Bank charge—Shares in subsidiary pledged to bank as security—Charterparty between parent charterer and shipowner exempting charterer’s subsidiaries from liability—Whether pledge to bank altering status of subsidiary in charterparty
Bank charge—Shares in subsidiary pledged to bank as security —Charterparty between parent charterer and shipowner exempting charterer’s subsidiaries from liability—Whether pledge to bank altering status of subsidiary in charterparty
Enviroco Ltd v Farstad Supply A/S [2009] EWHC 906 (Ch)
Gabriel Moss QC sitting as a deputy judge of the High Court 22 May 2009
Where a contract incorporates a section of a statute by cross-reference, the effect of the cross-reference is to treat the statutory provisions as having been set out in the context of the contract and to take its meaning from that context. The High Court so held when finding that the fact that a charterer’s shares in its subsidiary were pledged under Scottish law to a bank by way of security did not mean that the subsidiary ceased to be an “affiliate” of the charterer for the purposes of an indemnity clause in the charter covering the charterer’s subsidiaries as against the shipowners.
Poonam Melwani and Saira Paruk (instructed by Clyde & Co LLP) for the claimant. Ceri Bryant (instructed by HBJ Gately Wareing (Scotland) LLP) for the defendant.
In July 2002 the claimant was instructed to clean the oil tanks of a vessel chartered by its parent company (the charterer) from the defendant shipowners. A fire occurred causing substantial damage. The owners brought an action in Scotland. The claimant contended that the owners were not entitled to bring those proceedings because of an indemnity in the charterparty. The indemnity applied to “affiliates” of the charterer.
Affiliate
The term “affiliate” was defined as “... any Subsidiary of the Charterer .... For the purposes of this definition “Subsidiary” shall have the meaning assigned to it by section 736 of the Companies Act 1985 ...” In English proceedings it was ordered that a preliminary issue be heard concerning whether the claimant was an “affiliate” under the charter. For the purposes of the issue it was assumed that the claimant would be an affiliate but for one aspect, namely that the parent had “pledged” its shares in the contractor to a bank. The parent was a Scottish company. Under Scots law the pledge required the bank or its nominee to become the registered holder of the pledged shares. The deed of pledge made it clear that the registration of the bank or its nominee in the register of members of the claimant was for the purposes of security only. The voting rights were exercised by the pledgor who also received all dividends subject to an express proviso protecting the security.
Gabrial Moss QC:
The fact that the parent borrowed money from the bank and was required to execute a Scottish law form of security which made the bank or its nominee, as a matter of either perfecting or protecting the bank’s security, a registered member of the contractor in place of the parent, but with all the key rights exercisable by the parent, would not, in the view of any reasonable businessman, make any difference to the allocation of insurable risk as between owner and charterer and their related companies. The transfer of registration of membership was a mere technicality required to perfect or protect the bank’s security.
The question raised by the preliminary issue was whether the law, and in particular the cross-reference to s 736 of the Companies Act 1985 (CA 1985) (or now its Companies Act 2006 equivalent) came to a different conclusion.
It was often not appreciated that when a section of a statute was incorporated into a contract by cross-reference, the effect of the cross-reference was to treat the statutory provisions as being set out in the contract and to take its meaning from that context. That meaning might not be the same meaning as the provision had in the context of the statute itself or in another context. In support of that approach the claimant had cited Brett v The Brett Essex Golf Club Ltd (1986) 278 EG 1476.
His lordship turned to s 736. Section 736A(7) referred specifically to a situation where shares were used as security. It provided that “rights attached to shares held by way of security” shall be treated as held by the person providing the security in two situations. The parties agreed that in the instant case situation (b) applied, namely that the shares were held in connection with the granting of loans as part of the normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security or of realising it, the rights were exercisable only in the interests of the party providing the security.
His lordship held that subsection (7) should be construed so that it treated the provider of the present type of security as a registered member. That was also the only interpretation that made any commercial sense in the context of the charterparty. It could be achieved by using the width and flexibility of the wording of s 736A(7) to treat the provider of security as the registered holder of the shares where they were registered in the name of the security holder or its nominee, either from the start of the arrangement or for that matter as part of perfection or enforcement of security subsequently.
Absurdity
That conclusion was also needed to avoid absurdity. One of the owner’s arguments was that the failure to fulfill the membership requirement could easily have been prevented by the parent, because it could have agreed with the bank to remain registered in respect of one share, suitably denuded of any value, and that would have fulfilled the membership requirement. That suggestion had no relation to commercial sense or reality.
His lordship thus concluded that the contractor was an “affiliate” of the charterer on the true construction of the charterparty, notwithstanding the fact that the parent’s shares in the contractor had been “pledged” to the bank by a method which involved the registration of the shares in the name of the bank’s nominee as a member of the contractor by way of security.
