Farstad Supply AS v Enviroco Ltd

Factual and Procedural Background

Company A (the vessel owner) and Company B (the charterer) entered into a charterparty in 1994 concerning an offshore supply vessel. The contract contained mutual indemnities covering the charterer’s “Affiliates,” a term expressly defined to incorporate the statutory concept of a “subsidiary” in section 736 of the Companies Act 1985.

Company C (the appellant) performed industrial cleaning services on the vessel. In 1999 the shareholding structure of Company C changed: Company D became a 50% shareholder while Company E (the charterer’s ultimate parent) retained the remaining 50% and contractual control of the board. In 2000 Company E pledged its shares in Company C to The Bank under Scots law. To perfect that security, the shares were transferred and registered in the name of The Bank’s nominee company.

In 2002 a fire aboard the vessel caused major damage and the death of one of Company C’s employees. Company A sued Company C in Scotland for approximately £2.7 million. Company C, contending it was an “Affiliate” of Company B and therefore protected by the charterparty indemnity, commenced English proceedings in 2007 seeking a declaration to that effect.

The High Court granted the declaration, but the Court of Appeal reversed. Company C (now “Appellant”) appealed to the Supreme Court.

Legal Issues Presented

1. Whether, for the purposes of clause 1(a) of the charterparty and section 736(1)(c) of the Companies Act 1985, Company E remained a “member” of Company C after its shares had been transferred and registered in the name of The Bank’s nominee as security.
2. If Company E was not a registered member, whether the attribution provisions in section 736A(6)–(7) nevertheless deemed Company E to be a member so that Company C qualified as an “Affiliate.”
3. Whether the words of section 736, when incorporated into a commercial contract, could be construed differently to avoid commercially anomalous results.

Arguments of the Parties

Appellant's Arguments

• Policy: Parliament did not intend that statutory restrictions on holding-subsidiary relationships could be avoided merely by using nominees or ordinary security arrangements.
• Membership: The term “member” in section 736(1)(c) refers to the holding of membership rights, not necessarily to being entered on the register. Because section 736 applies to bodies that may not keep a register, registration cannot be essential.
• Attribution: Even if registration is required, section 736A(6) (nominee shares) and section 736A(7) (shares held by way of security) attribute the voting and board-control rights back to Company E, thereby making it the relevant member.
• Contractual context: Commercial common sense favours treating Company C as an “Affiliate,” since the parties would not have intended a change in security arrangements to strip the indemnity.

Respondent's Arguments

• The charterparty incorporates the statutory definition without modification; therefore the strict statutory meaning of “member” (i.e., being on the register) controls.
• Section 22 of the 1985 Act establishes that only persons entered on the register are members; none of the attribution provisions alters that status requirement.
• The absence in section 736 of a deeming clause equivalent to section 258(3) (parent-undertaking definition) demonstrates that Parliament did not intend nominees or pledgees to be disregarded for membership purposes.
• Courts should not engage in judicial re-drafting to cure any perceived legislative omission.

Table of Precedents Cited

Court's Reasoning and Analysis

The Supreme Court unanimously held that Company E was not a “member” of Company C after the security transfer:

• Literal meaning of “member”: Section 22 of the 1985 Act defines members by registration. The statutory framework consistently relies on the register for determining rights and obligations. Nothing in sections 736 or 736A displaces this.
• Scope of attribution provisions: Sections 736A(6)–(7) attribute voting and board-control rights held by nominees or security-holders, but they do not confer the status of membership. Parliament included an explicit deeming clause in section 258(3) (accounting definition) but omitted any equivalent in section 736, implying it was not intended.
• Legislative history: Although drafting history suggests the omission may have been accidental, ministerial statements were insufficiently clear to warrant judicial correction under Inco Europe. Any remedy rests with the legislature.
• Scots law on security over shares: Because the shares situs was Scotland, security had to be perfected by fiduciary transfer. Upon registration, The Bank’s nominee acquired full membership; Company E relinquished it.
• Contractual context: Incorporation of statutory text into the charterparty imported the statutory meaning without modification. The court found no absurdity or business-sense anomaly compelling a different contractual construction.

Holding and Implications

APPEAL DISMISSED. The court affirmed that Company C was not an “Affiliate” of the charterer because Company E was not a member of Company C at the relevant time; consequently the contractual indemnity did not protect Company C.

Implications: The decision confirms that, under both English and Scots law, only the registered holder is a “member” for the Companies Act 1985 general-purpose subsidiary definition. Commercial parties who incorporate that definition must account for the possibility that standard Scottish share-pledge practice can sever parent-subsidiary status, potentially affecting group-wide indemnities or covenants. No new legal test was created, but the judgment underscores the limits of judicial correction of perceived legislative omissions.