit from an indemnityfound in the charterparty, which providedfor English law and jurisdiction.Clause 33 of the charterparty contained aseries of indemnities by Owners in favourof Charterers and their ʺaffiliatesʺ,including one in respect of all claims andliabilities resulting from loss and damageto the vessel, even if caused by negligence.The charterparty defined ʺAffiliateʺ asfollows:ʺʹAffiliateʹʺ means any subsidiary ofthe Charterer or Customer or acompany of which the Charterer orCustomer are a Subsidiary or acompany which is another Subsidiaryof a company of which the Charterer orCustomer is a Subsidiary. For thepurposes of this definitionʺSubsidiaryʺ shall have the meaningassigned to it in Section 736 of theCompanies Act 1985ʺ.Enviroco contended that it was an affiliateof the Charterers, and therefore entitled torely on the indemnities in the charterparty.In fact, Enviroco and the Charterers wereboth subsidiaries of a third company,ASCO plc. In 2005 however, ASCO plc hadcharged its shares in Enviroco under adeed of pledge to the Bank of Scotland assecurity, which required the shares to beregistered in the name of the bank or itsnominee. It was common ground that, butfor the existence of the pledge and theregistration of the bank as the holder of theshares, Enviroco and the Charterers wereboth “subsidiaries” of the same parentcompany and therefore “affiliates” asdefined in the charterparty.The question for the courts thereforeturned on the interpretation of thedefinition of “subsidiary” as found in s. 736of the Companies Act 1985 [now s. 1159 ofthe Companies Act 2006]. As a result of thebank becoming the registered owner of theshares, was Enviroco no longer a“subsidiary” of ASCO plc, and therefore not
entitled to benefit from the indemnityfound in the charterparty?The High Court DecisionThe High Court held that Enviroco was anaffiliate of the Charterers despite theexistence of the pledge, and therefore wasentitled to the benefit of the indemnity. Inessence, the High Court reasoned that sucha security arrangement would not preventASCO plc from continuing to act as aparent company.The Court of Appeal DecisionThe Court of Appeal allowed the appeal.Based on its interpretation of the applicableprovisions of the Companies Act, which inbrief provide that a company is a“subsidiary” of another company, if theholding or parent company is, inter alia, “amember of it”, the Court of Appeal foundthat Enviroco had in fact ceased to be asubsidiary of ASCO plc once the bankbecame the registered owner of the shares.The reasoning was based partly on s. 22 ofthe Companies Act 1985 (which has beenmodified by s. 112(1) of the Companies Act2006), which provides that to be a member,a person must have its name entered in theregister of members. The Court of Appealheld that as the statutory definitionrequired membership as a condition, if aparent is no longer a member then theunderlying company could not be its“subsidiary”. The Court of Appealrecognized that this interpretation mayproduce uncommercial results, however itstated that a court does not have the powerto revise the provisions of a statute simplyon these grounds.we understand the Supreme Court willhear the appeal in October of this year. Inthe meantime, although this case will onlyimpact on contractual provisions if (i) alender or its nominee has taken securityover the issued share capital of a companyand registered those shares in its name,and (ii) the contract incorporates thedefinition of “subsidiary” as found in theCompanies Act, it is nevertheless a cautionin respect of two matters. First, allowingthe registration of shares held by way ofsecurity, and secondly, ensuring thatcontractual provisions that refer toaffiliates or subsidiaries, such asindemnities, assignments, representations,and change of control provisions, aredrafted in a manner that accounts for theexisting corporate structure.nick.gould@incelaw.comvanessa.rochester@incelaw.comConclusionThe Supreme Court has granted leave toappeal the Court of Appeal’s decision and2
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Ince & Co Chinese Shipping E-brief August 2010 English Version

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